Fact-Finding Page1

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United States of America v. Peabody Construction Company, Inc., et al.

U.S. District Court, Dist. Mass.; CIV. 02-11796-RWZ, February 24, 2005.

Related DC-Mass. case at 2001-2 USTC ¶50,694.

[ Code Sec. 6323]

Lien for taxes: Priority of lien: Judgment creditor. --

A federal tax lien against a subcontractor had priority over the judgment lien of the subcontractor's creditor as to amounts owed by the general contractor to the subcontractor. The subcontractor owed employer pension contributions and federal taxes and had an outstanding amount due from a general contractor. The contractor received a notice of levy from the IRS and, the following year, the pension trustees received a judgment against the contractor for the amount that he owed to the subcontractor. The IRS successfully argued conversion by the trustees since they knew of the IRS lien prior to receipt of the funds from the general contractor pursuant to judgment.

MEMORANDUM OF DECISION

ZOBEL, District Judge: Peabody Construction Company, Inc. ("Peabody") owed $27,642.32 to Baldwin Steel ("Baldwin") as payment for subcontracting work. In turn, Baldwin owed $31,185.60 to Trustees of the Iron Workers District Council of New England Pension, Health and Welfare, Annuity, Vacation and Education Funds (the "Trustees") in employer contributions under the Employee Retirement Income Security Act. At the same time, Baldwin also owed money to the Internal Revenue Service (the "IRS") for certain unpaid tax liabilities. Peabody received a Notice of Levy from the IRS in 1999 regarding this obligation. The Trustees sued Peabody in federal court in 2000 as a reach-and-apply defendant. Peabody raised the issue of this lien's potential priority over the Trustees' claim, but neither Peabody nor Baldwin nor the Trustees moved to include the IRS as a party to that suit. Peabody notified the IRS about the suit, but the IRS never moved to join the litigation or provided any detailed or dated documentation of its lien. Consequently, nothing in the record specifically undermined the Trustees' showing of a choate claim deserving payment, and the court ordered Peabody to pay the money it otherwise owed to Baldwin to the Trustees instead. Peabody complied with this order.

In this law suit brought some years later, the United States challenges Peabody 's payment to the Trustees as subverting the alleged priority of the IRS lien and has named both Peabody and the Trustees as defendants. In Count One, plaintiff asserts that Peabody is liable for refusing to surrender to the IRS the funds owed to Baldwin . In Count Two, plaintiff alleges that the Trustees misappropriated Baldwin's property in accepting Baldwin's funds from Peabody , effectively arguing conversion, since the Trustees knew of the IRS lien prior to accepting such funds. Plaintiff seeks payment from each defendant in the amount of the lesser of either (1) the funds paid by Peabody to the Trustees in the prior litigation, plus interest, or (2) Baldwin's unpaid tax liabilities, plus interest and any applicable statutory additions.

Plaintiff and the Trustees each now separately moves for summary judgment on Count Two. In order to establish a claim for conversion under Massachusetts law, plaintiff must show that

(1) the defendant intentionally and wrongfully exercised control or dominion over the personal property; (2) the plaintiff had an ownership or possessory interest in the property at the time of the alleged conversion; (3) the plaintiff was damaged by the defendant's conduct; and (4) if the defendant legitimately acquired possession of the property under a good-faith claim of right, the plaintiff's demand for its return was refused.

Evergreen Marine Corp. v. Six Consignments of Frozen Scallops, 4 F.3d 90, 95 (1st Cir. 1993). Factors one, three and four are easily established in the instant case. The first factor of control or dominion over the personal property requires "intentional deprivation of property from the rightful owner." Kelley v. LaForce, 288 F.3d 1, 12 (1st Cir. 2002). In the instant case, the Trustees intended to, and did, obtain control of the funds from Peabody . Even though the Trustees received the funds at issue as the result of a court order, "[i]t is no defense to conversion for defendant to claim that he acted in good faith, reasonably believing that he had a legal right to possession of the goods." Id. The Trustees accepted the funds with knowledge that the IRS's interest remained unresolved, and thus, at the risk of a subsequent decision in the IRS's favor. With respect to the third factor, plaintiff alleged damage from the deprivation of funds, and the Trustees have not contested this allegation. Regarding factor four, the Trustees also have not disputed plaintiff's claim that they had rejected plaintiff's demand for payment. The remaining issue is the second factor, namely, whether plaintiff had an ownership or possessory interest in the Peabody funds at the time the Trustees acquired such funds.

