Colorado

[2002-2
USTC ¶50,637] United States of America, Plaintiff v. Edward G. Novotny,
in his individual capacity and as Trustee of Midwest Limited and Sunrise
Investments, Etta B. Novotny, in her individual capacity and as Trustee
of Midwest Limited and Sunrise Investments, and the State of Colorado,
Department of Revenue, Defendants
U.S.
District Court,
Dist.
Colo.
, Civ. 99-RB-2196 (PAC),
7/3/2002
, 2002
U.S.
Dist. LEXIS 15895. Previous decisions in this same case, 2001-2
USTC ¶50,719 , 184 FSupp2d 1071, 2002-1
USTC ¶50,147
[Code Secs.
677 , 6321 and 7403
]
Federal tax liens: Foreclosure: Who is the taxpayer: Real property
transferred to sham trusts: Nominee/alter ego status: Husband and wife
transactions: Quiet title action.--The government was entitled to
reduce to judgment taxes, interest, and penalties owed by a nonfiler
who, with his wife, transferred real property to sham trusts that
qualified as his nominees or alter egos. The taxpayer exercised complete
dominion and control over the property and continued to use the
properties for his own benefit as if the attempted transfers had never
occurred. Schemes targeted at limiting tax liability by assigning income
to sham trusts, such as those in the present case, have been uniformly
rejected by the courts. Further, because the trusts were dominated by
the taxpayer and had no separate existence from him, they were his alter
egos. Quiet title claims asserted by the trusts in an attempt to defeat
the tax liens were unsuccessful because the entities did not have actual
and exclusive possession of the realty and did not act in good faith.
[Code Sec.
6323 ]
Federal tax liens: Foreclosure: Who is the taxpayer: Real property
transferred to sham trusts: Nominee/alter ego status: Tax liens under
state law:
Colorado
: Quiet title action.--The government was entitled to reduce to
judgment taxes, interest, and penalties owed by a nonfiler who, with his
wife, transferred real property to sham trusts that qualified as his
nominees or alter egos. The attempted transfers were ineffective under
state (
Colorado
) law because the trusts failed to comply with a state statute that
permits trusts to hold title to real property.
[Code Sec. 1 ]
Federal tax liens: Foreclosure: Individuals subject to tax: Frivolous
arguments.--The government was entitled to reduce to judgment taxes,
interest, and penalties owed by a nonfiler who, with his wife,
transferred real property to sham trusts that qualified as his nominees
or alter egos. The taxpayer's frivolous claim that he was not subject to
federal tax was rejected.
[Code Sec.
6203 ]
Federal tax liens: Foreclosure: Assessment and collection:
Certificates of Assessments and Payments: Presumption of correctness.--The
government was entitled to reduce to judgment taxes, interest, and
penalties owed by a nonfiler who, with his wife, transferred real
property to sham trusts that qualified as his nominees or alter egos.
Certificates of Assessments and Payments produced by the government
established that the taxes, interest, and penalties were assessed
against him, notice and demand for payment was properly made, and the
taxpayer was presumptively liable for the assessed amounts. He
introduced no evidence to rebut the presumption of correctness accorded
to the Certificates.
[Code Sec.
162 ]
Business expenses: Deductions: Substantiation: Deductions denied in
full.--The government was entitled to reduce to judgment taxes,
interest, and penalties owed by a nonfiler who, with his wife,
transferred real property to sham trusts that qualified as his nominees
or alter egos. The taxpayer failed to substantiate his entitlement to
claimed business expense deductions. Although he received business
income in one of the tax years at issue, the court was unable to
determine what expenses allegedly incurred by the taxpayer were
allocable to his business; it had no basis for determining which of the
utility costs incurred by the taxpayer were attributable to business,
rather than personal, use. Additionally, because the taxpayer realized
no business income in two subsequent years, he was not allowed to reduce
his taxable income with business expense deductions.
[Code
Secs. 6321 , 7402 and
7421 ]
Federal tax liens: Foreclosure: Husband and wife transactions:
Property rights of nondelinquent spouse: Injunctions: Anti-Injunction
Act: Application of statute: Sovereign immunity: Quiet title action.--The
government was entitled to reduce to judgment taxes, interest, and
penalties owed by a nonfiler who, with his wife, transferred real
property to sham trusts that qualified as his nominees or alter egos.
The wife's claim for an injunction against the tax assessments at issue
was barred by the Anti-Injunction Act. Also, to the extent that she
asserted a claim for damages, that claim was dismissed, absent a showing
that the government had waived its immunity from suit. However, the wife
was entitled to judgment quieting title to her undivided one-half
interest in the real properties, which she held in joint tenancy with
her husband. One-half of the net sales proceeds from the foreclosure
sale of the properties was payable to her.
Philip
Blondin, August A. Imholtz III, Department of Justice, Washington, D.C.
20530, for defendant U.S. Edward G. Novotny, Etta B. Novotny, Cortez,
Colo., pro se. William Allan Cohan, William A. Cohan, P.C., San
Diego, Calif., for Midwest Limited and Sunrise Investments.
Rob
ert D. Clark, Attorney General's Office,
Denver
,
Colo.
, for Colorado Department of Revenue.
MEMORANDUM
OPINION AND ORDER
INTRODUCTION
BLACKBURN
, District Judge:
The
United States of America
("Government") through its complaint and concomitant claims
for relief seeks to reduce to judgment outstanding federal tax
assessments against defendant Edward Novotny ("Novotny"). The
assessments concern unpaid 1989, 1990, and 1991 federal income taxes,
penalties, and interest. In addition, the Government seeks to foreclose
the resultant federal tax liens under 26 USC §§7401 and 7403 on seven
parcels of real property in Montezuma County, Colorado, titled in the
names of defendants Midwest Limited ("Midwest") and Sunrise
Investments ("Sunrise") (collectively referred to as
"Trusts"). The Trusts have filed a counterclaim against the
Government and cross-claims against the other defendants to quiet title
to these seven parcels of real property. Defendant Etta Novotny is the
wife of Novotny and is named as a defendant because she may have an
interest in the real property at issue. Etta Novotny has filed a
counterclaim against the Government to quiet title, if any, in the
subject properties. Defendant Colorado Department of Revenue
("Colorado") has filed cross-claims against the defendants
seeking to foreclose its tax liens against the seven parcels of real
property to satisfy a judgment entered in the Montezuma County District
Court, case No. 99-CV-202, in favor of Colorado against Novotny for
unpaid 1989 and 1990 Colorado income taxes, penalties, and interest.
The case was
tried to the court June 3 through
June 6, 2002
. Philip E. Blondin and August Imholtz, III, appeared on behalf of the
government.
Rob
ert Clark appeared on behalf of the state of
Colorado
. William Cohan appeared on behalf of the Trusts. Novotny and Etta
Novotny appeared pro se.
The court
having judicially noticed all relevant adjudicative facts in the file
and record of this action; having considered the evidence educed at
trial (including via deposition transcripts); and having considered the
arguments advanced and authorities cited by the parties, enters the
following findings of fact (based on preponderance of the evidence),
conclusions of law, orders, judgments, and decrees.
FINDINGS
OF FACT
A. Edward Novotny's Federal Income Tax Liability
1. Novotny
stopped filing federal income tax returns starting with the 1979 tax
year. See Exhibit 69.
2. Novotny
maintains he is not required to pay federal income taxes.
Respondent has
claimed that he is not a "person" required to file, and that
he has no tax liability, as he is acting in a "private
capacity," and not "corporate" nor
"privileged", nor does he receive any
"consideration" from his actions.
Exhibit
38, Edward Novotny's Responses to United States Interrogatories at p. 5,
P 3; see also Exhibits 14, 47, and 49.
3. Novotny did
not file federal income tax returns for the 1989, 1990, and 1991 tax
years. After conducting audits for 1989, 1990, and 1991, the Internal
Revenue Service sent Notices of Deficiency for the 1989, 1990, and 1991
tax years to Novotny. See Exhibits 34 and 35; United States'
Requests for Admission Directed to Edward Novotny and Edward Novotny's
Response to Requests for Admission at para. 4-7; Exhibits 4 and 5,
Notices of Deficiency sent to Edward G. Novotny; and Exhibit 49, letter
to Douglas Kahl, Internal Revenue Service.
4. On the
dates and in the amounts set forth below, a delegate of the Secretary of
the Treasury of the United States made assessments against Novotny for
unpaid federal income taxes and statutory additions to tax and gave
notice and demand for payment thereof, for the following taxable
periods:
ASSESSMENT AMOUNT
TAX PERIOD ENDING DATE ASSESSED
12/31/1989
....................................
5/17/93
$ 85,700.00 (1)
5/17/93
$ 5,796.00 (2)
5/17/93
$ 35,615.20 (3)
5/17/93
$ 21,425.00 (4)
7/26/93
$ 10.00 (5)
12/31/1990
....................................
5/17/93
$ 7,312.00 (1)
5/17/93
$ 482.00 (2)
5/17/93
$ 1,774.78 (3)
5/17/93
$ 1,828.00 (4)
7/26/93
$ 10.00 (5)
12/31/1991
....................................
11/14/94
$ 7,672.00 (1)
11/14/94
$ 441.00 (2)
11/14/94
$ 1,948.78 (3)
11/14/94
$ 1,918.00 (4)
Total: ........................................ $171,932.76
See Exhibits 1, 2, and 3, Certificate of Assessments and Payments
for Edward G. Novotny for 1989, 1990, and 1991 tax years respectively.
5. This court
already has found that the Government has established that Novotny
received income in the amounts set forth in the Notices of Deficiency
sent to him for the 1989, 1990, and 1991 tax years. See
Memorandum Opinion and Order dated September 14, 2001 [2001-2
USTC ¶50,719 ], 184 F.Supp.2d 1071 p. 20 (hereafter
"Opinion"); 1
see also Exhibits 4 and 5. This court has held that the sole
issue for trial with respect to Novotny's federal income tax liability
is whether he is entitled to reduce his taxable income as determined by
the Internal Revenue Service by deducting certain business expenses.
Id.
