6321 Conveyances to Related Parties page1

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Deborah Isaac Cooper v. United States of America v. Roland T. Glass, et al.

U.S. District Court, East. Dist. Texas , Lufkin Div.; Civ. 9:02 CV 321, May 7, 2004.

[ Code Sec. 6321]

Liens: Property interest: Quiet title actions. --

A federal tax lien did not attach to a delinquent taxpayer's right to occupy property that she had conveyed to her grandson before the lien was filed, and that was later sold to a bona fide purchaser. Under state ( Texas ) law, the retention of the right of occupancy did not create a life estate or any interest in the property that was transferable and, therefore, a fee simple was conveyed to the grandson, subject to a contractual right of occupancy. Since the taxpayer did not have any rights in the property after she conveyed it to her grandson, the bona fide purchaser obtained the property free of any tax lien.

MEMORANDUM AND ORDER

HEARTFIELD, Chief District Judge: Before the Court is the Plaintiff's Amended Motion for Summary Judgment (doc. #66) and the United States ' Cross Motion for Partial Summary Judgment (doc. #73). After careful consideration of the motions and the applicable law, the Court is ready to make its ruling.

BACKGROUND

Plaintiff brought this lawsuit against the United States to quash two federal tax liens and to quiet title to a 5.7 acre parcel of land in the A. Viesca Seven League Grant, #77, in Polk County , Texas . The United States filed a counterclaim against Plaintiff and brought a Third Party Complaint against Roland T. Glass, Krystal Lea McQueen Gay, Alvin T. McQueen, and Wilma McQueen.

The relevant history of the ownership of property, for purposes of the motions under consideration is as follows:

On April 28, 1977 Alvy T. McQueen conveyed the property to Wilma L. McQueen, wife of Alvy T. McQueen, as her sole and separate property and estate;

On July 17, 1986, Alvy T. McQueen and Wilma L. McQueen designated this 5.7 acres parcel as their homestead;

On June 30, 1997, Wilma L. McQueen conveyed the property to Roland Thomas McQueen Glass, her grandson. The instrument contained the following language: "Be it also known that Wilma McQueen is to be able to reside on this property in the present home until the day she dies."

On April 13, 1998 and April 20, 1998, Wilma MCQueen was assessed federal excise taxes related to her involvement in the Livingston Oil Company for the four quarters of 1987 and the first three quarters of 1988. On July 17, 1998, the IRS filed a notice of federal tax lien in Polk County , Texas in the real property records relating to Wilma McQueen.

On July 30, 2001, Deborah Isaac Cooper purchased the property from Roland Glass, Wilma Lea McQueen and Alvy T. McQueen by General Warranty Deed with Vendor's Lien Retained. The promissory note involved was for $140,000.00. The grant was without reservations and the exceptions listed were any easements, valid gas and mineral rights, and ad valorem taxes for the year 2001. In connection with this sale, Wilma McQueen signed an affidavit of marital status which stated that she was the owner of a life estate in the 5.7 acre parcel.

Ms. Cooper paid $170,000.00 for the property and Roland Glass received a net of $130,250.00 which he used to buy a house in North Zulch, Texas . His grandparents, Wilma and Alvy McQueen, moved into the house Roland Glass purchased in North Zulch, Texas .

The United States seeks to foreclose its tax lien upon the property while Plaintiff seeks to quiet title to the property and removed the federal tax liens. Both parties bring motions for summary judgment.

LEGAL STANDARD

A motion for summary judgment is properly granted only if there is no genuine issue as to any material fact. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). An issue is material if its resolution could affect the outcome of the action. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In deciding whether a fact issue has been created, we must view the facts and the inferences to be drawn therefrom in the light most favorable to the nonmoving party. Olabisiomotosho v. City of Houston , 185 F.3d 521, 525 (5th Cir. 1999). The standard for summary judgment mirrors that for judgment as a matter of law. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. Thus, the court must review all of the evidence in the record, but make no credibility determinations or weigh any evidence. Reeves v. Sanderson Plumbing Products, Inc., 530 U.S. 133, 120 S.Ct. 2097, 2102, 147 L.Ed.2d 105 (2000).

DISCUSSION

The cross-motions for summary judgment raise an issue of law as to the legal effect of the deed from Wilma McQueen to her grandson, Roland T. Glass. The United States takes the position that the interest retained by Wilma McQueen signified by the language, "[b]e it also known that Wilma McQueen is to be able to reside on this property in the present home until the day she dies," created a life estate in Wilma McQueen. The United States fails, however, to cite any law, from Texas or other jurisdictions, to support its position. It merely recites the fact that the title insurance company treated Wilma McQueen's interest as a life estate and the fact that both Wilma and Alvy McQueen were parties to the General Warranty Deed with Vendor's Lien Retained when the property was transferred to Plaintiff by Roland Glass on July 30, 2001.

The threshold question in any case involving the federal government's assertion of its tax lien is whether and to what extent the taxpayer had "property" within the meaning of the federal tax lien statute. Section 6321 of the Internal Revenue Code affords the government a lien for delinquent taxes upon "all property and rights to property" belonging to the taxpayer. The Supreme Court has held that state law determines whether the taxpayer has property or the right to property to which the tax lien may attach. See United States v. National Bank of Commerce [ 85-2 USTC ¶9482], 472 U.S. 713, 722 (1985); Aquilino v. United States [ 60-2 USTC ¶9538], 363 U.S. 509, 512-14, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960). In United States v. Bess [ 58-2 USTC ¶9595], 357 U.S. 51, 55, 78 S.Ct. 1054, 1057, 2 L.Ed.2d 1135, the Court said that the federal tax lien provision "creates no property rights but merely attaches consequences, federally defined, to rights created under state law." The case relied on as authority for that statement, Fidelity & Deposit Co. v. New York City Housing Authority [ 57-1 USTC ¶9410], 241 F.2d 142, 144 (2d Cir. 1957), clearly states that "the statute was fashioned to require the courts to determine for federal purposes whether those state- created interests are 'property' or 'rights to property.'" All of this indicates that a federal court looks to state law to determine whether an interest exists, and then determines under a federal standard whether such an interest amounts to a "property" interest.

We thus look to the law of the State of Texas to determine what interest was created by the words of the deed cited above. The primary duty of courts called upon to construe deeds is to ascertain the intent of the parties from all of the language contained in the particular deed by the fundamental rule of construction known as the "four corners" rule. The actual intent of the parties as expressed in the instrument, in its entirety, prevails over arbitrary rules of construction. Neel v. Killam Oil Co., Ltd., 88 S.W.3d 334 ( Tex. Civ. App.- San Antonio 2002).

The process of deed construction has been described as three-tiered: (1) the court attempts to ascertain the grantor's intent by examining the plain language of the deed; (2) the court then applies applicable rules of construction to the deed; and (3) the court considers extrinsic evidence to aid interpretation. Cherokee Water Co. v. Freeman, 33 S.W.3d 349 (Tex. Civ. App. - Texarkana, 2000), citing Laura H. Burney, The Regrettable Rebirth of the Two Grant Doctrine in Texas Deed Construction, 34 S. TEX. L. REV. 73, 77-78 (1993). The third tier, the admission of extrinsic evidence, is not reached unless the intent of the parties is unclear because the deed is ambiguous. Cherokee Water, 33 S.W.3d at 353, citing Stauffer v. Henderson, 801 S.W.2d 858, 863 ( Tex. 1990). The question of ambiguity in a deed, as with other written instruments, is a question of law. Cherokee Water, 33 S.W.3d at 353. A document or deed that can be given a definite or certain legal meaning from the words used is not ambiguous. Stewart Title Guaranty Co. v. Aiello, 941 S.W.2d 68, 74 ( Tex. 1997); Cherokee Water, 33 S.W.3d at 353. If the deed language is susceptible to a single meaning, the court will be confined to the writing. Cherokee Water, 33 S.W.3d at 353. If the language may be interpreted in different ways, rules of construction may be used. Id. An instrument is ambiguous only when the application of these rules leaves it unclear which of two reasonable meanings is the correct one. Id.

The language of the right reserved by Wilma McQueen in her deed of the property to Roland T. Glass, i.e., "[b]e it also known that Wilma McQueen is to be able to reside on this property in the present home until the day she dies," gives Wilma McQueen a right to "reside" on the property "in the present home until the day she dies." The words in question are unambiguous. Texas cases have held that similar language does not create a life estate. In Cruse v. Reinhard, 208 S.W.2d 598 (Tex. Civ. App. Beaumont 1948), writ refused n.r.e., the grant of permission to "live" on the property did not create a life estate but a mere right of occupancy. See also Setliff v. Fielder, 422 S.W.2d 527, 530 (Tex. Civ. App. - Corpus Christi 1967). In Ahrens v. Lowther, 223 S.W. 235 (Civ. App. 1920), error refused, the court held that language stating the grantor was "to continue using said lot as she has always done, so long as she may live," did not, as a matter of law, constitute a reservation of a life estate. A grantor may reserve the right to occupy a house on the premises conveyed. Sisk v. Randon, 33 S.W.2d 1082 (Tex. Civ. App. Galveston 1930), writ granted, (Mar. 4, 1931) and aff'd, 123 Tex. 326, 70 S.W.2d 689; Setliff v. Fielder, 422 S.W.2d 527 (Tex. Civ. App.- Corpus Christi 1967). In both Sisk and Setliff, the language creating the right to occupy the house on the premises what not held to create a life estate. It is apparent that under Texas law, the language used in the deed in question created in Wilma McQueen a right of occupancy and did not create a life estate.