Plaintiff asserts that its ownership interest derives from the IRS tax lien against Baldwin, as filed in 1999 against Baldwin in the New Hampshire Office of the Secretary of State. The Trustees dispute this claim on several grounds. First, the Trustees characterize the funds paid by Peabody as a setoff intended to compensate Baldwin's creditors and argue that, under state law, Baldwin never had any property interest in setoff funds. Rather, the agreement between Peabody and Baldwin intended for these funds to be paid directly to Baldwin's creditors with no interest held or retained by Baldwin . Because a federal tax lien may only attach "what is defined as property by state law," the Trustees maintain that IRS lien never successfully attached the setoff funds. Markham v. Fay [ 96-1 USTC ¶50,118], 74 F.3d 1347, 1364 (1st Cir. 1996). Assuming arguendo that a setoff existed, however, the right of setoff becomes choate only upon its exercise. See Horton Dairy Inc. v. United States [ 93-1 USTC ¶50,195], 986 F.2d 286, 291 (8th Cir. 1993), and United States v. Bell Credit Union [ 88-2 USTC ¶9564], 860 F.2d 365, 369 (10th Cir. 1988). The record contains no evidence to support the Trustees' claim that Peabody exercised the setoff, thereby making it choate, before the IRS filed its lien. Although the Trustees refer the Court to exhibits they filed in a separate action, these exhibits are not before this Court and, thus, cannot be considered in connection with the instant motions.

The Trustees next contend that Baldwin 's failure to pay its employee obligations constituted a material breach of contract enforceable by the Trustees as intended third party beneficiaries of the agreement between Baldwin and Peabody. The Trustees argue further that upon nonpayment by Baldwin to the Trustees, Peabody became directly liable to the Trustees as third-party beneficiaries. As a result, the funds paid by Peabody never became Baldwin 's property and, thus, never became subject to the IRS lien. Courts in Massachusetts "have adopted the rule of the Restatement (Second) of Contracts §302 (1981), and limit enforcement by [third-party] beneficiaries to those who are intended beneficiaries." Miller v. Mooney, 431 Mass. 57, 62 (2000) (emphasis in original). "The intent must be clear and definite" to establish third-party beneficiary status. Anderson v. Fox Hill Village Homeowners Corp., 424 Mass. 365, 366-367 (1997). As the Trustees have not identified any language in the agreement between Baldwin and Peabody in support of their claim, or any other evidence of intent to benefit the Trustees, this reasoning fails to demonstrate why the IRS may not maintain a lien against the funds owed by Peabody to Baldwin .

The Trustee's last set of arguments challenge the perfection, filing and refiling of the IRS lien and specifically rely upon an assertion that the Uniform Commercial Code (the "UCC") governs federal tax liens. In response, plaintiff argues, based on the plain text of IRS regulations, that the Internal Revenue Code (the "IRC"), not the UCC, governs federal tax liens. See, e.g., 26 C.F.R. §301.6323(f)-1(c). The Trustees offer no authority in support of their contrary position, and other courts have found that "[t]he statutory UCC requirements for the creation and perfection of security interests governing consensual, commercial transactions are completely at odds with the framework for tax liens provided within the Internal Revenue Code." In re Elliot [ 87-1 USTC ¶9118], 67 B.R. 866, 869 (D. R.I. 1986). Indeed, the cases the Trustees cite resolve the questions of perfection and filing under the IRC, not the UCC. See, e.g., Waste Management of Missouri v. Evert [ 99-2 USTC ¶50,827], 188 F.3d 1002, 1004 (8th Cir. 1999); Griswold v. U.S. [ 95-2 USTC ¶50,419], 59 F.3d 1571, 1575 (11th Cir. 1995); and U.S. v. New York State Dept. of Taxation and Finance [ 2003-1 USTC ¶50,300], 138 F.Supp.2d 392, 397 ( W.D. N.Y. 2001). The Trustees' further argument that plaintiff filed its Notice of Lien in the wrong state reflects an incomplete reading of the IRC. The statute in question places the site of personal property held by a corporation in the state "at which the principal executive office of the business is located," in this case, New Hampshire , and not Massachusetts as urged by the Trustees. 26 U.S.C. §6323(f)(2)(B). Consequently, the Trustees have offered no persuasive challenge to plaintiff's claim that the IRS lien constituted an ownership or possessory interest in the Peabody funds at the time these were paid to the Trustees.

The Trustees raised a separate concern about the amount of the IRS lien and whether any responsible persons, for example a corporate officer, may have already provided payment to the IRS in partial satisfaction of the lien. Plaintiff already addressed this issue in its pleadings by seeking damages in an amount equal only to the lesser of the funds received by the Trustees or the total tax liability of Baldwin , including applicable accrued interest and penalties, as of the date that judgment is entered. In other words, plaintiff's damages would in no case exceed Baldwin 's total outstanding tax liability.

Accordingly, plaintiff's motion for summary judgment (# 23 on the docket) is allowed, and defendant's motion for summary judgment (# 25 on the docket) is denied.

 

 

Donald Derrington, et al., Plaintiffs v. United States of America , Defendant.

U.S. District Court, West. Dist. Wash. , at Seattle ; C02-5257L, September 12, 2003 .