6. Novotny has
produced admissible evidence in an attempt to support his claim that he
is entitled to reduce his taxable income for 1989 by expenses that were
incurred in the operation of his business, Four Corners Auto Parts and
Salvage. Novotny's business was operated on Parcel 3. The Novotny's
personal residence also is located on Parcel 3.
7. The
evidence in the record, which includes the testimony of Novotny and of
Etta Novotny, does not provide a reasonable means to differentiate
between personal expenses incurred by the Novotnys in 1989 and expenses
incurred in operating the business during 1989. Most notably, Novotny
claims that amounts paid for utilities such as water, electricity,
propane gas, and telephone service, are business expenses. The evidence
in the record demonstrates the cost of various utility services provided
for the buildings on Parcel 3 during 1989. However, this evidence does
not provide any basis to determine what portion of these expenses is
related to the business and what portion is related to Novotnys'
personal use. Absent some reasonable basis on which the court can
distinguish between personal expenses and business expenses, the court
cannot conclude that Novotny has established the amount of any
reasonable business expenses he incurred in 1989.
8. Novotny
claimed business expenses for 1990 and 1991. However, Novotny had no
business income in 1990 or 1991. Thus, he is not entitled to reduce his
taxable income by demonstrating that he incurred business expenses.
9. The court
finds that the Assessment for tax year 1989 is correct, and that Novotny
is not entitled to any reduction of his taxable income for that year
based on his claimed business expenses. See Exhibit 1,
Certificate of Assessments and Payments for Edward G. Novotny for 1989.
10. The court
finds that the Assessments for tax years 1990 and 1991 are correct, and
that Novotny is not entitled to any reduction of his taxable income for
those years. See Exhibits 2, and 3, Certificate of Assessments
and Payments for Edward G. Novotny for 1990, and 1991 tax years
respectively.
11. The court
finds that, as of
June 3, 2002
, Novotny owed the Government $383,446.33 (three hundred and
eighty-three thousand, four hundred and forty-six dollars and
thirty-three cents) in unpaid taxes and statutory additions for the
1989, 1990, and 1991 tax years.
B.
The Seven Parcels of Property
12. Parcel 1
consists of two vacant lots on the corner of Empire and Broadway,
Cortez
,
Colorado
. These lots are sometimes referred to as 710 and 720 North Broadway. On
or about
February 3, 1977
, a deed was recorded in the Clerk and Recorder's Office for
Montezuma County
,
Colorado
, conveying title to Parcel 1 (all references to the parcels are to the
parcels set forth in the Government's Complaint. The parties have
stipulated to the legal descriptions contained therein with the
exception of the amount of acreage in Parcel 3 from Max Hamilton and
Shyrel Noreen Hamilton to Edward G. Novotny and Etta B. Novotny, as
joint tenants, for the stated consideration of $10.00 (ten dollars). The
documentary fee stamp applied when the deed was recorded indicates that
the purchase price was $17,000.00 (seventeen thousand dollars). See
Exhibit 51.
13. Parcel 2
consists of two commercial buildings located at 483 and 485 N. Broadway,
Cortez
,
Colorado
. On
November 18, 1977
, a deed was recorded in the Clerk and Recorder's Office for
Montezuma County
,
Colorado
, conveying title to Parcel 2 from James R. Carpenter and Gail R.
Carpenter to Edward G. Novotny and Etta B. Novotny, as joint tenants,
for the stated consideration of $10.00 (ten dollars). The documentary
fee stamp applied when the deed was recorded indicates that the purchase
price was $58,000.00 (fifty-eight thousand dollars). See Exhibit
53.
14. Parcel 3
consists of approximately 62 acres of land located at
13106 U.S. Highway No. 666
,
Cortez
,
Colorado
. The Novotnys' primary personal residence is located on this parcel. On
or about
September 15, 1956
, a deed was recorded in the Clerk and Recorder's Office for
Montezuma County
,
Colorado
, conveying title to Parcel 3 from Georgia Spickert a/k/a Mrs. Georgia
Spickert to Edward G. Novotny and Etta B. Novotny, a joint tenants, for
the stated consideration of $10.00 (ten dollars) See Exhibit 55.
15. Parcel 4
consists of 17 acres of land and is located at 23400 Road N,
Cortez
,
Colorado
. On or about
August 7, 1975
, a deed was recorded in the Clerk and Recorder's Office for
Montezuma County
,
Colorado
, conveying title to Parcel 4 from Charles Dean Stone to Edward G.
Novotny and Etta B. Novotny, as joint tenants, for the stated
consideration of $10.00 (ten dollars). The documentary fee stamp applied
indicates that the purchase price was $16,000.00 (sixteen thousand
dollars). See Exhibit 57.
16. Parcel 5
is located at
112 North Street
,
Cortez
,
Colorado
. This parcel includes a 900 square foot house. On or about
March 2, 1978
, a deed was recorded in the Clerk and Recorder's Office for
Montezuma County
,
Colorado
conveying Parcel 5 from Glenda C. Pool to Edward G. Novotny and Etta B.
Novotny, as joint tenants, for the stated consideration of $10.00 (ten
dollars). The documentary fee stamp applied when the deed was recorded
indicates that the purchase price was $19,000.00 (nineteen thousand
dollars). See Exhibit 59.
17. Parcel 6
consists of 40 acres of vacant land and is located at 26058 Highway 145,
Cortez
,
Colorado
. On or about
August 25, 1975
, a deed was recorded in the Clerk and Recorder's Office for
Montezuma County
,
Colorado
, conveying title to Parcel 6 from John L. King and Ruth D. King to
Edward G. Novotny and Etta B. Novotny as joint tenants, for the stated
consideration of $10.00 (ten dollars). The documentary fee stamp applied
when the deed was recorded indicates that the purchase price was
$56,000.00 (fifty-six thousand dollars). See Exhibit 61.
18. Parcel 7
is located at
29456 County Road
U,
Montezuma County
,
Colorado
. The parcel includes a small cabin. On or about
May 17, 1967
, a Treasurer's Deed was recorded in the Clerk and Recorder's Office for
Montezuma County
,
Colorado
, conveying title to Parcel 7 to Edward G. Novotny and Etta B. Novotny.
A true and correct copy of this Deed is attached to the Complaint as
Exhibit 17. See also Exhibit 63.
C.
The Federal Tax Liens
19. On or
about
June 23, 1993
, a Notice of Federal Tax Lien was recorded in the Clerk and Recorder's
Office of Montezuma County, Colorado, listing assessments made against
Novotny for the 1989 and 1990 tax years. See Exhibit 65.
20. On or
about
June 23, 1993
, a Notice of Federal Tax Lien was recorded in the Clerk and Recorder's
Office of Montezuma County, Colorado, naming several entities, including
the Trusts as nominees, alter egos, and/or transferees of Novotny with
respect to the assessments made against him for the 1989 and 1990 tax
years. See Exhibit 66.
21. On or
about
March 1, 1995
, a Notice of Federal Tax Lien was recorded in the Clerk and Recorder's
Office of Montezuma County, Colorado, listing assessments made against
Novotny for the 1991 tax year. See Exhibit 67.
22. On or
about
March 1, 1995
, a Notice of Federal Tax Lien was recorded in the Clerk and Recorder's
Office of Montezuma County, Colorado naming several entities, including
the Trusts as nominees, alter egos, and/or transferees of Novotny with
respect to the assessments made against him for the 1991 tax year. See
Exhibit 68.
D.
Colorado
's Tax Lien
23. On
December 13, 1999
, the Montezuma County District Court entered judgment for
Colorado
against Novotny in the amount of $34,264 for unpaid state income tax and
statutory additions for 1990 and 1991. See Exhibit 99-C. The
state of
Colorado
recorded on
December 15, 1999
, a transcript of judgment docket with the clerk and recorder of
Montezuma
County
. See id.
E.
The Attempt to Transfer the Subject Property to
Sunrise
and
Midwest
24. On
August 3, 1979
, Edward G. Novotny and Etta B. Novotny attempted to transfer the seven
parcels of real property (described in paragraphs 10-16 above) to
Midwest and
Sunrise
. The Novotnys attempted to transfer title to parcels 1, 2, 4, 5, and 6
to
Midwest
. See Exhibits 52, 54, 58, 60, and 62. The Novotnys attempted to
transfer title to parcels 3 and 7 to
Sunrise
. See Exhibits 56 and 64.
25. In
consideration of $10.00 (ten dollars) and 100 Trust Certificate Units
("TCUs") the Novotnys conveyed their interests in Parcels 1,
2, 4, 5, and 6 to Midwest Ltd. on
June 1, 1979
. In consideration of $10.00 (ten dollars) and 100 TCUs, the Novotnys
conveyed their interests in Parcels 3 and 7 to
Sunrise
on
June 1, 1979
. See Exhibits 72 and 76.
26. The
documentary fee stamps applied when the Deeds to Parcels 1, 2, 4, 5, and
6 were recorded indicate that the Novotnys paid approximately
$166,000.00 (one hundred and sixty-six thousand dollars) for those five
parcels of property. It is unclear what the Novotnys paid for Parcels 3
and 7.
27. This court
has previously held that the attempted transfers of the seven parcels
from the Novotnys to Midwest and
Sunrise
were ineffective as a matter of
Colorado
law, because Midwest and
Sunrise
failed to comply with section 38-30-166, C.R.S., the
Colorado
statute that permits trusts to hold title to real property. See
Opinion [2001-2
USTC ¶50,719 ], 184 F.Supp.2d at 1087. This court further held that
because title to all seven parcels was never transferred to Midwest and
Sunrise
, title to the seven parcels remains with Novotny and Etta Novotny,
unless Midwest and
Sunrise
prevail in their quiet title actions. See Opinion, id. at
1089.
F.
Creation of Midwest and
Sunrise
28. On June 1,
1979, for the purposes of estate planning and asset protection, the
Novotnys formed two trusts, Midwest and Sunrise, by purchasing trust
packages to form "family trusts" or "common law
trusts" from a trust promoter named Lowell Anderson
("Anderson").
29. Anderson
and several co-conspirators subsequently were indicted and charged with
conspiracy to defraud the Government by selling common law trust
packages designed to avoid the payment of federal income taxes. See
United States v. Tranakos, 911 F.2d 1422, 1424 (10th Cir. 1990); see
also
United States
v.