When a grantor conveys the fee, he or she may reserve specified rights for himself or herself or his or her heirs and assigns. Hansen v. Bacher, 299 S.W. 225 (Tex. Comm'n App. 1927). An estate in the land less than the fee simple as well as an interest in land not amounting to an estate known to the law may be reserved. Woodmen of the World, Camp No. 1772 v. Goodman, 193 S.W.2d 739 ( Tex. iv. App. - Dallas 1945). However, if the reservation does not reserve to the grantor a definite estate in the land, the deed may be construed as a grant of the fee simple, subject to a mere contractual right. Emerson v. Pate, 165 S.W. 469 (Tex. Crim. App. 1914).

It appears that a right of occupancy, under Texas law, is not a definite estate in the land. The rationale supporting this conclusion appears to be that the language creating a right of occupancy only does not create any right or privilege that is transferable. It would appear that Congress meant the tax lien to apply only to interests which have or foreseeably will have value to the taxpayer, for only such interests could serve to satisfy the tax debt. Transferability is the primary value-imparting characteristic of most property interests. Federal definitions of property have generally emphasized the elements of transferability and leviability by creditors. See Note, Property Subject to the Federal Tax Lien, 77 HARV. L.REV. 1485, 1487 (1964). A right of occupancy is a personal right which is not transferable. Furthermore, the United States has provided no authority showing that under federal law a right of occupancy is an inter[e]st which amounts to "property" for tax lien purposes.

Having found that Wilma McQueen, in her deed to Roland T. Glass, reserved only a personal right of occupancy, and therefore transferred fee simple interest in the land to Roland T. Glass, we look to the legal effect of the recording of the tax liens against Wilma McQueen and of the transfer from Roland T. Glass to the Plaintiff, Deborah Cooper.

It is undisputed that the federal tax liens were filed against Wilma McQueen and registered in the property records of Polk County , Texas in April, 1998 after the land was deeded by Wilma McQueen to Roland Glass on June 30, 1997. Thus the transfer to Roland T. Glass was free of any prospective tax lien.

It is also apparently undisputed that Plaintiff, Deborah Isaac Cooper, is a bone fide purchaser of the property from Roland Glass. The United States in its Opposition to Plaintiff's Motion for Summary Judgment and its Cross Motion for Summary Judgment asserts that there are only two questions presented: 1. Whether Wilma McQueen owned a property interest in the subject property and 2. Whether the United States has valid tax assessments against Wilma McQueen. The United States provides no argument, evidence or authority which would challenge Ms. Cooper's affidavit and other evidence which establishes that she was a bona fide purchaser for value who had no notice of the liens and purchased the property in good faith for valuable consideration. See City of Richland Hills v. Bertelsen, 724 S.W.2d 428, 429 (Tex. App. - Fort Worth 1987) no writ.

For the above and foregoing reasons, the Court finds in answer to the questions of the United States, that Wilma McQueen did not own a property interest in the subject property at the time of its transfer to Plaintiff and that Plaintiff is entitled to summary judgment on the question of whether she took the property free and clear of any tax lien later levied by the United States against Wilma McQueen.

The Court further find that the summary judgment evidence submitted by the United States is insufficient to determine the question of whether or not it has a valid tax lien against Wilma McQueen. The United States is not entitled to summary judgment on that issue.

CONCLUSION

IT IS THEREFORE ORDERED that Plaintiff's Amended Motion for Summary Judgment (doc. #66) is hereby GRANTED.

IT IS ORDERED that the Cross Motion for Partial Summary Judgment of the United States (doc. #73) is DENIED.

 

[2002-2 USTC ¶50,660] United States of America , Plaintiff v. Susan Snyder, et al., Defendants

U.S. District Court, Dist. Conn., Civ. 3:01cv796(PCD), 8/8/2002

[Code Secs. 6303 and 7403 ]

Enforcement of tax lien: Demand for payment: Lien theory: Constructive trust.--Summary judgment was denied where the government attempted to seize and sell a taxpayer's house to satisfy trust fund recovery penalties assessed against her parents. A constructive trust to hold the deed to the house was denied because no demand for payment was made upon the parents before they transferred money to the taxpayer for her to purchase the house.

[Code Secs. 6321 , 6331 and 7404 ]

Enforcement of tax lien: Fraudulent conveyance: Nominee theory: Lien theory: Constructive trust: Invocation of Fifth Amendment privilege: Waiver of right to testify: District court.--Summary judgment to recover a taxpayer's house to satisfy trust fund recovery penalties assessed against her parents was denied. There was no proof that the conveyance of funds from the parents to the taxpayer for purchase of the house was fraudulent. A discrepancy between the taxpayer's reported income and income reported on a mortgage application failed to establish fraudulent intent. Also, there was no proof that the conveyance left the parents unable to satisfy the tax penalties. The application of the nominee theory was rejected.

RULING ON UNITED STATES'S MOTION FOR SUMMARY JUDGMENT

DORSEY, Senior District Judge:

Plaintiff, the United States of America , moves for summary judgment. Its motion is denied.

I. JURISDICTION

Subject matter jurisdiction is pursuant to 28 U.S.C. §§1340, 1345 and 22 U.S.C. §§7402, 7403.

II. BACKGROUND

The following facts are undisputed. During 1989, 1990, and 1991, Russell and Stelle Mahler ("Russell and Stelle") accrued federal tax debt for willfully failing to collect, account for, and pay taxes on the wages of their company's employees. On July 12, 1995, Stelle gave her daughter, Defendant Susan Snyder, $44,000 for the purpose of purchasing the property located at 14 Michele Lane , Madison , Connecticut (" 14 Michele Lane "). To her Uniform Loan Application for the purpose of purchasing 14 Michele Lane , Defendant attached a "Certificate of Gift," signed by Stelle indicating that the $44,000 was a gift. On or about August 4, 1995, Defendant used the $44,000 as a down payment on the purchase of 14 Michele Lane for $282,500. The 14 Michele Lane deed remains in Defendant's name. Defendant's place of residence before and after the purchase of 14 Michele Lane is 12577 McIntire Drive , Woodbridge , Virginia . Russell and Stelle maintain 14 Michele Lane as their residence. Evidence submitted in the form of bank checks shows that Russell regularly makes the mortgage payments from funds over which Defendant has no control. On September 30, 2000, the United States received a judgment pursuant to 26 U.S.C. §6672 (trust fund recovery penalty) against Russell and Stelle for their unpaid tax debt. On February 28, 2001, the federal tax lien judgment was amended and principal amounts were entered against Russell and Stelle of $200,991 and $200,249, respectively. Pursuant to IRC §6321, unpaid federal tax liens remain against all property and rights of Russell and Stelle.

The United States now moves for summary judgment. In the alternative, the United States moves to preclude Defendant from testifying in her defense.

III. DISCUSSION

The United States argues that (1) Defendant holds bare legal title to 14 Michele Lane as a nominee for her parents; (2) that there are no genuine issues of material fact as to whether the lien against Russell and Stelle can attach to 14 Michele Lane; and (3) the $44,000 transfer was fraudulent and that a constructive trust should therefore be imposed as an equitable remedy. Defendant asserts that the $44,000 was intended to be a gift from Stelle, and as a gift, there is no presumption of a constructive trust.

A. Standard of Review

Rule 56(c) provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). The mere existence of an alleged factual dispute is not, on its own, sufficient to defeat a motion for summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).

While the court is required to view the inferences to be drawn from the facts in the light most favorable to the opposing party, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citation omitted), a party may not "rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment," Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986).

The party without the burden at trial may defeat summary judgment by providing sufficient facts to establish that there exists a genuine issue of material fact necessary for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Mere denials or conclusory allegations in legal memoranda are not, on their own, evidence and cannot create a genuine issue of material fact where none would otherwise exist. See Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir. 1980) (citation omitted). "[A] party who asserts the privilege against self-incrimination must bear the consequence of lack of evidence, and the claim of privilege will not prevent an adverse finding or even summary judgment if the litigant does not present sufficient evidence to satisfy the usual evidentiary burdens in the litigation." United States v. 4003-4005 5th Ave., 55 F.3d 78, 83 (2d Cir. 1995) (internal citation and quotation marks omitted).