[ Code Secs. 6323 and 6871]

Collection: Tax liens: Validity and priority against third parties: Constructive trust. --

The IRS was entitled to levy upon funds held by a bankruptcy estate to satisfy a debtor's delinquent tax obligations. Because funds transferred into the bankruptcy estate by a third party as part of an investment plan were determined to be a loan, the debtor was deemed the owner of the transferred funds at the time of the levy. The third party's prior testimony and an examination of the agreement between the third party and the debtor indicated that the transaction constituted a loan. As such, the transferred funds were appropriately subject to an IRS levy. Moreover, the court rejected the third party's argument that a constructive trust arose on its behalf to protect the transferred funds from IRS levy. The court noted that the IRS levy preceded the event giving rise to the possible establishment of a constructive trust.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

LASNIK, District Judge: This matter comes before the Court on a motion for summary judgment (Dkt. # 15) filed by defendant United States of America ("the IRS"). The IRS seeks dismissal of claims for a refund filed by plaintiffs Donald Derrington, et al. (collectively, "Plaintiffs"). The Court grants the IRS's motion for the reasons set forth in this Order.

II. DISCUSSION

A. Background.

This suit centers upon the ownership of approximately $235,000 seized in 2000 by the IRS to collect income taxes, interest and penalties owed by G. Sloan Smith ("Smith"). The funds levied by the IRS were payable to Smith or his nominee, Plains Group Ltd. ("Plains Group"), due to claims Smith obtained against a bankruptcy estate with funds supplied by Plaintiffs. Plaintiffs argue that they owned the claims from which the funds were derived. The IRS contends that Smith acquired the claims with money loaned to him by Plaintiffs and therefore the IRS's liens against the claims trumps any interest Plaintiffs may have had in the claims. Discussion of a fairly complex set of transactions is necessary for resolution of this issue.

In the early 1990s, the IRS assessed Smith with federal income tax liabilities arising from his failure to pay taxes owed for several years. (Bedford Decl. ¶3). Pursuant to 26 U.S.C. §6321, statutory liens arose against Smith's property and rights to property for the tax liabilities. Id. ¶4. In November of 1993, the IRS recorded nominee liens against Plains Group. Id. ¶5; see also Bedford Decl. Exs. A-B (notices of federal tax lien).

In 1991, Wallace and Clarice Hall ("the Halls") and their entities entered bankruptcy proceedings in In re Wallace and Clarice Hall, Bankr. No. 91-09143, United States Bankruptcy Court, Western District of Washington . (Hankla Decl. Ex. A (Derrington Decl.) ¶2). The Halls held a fifty percent interest in the Mariner Village Mobile Home Park in Everett , Washington . Id.

Plaintiffs learned of an investment opportunity involving the Halls' bankruptcy through John Widmer, a mutual friend of Plaintiffs and the Halls. Id. ¶7. The plan called for Plaintiffs, along with other investors, to purchase the unsecured claims against the Halls' estate, seek to have the bankruptcy case dismissed, and then recoup the principal investment plus points and interest with income generated by the Halls' interest in Mariner Village . Id. ¶ ¶5, 12. Plaintiffs initially planned to use an individual named Tim Golden ("Golden") to raise the funds and implement the investment plan. Id. ¶5. Golden gave a presentation to Plaintiffs in which he used a term sheet that described a one-year loan to an unspecified borrower. Id. Ex. 2. The plan called for Plaintiffs to earn a thirty-three percent return on their investment: a fifteen percentage point origination fee and eighteen percent interest. Id.

Golden was unable to complete the deal. Id. ¶2. However, in April of 1994, the Plaintiffs met with Smith and the parties finalized a deal that was similar to that proposed by Golden. Id. ¶12. Plaintiff Donald Derrington described the plan as follows:

The deal with Plains Group was to be the same as the deal with Golden, that is, we were putting up half the money, that Sloan Smith or some other investor would be going in on the rest of the transaction, and that our investment was to be secured by Hall's 50% ownership in the Mariner Village manufactured home park. The thrust was also to get the bankruptcy dismissed, but that our investment was to be secured by Hall's 50% ownership of the Mariner Village manufactured home park. We were also going to receive a 15% loan fee and 18% interest. If the Halls ended up with Mariner Village , we were going to be paid out over time. If the Halls did not end up with Mariner Village , we would have the security of the funds to be paid out on the bankruptcy claims from the funds in the hands of the Hall bankruptcy trustee.

 

The net result was that among the investors we put $325,000, which we paid to Sloan Smith or Plains Group Ltd. about April 21, 1994 .

Id. ¶ ¶12-13.

Plaintiffs and Smith signed a document entitled "Agreement to Consolidate Loans and Negotiate Settlement" (the "Agreement"). Id. Ex. 3. The Agreement appears to have contemplated that the investors would loan funds directly to the Halls and that the Halls would use the proceeds to settle the claims against them. ¹ See id. at ¶4 ("All funds loaned to the Halls by the undersigned lenders shall be subject to the terms of a loan agreement between the Halls and the undersigned lenders and shall be secured by the Halls [sic] 50% ownership in Mariner Village Mobile Home Park."). However, the Halls did not sign the Agreement. ²

On April 21, 1994 , Plaintiffs deposited funds into a Plains Group bank account. Id. ¶13. Smith then used the funds to purchase claims against the Halls' bankruptcy estate. (Hankla Decl. Ex. C (Derrington Dep.) at 44). Derrington accompanied Smith while he negotiated the claim purchases. Id. The claims appear to have been acquired in the name of the Plains Group. (Hankla Decl. Ex. A ¶19).