Anderson
, 778 F.2d 602 (10th Cir. 1985); United States v. Anderson,
577 F.Supp. 223 (D.
Wyo.
1983).
Anderson
died before trial, but his co-conspirators were convicted. See
Tranakos, 911 F.2d at 1429.
1.
Midwest
: The "Trustees"
30.
Midwest
was governed by several trustees immediately after its formation,
including Novotny, Etta Novotny, Anderson, and Frank Pena
("Pena"). See Exhibit 82. In addition to these
individual trustees, another trust also served as trustee of
Midwest--the Pioneer Trust through its trustee C. A. Anderson
("C.A. Anderson" as distinguished from "
Anderson
"). See id.
31. At the
time
Midwest
was formed, the Novotnys barely knew Anderson or Pena, two of the first
trustees.
32. After they
were appointed as trustees of
Midwest
in April 1979, Novotny, Etta Novotny, and Pena resigned as trustees in
August 1979. See Exhibit 82. After the Novotnys resigned as
trustees, Anderson and the Pioneer Trust, the remaining trustees,
appointed Novotny as
Midwest
's "manager" and Etta Novotny as the "assistant
manager." See Exhibit 82.
33. In 1984,
another trust, the Common Estates Company, was appointed as a trustee of
Midwest
. See Exhibit 82.
34. The Common
Estates Company and Anderson shared the same address:
P.O. Box 328
,
Greybull
,
Wyoming
,
82426
. See Exhibit 82.
35. In October
1985, Novotny and Etta Novotny were appointed as trustees of Midwest and
Sunrise
by the then current trustees, Anderson and Common Estates Company, both
of whom resigned as trustees several days later. See Exhibits 82
and 84.
36. In
September 1993, after the IRS issued a Notice of Deficiency to Novotny
for the 1989 and 1990 tax years, the Novotnys resigned as trustees of
Midwest
and appointed Barbara Costello ("Costello") and Jimmy Chisum
("Chisum") as trustees. See Exhibit 82.
2.
Sunrise
: The "Trustees"
37.
Sunrise
, like
Midwest
, was governed by a number of trustees immediately after its formation,
including Novotny, Etta Novotny, Anderson, C. A. Anderson, and Pena. See
Exhibit 84.
38. It is
unclear whether C. A. Anderson served as a trustee of
Sunrise
in her individual capacity or in her capacity as trustee of the Pioneer
Trust. See Exhibit 84.
39. At the
time
Sunrise
was formed, the Novotnys barely knew Anderson or Pena, two of the first
trustees.
40. After they
were appointed as trustees of
Sunrise
in April 1979, Novotny, Etta Novotny, and Pena resigned as trustees in
August 1979. See Exhibit 84.
41.
Sunrise
, unlike
Midwest
, did not have a "manager" or "assistant manager."
42. The
Novotnys have been the only trustees of
Sunrise
since 1985.
G.
Operation of Midwest and
Sunrise
43. Novotny
has been the "manager" of
Midwest
from 1979 to date. He maintains and repairs the five parcels that the
Novotnys attempted to transfer to
Midwest
. He has not received compensation from
Midwest
for performing these services.
44. It is
unclear what duties Etta Novotny performs as
Midwest
's "assistant manager."
45. With the
exception of the Novotnys and Costello's involvement with the house on
112 North Street located on Parcel 5, none of the other individual
trustees of Midwest or Sunrise has participated directly in managing any
of the seven parcels. Costello's role with respect to the house on
112 North Street
was primarily that of a renter who maintains the property in exchange
for her use of the house.
46. While
Chisum appears on trust documents as a trustee of
Midwest
, Chisum has not performed any duties as a trustee. Even though the
Novotnys do not know where Chisum lives, he has not been replaced as a
trustee. See Exhibit 82.
47. Neither
Midwest nor
Sunrise
has made any distributions of principal or income to the designated
beneficiaries. The designated beneficiaries are not even aware of the
details of Midwest and
Sunrise
; several of them incorrectly think that they are "trustees"
of Midwest and/or
Sunrise
.
48. Neither
Sunrise
nor
Midwest
has maintained financial statements.
49. Neither
Midwest nor
Sunrise
has filed federal income tax returns since they were formed. See
Exhibit 74, P 2 and Exhibit 78, P 2.
50. Neither
Midwest nor
Sunrise
has maintained consistent and legitimate trust minutes. Indeed, many of
the most important decisions regarding the subject property are not
memorialized in the minutes. See Exhibits 82 and 84.
51. The
Novotnys have not paid rent as such to Midwest or
Sunrise
for their use of any of the seven parcels.
52. Neither
Sunrise
nor
Midwest
has placed specific restrictions on the Novotnys' use of the seven
parcels.
53. Novotny
and Etta Novotny make virtually all of the decisions concerning the
seven parcels.
54. Midwest or
Sunrise
has paid the property taxes on each of the seven parcels from 1979 to
the present. In those years when the Trusts had the money to pay the
taxes, they did. In other years when the Trusts lacked the money to pay
the taxes, the Novotnys paid them for the Trusts.
55. In June
1979, Novotny negotiated a lease with a rancher permitting him to use
Parcel 6 for livestock grazing for $300.00 (three-hundred dollars) per
year.
H.
Parcel 3: The Residence and Business
56. In June
1979,
Sunrise
entered into an agreement to lease Parcel 3 to
Midwest
for the nominal rent of $10.00 (ten dollars) per year. Midwest has not
paid any rent to
Sunrise
. See Exhibit 96. There does not appear to be any legitimate
purpose for the lease.
57. Parcel 3
consists of the Novotnys' primary personal residence and approximately
50 acres of land that was used for Novotny's business, Four Corners Auto
Parts and Salvage, until approximately 1990. Since 1979, the Novotnys
have lived almost continuously in the residence located on Parcel 3,
just as they had before they attempted to transfer it to
Sunrise
.
58. The
Novotnys have not paid rent to either Midwest or
Sunrise
for their nearly continuous and extensive use of the Parcel 3 residence.
In lieu of rent, the Novotnys have secured, maintained, and improved the
property. Additionally, in any year in which the Trusts lacked the funds
necessary to pay the required property taxes, the Novotnys either loaned
the Trusts the money to pay the taxes or paid them for the Trusts,
thereby eschewing the sale of Parcel 3 for delinquent taxes.
59. Neither
Novotny nor his business, Four Corners Auto Parts and Salvage, has paid
Midwest or
Sunrise
rent for the use of the portion of Parcel 3 that was devoted to the auto
parts and salvage business. Again, in lieu of rent, Novotny has secured,
maintained, and improved the property. This portion of Parcel 3 has been
free from waste and trespass during Novotny's use and occupancy.
60. Novotny,
in conjunction with the sale of scrap metal to Copperstate Metals, Inc.,
leased Parcel 3 ostensibly on behalf of
Midwest
to David Zack ("Zack") of Copperstate Metals, Inc., for
approximately two-to-three years. See Exhibit 20.
61. Novotny,
purportedly acting as the manager of
Midwest
, negotiated the lease of Parcel 3 with Zack. The lease required monthly
lease payments in the cash equivalent of 1,200 Federal Reserve Notes,
which the lease specified was $225.00 (two-hundred and twenty five
dollars). The lease required that the monthly lease payments be made in
cash or money order. See Exhibit 20.
62. The lease
payments were made by money order directly to Novotny in his name, not
to
Midwest
. See Exhibit 21. However, the rent was expended by the Novotnys
ostensibly for the benefit of
Midwest
.
63. Novotny,
purportedly acting as manager of
Midwest
, wrote to Zack on several occasions concerning late payment of rent. See
Exhibits 23-26; 28-34.
64. When
Copperstate Metals, Inc., tried to pay the monthly lease payment with a
check. Novotny returned it to Copperstate Metals, and wrote a letter
reminding Zack that the lease agreement required the payments be made in
cash or money order. See Exhibit 27. Novotny wrote "I know
that this will cause some inconvenience, but it could cause me a great
deal more if it is not done that way."
Id.
65. Despite
the fact that the Novotnys had purportedly transferred Parcel 3 to
Sunrise
, which then purportedly leased it to Midwest, it was Novotny,
supposedly acting as manager of
Midwest
, who gave Zack the option to purchase Parcel 3. The option to purchase
the property was open for the duration of the lease with Copperstate
Metals, Inc. See Exhibit 20.
66. The lease
between Midwest and
Sunrise
did not provide
Midwest
with the authority to sublet Parcel 3 or to offer it for sale. See
Exhibit 96. There is nothing in the trust minutes reflecting a decision
by the trustees of Midwest or
Sunrise
to grant Mr. Zack, or any other party, an option to purchase Parcel 3. See
Exhibits 82 and 84.
67. Novotny,
purportedly acting as the manager of Midwest, drafted a contract that
provided for the sale of the entire inventory of Four Corners Auto Parts
and Salvage, including used cars, classic cars, new and used automotive
parts, and junk cars, from
Midwest
to Copperstate Metals. See Exhibit 20. There is no record,
however, that Four Corners Auto Parts and Salvage, or its principal
Novotny, ever sold, gifted, or otherwise transferred the entire
inventory of new, used, and junk vehicles and auto parts to
Midwest
.
I.
Parcel 2: The Commercial Rental Property
68. Parcel 2
consists of two commercial buildings located at 483 and 485 Broadway in
Cortez
,
Colorado
.
69. Novotny
managed and controlled Parcel 2 before the Novotnys attempted to
transfer it to Midwest, and he continued to manage and control it in the
same manner after the attempted transfer, despite never receiving
compensation from
Midwest
.
70. An
unrelated third party, James Rodd ("Rodd"), leased Parcel 2
from
Midwest
from approximately 1979 until approximately 1994 pursuant to an oral
lease agreement with Novotny dating to 1979. See Exhibit 95.
During the term of this lease, Rodd operated an auto repair business
from the commercial parcel.
71. When Rodd
stopped paying the rent for Parcel 2, Novotny filed a document titled
"Equity Claim and Interest" with the Montezuma County Recorder
for the unpaid rent allegedly owed by Rodd for use of Parcel 2. See
Exhibit 95. The "Equity Claim and Interest" provides that
"this claim and interest is assignable by Edward G. Novotny to any
person/citizen or to any assignee(s) or heirs(s)." See id.