B. Nominee Theory

Under the nominee doctrine, an owner of property may be considered a mere "nominee" and thus may be considered to hold only bare legal title to the property. The District Court of New York, in deciding a case on remand from the Second Circuit, applied the nominee doctrine in the case of LiButti v. United States [97-2 USTC ¶50,601 ], 968 F.Supp. 71 (N.D. N.Y. 1997). The United States , in an attempt to collect unpaid tax debt, asked that court to declare a father the "true" owner of a race horse, title to which was in his daughter's name. Id. at 75. In reviewing New Jersey state law, that court found no reported New Jersey cases applying the nominee doctrine. Id. Nonetheless, that court chose to apply six factors used by other states' courts for the purpose of determining whether a transferee is a mere nominee of the transferor. Id. at 76. The six factors considered by LiButti in determining whether a transferee is a nominee are: (1) whether inadequate or no consideration was paid by the nominee; (2) whether the property was placed in the nominee's name in anticipation of a lawsuit or other liability while the transferor remains in control of the property; (3) whether there is a close relationship between the nominee and the transferor; (4) whether they failed to record the conveyance; (5) whether the transferor retains possession; and (6) whether the transferor continues to enjoy the benefits of the transferred property. Id.

The United States presents no case law wherein a Connecticut court has applied the nominee theory, nor is this court aware of any. This court declines the invitation to make the nominee theory Connecticut state law, especially in light of the available statutory remedies the legislature has already provided. Even if this court did apply these six factors to the $44,000 transfer from Stelle to Defendant, the United States has failed to successfully show that Defendant holds title to 14 Michele Lane as a mere nominee. The second factor, whether the property was placed in the nominee's name in anticipation of a lawsuit or other liability, is not satisfied. The United States proffers no evidence to show that in 1995, Stelle and Russell anticipated a lawsuit or other liability. Also, the United States concedes the fourth factor, whether they failed to record the conveyance, is not satisfied. Therefore, the United States would not benefit at summary judgment from this court's adoption of the six-factor nominee test.

C. Lien Theory

The Internal Revenue Code, 26 U.S.C. §§6321, 6322, governs the IRS's authority to place a lien in favor of the United States upon the property, and rights to property, of any person liable to pay taxes, and who, after a demand has been made, refuses or neglects to pay his taxes. ¹ Where, as in this case, an employer willfully fails to collect, account for, and pay over taxes withheld from the wages of employees, "[a]fter assessment, notice, and demand, the IRS may, therefore, create a lien upon the property of the employer, §6321, and levy, distrain, and sell the employer's property in satisfaction." Slodov v. United States [78-1 USTC ¶9447 ], 436 U.S. 238, 244 (1978) (footnote omitted). "Assessment is made by recording the liability of the taxpayer in the office of the Secretary of the Treasury, 26 U.S.C. §6203, and notice of the assessment and demand for payment generally are required to be made within 60 days of the assessment. 26 U.S.C. §6303(a)." Id. at 244 n.5.

Pursuant to 26 U.S.C. §6321, the United States argues that Russell's and Stelle's judgment for willfully failing to pay taxes authorizes federal tax liens upon all Russell's and Stelle's property and rights to property, including 14 Michele Lane. In order for this argument to succeed, the United States must show that "assessment, notice, and demand" were made prior to the $44,000 transfer of funds from Stelle to Defendant in 1995. Unless a demand had been made, a lien against property of Russell and Stelle did not yet exist at that time. Though trust fund recovery penalties were assessed against Russell and Stelle in 1996 and though the United States received judgments against Russell and Stelle in 2000, the United States has not submitted evidence which shows that a demand was made prior to the $44,000 transfer in 1995. As to whether the unpaid federal tax liens against Russell and Stelle can be applied to 14 Michele Lane under a lien theory, summary judgment is denied.

D. Fraudulent Conveyance Theory

1. Statute of limitations

Pursuant to CONN. GEN. STAT. §52-552j, the statute of limitations with respect to a fraudulent transfer extinguishes a claim unless the action is brought within four years of the transfer or, if later, within one year of when the transfer could have reasonably been discovered by the claimant. However, "[t]he Connecticut three-year statute of limitations for setting aside fraudulent transfers is not applicable to a suit by the United States to recover the value of allegedly fraudulently conveyed property in partial satisfaction of outstanding tax deficiencies." United States v. Upton [97-1 USTC ¶50,366 ], 967 F.Supp. 57, 58 (D. Conn. 1997) (citing United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609, 612 (5th Cir. 1981)). Since this case involves a suit by the United States to partially satisfy outstanding tax liens by recovering allegedly fraudulently conveyed property, the four-year statute of limitations is not applicable.

2. Merits of fraudulent conveyance theory

The United States argues that since Defendant acquired 14 Michele Lane fraudulently, Defendant holds only bare legal title to the property and so a constructive trust should be imposed as an equitable remedy. The proposed constructive trust would provide the United States a source of partial satisfaction towards Russell's and Stelle's outstanding tax deficiencies. The Connecticut Supreme Court has held that "the party seeking to set aside a conveyance as fraudulent bears the burden of proving either: (1) that the conveyance was made without substantial consideration and rendered the transferor unable to meet his obligations; or (2) that the conveyance was made with a fraudulent intent in which the grantee participated." Wendell Corp. Tr. v. Thurston, 239 Conn. 109, 115-16 (1996) (citation, alteration, and emphasis omitted); Bizzoco v. Chinitz, 193 Conn. 304, 312 (1984); Zapolsky v. Sacks, 191 Conn. 194, 200 (1983). Either test defined by the Connecticut Supreme Court is sufficient to set aside the conveyance. Wendell Corp. Tr., 239 Conn. at 116. A fraudulent conveyance must be proven by "clear and convincing" evidence. Tessitore v. Tessitore, 31 Conn. App. 40, 43 (1993). A party who seeks to set aside a transfer as fraudulent bears the burden of proving fraudulent intent. Tyers v. Coma, 214 Conn. 8, 11 (1990). "[T]he determination of the question of fraudulent intent is clearly an issue of fact which must often be inferred from surrounding circumstances. . . . Such a fact is, then, not ordinarily proven by direct evidence, but rather, by inference from other facts proven--the indicia or badges of fraud." Dietter v. Dietter, 54 Conn. App. 481, 487 (1999) (citation omitted; ellipsis in original).

An imposition of a constructive trust can be an appropriate remedy where property has been fraudulently conveyed. See generally Wendell Corp. Tr., 239 Conn. 109. "A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee." Cohen v. Cohen, 182 Conn. 193, 203 (1980) (citation omitted). A constructive trust arises against one who by actual or constructive fraud or questionable means has obtained or holds the legal right to property which in the interest of equity he should not hold. Giulietti v. Giulietti, 65 Conn. App. 813, 856, cert. denied, 258 Conn. 946, cert. denied sub nom. Giulietti v. Vernon Vill., Inc., 258 Conn. 947, and cert. denied, 258 Conn. 947 (2001).

The first fraudulent transfer test, requiring the conveyance to have been made without substantial consideration and to have rendered transferor unable to meet his obligations, is not fully satisfied. Defendant concedes the $44,000 was conveyed without substantial, or indeed any, consideration and was used to purchase 14 Michele Lane . That being said, the United States has not put forward any evidence to prove that the transfer left Russell and Stelle unable to meet their obligations. ²

The second fraudulent transfer test, requiring proof that conveyance was made with fraudulent intent, is not satisfied. In order to set aside a conveyance as fraudulent the United States must show that Russell and Stelle knew of their indebtedness to the United States at the time of the $44,000 transfer of funds. The United States puts forward some evidence to the effect that 14 Michele Lane was conveyed with fraudulent intent. In particular, the United States submits documents which show significant discrepancies between Defendant's reported income on her mortgage application for 14 Michele Lane and income reported on her tax returns submitted to the IRS. On the first page of Defendant's 1995 Uniform Residential Loan Application for the purpose of purchasing 14 Michele Lane , Defendant indicated that she was employed as a "Director" for Broad Store Corporation, a corporation controlled by Russell. Defendant further submitted to the loan company an IRS W-2 form showing that as Director of Broad Store Corporation she earned $88,000 in 1993 and $94,000 in 1994. In contrast to these representations, Defendant's 1993 and 1994 federal income tax returns show no income from Broad Store Corporation. Rather, Defendant listed her occupation as "Homemaker/PT Recept." The presumably fraudulent IRS W-2 forms ³ submitted to the loan company were never submitted to the IRS as part of Defendant's federal income tax returns, as would have been required by law. The foregoing pertains to the purchase of 14 Michele Lane , not to the conveyance of the $44,000, which may be related. These factors, while regardable as evidence of fraud in the purchase of the home, are not so determinative that every reasonable jury must determine that it is clear and convincing evidence of the intent to defraud the United States at the time of the alleged fraudulent $44,000 transfer.