Smith did not acquire all of the creditors' claims and the bankruptcy trustee remained in control of the estate. Id. ¶ ¶16-17. The Halls' fifty percent interest in Mariner Village was sold through the bankruptcy proceeding, and the investors were therefore limited to the claims for repayment of the investment. Id. On November 2, 1994 , unbeknownst to Plaintiffs, the bankruptcy trustee made an interim distribution on the claims acquired by the Plains Group in the amount of $373,848. Id. ¶22. The check distributing these funds was payable to Sloan Smith. (Hankla Decl. Ex. D).

Smith did not inform Plaintiffs that he had received this distribution. (Hankla Decl. Ex. A ¶22). Plaintiffs later learned of the distribution from bankruptcy court records and demanded an accounting from Smith. Id. ¶27. Smith informed Plaintiffs that he had reinvested the funds in other ventures. Id. Shortly thereafter Plaintiffs hired an attorney and initiated a lawsuit against Smith in the United States District Court for the District of Oregon. In deposition testimony taken in that litigation the Plaintiffs characterized the transaction as a loan to Smith or the Plains Group. See Hankla Decl. Ex. C (Derrington Dep.) at 46 (testifying that he though he was loaning money to Sloan Smith); Hankla Decl. Ex. B (Nortman Dep.) at 18-19 (testifying that he thought he was loaning money to Smith or the Plains Group); Hankla Decl. Ex. F (Halver Dep.) at 18 (testifying that he thought he was loaning money to the Plains Group). Plaintiffs obtained a judgment against Smith and the Plains Group by default. (Second Hankla Decl. Ex. F).

After the $373,848 distribution, approximately $235,000 remained due from the Halls' bankruptcy estate on the Plains Group claims. (Hankla Decl. Ex. I). Plaintiffs sued the bankruptcy trustee in an effort to prevent distribution of the remaining amount to Smith. Id. Prior to issuance of the default judgment against Smith in the Oregon litigation, Plaintiffs and the bankruptcy trustee reached an agreement whereby the trustee would deposit the remaining amount into Plaintiffs' attorney's trust account pending resolution of the Oregon litigation. Id. However, before the bankruptcy trustee transferred the funds to the trust account, the IRS issued a notice of levy to the trustee commanding him to pay the Plains Group property to the IRS for taxes owed by Smith. ( Bedford Decl. Ex. C). Plaintiffs and the IRS negotiated for several months regarding whether the IRS might release the levy and pursue its tax claim in the Oregon litigation. (Hankla Decl. Ex. I). Plaintiffs and the IRS were unable to reach an agreement, and Plaintiffs initiated a wrongful levy action against the IRS in this Court. (Hankla Decl. Ex. L). On June 14, 2000 , the Court dismissed that action as time-barred. (Hankla Decl. Ex. T).

In September of 2000 the IRS obtained the levied funds, amounting to $239,498.29. The levied funds paid all of Smith's outstanding tax liabilities with the exception of approximately $3,000 due for 1990. (Bedford Decl. ¶18). In April of 2001, Plaintiffs filed admin istrative claims with the IRS in an attempt to recover the money seized by the IRS. (Colvin Decl. Ex. L). The IRS denied Plaintiffs' claims. (Colvin Decl. Ex. M). Plaintiffs initiated this lawsuit on May 22, 2002 .



B. Summary Judgment Standard.

Summary judgment is proper if the moving party shows that "there is no genuine issue as to any material fact and that [it] is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c).

Once a defendant who is seeking summary judgment has demonstrated the absence of a genuine issue of fact as to one or more of the essential elements of the plaintiff's claims, the plaintiff must make an affirmative showing on all matters placed at issue by the motion as to which the plaintiff has the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In such a situation Fed. R. Civ. P. 56(e) "requires the nonmoving party to go beyond the pleadings and by her own affidavits, or by the `depositions, answers to interrogatories and admissions on file,' designate `specific facts showing that there is a genuine issue for trial."' Id. at 324 (quoting Fed. R. Civ. P. 56(e)); see also Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) ("When the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts.").



C. Ownership of the Claims Against the Hall Bankruptcy Estate.

All parties agree that the ownership of the claims against the Hall bankruptcy estate is the key issue in this litigation. See Motion at 12 ("The instant refund suit turns on a property question: who owned the Plains Group claims against the Hall bankruptcy estate, Smith or plaintiffs? If Smith owned the claims, then the government's liens for taxes attached to them, the levy was proper, and this suit must be dismissed."); Response at 13 ("[T]he only issue in this case is who is the rightful owner of the funds levied upon by the IRS from the Halls' bankruptcy estate? If Smith owned the claims, then the Government's liens attached to that property and the levy was proper."). When levying funds "the IRS `steps into the taxpayer's shoes' ... [and] acquires whatever rights the taxpayer himself possesses." United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 725 (1985) (internal citation omitted). "[S]tate law controls in determining the nature of the legal interest which the taxpayer had in the property." Id. at 722. Therefore, if under state law Smith owned the claims, the IRS properly stepped into Smith's shoes when it levied the funds payable for the claims.