Early on in this document Novotny states that he is acting for and on
behalf of
Midwest
. See id.
J.
The Financial History of Midwest Limited
72. When
Midwest maintained a bank account, Novotny was a signatory on that
account, and he authorized payment of
Midwest
's bills. See Exhibits 7, 8, 11, 12, and 87. Novotny's wife and
curiously his daughter were also signatories on
Midwest
's bank account. See Exhibits 7 and 8. There is no indication
that trustees of
Midwest
, other than the Novotnys, ever were signatories on its bank account. See
Exhibits 7 and 8.
73. Novotny
also used
Midwest
's bank account to pay personal bills and expenses, including his gas
bill and electric bill. See Exhibit 87. Novotny wrote checks from
that account to the Tenth Circuit Court of Appeals and to a court
reporter in conjunction with a federal criminal case in which he was
convicted of illegally removing timber from a national forest. See
Exhibit 87, pp. 00030 and 00038; see also United States v. Novotny,
968 F.2d 22 (10th Cir. 1992) (unpublished). He also wrote checks from
Midwest
's bank account to West Publishing. See Exhibit 87, pp. 00053 and
00062. He wrote numerous checks in large dollar amounts from
Midwest
's bank account to himself and to his business, Four Corners Auto Parts
and Salvage. See Exhibit 87. He wrote checks from
Midwest
's bank account to various individuals and businesses. See
Exhibit 87, p. 00070 (check to Jim Crosby marked "loan"), p.
00094 (check to his daughter), and p. 00133 (check to the "Computer
Corner"). Novotny even wrote a check from
Midwest
's bank account to a publication called the "Justice Times"
for a two-year subscription. See Exhibit 87, p. 00044. These
expenditures are not discussed or authorized in the trust minutes. See
Exhibit 82. These expenditures could represent partial repayment of
monies loaned out of financial necessity by the Novotnys to
Midwest
. However, from the extant and scant paper trail it is impossible to
determine who was owed what at any given time. Clearly, Novotny assumed
he had carte blanch to use
Midwest
funds however he deemed necessary without discussion with or
authorization by other trustees.
74. Because
any Midwest bank account became potentially subject to levy and seizure
by the IRS and/or
Colorado
, Novotny maintained a cash box in his house where he kept cash to pay
bills associated with the seven parcels on behalf of the Trusts.
75. The
Novotnys have loaned approximately $17,500.00 (seventeen thousand and
five hundred dollars) of their own funds to
Midwest
although the loan, or series of loans, is not formally discussed or
authorized in the trust minutes See Exhibit 82. The Novotnys have
not charged interest to
Midwest
. The loan has not been documented, e.g., as in a promissory
note, and is unsecured.
76. The rental
income from Parcel 2 has been used to pay expenses associated with all
seven parcels, including those purportedly owned by
Sunrise
.
77. When the
rent from Parcel 2 has not been sufficient to pay the expenses, such as
property taxes, associated with the seven parcels, Novotny and/or his
wife have paid these bills with their personal funds to insure survival
of the Trusts and their assets for the benefit of the trust
beneficiaries as well as themselves.
78.
Sunrise
has never had a bank account or source of income. It appears that the
expenses related to the property held by
Sunrise
were either paid with the rental income from Parcel 2 or with Novotny's
personal funds or with funds from Four Corners Auto Parts and Salvage. See
Exhibit 38, p. 9, P 7.
CONCLUSIONS
OF LAW
A. Jurisdiction
1. The
Government seeks to reduce to judgment federal income tax assessments
against defendant Novotny and to foreclose federal tax liens against
seven parcels of real property ("the subject property").
Defendant Colorado has filed cross-claims against the defendants seeking
to foreclose its tax liens against the seven parcels of real property to
satisfy a judgment entered in the Montezuma County District Court, case
No. 99-CV-202 in favor of Colorado against Novotny for unpaid 1989 and
1990 Colorado income taxes, penalties, and interest. Midwest and
Sunrise
filed counterclaims seeking to quiet title to the subject property in
their names. Defendant Etta Novotny filed a counterclaim seeking to
quiet title to her interest in the seven parcels.
2. The Court
has jurisdiction over the Government's action to reduce the federal
income tax assessments to judgment and foreclose the federal tax liens
pursuant to 26 U.S.C. §7402 and 28 U.S.C. 1340 and 1345. The Court has
personal jurisdiction over each of the defendants.
3. The Court
has jurisdiction over the quiet title claims of defendants Midwest,
Sunrise, and Etta Novotny, pursuant to 28 U.S.C. §2410. In her
counterclaim against the
United States
, Etta Novotny also seeks to enjoin the tax assessments at issue. This
claim is barred by the Anti-Injunction Act, 26 U.S.C. §7421. See,
e.g., Stafford v. U.S. [2000-1
USTC ¶50,325 ], 208 F.3d 1177, 1179 (10th Cir. 2000) (actions
challenging enforcement of tax liens are barred under 26 U.S.C. §7421).
To the extent Etta Novotny asserts a claim for damages against the
government, that claim is barred by sovereign immunity. Etta Novotny has
not demonstrated that the Government has waived sovereign immunity as to
this claim.
B.
Edward Novotny's Federal Income Tax Liability.
4. This suit
is based upon IRS assessments against defendant Novotny for unpaid
federal income taxes, penalties, and interest as reflected on the
Certificates of Assessments and Payments, plus accrued but unassessed
statutory additions to tax. See Exhibits 1, 2, and 3.
5. A
Certificate of Assessments and Payments is admissible pursuant to Fed.
R. Evid. 803(8).
6. An
assessment of taxes, when properly certified, is presumptively correct
evidence of a taxpayer's liability and satisfies the Government's burden
of proof so that the Government may rest its case. See United States
v. Janis [76-2
USTC ¶16,229 ], 428 U.S. 433, 440-441, 49 L.Ed.2d 1046, 96 S.Ct.
3021 (1976); Anderson v. United States [77-2
USTC ¶9614 ], 561 F.2d 162, 165 (8th Cir. 1977).
7. It is well
established that a Certificate of Assessments and Payments is sufficient
evidence that the assessments were made in the manner prescribed by 26
U.S.C. §6203 and the accompanying regulations. See Long v. United
States [92-2
USTC ¶50,431 ], 972 F.2d 1174, 1181 (10th Cir. 1992); United
States v. Chila [89-1
USTC ¶9299 ], 871 F.2d 1015 (11th Cir. 1989); United States v.
Miller [63-2
USTC ¶12,155 ], 318 F.2d 637, 639 (7th Cir. 1963); United States
v. Schaeffer [99-2
USTC ¶50,792 ], 245 B.R. 407, 84 A.F.T.R.2d 99-5786 (Colo. 1999)
(Nottingham, J.).
8. An
assessment of tax as well as an assessment for failure to file tax
returns and make estimated tax payments are entitled to a presumption of
validity. See United States v. Dixon [87-2
USTC ¶9485 ], 672 F.Supp. 503 (M.D. Ala. 1987), aff'd, 849
F.2d 1478 (11th Cir. 1988) (Certificate of Assessments and Payments
sufficient of establish that taxpayer was liable for taxes, penalties,
and interest).
9. The
Certificates of Assessments and Payments establish that: (1) the federal
income taxes, penalties and interest were assessed (Sections 6201-6203
of the Internal Revenue Code); (2) notice and demand for payment of
these taxes, penalties, and interest were properly made (Sections
6303(a) and 6321 of the Internal Revenue Code); and (3) the taxpayer is
presumptively liable for the unpaid taxes, penalties, and interest shown
on the Certificate. See Schaeffer [99-2
USTC ¶50,792 ], supra.
10. Novotny
has the burden of presenting admissible evidence to rebut the
presumption of correctness accorded the Certificates of Assessments and
Payments. See United States v. Gosnell [92-2
USTC ¶50,368 ], 961 F.2d 1518, 1519 (10th Cir. 1992), quoting Jones
v. Commissioner [90-1
USTC ¶50,280 ], 903 F.2d 1301, 1303 (10th Cir. 1990).
11. This Court
ruled on the Government's Motion for Summary Judgment and held that the
Government has established Novotny's income for the years at issue. See
Opinion [2001-2
USTC ¶50,719 ], 184 F.Supp.2d 1080-1081. The Court held that the
sole remaining issue to be addressed at trial is whether Novotny is
entitled to reduce this income by establishing that he is entitled to
deduct business expenses that may be related to Four Comers Auto Parts
and Salvage. See Opinion, id. at 1082.
12. A taxpayer
bears the burden of showing that he is entitled to deductions from
income. See INDOPCO, Inc., v. Commissioner [92-1
USTC ¶50,113 ], 503 U.S. 79, 117 L.Ed.2d 226, 112 S.Ct. 1039
(1992); New Colonial Ice Co. v. Helvering [4 USTC ¶1292], 292
U.S. 435, 78 L.Ed. 1348, 54 S.Ct. 788 (1934).
13. With
respect to claimed business expenses, Novotny "bears the burden of
substantiating the amount and purpose of the item for the claimed
deduction." Ashley v. Comm'r [CCH
Dec. 54,151(M) ], 2000 Tax
Ct.
Memo LEXIS 443, 80 TCM 841, 2000 WL 1839373, 2000 T.C. Memo 376 (2000).
14. Novotny
has repeatedly advanced the untenable position that he is immune from
federal taxation. To the extent his arguments are decipherable, a
representative sampling includes the following: he has not entered into
a written agreement with the federal government that would subject him
to taxation; he is not the type of person required to file a tax return;
the tax system is voluntary; he is not a federal employee; and he has
returned the bills (notices of deficiency) sent to him by the Internal
Revenue Service with dishonor. Novotny's contentions are frivolous and
have been explicitly rejected by the courts. See Lonsdale v. United
States [90-2
USTC ¶50,581 ], 919 F.2d 1440, 1448 (10th Cir. 1990).
15. Novotny is
not entitled to claim any business expenses as deductions against his
gross income for the tax years 1989, 1990, or 1991. Novotny has not
presented sufficient evidence to establish that he is entitled to any
such deductions.