The conveyance which the United States seeks to set aside as fraudulent is the $44,000 transferred from Stelle to Defendant. The chronological order of events does not, as a matter of law, prove fraudulent intent with regard to the $44,000 transfer. The United States submits no evidence that in 1995, at the time of the $44,000 transfer, Russell and Stelle knew of their indebtedness to the United States . Judgments for the tax deficiencies were not entered against Russell and Stelle until 2000. Therefore, a genuine issue of material fact exists as to the existence of fraudulent intent at the time of the $44,000 conveyance in 1995. The "clear and convincing" standard of proof required in order to set aside the conveyance as fraudulent is not satisfied, especially when considered as a matter of summary judgment. Since Russell's and Stelle's intent at the time of the transfer has not been conclusively established, it would therefore be improper to impose a constructive trust on 14 Michele Lane as a matter of law. Rather the issue of fraudulent intent is a question of fact.

E. Intent to Gift

Where the nominal grantee is the natural object of the payor's bounty the law presumes a donative intent. E.g., Walter v. Home Nat'l Bank & Trust Co. of Meriden, 148 Conn. 635, 639 (1961); see RESTATEMENT (SECOND) OF TRUSTS §442. Particularly, where purchase money is provided by parents to their child, there is a presumption of a gift of money, rather than an intention of a trust. See Zack v. Guzauskas, 171 Conn. 98, 102 n.1 (1976). This presumption is one of fact, not of law, and may be rebutted. Whitney, 171 Conn. at 33. For instance, the presumption of a gift was rebutted in the case of LiButti v. United States [97-1 USTC ¶50,235 ], 107 F.3d 110, 125 (2d Cir. 1997) (interpreting New Jersey state law), where the Second Circuit held, in remanding an injunction barring the IRS from enforcing a tax levy against Plaintiff, that a nominee ownership could be determined based on the fact that a father who transferred money to his daughter for the purchase of a racehorse, did so with the intent to hide the funds from creditors. In LiButti, the facts showed that the father had supplied money to his daughter to purchase a race horse, in her name, subsequent to his being assessed by the IRS for several million dollars in unpaid income taxes. Id. at 113-14.

Defendant submits an affidavit signed by Stelle which states that the $44,000 was a gift to Defendant, to be utilized as a down payment for 14 Michele Lane . In her affidavit, Stelle asserts her belief that at the time of the purchase of 14 Michele Lane , Defendant planned to relocate from Virginia to 14 Michele Lane for the purpose of assisting in the family gasoline station and convenience store business. Defendant also submitted a "Certification of Gift" signed by Stelle as part of Defendant's Uniform Loan Application for the purchase of 14 Michele Lane . In response, the United States correctly argues that the intent of a gift is irrelevant where a transfer is deemed fraudulent. However, since the United States has failed to show conclusively that the $44,000 transfer from Stelle to Defendant was made with fraudulent intent, a genuine issue of material facts exists as to Defendant's assertion of an intent to give the $44,000 as a gift.

F. Motion to Preclude Susan Snyder from Testifying in Her Defense

Defendant asserted her Fifth Amendment privilege against self-incrimination during discovery. In doing so, the United States and Defendant agree that Defendant waived her right to testify at trial. However, Defendant requests to reserve her right to move this court to modify the preclusion order and reopen discovery should she subsequently decide to waive her privilege. "[S]o long as a district court attempts to accommodate a claimant's fifth amendment interests, the nature and extent of accommodation should be left primarily to that court's discretion." United States v. Parcels of Land, 903 F.2d 36, 44 (1st Cir. 1990). In cases where a litigant chooses to withdraw their Fifth Amendment privilege, "[t]he district court should, in general, take a liberal view towards such applications, for withdrawal of the privilege allows adjudication based on consideration of all the material facts to occur." 4003-4005 5th Ave. , 55 F.3d at 84. In deciding whether to allow such a litigant to waive his or her privilege, it should be taken into consideration whether the privilege was originally invoked in a manner as to manipulate or gain an unfair advantage over opposing parties. Id. at 85. Evidence has not been submitted to the effect that Defendant has asserted her Fifth Amendment privilege in an abusive or manipulative manner. Therefore, Defendant retains the right to rescind the invocation of her right not to incriminate herself and thus any preclusion of her testimony, as to which this court will not now comment.

G. Order Approving Stipulation

Still pending is the United States 's motion to approve a stipulation between the Bank of America, N.A. and the United States . As the underlying stipulation has already been approved, (Dkt. No. 15, margin endorsement), the motion is denied as moot.

IV. CONCLUSION

The United States's motion to approve stipulation between Bank of America, N.A. and the United States as an order of the court, (Dkt. No. 16-2), is denied as moot. The United States 's motion for summary judgment, (Dkt. No. 25-1), is denied. The United States 's motion to preclude Defendant from testifying at trial of this matter in her defense, (Dkt. No. 25-2), is granted.

SO ORDERED.

¹ 26 U.S.C. §6321 provides, "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

² Also left unresolved is whether Russell and Stelle even knew they had outstanding tax obligations to the United States at the time of the transfer.

³ Presumably, as it is possible that the IRS W-2 forms submitted to the loan company were accurate and her 1993 and 1994 federal income tax forms were fraudulent. Or both were fraudulent.

 

 

 

 

 

United States of America , Appellee v. Francis Taylor, Defendant, Mary E. Taylor, Appellant.

U.S. Court of Appeals, 8th Circuit; 01-2874/3872, 338 F3d 947, July 31, 2003.

Reversing and remanding an unreported DC Minn. decision; related opinion at DC Minn. 2002-1 USTC ¶50,198.

[ Code Secs. 6321 and 6323]

Tax liens: Priority: Conveyances made by taxpayer to ex-wife: Qualified domestic relations order: Employee plan proceeds: Relation back of interest in proceeds. --

A divorced wife became the owner of 90 percent of her former husband's interest in employee plan proceeds on the date when a state (Texas) court issued a domestic relations order (DRO), even though details of qualification remained to transform the DRO into a qualified domestic relations order (QDRO). Thus, as a judgment lien creditor, her interest in the proceeds had priority over an IRS tax lien against the husband that was filed subsequent to the entry of the DRO but before the order became a QDRO. On the date the DRO was granted, her identity was clear, the subject property was identified, the amount was fixed, and the husband no longer owned 90 percent of the plan proceeds at issue.

Before: Loken, Bye and Riley, Circuit Judges.

RILEY, Circuit Judge: This case arises out of an April 1996 Northwest Airlines (Northwest) interpleader of the United States and Mary Taylor (Mary) to determine whether the Internal Revenue Service (IRS) or Mary has priority and is entitled to the benefits of three Northwest sponsored employee benefits plans. On cross motions for summary judgment, the district court ruled generally for the IRS and against Mary, finding Mary's right to the plans under a Texas domestic relations order (DRO) was subject to a prior federal tax lien. We disagree and reverse.



I. BACKGROUND

As is often the case, the sequence of events is critical. Francis Taylor (Francis) worked as a pilot for Northwest from 1966 to 1994. During his employment, Francis participated in a retirement plan, a stock plan, and a savings plan administered by Northwest under ERISA. ¹ Francis retired from Northwest in September 1994, at which time he filed in a Texas state court for divorce from Mary, his wife of more than thirty years. The following month, in October 1994, a tax court concluded that Francis had not filed tax returns from 1981 through 1985. On May 1, 1995, the IRS assessed deficiencies totaling approximately $984,310 (including penalties and interest) for those tax years. On July 28, 1995, the Texas court entered a divorce decree and approved a marital settlement agreement. The agreement provided that "to settle all obligations of the marriage," Mary would receive a 90 percent interest in Francis's Northwest employee benefits proceeds (plan proceeds). Also in July, the court entered a purported qualified domestic relations order (QDRO), directing the plan administrator to distribute Mary's interest in the plan proceeds directly to her. The Texas court, in the July order, retained jurisdiction to amend or reform the order as necessary to conform with plan requirements and qualify as a QDRO.

In October 1995, Northwest informed Mary and Francis that the July DRO did not qualify as a QDRO. In December 1995, the IRS filed a lien against the plan proceeds in Texas , where Francis claimed he resided at the time of the divorce, and where the DRO issued. In October 1996, the IRS filed another lien in Minnesota , where the plans were administered. Meanwhile, Mary and Francis attempted to correct the DRO's identified deficiencies. Among other things, the order: (1) did not specify the period to which it applied; (2) did not address how to treat amounts accrued, but had not yet been credited to the account; and (3) would have required Northwest to make an extra payment. Twice the Texas court, at Mary's request, reformed the DRO to address Northwest's concerns. Northwest finally pronounced the DRO a QDRO in January 1997.