In support of its argument that Smith owned the claims, the IRS cites the above-quoted deposition testimony given by Plaintiffs in the Oregon litigation in which each of the Plaintiffs testified that the transaction involved a loan to Smith or the Plains Group. Additionally, the IRS cites a letter plaintiff Nortman wrote to Smith regarding the "Loan to Plains Group Ltd/Plains Mgmt Ltd/Sloan Smith" in which Nortman discussed payment of all "principle [sic]/points/interest" due to the investors. (Hankla Decl. Ex. A. Ex. 5). Additionally, when the Halls sued the bankruptcy trustee, Plaintiffs' prior attorney wrote a letter to the Halls' attorney threatening Rule 11 sanctions. (Hankla Decl. Ex. J). In that letter Plaintiffs' attorney stated that his clients had "lent money to Plains Group." Id.

The IRS also notes that once it became apparent that if the investment constituted a loan to Smith or the Plains Group, Plaintiffs would not recover the funds levied the by IRS, Plaintiffs' prior attorney advised them not to refer to the transaction as a loan. For example, Plaintiffs' prior attorney advised his clients "never to say anything that undercuts our position that you owned and own the claim." (Hankla Decl. Ex. N). Plaintiffs' prior attorney also stated in a letter to Plaintiffs that if Plaintiffs ultimately were considered lenders to Smith or Plains Group, they could "[k]iss the $235,000 in Seattle goodbye." (Hankla Decl. Ex. O).

Plaintiffs argue that their prior testimony that the transaction constituted a loan to Smith or the Plains Group should be disregarded because they were inexperienced investors. See Response at 14 ("To an unsavvy investor, such as the Plaintiffs, an advance of money to an agent for him to purchase bankruptcy claims for the Plaintiffs may have the feel or color of a `loan;' however, this is clearly not a `loan' in the legal sense."). Additionally, Plaintiffs attempt to explain their prior testimony by stating that reference to "`loaning' the investment funds to Smith ... was their short-hand way of describing the investment they made through Smith." Id. at 15 (emphasis in original) (citing Derrington Decl. Ex. D; Nortman Decl Ex. C; Colvin Decl. Ex. O). Finally, Plaintiffs submit a purported transcript of a telephone conversation in which Plaintiffs contend that Smith stated that the transaction did not constitute a loan to him. ³ See Colvin Decl. Ex. F at 6.

Having considered the evidence in the light most favorable to Plaintiffs, the Court finds that the transaction constituted a loan by Plaintiffs to Smith or the Plains Group. Not only is this demonstrated by Plaintiffs' prior testimony, but examination of the terms of the agreement, admitted by all parties, shows that Plaintiffs loaned the funds to Smith or the Plains Group and did not own the claims in the Hall bankruptcy estate. For example, Plaintiffs admit that the terms of the investment called for a thirty-three percent return on investment: a fifteen percentage point origination fee and eighteen percent in interest. See, e.g., Hankla Decl. Ex. A (Derrington Decl.) Ex. 2 (original terms sheet); Hankla Decl. Ex. A (Derrington stating that "[w]e were also going to receive a 15% loan fee and 18% interest). Plaintiffs maintained that this was their expected return even after they denied the transaction was a loan. See, e.g., Hankla Decl. Ex. R ( March 30, 2000 Nortman Dep.) at 19 (testifying that the agreement with Smith called for a return composed of a fifteen point fee and eighteen percent interest). The undisputed terms of the investment demonstrate that Plaintiffs did not contemplate an equity investment, in which they would assume the risk that the claims would not cover the funds they advanced (or the chance that the claims would be worth more than their principal and expected return). Furthermore, Plaintiffs' recent redefinition of the transaction as an "investment," rather than a "loan," does not support Plaintiffs' position. A loan is a particular kind of investment; the most common is known as a "bond."

The evidence before the Court demonstrates that Plaintiffs' investment constituted a purchase money loan to Mr. Smith. Plaintiffs did not own the claims levied by the IRS.



D. Constructive Trust.

Plaintiffs contend that even if the Court determines that they did not own the claims, the Court should find that a constructive trust in their favor arose prior to the time the IRS liens attached to the property. (Response at 16-18). In support of this argument Plaintiffs cite F.T.C. v. Crittenden, 823 F.Supp. 699 (C.D. Cal. 1993). Relying upon California law that a constructive trust may exist if a court finds "merely that the acquisition of property was wrongful and that the keeping of the property ... would constitute unjust enrichment," the Crittenden Court imposed a constructive trust retroactively to prime a federal tax lien. Crittenden, 823 F.Supp. at 703. Because the funds were wrongfully taken from consumers when the taxpayer secretly overcharged them, by virtue of the constructive trust "the funds ... belong[ed] to Crittenden's injured customers, and not to Crittenden." Id.