16. The
Certificate of Assessments and Payments for the tax year 1989 is
correct. Novotny is indebted to the
United States
for the amounts reflected in the Certificate of Assessments and Payments
for the tax year 1989, plus interest and statutory additions calculated
through
June 3, 2002
.
17. The
Certificates of Assessments and Payments for the tax years 1990 and 1991
are correct. Novotny is indebted to the
United States
for the amounts reflected in the Certificates of Assessments and
Payments for the tax years 1990 and 1991, plus interest and statutory
additions calculated through
June 3, 2002
.
18. As of
June 3, 2002
, the first day of trial in this matter, Novotny owed the
United States
$383,446.33 (three hundred and eighty-three thousand, four hundred and
forty-six dollars and thirty-three cents) in unpaid taxes and statutory
additions for the 1989, 1990, and 1991 tax years.
C.
The Federal Tax Liens Should Be Foreclosed Upon the Seven Parcels of
Subject Property.
1. The Federal Tax Liens.
19. Section
6321 of Title 26 of the United States Code provides that after (1)
assessment of tax and (2) notice and demand for payment, a lien arises
in favor of the Government in the amount of the assessment. The tax lien
is all encompassing; it attaches to all property and rights to property
belonging to the taxpayer on the date the lien arises. See 26
U.S.C. §6321 and 6322. In addition, the federal tax lien attaches to
any property interest subsequently acquired by the taxpayer while the
federal tax lien remains in force. See Glass City Bank v. United
States [45-2
USTC ¶9449 ], 326 U.S. 265, 267-68, 90 L.Ed. 56, 66 S.Ct. 108
(1945).
20. The tax
lien continues in full force until the liability is paid in full or
becomes unenforceable due to lapse of time. See 26 U.S.C. §6323;
see also United States v. Cache Valley Bank [89-1
USTC ¶9157 ], 866 F.2d 1242, 1244 (10th Cir. 1989). A federal tax
lien is perfected upon assessment and no further action need be taken. See
United States v. Vermont [64-2
USTC ¶9520 ], 377 U.S. 351, 352, 12 L.Ed.2d 370, 84 S.Ct. 1267
(1964).
21. Federal
tax liens arose against Novotny when the IRS made assessments against
him for unpaid federal income tax liabilities for the 1989, 1990, and
1991 tax years in May of 1993 and November of 1994. See Exhibits
1 and 2. The IRS recorded the corresponding Notices of Federal Tax Lien
with respect to the 1989 and 1990 tax years on
June 23, 1993
. The IRS recorded the corresponding Notice of Federal Tax Lien with
respect to the 1991 tax year on
March 1, 1995
.
2.
Foreclosure of Federal Tax Liens--Generally.
22. Novotny
has an interest in the seven parcels against which the federal tax liens
may be foreclosed. Because Midwest and Sunrise failed to comply with
recording requirements under Colorado law that permit trusts to take and
hold title to real property, the attempted transfers of the seven
parcels from Novotny and Etta Novotny to Midwest and Sunrise were
ineffective as a matter of Colorado law. Thus, title to the seven
parcels remain with the Novotnys. Even if the trusts did hold title to
the seven parcels, the federal tax liens may nevertheless be foreclosed
for three reasons: (1) Midwest and
Sunrise
hold the seven parcels as nominees of Novotny; (2) Midwest and
Sunrise
should be disregarded because they are shams; and (3) Midwest and
Sunrise
are alter egos of Novotny.
3.
The Trusts Did Not Comply With the
Colorado
Recording Requirements That Permit Trusts to Hold Title To Real
Property.
23. This Court
has previously held that, as a matter of
Colorado
law, the attempted transfers of the seven parcels from Etta Novotny and
Novotny to Midwest and
Sunrise
were ineffective and that the trusts never took title to the property. See
Opinion, id. at 1087. Thus, title to the seven parcels has
remained with the Novotnys, despite the attempted transfers.
Accordingly, because title remained with the Novotnys despite the
attempted transfers, Novotny had an undivided one-half interest in the
seven parcels to which the federal liens attached when they arose in May
1993 and November 1994, and to which the state tax lien attached on
December 15, 1999
. The federal and state tax liens against Novotny have not expired or
been released and thus remain attached to the property. See United
States v. Cache Valley Bank [89-1
USTC ¶9157 ], supra.
4.
Midwest and
Sunrise
Are Nominees of Edward Novotny.
24. It is
firmly established that the Government may foreclose its federal tax
liens on property held by the nominee of a taxpayer in order to collect
the taxpayer's liability. See United States v. Miller Bros. Constr.
Co. [74-2
USTC ¶9817 ], 505 F.2d 1031, 1036 (10th Cir. 1974); Shades Ridge
Holding Co. v. United States, 888 F.2d 725, 728-729 (11th Cir.
1989); United States v. Schaeffer [99-2
USTC ¶50,792 ], 245 B.R. 407, 84 A.F.T.R.2d P 99-5786 (D. Colo.
1999) (Nottingham, J.); United States v. Stonier [89-1
USTC ¶9208 ], 73 A.F.T.R.2d P 94-971 (D. Colo. 1994), aff'd by
unpublished decision, 48 F.3d 1233 (10th Cir. 1995), cert. denied,
516 U.S. 1183, 134 L.Ed.2d 231, 116 S.Ct. 1286(1996); Cityview Trust
v. United States [98-2
USTC ¶50,872 ], 98-2 USTC P 50-872, 1998 WL 1031525 (D. Wyo. 1998).
25. This Court
has held that whether analyzed under state or federal law
"the following considerations are relevant in determining whether
an individual or a corporation holds property as the nominee of another:
(1) the lack of consideration paid by the nominee; (2) the control
exercised over the property by the transferrer while the title is in the
nominee's name; (3) the close relationship between the transferrer and
the nominee; (4) the use by the transferrer of the transferred property;
and (5) lack of interference in transferrers use of property by the
nominee." Stonier [89-1
USTC ¶9208 ], 73 A.F.T.R. 2d P 94-971 at p. 94-2087, aff'd by
unpublished opinion, 48 F.3d 1233 (10th Cir. 1995), cert. denied,
516
U.S.
1183 (1996).
26.
Additionally, courts sometimes consider whether the property was placed
in the name of a nominee in anticipation of a suit or the occurrence of
liabilities. See Cityview Trust v. Hutton [98-2
USTC ¶50,872 ], 1998 U.S. Dist. LEXIS 17952, 98-2 USTC p 50,872,
1998 WL 1031525 (D. Wyo. 1998).
27. A review
of the factors to be considered in making a nominee determination
requires a finding that Midwest and
Sunrise
hold the subject property as nominees of Novotny.
28. First,
despite the attempted transfer of the subject property to Midwest and
Sunrise
, Novotny continued to exercise virtually complete dominion and control
(the second factor) over the seven parcels. The exercise of dominion and
control is the key factor in determining whether a nominee situation
exists. See Stonier, supra. He continued to use Parcel 3 as his
residence and even operated his business from it. Novotny did not pay
rent to either Midwest or
Sunrise
for his extensive use of Parcel 3.
29. With
respect to all seven parcels, little or nothing changed after the
Novotnys attempted to transfer them to Midwest and
Sunrise
. Novotny's use and enjoyment of the property was not restricted in any
way by the trusts. He controlled and managed the improved parcels for
his benefit just as he had prior to the attempted transfers, despite the
fact that he did not receive any compensation from the trusts.
30. With
respect to Parcel 6, which consists of raw land, Novotny negotiated the
lease allowing a rancher to use it for grazing. There is no evidence
that any individual or entity other than Novotny and/or his wife,
regardless of any designation on trust documents, exercised any
significant dominion or control over the seven parcels.
31. Second,
there is and was a close relationship between the transferrer and
nominee (the third factor). Novotny, with the assistance of the trust
promoters, created Midwest and
Sunrise
. He was a signatory on Midwest's bank account (when
Midwest
had a bank account). He makes disbursements related to the subject
property. He has used his own personal funds to pay expenses related to
property purportedly held in the names of the trusts. He also paid his
own personal bills and expenses with funds from
Midwest
's bank account. After
Midwest
stopped maintaining a bank account, expenses for the subject property
were (and continue to be) paid out of a cash box which Novotny maintains
and controls.
32. The fourth
and fifth factors in a nominee determination are (4) the use by the
transferrer of the property transferred to the nominee and (5) the
nominee's lack of interference with the transferrers use of the
property. The evidence unequivocally establishes that the fourth and
fifth factors also apply because Novotny has exercised complete dominion
and control over the seven parcels since the attempted transfers. See
Shades Ridge Holding Co., 888 F.2d at 728 (nominee determination
hinges on who has active or substantial control). Novotny has continued
to use the putatively transferred property for his benefit without any
interference from the trusts. He lived on one of the parcels and
operated his salvage yard from it. With respect to the other parcels, he
has continued to make virtually all of the decisions concerning their
use. Neither Midwest nor
Sunrise
has interfered with Novotnys' use of the property in any way. While
several of the parcels of subject property are undeveloped, to the
extent that they have been used, Novotny has determined and controlled
their use. For example, one parcel has been leased to a rancher by
Novotny.
33. With
respect to the sixth factor, Novotny stopped filing federal income tax
returns and paying federal income taxes in 1979, the same year that the
Novotnys attempted to transfer the subject property to Midwest and
Sunrise
.
34. In sum,
because Novotny decided to form Midwest and Sunrise; attempted to
transfer the seven parcels to the trusts, but continued to use the
property for his own benefit as if the attempted transfers had never
occurred; and exercised almost complete dominion and control over the
seven parcels after the attempted transfers, Midwest and Sunrise must be
considered nothing more than his nominees or alter egos. There is no
evidence that the seven parcels were used by, or managed for the benefit
of, anyone other than Novotny and Etta Novotny.
5.
Midwest and
Sunrise
Are Shams.
35. Courts
have routinely held that so-called "family trusts" that are
similar or identical to the trusts in the instant case are nullities for
federal and state tax purposes.
36. Courts
have uniformly rejected taxpayers' attempts to limit their tax liability
by assigning income to such trusts, and then having the trusts deduct
payments to the taxpayers as expenses, finding the trusts to be shams
lacking any substance. See Holman v. United States [84-1
USTC ¶9265 ], 728 F.2d 462, 465 (10th Cir. 1984); United States
v. Krall [88-1
USTC ¶9103 ], 835 F.2d 711, 714 (8th Cir. 1987); Joe G.