The district court dismissed Northwest from the interpleader action, and the IRS and Mary were left to determine who was entitled to the plan proceeds. The IRS claimed its interest in the plan proceeds was first in time, while Mary argued her interest had priority because she was both a "judgment lien creditor" and a "purchaser" under 26 U.S.C. §6323(a), ² a statute that in certain situations requires the IRS to file notice of its lien to obtain priority.

The district court concluded Mary was neither a purchaser nor a judgment lien creditor under section 6323(a). Specifically, the court determined Mary was not a purchaser because her consideration was not "adequate and full," as defined in 26 C.F.R. §301.6323(h)-1(f)(3) (2001) (consideration must have reasonable relationship to true value of interest in acquired property). Further, the district court found Mary was not a judgment lien creditor because there was no evidence she had perfected her lien by executing the judgment as required under Texas law. Because Mary was not entitled to the protections of section 6323, the district court held the IRS tax liens assessed on May 1, 1995, became effective against Mary as of that date and were first in time and entitled to priority.

On appeal, Mary argues: (1) the Texas divorce court had exclusive jurisdiction over this dispute; thus, there was no federal question and the interpleader action was not proper; (2) under Texas community property law, Mary had substantial property rights in the plan proceeds even before the divorce; (3) she was a purchaser under section 6323(a); and (4) she was a judgment lien creditor under section 6323(a).



II. DISCUSSION

This court reviews de novo the district court's grant of summary judgment. Mayberry v. United States [ 98-2 USTC ¶50,632], 151 F.3d 855, 858 (8th Cir. 1998). Initially, we reject Mary's first two arguments: (1) federal jurisdiction does exist, see 29 U.S.C. §1132(a)(3) (civil action may be brought by fiduciary to enjoin violations of ERISA plan, or to obtain appropriate equitable relief); and (2) Texas community property law does not vest her with an interest in the plan proceeds. See 29 U.S.C. §1144(a) (ERISA supersedes state law insofar as such law relates to ERISA-governed plans); Boggs v. Boggs, 520 U.S. 833, 850 (1997) (QDRO provisions define scope of nonparticipant spouse's community property interest in pension plans).

We turn next to whether Mary became a judgment lien creditor under section 6323(a) within sufficient time to have priority over the IRS. ³ An IRS lien attaches automatically on the date a penalty is assessed, 26 U.S.C. §6322 (lien arises at time of assessment), and is enforceable as of that date against creditors except any "purchaser," "holder of security interest," "mechanic's lienor," or "judgment lien creditor," within the meaning of section 6323(a). If the creditor falls into one of these categories, then the IRS must provide adequate notice to establish the priority of its lien. See 26 U.S.C. §6323(a); Rodeck v. United States [ 89-2 USTC ¶9401], 697 F.Supp. 1508, 1511 (D. Minn. 1988) (as to §6323(a) creditors, tax lien will have priority only if notice has been filed in accordance with §6323(f)).

A Treasury Regulation defines "judgment lien creditor" as follows:

... a person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money. In the case of a judgment for the recovery of a certain sum of money, a judgment lien creditor is a person who has perfected a lien under the judgment on the property involved. A judgment lien is not perfected until the identity of the lienor, the property subject to the lien, and the amount of the lien are established. Accordingly, a judgment lien does not include an attachment or garnishment lien until the lien has ripened into judgment, even though under local law the lien of the judgment relates back to an earlier date.

 

...

 

If under local law levy or seizure is necessary before a judgment lien becomes effective against third parties acquiring liens on personal property, then a judgment lien under such local law is not perfected until levy or seizure of the personal property involved.

26 C.F.R. §301.6323(h)-1(g).

A state law created lien's priority depends on when it attaches and becomes choate, and federal law will determine when the lien has acquired sufficient substance and becomes so perfected as to defeat a later federal tax lien. United States v. Pioneer Am. Ins. Co. [ 63-2 USTC ¶9532], 374 U.S. 84, 88 (1963). Liens are perfected, under the federal rule, when there is nothing more to be done to have a choate lien, that is, "when the identity of the lienowner, the property subject to the lien, and the amount of the lien are established." Id. at 89 (citations omitted). Here, Mary obtained a valid judgment from a Texas divorce court for 90 percent of Francis's plan proceeds creating an exclusive property interest in the plan proceeds for Mary. On the date the Texas court granted the DRO, Mary's identity was clear, the subject property was identified, and the amount (90 percent) was fixed.

Mary was not required to comply with any state law requirements for purposes of establishing lien priority over the IRS's interest in the plan proceeds. ERISA provides a mechanism for enforcing QDROs, and this mechanism supersedes any contrary state law. See U.S. Constitution art. VI, cl. 2, Heart of Am. Grain Inspection Serv., Inc. v. Mo. Dep't of Agric., 123 F.3d 1098, 1103 (8th Cir. 1997) (under Supremacy Clause, federal laws are supreme law of land and may preempt state law); cf. Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-44 (1984) (agencies may elucidate, through regulations, specific provisions of statutes that agencies administer). Specifically, 29 U.S.C. §1056(d) provides for alienation of pension plan benefits in accordance with a QDRO, and gives plan administrators or courts eighteen months to determine whether a DRO qualifies as a QDRO, directing the plan administrator to segregate the amounts in question during that period. See 29 U.S.C. §1056(d)(3)(H). ⁴

In this case, Northwest determined, within eighteen months of the date the first payment would have been made under the DRO, that the DRO, as modified, was a QDRO. Thus, Mary satisfied ERISA's requirements for alienating pension plan proceeds. Requiring Mary to satisfy state law perfection requirements would conflict with ERISA's policy of ensuring that plan sponsors are subject to a uniform body of law. See Egelhoff v. Egelhoff, 532 U.S. 141, 148 (2001) (principal goal of ERISA is to establish uniform scheme with standard procedures; uniformity is impossible if plans are subject to different legal obligations in different states); Minnesota Chapter of Associated Builders & Contractors, Inc. v. Minn. Dep't of Pub. Safety, 267 F.3d 807, 810-11 (8th Cir. 2001) (ERISA's goal is to minimize administrative and financial burden of complying with conflicting state directives, and to prevent potential for conflicts in substantive law requiring tailoring of plans to peculiarities of multiple local laws), cert. denied, 122 S.Ct. 2292 (2002); Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d at 710 (imposing state law perfection requirements would create choice-of-law difficulties, frustrating objective of ensuring uniformity of ERISA administration).

We further conclude that Mary's interest in the plan proceeds relates back to the date of the initial DRO. See Nelson v. Ramette, 322 F.3d 541, 544 (8th Cir. 2003) ("A person awarded a lump-sum distribution from an ERISA plan pursuant to a divorce decree has a direct interest in plan funds while the plan reviews the DRO to determine whether it constitutes a QDRO."); Gendreau v. Gendreau, 122 F.3d 815, 818 (9th Cir. 1997) (wife's interest in pension plans was established at time of divorce decree; husband's interest was concomitantly limited at that time, or subject to being limited at any time wife obtained QDRO, much like property owner's rights may be subject to divestment by contingent interest); Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d at 711-12 (wife had possessory interest in benefits once first DRO had been entered although interest was unenforceable until QDRO was obtained); cf. 29 U.S.C. §1056(d)(3)(H) (any determination made within eighteen months of the order, or modification of the order, will be applied prospectively). Mary had eighteen months pursuant to section 1056(d)(3)(H)(ii) to qualify her DRO, and "[i]f within the 18-month period ... the order (or modification thereof) is determined to be a qualified domestic relations order, the plan administrator shall pay the segregated amounts ... to the person...." (Emphasis added). The plan administrator, by plan procedures, cannot shorten this eighteen month qualification period.

Because the DRO preceded the IRS's notice of tax lien, and Northwest determined within the requisite eighteen months that the DRO qualified as a QDRO, see 29 U.S.C. §1056(d)(3)(H)(v) (computation of time), Mary was a judgment lien creditor with priority as of July 1995, when the DRO was entered. She is thus entitled to the plan proceeds free of the IRS lien.

One other related issue should be addressed regarding the finality of the July 1995 Texas DRO. The Texas judge signed an order prepared and approved by the parties which stated:

The Court retains jurisdiction to amend this Order so that it will constitute a qualified domestic relations order under the Plan even though all other matters incident to this action or proceeding have been fully and finally adjudicated. If the Plan determines at any time that changes in the law, the administration of the Plan, or any other circumstances make it impossible to calculate the portion of a distribution awarded to Alternative Payee by this Order and so notifies the parties, either or both parties shall immediately petition the Court for reformation of this Order.

The intent of the July 1995 DRO, to qualify under the applicable Northwest plans, is clear. The parties and the court recognized the order may need changes to qualify. Northwest did require certain changes to qualify. Mary asked the Texas court twice to reform the DRO before Northwest accepted the DRO as a QDRO. This process is anticipated by the law, which provides for segregation of the funds by the plan administrator for up to eighteen months to qualify the DRO as a QDRO. See 29 U.S.C. §1056(d)(3)(H). Our holdings in Nelson and here, recognizing the DRO establishes a "direct interest in plan funds," and upon qualification, the interest relates back to the initial DRO date, further the statutory scheme to protect employee retirement benefits for beneficiaries of the plans, including divorced spouses.