In Washington "[a] constructive trust arises where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it." Baker v. Leonard, 120 Wn. 2d 538, 547-48 (1993). Here, in contrast to Crittenden ⁴ , assuming that a constructive trust arose on Plaintiffs' behalf, such a trust could not have been formed prior to the time the IRS liens attached to the property. The parties do not dispute that Plaintiffs intended Smith and the Plains Group to utilize Plaintiffs' funds to acquire the creditors' claims. Smith could not have breached his duty to convey the proceeds of those claims to Plaintiffs until he failed to transfer to Plaintiffs the $373,848 interim distribution on November 2, 1994 . ⁵ Because the IRS liens attached to the claims when they were purchased by Smith/the Plains Group, any constructive trust on Plaintiffs' behalf would have been inchoate when the tax liens attached and therefore would not prime the liens. Blachy v. Butcher [ 2000-2 USTC ¶50,629], 221 F.3d 896, 906 (6th Cir. 2000).

III. CONCLUSION

For the foregoing reasons, the Court GRANTS the IRS's motion for summary judgment (Dkt. # 15). The Clerk of the Court is directed to enter judgment in favor of the IRS and against Plaintiffs. The Clerk of the Court is also directed to send copies of this Order to all counsel of record.

¹ Plaintiffs state that "at least on paper, the investors actually entered into an agreement with the Halls in which the investors would loan money to the Halls and the Halls agreed to pay points and interest." (Response at 4). However, Plaintiffs admit that this was not "the deal contemplated by the investors." Id. at 5.

² Additionally, it is unlikely that the Halls could have used such loan proceeds to pay off creditors because at the time the Agreement was signed the Halls were in bankruptcy proceedings.

³ Because the statement is made by a person other than the declarant to prove the truth of the matter asserted, the transcript constitutes inadmissable hearsay evidence. Fed. R. Evid. 801, 802. A party may not defeat a motion for summary judgment on the basis of inadmissible hearsay evidence. Orr v. Bank of America , NT & SA, 285 F.3d 764, 783 (9th Cir. 2002). Additionally, even if this transcript did not constitute inadmissible hearsay evidence, it would not likely assist Plaintiffs because Smith appeared to be speculating regarding what Hall's attorneys would consider the transaction to be based upon the written agreement. See Colvin Decl. Ex. F at 6 ( "I mean she faxed all the stuff down to her attorney's [sic] yesterday and those guys got it all and they're saying what the hell is this? This loan was made to Clarise [Hall], this wasn't made to Sloan Smith. Sloan Smith is the facilitator, he's the guy who's managing it. There's no loan to Sloan Smith.").

⁴ In Crittenden the constructive trust arose at the time the taxpayer secretly overcharged the customers.

⁵ Plaintiffs contend that "a constructive trust arose when Smith wrongfully purchased the claims in the name of Plains Management, Ltd. (not the Plains Group) for his own purposes, and intended to keep the proceeds for himself." (Response at 17). However, the parties do not dispute that Smith acquired the claims through the Plains Group, subsequently transferred them to Plains Management, and finally transferred them back to the Plains Group. See, e.g., Hankla Decl. Ex. A ¶ ¶14, 19 (Smith and Derrington acquired claims from funds in "Plains Group Ltd." account and "another entity called Plains Management was assigned the claims"); Hankla Decl. Ex. L (wrongful levy complaint) ¶15 ( "Eventually, Smith caused Plains Group Ltd. to assign the claims to defendant Plains Management (USA) Ltd., or Plains Management Ltd. Thereafter, Smith caused Plains Management (USA) Ltd., or Plains Management Ltd. to reassign the claims to Plains Group Ltd."). Even if a constructive trust arose when the claims were assigned from the Plains Group to Plains Management, the trust would have been inchoate when the tax liens attached and therefore would not prime the IRS liens. Blachy v. Butcher [ 2000-2 USTC ¶50,629], 221 F.3d 896, 906 (6th Cir. 2000).

 

 

United States of America, Plaintiff v. Timothy J. McCarville, Evelyn W. McCarville, Bank One, and Administrative Committee of the Money Purchase Plan of Local 400 and Mechanical Contractors Association of North Central Wisconsin, Defendants.

U.S. District Court, East. Dist. Wis. ; 01-C-787, August 21, 2003 .

Related DC Wis. decision at 2003-1 USTC ¶50,398.

[ Code Sec. 6203]

Assessment of tax: Certificates of Assessments and Payments: Prima facie case: Evidence: Frivolous arguments: Jurisdiction. --

Certificates of Assessments and Payments reflecting adjusted outstanding assessments against a retired steamfitter for seven tax years established a prima facie case of tax liability absent a showing of error. Because the taxpayer merely denied liability and filed nothing that drew the evidence into dispute, the government was entitled to have the assessments reduced to judgment. His contention that he could not be considered a "taxpayer" because he simply exercised his inalienable right to work as a steamfitter was rejected as meritless. The individual could not declare himself to be outside the scope of the federal tax laws. Further, the court had jurisdiction over the case, which involved federal law and federal taxation.