Schneider v. Comm'r [CCH
Dec. 44,318(M) ], 54 TCM 1044 (1987).
37. Courts
also have found trusts, similar if not identical to the instant ones,
that were controlled by the taxpayers to be shams, and have permitted
the Government to use assets held by these trusts to satisfy the tax
liability of the individual taxpayer who transferred the assets to the
trust. See F.P.P. Enters. v.
United States
[87-2
USTC ¶9536 ], 830 F.2d 114, 115-117 (8th Cir. 1987); James E.
Edwards Family Trust v. United States [83-1
USTC ¶9180 ], 572 F.Supp. 22, 24-25 (E.D.N.M. 1983). Here, although
Novotny did not attempt to assign income to the trusts (deciding instead
that he was altogether immune from taxation), the trusts should
similarly be disregarded as shams.
38. In F.P.P.
Enters. v.
United States
[87-2
USTC ¶9536 ], 830 F.2d 114, 115 (8th Cir. 1987), the taxpayers
transferred their property to trusts promoted by
Anderson
in exchange for "trust certificate units."
Id.
at 116. The Government levied on property titled in the name of the
trusts to collect the individual taxpayers' liability. In upholding the
District Court's determination that the trusts were shams, the Eighth
Circuit noted:
The trusts
here are without economic substance. Soester as "creator" and
the Andersons as "trustees" established "paper
trust" entities on
December 21, 1978
. Soester never held or contributed any of the real property placed in
the trusts. Instead, the property was conveyed by the Beasons to the
trusts approximately four months later. The Beasons continued to treat
the property in exactly the same manner after the transfers as they did
before that time, quite simply, as their own. The trust property may
therefore be levied on to satisfy the Beason's tax liability.
F.P.P.
Enters. [87-2
USTC ¶9536 ], 830 F.2d at 117.
39. The
situation in the instant case is identical to that faced by the Eighth
Circuit in F.P.P. Enters. "Paper trusts" were created
for the Novotnys. The Novotnys then attempted to transfer the seven
parcels to Midwest and
Sunrise
and continued to treat the property as their own after the attempted
transfers.
40. F.P.P.
[87-2 USTC
¶9536 ], supra, is particularly instructive because the
Government argued, and the District Court and Eight Circuit agreed, that
even if the entities were considered valid trusts under Nebraska law,
they should not be considered entities separate from the taxpayer. F.P.P.
Enters., supra [87-2
USTC ¶9536 ], 830 F.2d at 117-118 (because trusts were shams and
shells acting as alter egos they were not entities separate from the
taxpayer). Therefore, as in F.P.P. Enters. [87-2
USTC ¶9536 ], supra, the trusts in the instant case are
shams.
41. The
defendant trusts' central argument--that a taxpayer's interest in
property is limited by state law--does not override the well-established
doctrine that, for federal and state income tax purposes, an entity may
be disregarded if it lacks any economic reality. Furthermore, of central
importance here, state law does not prohibit the
United States
or
Colorado
from establishing that a taxpayer has a beneficial interest in property
held by an entity that is a sham, or is the taxpayer's nominee or alter
ego. See PP 28--49, herein.
42. Indeed,
the Trusts' argument that the Government and
Colorado
cannot foreclose upon the subject property because the trusts may be
considered valid under state law would effectively eviscerate the
doctrine of nominee and sham trust. The logical result of accepting the
trusts' position would be to elevate form over substance. It would
permit any taxpayer to avoid collection of unpaid federal and state
income taxes merely by placing his real property and other valuable
assets into a trust that satisfies state-law formalities, even if the
taxpayer continued to use and enjoy the property as if it were his own.
43. The
evidence establishes that Midwest and
Sunrise
are nothing more than sham trusts and that Novotny has a beneficial
interest in the seven parcels purportedly held by these sham trusts that
may be foreclosed upon by the Government and
Colorado
.
6.
Midwest and
Sunrise
Are Alter Egos of Edward Novotny.
44. When an
entity is so dominated by a taxpayer that it does not have a separate
and independent existence, it is considered be an alter ego of the
taxpayer. G.M. Leasing Corp. v. United States [75-1
USTC ¶9435 ], 514 F.2d 935 (10th Cir. 1975), rev'd on other
grounds [77-1
USTC ¶9140 ], 429 U.S. 338, 50 L.Ed.2d 530, 97 S.Ct. 619 (1977); Lemaster
v. United States [90-1
USTC ¶50,032 ], 891 F.2d 115, 119-120 (6th Cir. 1989). The
Government may use the assets held by the alter ego of a taxpayer to
satisfy the taxpayer's federal tax liabilities.
Id.
45. Midwest
and
Sunrise
are so dominated by Novotny that they have no separate existence from
him and, accordingly, are his alter egos. See United States v.
Gosnell [92-2
USTC ¶50,368 ], 961 F.2d 1518 (10th Cir. 1992).
46. As
discussed in detail above, Novotny, despite the attempted transfer of
the subject property to Midwest and
Sunrise
, continues to treat the subject property as his own.
47. Various
individuals like Anderson and Chisum have been listed as trustees, but
they do not perform duties for the trusts. Indeed, Novotny does not even
know where Chisum purportedly a trustee, is located. Despite his lack of
participation, Chisum has not been replaced as a trustee.
48. Trustee
meetings are sporadic or non-existent.
49. The trusts
have not filed federal income tax returns.
50. The
individuals listed as trust beneficiaries have had little or no
involvement with the subject property and have received no distributions
since the formation of Midwest and
Sunrise
in 1979.
D.
Dismissal of the Trusts' Quiet Title Actions.
51. Midwest
and
Sunrise
have asserted quiet title claims in an attempt to defeat the federal and
state tax liens. The trusts' attempt to defeat the federal and state tax
liens through their quiet title claims must fail because Midwest and
Sunrise
cannot satisfy the elements of the quiet title claims that they
asserted.
1.
Midwest and
Sunrise
Cannot Satisfy The Elements of Their Quiet Title Claims.
52. Midwest
and
Sunrise
asserted quiet title claims pursuant to §38-41-108 and §38-41-111,
C.R.S.
53. In order
to prevail under §38-41-108, C.R.S., Midwest and Sunrise must prove
that: (1) they have been in actual and exclusive possession of the seven
parcels of subject property; (2) under claim and color of title made in
good faith; (3) for a period of seven successive years; and (4) they
paid taxes on the seven parcels during that period. See §38-41-108,
C.R.S.; see also Peters v. Smuggler-Durant Mining Co., 930 P.2d
575, 579-80 (
Colo.
1997); Ginsburg [Ginsberg] v. Stanley Aviation Corp.,
193
Colo.
454, 568 P.2d 35 (
Colo.
1977). Midwest and
Sunrise
must show that they have satisfied all these elements prior to the time
that the federal tax liens attached to the subject property.
54. Midwest
and
Sunrise
have not had actual and exclusive possession of the seven parcels.
Instead, as discussed extensively above, despite the attempted
transfers, the Novotnys retained possession of and exercised virtually
complete dominion and control over all seven parcels.
55. Second,
the Trusts' claim to the subject property was not made in good faith.
The Novotnys attempted to transfer the seven parcels to Midwest and
Sunrise
at about the same time that Novotny decided to opt out of the federal
income tax reporting and payment system. Midwest and Sunrise cannot be
considered to have acted in good faith because, at their core, they are
merely sham entities that the Novotnys created in a thinly veiled
attempt to shield their assets from legitimate creditors like the
Government.
56. Third,
although Midwest and
Sunrise
can show that the real property taxes for the seven parcels have been
paid for seven years, they cannot escape the ineluctable conclusion that
they were the nominees and alter egos of Novotny since shortly after
their formation, if not as of their creation.
Sunrise
never had a bank account or assets from which it could pay taxes. The
evidence shows that the Novotnys used rental payments from parcel two
and their personal funds to pay expenses for all of the properties,
including taxes. Importantly, because Midwest and
Sunrise
cannot be said to have an existence separate from Novotny, they cannot
be considered to have paid any taxes. Instead, only Novotny can be
considered to have paid the taxes related to the subject property.
57. To
establish ownership of property under §38-41-111, C.R.S., the Trusts
must prove (1) actual ownership of the seven parcels, and (2) that the
deeds conveying the property were recorded for a seven-year period. See
§38-41-111, C.R.S.; see Ginsberg v. Stanley Aviation Corp., 193
Colo.
454, 568 P.2d 35, 38 (
Colo.
1977); Cavat v. Juhan, 119
Colo.
561, 206 P.2d 600 (1949).
58. Midwest
and
Sunrise
cannot establish the elements necessary for a successful quiet title
claim pursuant to §38-41-111, C.R.S. Midwest and
Sunrise
never had actual and continuous possession of the seven parcels. These
trusts were shams and the nominees and alter egos of Novotny. The
Novotnys maintained possession of, and exercised virtually complete
dominion and control over, the seven parcels despite their ostensible
attempt to transfer them to Midwest and
Sunrise
.
2.
The Relationship Between The Trusts' Counterclaims to Quiet Title And
The Taxing Authorities' Sham, Nominee, And Alter Ego Theories
59. Even
assuming arguendo that the evidence had been sufficient to
sustain the Trusts' counterclaims to quiet title, the federal and state
taxing authorities are not precluded from asserting their theories of
nominee, alter-ego, and sham because of the state law statues of
limitation concerning actions to set aside a conveyance or deed.
60. The
relevant portions of §38-41-111(1), C.R.S., place a time limit on
actions to "question or attack the validity of or to set aside . .
. any instrument of conveyance or deed." If the party claiming
title is in possession of the property and the document has been
recorded and remained of record for seven years, an action to set aside
the document or render it inoperative is barred. (Emphasis added). Of
course, if the Trusts were able to establish title under §38-41-108 or
§38-41-111, C.R.S., they would own the relevant parcel or parcels. If
the bar of §111 were applicable, the Government could not
"question or attack the validity of . . . (the) instrument of
conveyance or deed" under which the Trusts claim title.