As a legal matter, when the DRO issued, Francis was no longer the owner of 90 percent of the Northwest ERISA plans. Mary was awarded this share as part of the divorce. Mary, the property, and the amount were identified clearly, only the details of qualification remained to transform the DRO into a QDRO.



III. CONCLUSION

Since we conclude Mary was a judgment lien creditor, we do not address whether she was also a purchaser under section 6323(a). Accordingly, we reverse the summary judgment with regard to Mary Taylor, and remand with instructions to enter judgment in conformity with this opinion.

Dissenting Opinion

LOKEN, Circuit Judge, dissenting: The lien priority issue in this case involves the interplay of two federal statutory regimes, ERISA and the Internal Revenue Code. The Code provides that a judgment lien, when perfected, has priority over an existing federal tax lien unless notice of the tax lien has been filed in accordance with state law. See 26 U.S.C. §6323(a), (f). ERISA provides that a former spouse may acquire an enforceable right to a participant's pension plan benefits pursuant to the provisions of a "qualified domestic relations order" (QDRO). ⁵ Here, the IRS more or less concedes that the Texas divorce court's domestic relations order granted Mary Taylor a judgment lien on Francis Taylor's ERISA plan benefits. The issue, then, is whether her lien on those plan benefits is entitled to priority over the IRS's tax liens under §6323(a).

Federal law governs whether a judgment lien created by state law is perfected for purposes of §6323(a). The federal rule is that a lien is perfected, or choate, "when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. Pioneer Am. Ins. Co. [ 63-2 USTC ¶9532], 374 U.S. 84, 89 (1963) (quotation omitted). A Treasury Regulation now codifies this principle. 26 C.F.R. §301.6323(h)-1(g). Though Mary Taylor's judgment lien was created by state law, ERISA provides that, to be perfected --that is, enforceable against Francis Taylor's plan benefits --the state court order must be a QDRO. And Congress's definition of a QDRO incorporates the substance of the federal law definition of a perfected lien: a domestic relations order qualifies as a QDRO if it clearly specifies the plan participant, the alternative payee (the lienholder), each plan to which the order applies, the amount or percentage of the benefits to be paid to the alternate payee, and the number of payments or period to which the order applies. 26 U.S.C. §414(p)(2).

Given this overlap between the judicially developed federal rule of perfection, and the statutory elements of a QDRO, I agree with the court that a QDRO is a perfected judgment lien for purposes of the priority rules of §6323(a). Like the court, I reject the IRS's argument that, to be perfected under §6323(a), the judgment lien created by a QDRO must also satisfy any levy or seizure requirements generally applicable to liens created by the laws of that State. Congress codified the perfection requirements for a QDRO in another section of the Internal Revenue Code, and ERISA would preempt any local law that interfered with its anti-alienation provisions. In the absence of a Treasury Regulation specifically addressing the relationship between Code §§6323(a) and 414(p)(2), I decline to apply a general reference to local law in a pre-existing Treasury Regulation, 26 C.F.R. §301.6323(h)-l(g), in a manner inconsistent with the QDRO perfection provisions of ERISA.

There remains the question whether Mary's judgment lien was perfected (acquired QDRO status) prior to the IRS filing notice of its tax liens in Dallas County , Texas , in late December 1995. Mary's judgment lien arose on July 28, 1995, when the Texas divorce court entered a domestic relations order awarding her a 90% interest in Francis Taylor's ERISA plan benefits. Northwest Airlines as plan administrator determined that amended versions of that order qualified as QDROs, long after the tax liens were filed in December 1995. The court nonetheless concludes that Mary's QDRO-perfected lien has priority because "Mary's interest in the plan proceeds relates back to the date of the initial [divorce court order]." Ante at 7. I disagree.

ERISA provides that, when a domestic relations order is submitted for a QDRO determination, the plan administrator must make the determination "within a reasonable period after receipt of such order," 26 U.S.C. §414(p)(6)(A)(ii), and must segregate plan benefits that would be payable to the alternate payee (here, Mary Taylor) for up to eighteen months while it makes that determination, §414(p)(7). See Hogan v. Raytheon, Co., 302 F.3d 854, 857 (8th Cir. 2002). If the administrator determines within the eighteen-month approval period that the submitted order or a "modification" of that order is a QDRO, it must pay the segregated amounts to the alternate payee. 26 U.S.C. §414(p)(7)(B); see Trustees of the Dirs. Guild of Am.-Producer Pension Benefits Plans v. Tise, 255 F.3d 661, 2000 U.S. App. LEXIS 38507, at **16 (9th Cir. 2000). In that situation, although the issue is not free from doubt, I do not take issue with the court's conclusion that QDRO status should "relate back" to the entry of the initial domestic relations order for purposes of §6323(a) lien priority because ERISA has conferred a direct interest in the segregated plan funds at that earlier date. ⁶ Cf. Nelson v. Ramette, 322 F.3d 541, 544 (8th Cir. 2003) (for bankruptcy purposes, alternative payee acquires QDRO interest in plan funds on the date the domestic relations order is first entered); Gendreau v. Gendreau, 122 F.3d 815, 818 (9th Cir. 1997) (same), cert. denied, 523 U.S. 1005 (1998).

But assuming the court has adopted a correct relation-back principle, it has misapplied that principle to the facts of this case. Unlike the plan administrator in Cooper Indus., Inc. v. Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d 702 (S.D. Tex. 2001), Northwest Airlines did not invite Mary and Francis Taylor to submit a modified domestic relations order to cure defects in the July 28, 1995, order. Rather, Northwest Airlines as plan administrator issued three letters between October 16 and November 3, 1995, initially determining that the July 28, 1995, domestic relations order did not qualify as a QDRO with respect to any of the three plans, and advising the Taylors that these initial determinations would become final at the conclusion of the sixty-day appeal period provided for in the three plans. When the Taylors did not appeal, Northwest Airlines issued three final negative determinations. At that point, ERISA expressly provides that Mary as alternate payee had no further interest in any segregated plan benefits. 26 U.S.C. §414(p)(7)(C). Consistent with the statute, Northwest Airlines then paid the segregated benefits for the months from July 1995 to January 1996 to Francis Taylor. At that point, though the eighteen-month period had not expired, Mary's claim to a perfected judgment lien as of July 28, 1995, was finally rejected. ⁷

As the court notes, the Texas court entered a modified domestic relations order on January 8, 1996, after the plan administrator's final negative determinations. The Taylors submitted that order to Northwest Airlines as plan administrator. Northwest Airlines again issued three notices that it had received a domestic relations order (one notice for each plan), which is the first step in the QDRO-determination process. See 26 U.S.C. §414(p)(6)(A)(i). In June 1996, Northwest Airlines finally determined that the January 8, 1996, order qualified as a QDRO with respect to Francis Taylor's savings plan and stock plan benefits. However, on April 15, 1996, Northwest Airlines initially determined that the January 8 order did not qualify as a QDRO with respect to Francis Taylor's retirement plan benefits. Again, the Taylors failed to appeal within the plan's sixty-day appeal period, and that determination became final. Again, after the appeal period expired, the Taylors submitted another modified domestic relations order, entered by the Texas court on August 29, 1996, which Northwest Airlines finally determined to be a QDRO on January 7, 1997.

On this undisputed record, I conclude that the plan administrator's QDRO determinations did not grant Mary Taylor a perfected judgment lien interest in Francis Taylor's plan benefits prior to January 8, 1996. As the IRS properly filed notice of its liens in late December 1995, the federal tax liens have priority over Mary's judgment lien under §6323(a). Accordingly, I respectfully dissent.

¹ Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. §§1001-1461 (2000).

² 26 U.S.C. §6323(a) states: "Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors. The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary [of the Treasury]."

³ The IRS has authority to proceed against Francis's interest in any ERISA plan benefits and "is not constrained by ERISA's anti-alienation provision." United States v. McIntyre [ 2000-2 USTC ¶50,613], 222 F.3d 655, 660 (9th Cir. 2000). After the DRO, Francis effectively no longer has any ownership interest in Mary's 90 percent share of the Northwest ERISA plans.

⁴ Pension benefit plans are distinguishable from welfare benefit plans, which do not provide an enforcement mechanism. See Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825, 831-33 (1988); Cooper Indus., Inc. v. Compagnoni [ 2001-2 USTC ¶50,626], 162 F.Supp.2d 702, 709-10 (S.D. Tex. 2001).

⁵ Significantly, the QDRO provisions of ERISA appear in both the Internal Revenue Code and the Title 29 labor laws. See 29 U.S.C. §1056(d); 26 U.S.C. §414(p). I will cite to the Code provisions in this dissent.