[ Code Secs. 6203, 6321 and 6323]

Tax liens: Date assessment created: Property subject to tax liens: Employee pension plans: Evidence. --

Federal tax liens against a delinquent taxpayer arose on the same dates as the unpaid taxes were assessed by the IRS, and the individual introduced no evidence to dispute that the government provided him with proper notice and demand for payment. Thus, the liens, which attached to "all property and rights to property," reached all of his rights and property interests in an employee benefit plan. His contention that the liens were not valid under state ( Wisconsin ) law were rejected because tax liens are subject to federal law.

[ Code Secs. 6323 and 6501]

Statute of limitations: Three-year period: Tax returns: Forms W-2: Substitute returns: Tolling of limitations period: Offers in compromise. --

The IRS's tax assessments against an individual who failed to timely file returns and who contended that he was not subject to federal income tax were not barred by the statute of limitations. The IRS assessed the taxes within the permitted three-year period, and the government had 10 years in which to collect the amounts owing. Neither the Forms W-2 filed by the taxpayer's employer nor the substitute returns filed by the IRS qualified as "returns" for purposes of starting the limitations period. Instead, the untimely returns filed by the taxpayer triggered the running of the statute of limitations, which was further tolled by his two offers in compromise (OICs). He provided no evidence contradicting the government's declaration regarding the periods during which the OICs were pending and their effect on the limitations dates.

[ Code Secs. 6663 and 7402]

Penalties, civil: Fraud: Evidence: Summary judgment. --

The government was not entitled to summary judgment on the issue of an individual's liability for fraud penalties absent a showing that no rational jury could find his claims regarding a lack of fraudulent intent to be sincere. The taxpayer contended that he believed he did not owe the assessed amounts and asserted that any false statements in his tax withholding statements were inadvertent and constituted mistakes. Although his self-serving allegations might seem incredible in the face of the government's evidence of fraud, the record did not disclose the taxpayer's education or level of sophistication.

DECISION AND ORDER

GRIESBACH, District Judge: The United States filed this case on August 3, 2001 , seeking to reduce federal tax assessments to judgment and foreclose federal tax liens against personal property. The United States also seeks to assess a penalty equal to 50% of his underpayment of taxes against McCarville for civil fraud. The case is presently before me on the United States ' motion for summary judgment against the main defendant, Timothy McCarville.

I conclude that there is no dispute as to material fact regarding the assessment of taxes owed by McCarville and the tax liens against his personal property and therefore grant the government's motion as to those issues. As to the civil fraud penalty, however, I conclude that a factual dispute does exist and therefore deny summary judgment as to that issue.

Summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

The moving party has the initial burden of demonstrating that it is entitled to summary judgment. Id. at 323. As a plaintiff moving for summary judgment, the United States must show that the evidence supporting its claims is so compelling that no reasonable jury could return a verdict for the defendant. See Select Creations, Inc. v. Paliafito Am., Inc., 911 F.Supp. 1130, 1149 (E.D. Wis. 1995); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50 (1986). Once this burden is met, McCarville must designate specific facts to defend the cause of action, showing that there is a genuine issue of material fact for trial. Celotex, 477 U.S. at 322-24. There must be a genuine issue of material fact for the case to go to trial. Anderson, 477 U.S. at 247-48. "Material" means that the factual dispute must be outcome-determinative under governing law. Contreras v. City of Chicago , 119 F.3d 1286, 1291 (7th Cir. 1997). A "genuine" issue of material fact requires specific and sufficient evidence that, if believed by a jury, would actually support a verdict in a party's favor. Fed. R. Civ. P. 56(e); Anderson, 477 U.S. at 249. Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

In analyzing whether a question of fact exists, the court construes the evidence in the light most favorable to the party opposing the motion. Anderson, 477 U.S. at 255.

The United States filed its motion for summary judgment on April 2, 2003 , together with several affidavits. Six days later McCarville, who represents himself, filed an "objection" to the motion for summary judgment; no evidence was presented by McCarville. Thinking perhaps that this was McCarville's brief in response to the motion, the United States filed a reply brief. Notwithstanding the local rules, which provide for only one response brief. Civil L.R. 7.1(c), McCarville also filed an "opposition" to the motion for summary judgment on May 1, again failing to submit any evidence. The United States filed a reply to McCarville's second brief as well. ¹

Then, because McCarville (as a pro se litigant) had not been properly warned about summary judgment procedures and the need for evidence, I gave McCarville those warnings and allowed him to file evidentiary materials if he desired. On July 7, he filed a "response" to the summary judgment motion. The first two pages are attested to under penalty of perjury. In other words, the first two pages of the response are verified, constituting some evidence. Almost everything McCarville says in those two pages, though, cannot be taken as facts in his favor. Other than his statement that for the years at issue he worked as a steamfitter, he merely sets forth his legal argument and legal conclusions. ( See, e.g., Pl.'s Resp. to Gov't Motion for Summ. J. at 2 ("The law is a witness to the fact that I am not liable for a federal income tax.").) "Self-serving assertions without factual support in the record will not defeat a motion for summary judgment." Jones v. Merchants Nat'l Bank & Trust Co., 42 F.3d 1054, 1058 (7th Cir. 1994).