61. A claim
that the Trusts are shams, or are nominees of or alter egos of Novotny,
is not an attack on the validity of the conveyances to the Trusts or the
validity of the recorded deeds supporting the Trusts' claims of
ownership. Rather, a sham, nominee, or alter ego claim is an attack on
the validity of the Trusts as independent entities. For example, if the
Trusts are alter egos of Novotny, the actions and holdings of the Trusts
are the actions and holdings of Novotny. When an alter ego theory has
been proven, "a court will disregard (the alter ego entity) . . .
and consider the actions ostensibly taken by the (alter ego entity) to
be those of the (underlying entity)." Gorsich v. Double B
Trading Co, Inc., 893 P.2d 1357 at 1362. Here, Novotny is the
underlying entity.
62. Under
these theories, if the Trusts own the property, Novotny owns the
property. In other words, claims that the Trusts are shams, nominees, or
alter egos can be asserted even when operating under the assumption that
the Trusts hold valid title to the properties. These theories simply
posit that the valid property interests of the Trusts amount to valid
property interests of Novotny; that any property owned by the Trusts is,
legally, property of Novotny. This is so because, as shams, nominees, or
alter-egos, the Trusts are, in reality, the same as Novotny.
63. In short,
proof that the Trusts are shams, or are nominees or alter egos of
Novotny is, in essence, proof that the Trusts are Novotny. If the Trusts
are Novotny, the Trusts' property is Novotny's. There is ample authority
for the proposition that the federal and state government can collect
taxes by levying on property held by a nominee or alter ego of the
taxpayer.
64. The
Government's alter ego, sham, and nominee theories are not barred by §38-41-111(1),
C.R.S. Section 38-41-111(1), C.R.S., limits only claims that question or
attack the validity of the instrument of conveyance or deed under which
the Trusts claim title. The limitation of §38-41-111(1), C.R.S., is not
applicable to the Government's sham, nominee, and alter ego claims
because these claims do not question or attack the validity of an
instrument of conveyance or deed under which the Trusts claim title.
Rather, these theories assert that any valid claim of title of tile held
by the Trusts flows through to Novotny.
E. Colorado
's Tax Lien And Concomitant Foreclosure
65. On
December 13, 1999
, the Montezuma County District Court entered judgment for
Colorado
against Novotny in the amount of $34,264 (thirty-four thousand,
two-hundred and sixty-four dollars) for unpaid state income tax and
statutory additions for 1990 and 1991. The state of
Colorado
recorded a transcript of judgment docket with the clerk and recorder of
Montezuma
County
on
December 15, 1999
. Therefore,
Colorado
has a valid tax lien against any property in which Novotny has a legal
or equitable interest. This tax lien is subordinate and junior to that
of the Government. For the reasons discussed above, the Trusts do not
hold title to the seven parcels of property. Rather, the Novotnys hold
title to the seven parcels of property. Further, even if the Trusts did
hold title to the properties, those property interests would flow
through to the Novotnys because the Trusts holding paper title to the
subject seven parcels of real property have been found to be shams and
the nominees and alter egos of Novotny. As a result,
Colorado
may enforce its tax lien against Novotny's undivided one-half interest
in that real property.
F.
Mrs. Novotny's Quiet Title Claim
66. As part of
her quiet title claim, Etta Novotny claims that, if the Trusts are found
not to hold valid title to the properties, that she holds an undivided
one-half interest in the properties, in joint tenancy with Novotny. The
Government does not dispute this claim, and the record supports this
claim. The properties originally were conveyed to Novotny and Etta
Novotny as joint tenants. Because the Trusts' claim of title to the
properties is invalid, the Novotny's continue to hold title to the
properties as joint tenants.
67. Etta
Novotny is entitled to judgment quieting title to her interest in each
of the seven parcels. This judgment shall reflect that Mrs. Novotny
holds title to the properties in joint tenancy with Novotny, and that
Etta Novotny holds an undivided one-half interest in each of the
properties.
THEREFORE,
IT IS ORDERED, ADJUDGED, AND DECREED as follows:
1. That
judgment be entered against Edward G. Novotny and in favor of the
Government with respect to the 1989, 1990, and 1991 tax years in the
amount of $383,446.33, (three hundred and eighty-three thousand, four
hundred and forty-six dollars and thirty-three cents) plus interest and
statutory additions as provided by law from June 3, 2002;
2. That
judgment shall enter in favor of Etta Novotny on her quiet title claim.
The judgment shall decree that Etta Novotny holds title to the to the
seven parcels of real estate described in this Order in joint tenancy
with Novotny, and that Etta Novotny holds an undivided one-half interest
in each of the properties;
3. That the
federal and state tax liens are foreclosed against the seven parcels of
real property described above;
4. That the
seven parcels shall be sold by the United States Marshal, with one half
of the net sale proceeds to be applied first to Edward G. Novotny's
federal tax liability, and if this liability is satisfied and funds
remain, then to Edward G. Novotny's Colorado state tax liability; the
other half of the net proceeds to be paid to Etta Novotny;
5. That a
deficiency judgment shall be entered against Edward G. Novotny in favor
of the United States of America if the proceeds of the sale do not
satisfy his federal tax liabilities;
6. That a
deficiency judgment shall be entered against Edward G. Novotny in favor
of the Department of Revenue, State of Colorado if the proceeds of the
sale do not satisfy Novotny's state tax liabilities;
7. That the
counterclaims and cross-claims of defendants Midwest and
Sunrise
are DISMISSED WITH PREJUDICE;
8. That the
counterclaims and cross-claims of Etta Novotny, other than the quiet
title counterclaim described in paragraph four (4), above, are DISMISSED
WITH PREJUDICE;
9. That the
Government and the State of Colorado shall recover their costs and shall
submit a bill of costs within eleven (11) days of the date of this
Order; and
10. That the
Government shall submit a proposed Order of Foreclosure and Decree of
Sale within 45 (forty-five) days.
1
The parties consented to the exercise of jurisdiction by U.S. Magistrate
Judge Coan with respect to the pending dispositive motions on
June 11, 2001
. See Notice of Availability of United States Magistrate Judge to
Exercise Jurisdiction, dated
June 11, 2001
[#172].
[57-1 USTC
¶9476]James L. Ewin, et al., Plaintiffs v. Brightwood Auto Body Works,
Inc., Defendant
U.
S. District Court, Dist. of Col., Civ. Action No. 1941-55, 12/31/56
[1954 Code Sec. 6323(a)--similar to 1939 Code Sec. 3672(a)(3)]
Collection of taxes: Lien for taxes: U. S. lien v. Landlord's lien:
Notice of lien filed.--On various dates preceding June 17, 1955, the
United States filed notices of federal tax liens with the Clerk of the
U. S. District Court for the District of Columbia for unpaid withholding
taxes. These dates also preceded the period
February 1, 1955-March
31, 1955, which was the period for which the taxpayer had not paid rent
to its landlord. On
April 29, 1955
, the landlord filed suit for the rent. Attachment before judgment was
issued and judgment in favor of the landlord was entered on
June 17, 1955
ordering the sale of taxpayer's property to satisfy the judgment. The
United States
was granted permission to intervene. It was held that the
United States
established the priority of its tax liens over the landlord's lien for
rent by filing notices of the liens.
Lowry N. Coe,
National Press Building
,
Washington
4, D. C., for plaintiffs. Oliver Gasch, United States Attorney, for the
United States
, intervenor.
Memorandum
(
2/9/56
)
TAMM, District
Judge:
On
May 6, 1953
,
November 24, 1953
,
October 8, 1954
and on
June 29, 1955
, the District Director of Internal Revenue filed with the Clerk of the
United States District Court for the
District of Columbia
notices of federal Tax liens for unpaid withholding taxes assessed
against the Brighwood Auto Body Works, Inc. On
April 29, 1955
, plaintiffs filed suit against Brightwood for rent due the plaintiffs
for the period
February 1, 1955
through
March 31, 1955
. An attachment before judgment was issued; judgment was entered for
plaintiffs against the defendant, and on
June 17, 1955
, the Court ordered the property of defendant in the custody of the
United States Marshal to be sold and the proceeds from such sale used to
satisfy the judgment in favor of plaintiffs. The
United States
served the Marshal with notice of levy, and plaintiffs moved to require
the United States Marshal to comply with the order of sale. At oral
argument on this motion, the
United States
was granted permission to intervene. Plaintiffs have now moved orally to
vacate the order granting intervention.
The
controversy presently before the Court revolves around the question of
whether a landlords's lien, as provided for in Title 45, Section 915 of
the District of Columbia Code (1951) takes precedence over a federal tax
lien. The Court finds that by the filing of the notices of the tax lien
by the District Director of Internal Revenue, the priority of the
federal tax liens was established over the lien of the landlord for
rent. 1
Accordingly, the plaintiffs' motion to require the Marshal to comply
with the order of sale and the motion to vacate order granting
intervention are both denied.
Counsel will
present order.
Order
(
2/15/56
)
The
above-entitled matter having come on for hearing on plaintiffs' motion
to require the United States Marshal to comply with the order of sale,
and plaintiffs' motion to vacate the order granting intervention on the
part of the United States as a plaintiff herein, and on the opposition
of the United States Marshal and the United States of America thereto,
and it appearing to the Court, for the reasons stated in the memorandum
filed herein dated February 9, 1956, that the plaintiffs' motion to
require the United States Marshal to comply with the order of sale
should be denied, and that the United States was properly accorded
intervention as a party possessing liens which had a priority over the
plaintiffs' landlord's lien, it is this 15th day of February 1956
ORDERED, that
plaintiffs' motion to require the United States Marshal to comply with
the order of sale be and hereby is denied
FURTHER
ORDERED, that plaintiffs' motion to vacate the order granting
intervention to the
United States
be and hereby is denied.