⁶ My doubt stems from the fact that the initial domestic relations order, if seriously deficient, may not satisfy the QDRO requirements in §414(p)(2) that correspond to the elements that make a judgment lien choate under federal common law. Here, for example, the July 28, 1995, order did not identify to which of the three Northwest Airlines plans it applied and thus did not clearly define the 90% interest that Mary was awarded. In such a case, for purposes of priority against a federal tax lien, I am not sure whether QDRO status should only relate back to the date the deficient domestic relations order was modified, or all the way back to the entry of the initial, non-choate domestic relations order. I need not resolve that question here.

⁷ The court has no support for its assertion that "[t]he plan administrator, by plan procedures, cannot shorten [the] eighteen month qualification period." Ante at 7. The assertion is contrary to the plain language of the statute, which requires a QDRO determination "within a reasonable period," provides that affected benefits must be segregated while the determination is made, but places an eighteen-month limit on the plan administrator's duty to segregate. The assertion is also contrary to the Department of Labor's interpretation of the QDRO provisions: "the `18-month period' during which a plan administrator must preserve the `segregated' amounts ... is not the measure of the reasonable period for determining the qualified status of an order and in most cases would be an unreasonably long period of time to take to review an order." U.S. Dep't of Labor, Employee Benefits Sec. Admin., QDROs --The Division of Pensions Through Qualified Domestic Relations Orders, Question 2-12 at p.19, available online at <http://www.dol.gov/ebsa/Publications/qdros.html>.

 

[2002-1 USTC ¶50,198] United States of America , Plaintiff v. Francis Taylor and Mary Taylor, Defendants

U.S. District Court, Dist. Minn., Civ. 3-96-335 (RHK/FLN), 10/24/2001

[Code Secs. 6321 and 7401 ]

Jurisdiction: Suits by U.S.: Tax liens: Property subject to liens: Fraudulent conveyances.--Jurisdiction was lacking over the government's claim that the transfer made by an individual whose property was subject to federal tax liens of his interest in his pension plan to his ex-wife during their divorce proceedings was fraudulent. The so-called Rooker-Feldman doctrine prevented the district court from changing the state ( Texas ) court's judgment in the taxpayer's divorce proceedings.

[Code Sec. 1 ]

Tax liens: Property subject to liens: Nominee status.--The government's contention that the an individual's ex-wife, to whom the taxpayer had transferred his pension plan during their divorce proceedings, was an alter ego or nominee of the taxpayer failed. There was no evidence that the taxpayer, whose property was subject to federal tax liens, retained control over the benefits payable under his transferred pension plan or that he had an unrestricted right to the funds his ex-wife was entitled to receive after the transfer.

ORDER

KYLE, District Judge:

On July 25, 2001, the Court entered an Order and Order for Judgment which, inter alia, determined that "the statutory tax liens that arose on April 14, 1997, and May 19, 1997, are valid and subsisting federal tax liens in favor of the United States upon all property and rights to property, whether real or personal, belonging to Francis Taylor at the time those liens attached." (July 25, 2001 Order at 7.) The Court also determined that "the 1997 tax liens did not attach to those proceeds of Francis Taylor's retirement Plans that were conveyed to Mary Taylor by means of the Qualified Domestic Relations Order [QDRO] issued by the Texas divorce court." ( Id. at 7-8 (emphasis added).) Furthermore, the Court dismissed as moot Counts III, IV, and V of the United States ' Answer, Second Amended Cross Claim, and Second Amended Counterclaim. ( Id. at 7.) Those counts asserted that (a) the QDRO issued by the Texas divorce court violated the Texas Fraudulent Transfer Act, (b) the QDRO violated the Federal Debt Collection Procedures Act, and (c) Mary Taylor was the alter ego or nominee of Francis Taylor, respectively.

Before the Court is the United States ' Motion to Alter or Amend the Judgment. The United States contends that the Court erred in not considering whether the fraudulent transfer, fraudulent conveyance, or alter ego claims justified setting aside or disregarding the transfer of 90% of Francis Taylor's interest in his Northwest Airlines pension plans to his wife Mary Taylor. That transfer was accomplished by the QDRO and Divorce Decree issued in the Taylors ' divorce.

I. Standard of Decision under Rule 59.

Rule 59 of the Federal Rules of Civil Procedure provides that a "motion to alter or amend a judgment shall be filed no later than 10 days after entry of the judgment." Fed. R. Civ. P. 59(e).

Federal Rule of Civil Procedure 59(e) was adopted to clarify a district court's power to correct its own mistakes in the time period immediately following entry of judgment. . . . Rule 59(e) motions serve a limited function of correcting manifest errors of law or fact or to present newly discovered evidence. . . . Such motions cannot be used to introduce new evidence, tender new legal theories, or raise arguments which could have been offered or raised prior to entry of judgment.

Innovative Home Health Care, Inc. v. P.T.-O.T. Assocs. of the Black Hills, 141 F.3d 1284, 1286 (8th Cir. 1998) (internal quotations marks and citations omitted).

In late 2000, the United States brought motions for summary judgment against both Francis and Mary Taylor. The United States sought a determination that its 1995 tax liens (which pertained to the 1981 through 1985 tax deficiencies) had priority over any interest Mary Taylor claimed in the Plans by reason of her divorce. The Government's arguments concerning fraudulent transfers and an alter ego theory were merely alternative arguments that did not need to be decided if the Court resolved the lien priority issue for the 1995 tax liens in favor of the United States . ¹ The United States did not argue that the fraudulent transfer and alter ego doctrines applied to permit enforcement of the Government's 1997 tax liens. Indeed, the Government's motions for summary judgment did not seek a determination of any sort regarding the 1997 tax liens.

In its Memorandum Opinion and Order granting the United States ' Motion for Partial Summary Judgment, this Court directed counsel to file a letter identifying what issues, if any, remained for trial. By a letter dated June 25, 2001, the United States argued, in a section entitled "Priority of 1997 statutory liens in Count VII," that the Court's earlier ruling that Mary Taylor was not a person entitled to notice of the federal tax liens pursuant to 26 U.S.C. §6323(a) as either a judgment lien creditor or purchaser "would also apply with respect to the 1997 additional tax assessments against Francis Taylor. Thus there was no need for the United States to file a tax lien for it to be effective against her." (June 28 letter from United States ' counsel at 2 (emphasis added).) In the same section of the letter, the United States further stated that "[i]f the Court does not believe the 1997 priority issue has been resolved, that issue could, in our view, be decided on the evidence and briefs already submitted." ( Id. at 3.) That sentence was followed by a footnote referring the Court to sections of several memoranda filed by the United States in connection with the motions for summary judgment. ( Id. at 3, n.6.) Thus, in its June 25, 2001 letter, the United States did not clearly articulate its desire to have the fraudulent transfer and alter ego claims decided vis-a-vis the 1997 tax liens. The Court accordingly concluded that they were moot.

Not until the Motion to Alter or Amend the Judgment did the United States expressly state its position that "[t]here would be no issue of priority between Mary Taylor and the United States as to the 1997 tax liens if the Court found the conveyance by Francis of his interest in the Plans to Mary to be fraudulent." (Mem. Supp. Mot. to Alter or Amend J. at 3-4.) The Court has carefully considered the record and the proceedings in this matter and concludes that Counts III, IV, and V of the United States ' Answer, Second Amended Cross Claim, and Second Amended Counterclaim should not have been dismissed as moot, in light of the pending case or controversy over the 1997 tax liens. Accordingly, the Court will grant the United States ' motion and will consider the merits of the claims asserted in Counts III, IV, and V. The parties have previously briefed whether the United States is entitled to judgment, as a matter of law, on its claims that either the QDRO was a fraudulent transfer or that Mary Taylor was the "alter ego" or nominee of Francis Taylor. The Court considers each theory in turn.

II. Fraudulent Transfer

The Court turns first to the counts alleging that the transfer accomplished by the Texas family court's QDRO violated state or federal fraudulent transfer law. As a threshold matter, the Court must resolve whether it has jurisdiction to decide such claims. Francis Taylor and the United States briefed the applicability of the Rooker-Feldman doctrine in connection with Francis Taylor's Motion to Dismiss. ² "The Rooker-Feldman doctrine recognizes that, with the exception of habeas corpus petitions, lower federal courts lack subject matter jurisdiction over challenges to state court judgments." Lemonds v. St. Louis County, 222 F.3d 488, 492 (8th Cir. 2000), cert. denied sub nom. Halbman v. St. Louis County , 121 S.Ct. 1168 (2001). "The Rooker-Feldman doctrine forecloses not only straightforward appeals but also more indirect attempts by federal plaintiffs to undermine state court decisions." Id.