I. UNDISPUTED FACTS

McCarville and his wife Evelyn reside in Iola, Waupaca County , Wisconsin . During the years for which the United States seeks recovery for unpaid taxes, McCarville worked as a steamfitter.

In February 1982, McCarville signed and filed a 1981 federal income tax return, jointly with his wife Evelyn. Federal income tax of about $2500 was withheld from his wages in 1981. In 1982, 1983, and 1984, however, McCarville filed form W-4 with his employers, claiming that he did not owe any federal income tax for the prior year and that he did not expect to owe any federal income tax in each then-present year. In 1982, 1983, and 1984, McCarville claimed he was exempt from the federal income tax withholding requirements. In 1984, no federal income tax was withheld form McCarville's wages.

McCarville did not file timely form 1040 income tax returns for 1982 through 1987. As a result, the Internal Revenue Service prepared substitutes for income tax returns for those years. The IRS determined that McCarville had federal income tax liability for 1982 through 1987 based on third-party information reported to the IRS (for example, employer W-2 reports of wages paid). A civil income tax audit for 1982 to 1984 began in September 1985, but it was suspended in June 1986 due to a criminal investigation. In October 1988, McCarville was convicted of failing to file federal income tax returns for 1984 and 1985 and sentenced to a term of imprisonment. In 1989, the civil income tax audit resumed for years 1982 to 1984, and another began for 1985 to 1987.

On February 27, 1990 , McCarville filed late income tax returns for 1983 through 1988. ² Thereafter, a delegate of the Secretary of the Treasury assessed McCarville for unpaid federal income taxes and related interest and other additions, based on the substitute returns. The assessments were made on May 30, 1990, for tax years 1986 and 1987, for unpaid taxes of about $18,000 and $15,000 respectively (exclusive of interest); September 10, 1990, for tax year 1985, for unpaid taxes of about $18,000 (exclusive of interest); and March 15, 1991, for tax years 1982, 1983, and 1984, for unpaid taxes of about $13,000, $8,000, and $76,000 respectively (exclusive of interest and additions).

The 1988 return was filed late an February 13, 1990 . On April 23, 1990 , a delegate of the Secretary of the Treasury assessed McCarville for unpaid federal income taxes and additions for 1988, in the amount of about $3,000 (exclusive of interest).

A delegate of the Secretary of the Treasury gave notice and demand to McCarville for the payment of federal income taxes, penalties, and interest for tax years 1982 through 1988. Despite the notices and demands, though, the assessments remain due and owing.

After discovery in this case resulted in the United States being provided with McCarville's copies the federal income tax returns for 1982 through 1988 and some W-2 forms, the IRS adjusted the tax liabilities assessed and some penalties against McCarville. As adjusted, the assessments, with interest and additions through March 10, 2003 , are as follows:

________________________________________________________________________________

Tax             Assessment      Amount          Accrued         Total Liability

Year            Date            Assessed,       Interest                       

                                Unpaid Balance  and Additions                  

________________________________________________________________________________

1982            3/15/91         $26,078.44      $0.00           $26,078.44     

________________________________________________________________________________

1983            3/15/91         $20,009.59      $0.00           $20,009.59     

________________________________________________________________________________

1984            3/15/91         $79,953.54      $0.00           $79,953.54     

________________________________________________________________________________

1985            9/10/90         $16,931.64      $31,391.23      $48,322.87     

________________________________________________________________________________

1986            5/30/90         $17,924.10      $35,157.19      $53,081.29     

________________________________________________________________________________

1987            5/30/90         $15,355.07      $30,362.66      $45,717.73     

________________________________________________________________________________

1988            4/23/90         $3,008.93       $5,824.79       $8,833.72      

________________________________________________________________________________

According to the United States , the total liability (adding up the last column) owed as of March 10, 2003 , was $281,997.18.

The IRS has an "integrated data retrieval system" (IDRS). IDRS transcripts are also known as Certificates of Assessment and Payments. The United States has submitted IDRS transcripts regarding the amounts McCarville owes. (Block Decl. ¶ ¶9, 17, Ex. H1-H7, J1-J7.) McCarville has presented no evidence to contradict any of the amounts the United States indicates is owed.

Notices of federal tax lien were filed against McCarville with the Register of Deeds Office for Waupaca County , Wisconsin as follows:

            ____________________________________________________________

            Tax Year                Dates Notices of Tax Lien Filed    

            ____________________________________________________________

            1982, 1983, 1984        6/27/91 and 
2/12/01
                

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