Order
(
11/7/56
)
KIRKLAND
, District Judge:
The
above-entitled cause having come on for hearing on intervenor United
States' motion for summary judgment, and plaintiffs' opposition thereto,
and counsel for both sides having been heard, it is this 7th day of
November, 1956,
ORDERED that
the intervenor
United States
' motion for summary judgment be and the same is hereby granted, and it
is
FURTHER
ORDERED that the plaintiff Ewin be reimbursed from the fund of the
United States Marshal in the amount of One Hundred Fifty Dollars
($150.00) representing amounts deposited by him for cost purposes on
April 29, 1955
and
May 23, 1955
; and it is
FURTHER
ORDERED that the United States Marshal for the District of Columbia be
reimbursed in the amount of Forty-nine and 14/100 Dollars ($49.14)
representing the sum of $5.50 service cost, $22.50 appraisal cost
incurred April 10, 1955, and $21.14 representing transfer and storage
charges incurred May 20, 1955, all of these amounts to be reimbursed
from the sum of Thirteen Hundred Sixty-five and 50/100 Dollars
($1,365.50) which represents the proceeds of the Marshal's execution
sale, said funds now being held by the United States Marshal for the
District of Columbia; and it is
FURTHER
ORDERED that the complaint herein be and the same is hereby dismissed.
Order
(
12/31/56
)
CURRAN,
District Judge:
It appearing
to the Court that the complaint herein should not have been dismissed on
the Intervenor's Motion for Summary Judgment since plaintiffs, James L.
Ewin, et al., had obtained a judgment against defendant, Brightwood Auto
Body Works, Inc., and
It further
appearing that the costs herein incurred by the United States Marshal
should total $364.72 instead of $49.14 as described in the order of this
Court, dated
November 7, 1956
, it is this 31st day of December, 1956,
ORDERED that
the United States Marshal for the District of Columbia be reimbursed in
the amount of Three Hundred Sixty-four and 72/100 Dollars ($364.72),
representing $5.50 costs for services of process, $22.50 appraisal costs
incurred April 10, 1955; $21.14 representing the transfer and storage
charges incurred May 20, 1955; $40.96 representing the United States
Marshal's commission on proceeds of the sale at 3% of an amount
totalling $1,365.50; and $107.50 payable to the Kalorama Garage for
storage and towing service; and $167.12 payable to Adam A. Weschler for
advertising and commission. All of these amounts are to be reimbursed
from the sum of One Thousand Three Hundred Sixty-five and 50/100 Dollars
($1,365.50) which represents the proceeds of the Marshal's execution
sale. Said funds now being held by the United States Marshal for the
District of Columbia
, and it is
FURTHER
ORDERED that the United States Marshal be instructed to pay the
remaining sum of One Thousand and 78/100 Dollars ($1,000.78) to the
Treasurer of the
United States
for partial satisfaction of the lien of the
United States of America
herein.
1
United States v. Scovil, 348
U. S.
218 [55-1 USTC ¶9137].
[76-2 USTC
¶9524]Commercial Lighting Equipment Co., a California corporation,
plaintiff v. Imperial Electric Co., Inc., a Colorado corporation, and
the City of Thornton, defendants Third-party plaintiffs v. Grebb
Electric Company,
Rob
ert Stewart and the United States of America, third-party defendants
U.
S. District Court, Dist. Colo., Civil Action No. 75 M 52, 6/4/76
[Code Sec. 6323]
Lien for taxes: Priority: Federal tax lien v. Choate mechanic's
lien.--The Government's lien for taxes was not superior to a choate
(perfected) mechanic's lien since the mechanic's lien became a valid and
effective choate lien prior in time to the attachment of the federal tax
lien.
T. William
Wallace, Daniel, McCain & Brown, 105 Bridge St., Brighton, Colo.,
for plaintiff, defendants and third-party plaintiffs. James L. Treece,
United States Attorney, Carolyn J. McNeill, Assistant United States
Attorney, Denver, Colo., for third-party defendants.
Memorandum
Opinion and Order
MATSCH,
District Judge:
This action
was brought by plaintiff Commercial Lighting Equipment Company
("Commercial") in the District Court of Adams County, State of
Colorado, and removed to this court by the United States pursuant to 28
U. S. C. §1441 upon its being named as a Third-Party Defendant. By
agreement of the parties, this court is limiting its consideration of
the case to a determination of competing claims asserted by Commercial
and the United States to certain funds interpleaded by defendant City of
Thornton ("City") on cross motions for summary judgment. These
funds represent proceeds owing to defendant Imperial Electric Company,
Inc. ("Imperial") for work performed under contract with City.
Commercial claims a prior right to the funds withheld by the City of
Thornton by virtue of liens arising on such funds pursuant to Colorado's
Public Improvement Lien Statute, C. R. S. (1973) 38-26-107. The
United States
claims a superior right to the funds by virtue of a tax lien under 26
U. S.
C. §6321. Upon resolution of this specific dispute, it is agreed that
the case will be remanded to the state court for disposition of all
other issues.
The essential
facts are not in dispute. On
April 30, 1974
, defendant Imperial was awarded the prime contract for construction of
a new lighting system for the City Park Ball Field. The contract was
fully performed in August, 1974, and City advertised in accordance with
C. R. S. (1973) 38-26-107(1) that final settlement would take place on
some date after
September 23, 1974
. City received, prior to the projected settlement date, the verified
statement of Commercial that $34,786.00 remained due and unpaid from
Imperial for labor and materials Commercial had furnished in the ball
field project. This amount was reduced to $14,786.00 after $20,000.00
payment. On October 18, this action was commenced by Commercial to
enforce its unpaid claim against Imperial. City was named as an original
party defendant to the action, and a formal lis pendens notice with
respect thereto was filed with City on
November 6, 1974
. As a result of Commercial's filing of its notice of amounts due and
unpaid on the ball field project, and the filing of this action, City
has withheld payment on its contract with Imperial in the sum of
$5,350.00 which it has interpleaded herein for disposition by the court.
In a second
and separate transaction, City requested in July, 1974 that Imperial
furnish certain materials and labor for repair work at
Highland
High School
. These materials and services were provided from July 29 through August
1. Subsequently, City received invoices from both Commercial and
Imperial for the project, with each firm representing that it had
performed the designated work. Because of the dispute, City has withheld
payment on both invoices pending court determination of which party is
rightfully entitled to payment. Although City did not advertise a final
settlement date with regard to the Highland High School project, it
received from Commercial at some time prior to September 23, 1974, a
statement for $643.70 due and unpaid for materials, pursuant to C. R. S.
(1973) 38-26-107, with a request that City withhold such amount from its
payment to Imperial. For purposes of resolving the federal question in
this litigation it will be assumed, without being decided, that Imperial
is entitled to payment for the Highland High School project, and that
the amount due Imperial is subject to competing claims by Commercial and
the United States.
On
October 9, 1974
, a federal tax lien arose in favor of the
United States
on defendant Imperial Electric Co., Inc., pursuant to the provisions of
Section 6321 of the Internal Revenue Code of 1954. 26 U. S. C. §6321.
Notice of this lien was duly filed and recorded on the same date with
the Secretary of State of Colorado as Reception No. 190904; notice of
levy was served on the City of
Thornton
on
October 15, 1974
. There remains due on said lien the sum of $13,872.60, plus interest
and penalty charges.
The record
herein establishes that there was timely compliance with the statutory
requisites of
Colorado
's Public Improvement Lien Statute, C. R. S. (1973) 38-26-107, and that
a lien attached on the funds withheld from Imperial by the City of
Thornton
. Whether that lien has priority over the competing tax lien asserted by
the
United States
is a question controlled by federal law. Aquilino v. United States
[60-2 USTC ¶9538], 363
U. S.
509 (1960).
Section 6323
of the Internal Revenue Act of 1954 codified the common law rule that
"the first in time is the first in right."
United States
v.
New Britain
[54-1 USTC ¶9191], 347
U. S.
81 (1954);
United States
v. Pioneer American Insur. Co. [63-2 USTC ¶9532], 374
U. S.
84 (1963). A choate (perfected) mechanic's lien takes priority over an
after-created §6321 tax lien. 26 U. S. C. §6323(a). The critical
determination, then, when considering the priority of the
Colorado
statutory lien, is "the time it attached to the property in
question and became choate."
United States
v. New Britain, supra, at 88. The law defines the state of
choateness to be the point at which the identity of the lienor, the
property subject to the lien, and the amount of the lien are
established.
United States
v. Pioneer American Insur. Co., supra; Avco Delta Corp. Canada Ltd.
v. United States [72-1 USTC ¶9359], 459 F. 2d 436 (7th Cir. 1972).
Commercial, as
holder of the public improvement liens, qualifies as a "mechanic's
lienor" under the definition set forth in 26
U. S.
C. §6323(h)(2). It is my conclusion that the liens in issue became
perfected, choate liens on a date no later than
September 23, 1974
, at the time Commercial filed its verified statements with City. At
that time the identity of the lienor, the identity of the fund on which
the lien had attached, and the amount of the lien had all been
established. Moreover, it is clear from the
Colorado
statute that legal consequences came into play upon submission of the
verified statements to the City of
Thornton
. Payments were required to be withheld from Imperial, at least to the
extent of the amounts claimed, and a failure to do so would have left
City open to liability.
Consistent
with the foregoing, I find that the liens asserted by Commercial became
valid and effective choate liens on or before
September 23, 1974
, prior in time to the attachment of the federal tax lien on
October 9, 1974
. Accordingly, Commercial's claim to the fund interpleaded by the City
of Thornton on the City Park Ball Field contract is superior to, and
entitled to priority over, the tax lien on such fund asserted by the
United States. If Imperial is found to be entitled to payment for
services and materials furnished in the
Highland
High School
project, and Commercial is found to be a sub-contractor therefor,
Commercial's claim to the fund withheld for the materials furnished is
superior to, and entitled to priority over, the tax lien on such fund
asserted by the
United States
.
Upon the
foregoing, it is
ORDERED that
summary judgment shall be entered declaring the rights of the parties as
set forth herein and that this action shall then be remanded to the
District
Court
of
Adams
County
, State of
Colorado
.
Judgment
PURSUANT to
and in accordance with the Memorandum Opinion and Order entered by the
Honorable Richard P. Matsch, United States District Judge, on
June 4, 1976
, it is hereby
ORDERED AND
ADJUDGED that summary judgment be and the same hereby is entered
declaring the rights of the parties as set forth in said Memorandum
Opinion and Order, and it is further
ORDERED AND
ADJUDGED that this action be and hereby is remanded to the District
Court in and for the
County
of
Adams
, State of
Colorado
.