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 .