In District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 482 n.16 (1983), the Supreme Court stated that a federal district court cannot decide constitutional claims that are "inextricably intertwined" with the state court's proceedings because such a ruling would essentially be a review of the state court's decision. The Eighth Circuit has not limited the doctrine to federal constitutional claims but has also applied it to claims seeking relief under state consumer protection laws that were before the district court pursuant to its supplemental jurisdiction. Fielder v. Credit Acceptance Corp., 188 F.3d 1031, 1034-35 (8th Cir. 1999). A claim, constitutional or otherwise, is "inextricably intertwined" for purposes of the Rooker-Feldman doctrine if it " 'succeeds only to the extent that the state court wrongly decided the issues before it [or] if the relief requested . . . would effectively reverse the state court decision or void its ruling.' " Id. at 1035 (quoting Charchenko v. City of Stillwater, 47 F.3d 981, 983 (8th Cir. 1995)); accord Neal v. Wilson , 112 F.3d 351, 356 (8th Cir. 1997). A lower federal court can exercise jurisdiction over a claim, however, "if it is 'separable from and collateral to the merits of the state-court judgment.' " Fielder, 188 F.3d at 1034 (quoting Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 21 (1987) (Brennan, J., concurring)).

The United States argues that Rooker-Feldman does not apply because the doctrine "only applies to litigants who were parties of both the state court decision and the federal claim." ( United States ' Opp'n to Mot. to Dismiss at 7.) In Lemonds, however, the Eighth Circuit Court of Appeals rejected the reasoning of cases such as the one cited by the United States in support of that argument: ³

Insisting that the parties must be identical, it seems to us, confuses the Rooker-Feldman doctrine with principles of res judicata. These doctrines are not the same. . . . Although the two rules often overlap in their practical effects, they rest on contrasting foundations and serve distinct purposes. Thus, whereas res judicata is largely a matter of common law and involves the impropriety of permitting parties to have "two bites at the apple," Rooker-Feldman is based squarely on federal law and is concerned with federalism and the proper delineation of the power of the lower federal courts. Such courts are simply without authority to review most state court judgments--regardless of who might request them to do so.

Lemonds, 222 F.3d at 495. ⁴ The Eighth Circuit further observed, however, that some courts of appeal have declined to apply the doctrine "where the federal plaintiffs lacked a reasonable opportunity, through intervention or otherwise, to litigate their claims in state court." Id. at 496 (citing Long v. Shorebank Dev. Corp., 182 F.3d 548, 558 (7th Cir. 1999); Valenti v. Mitchell, 962 F.2d 288, 296 (3d. Cir. 1992); Wood v. Orange County, 715 F.2d 1543, 1546-48 (11th Cir. 1983) ("The rule can apply only where the plaintiff had a reasonable opportunity to raise his federal claim in state proceedings. Where the plaintiff has had no such opportunity, he cannot fairly be said to have 'failed' to raise the issue.")). The Seventh Circuit observed that lower federal courts have not applied Rooker-Feldman where the federal litigants did not have a "reasonable opportunity" to raise their federal claims in state proceedings and where

the federal litigants have pointed to some factor independent of the actions of the opposing party that precluded the litigants from raising their federal claims during the state court proceedings. Typically, either some action taken by the state court or state court procedures in place have formed the barriers that the litigants are incapable of overcoming in order to present certain claims to the state court.

Long, 182 F.3d at 558.

The United States makes no argument that it was unable, by intervention or otherwise, to litigate in Texas state court the fraudulent nature of the transfer effectuated by the QDRO. The United States acknowledges that it knew of the Taylor 's divorce in late 1995. The process of obtaining a valid QDRO from the Texas state court took well over a year. (June 8, 2001 Memorandum Opinion and Order at ¶¶13, 16, 18, 20, 25, 26, and 28.) The United States cites to no procedural rule or action by the Texas court that prevented it from bringing the fraudulent nature of the transfer to the Texas Court's attention. Rather, the United States argues that it was not required to intervene in the divorce proceeding after learning of it in late 1995. ( United States ' Opp'n to Mot. to Dismiss at 8.) The United States has had a full and fair opportunity to address the application of the Rooker-Feldman doctrine to its fraudulent transfer claims. The Court concludes, based on the record before it, that the "no reasonable opportunity" exception does not apply here.

Determining whether Rooker-Feldman deprives the district court of subject matter jurisdiction in a given case " 'requires determining exactly what the state court held' to ascertain whether granting the requested federal relief would either void the state court's judgment or effectively amount to a reversal of its holding." Lemonds, 222 F.3d at 493 (quoting Charchenko, 47 F.3d at 983); see also Suzanna Sherry, Judicial Federalism in the Trenches: Rooker-Feldman Doctrine in Action, 74 Notre Dame L. Rev. 1085, 1099 (1999) (opining that the Rooker-Feldman doctrine applies whenever the federal district court "is in effect reviewing the state court judgment even if it is not reviewing the decision.") (emphasis in original). ⁵ In the present case, the Texas state court approved a marital property settlement whereby Francis Taylor transferred to Mary the right to receive 90% of the pension payments that were payable to him by Northwest Airlines.

The United States argues that "it cannot be said that the issue of whether there was fraud in the transfer was 'inextricably intertwined' with the prior state court decision, for the parties to the divorce proceeding were the very parties perpetrating the fraud." ( United States ' Opp'n to Mot. to Dismiss at 9.) The United States ' formulation of the issue misses the mark, however. There can be no doubt that deciding the fraudulent transfer issue in the United States' favor--that is, holding that the transfer to Mary Taylor of the vast majority of Francis Taylor's right to payment from the Plans via the state court's QDRO and Divorce Decree was fraudulent and therefore void--would effectively nullify the QDRO and the Divorce Decree.

The United States asserts that "it is doubtful that the Rooker-Feldman doctrine is designed to perpetrate fraud on any court." ( United States ' Opp'n to Mot. to Dismiss at 7.) The United States has not cited any authority, however, establishing the scope or nature of a "fraud" exception to the Rooker-Feldman doctrine or why this case would fall within such an exception. ⁶ The Court concludes that the Rooker-Feldman doctrine deprives this Court of jurisdiction to consider the United States ' fraudulent transfer claims in Counts III and IV. Accordingly, those counts are dismissed.

III. Mary Taylor as an Alter Ego/Nominee of Francis Taylor

The United States also argues that, although Mary Taylor holds legal title to the sums payable under the Plans as a result of the QDRO entered by the Texas state court, she holds title as a "mere nominee" or "alter ego" for Francis Taylor. Therefore, the United States contends, the transfer effectuated by the QDRO was subject to the taxpayer's liability to the United States .

The government may collect the tax debts of a taxpayer from assets of the taxpayer's nominee, instrumentality, or 'alter ego.' See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 429 U.S. 338, 350-51, 97 S.Ct. 619, 50 L.Ed.2d 530 (1977); Horton Dairy, Inc. v. United States [93-1 USTC ¶50,195], 986 F.2d 286, 291 (8th Cir. 1993); F.P.P. Enterprises, v. United States [87-2 USTC ¶9536], 830 F.2d 114, 117-18 (8th Cir. 1987). In determining the economic reality of a transaction, courts must analyze the substance of a transaction and are not restricted by its form. See, e.g., Gregory v. Helvering [35-1 USTC ¶9043], 293 U.S. 465, 469-70, 55 S.Ct. 266, 79 L.Ed. 596 (1935); Estate of Sachs v. Comm'r [88-2 USTC ¶13,781], 856 F.2d 1158, 1164 (8th Cir. 1988).

United States v. Scherping [99-2 USTC ¶50,758], 187 F.3d 796, 801 (8th Cir. 1999), cert. denied, 528 U.S. 1162 (2000). "Alter ego means 'other self'--where one person or entity acts like, or, for another to the extent that they may be considered identical." Id. (quoting Loving Saviour Church v. United States [83-1 USTC ¶9215], 556 F.Supp. 688, 691 (D. S.D. 1983), aff'd [84-1 USTC ¶9261], 728 F.2d 1085 (8th Cir. 1984) (per curiam). The analysis of whether an individual is an "alter ego" of another individual differs somewhat from the analysis involved when a business entity (such as a corporation) is alleged to be an individual's "alter ego":

[S]ince a corporation is a fiction, it is easier to manipulate, especially when it is closely held. The same cannot be said for individuals as alter egos for each other, since there will always be at least two human voices to explain the relationship. This is not to say that a human being cannot be another's alter ego; it is only to say that the proving an alter ego relationship between individuals is likely to be more difficult.

Morrison v. United States [99-1 USTC ¶50,252], 1998 WL 1038068, at *9 (W.D. Pa. Dec. 28, 1998). Courts generally consider several factors in deciding whether a person is a taxpayer's nominee:

(1) whether inadequate or no consideration was paid by the nominee;

(2) whether the property was placed in the nominee's name in anticipation of a lawsuit or other liability while the transferor remains in control of the property;

(3) whether there is a close relationship between the nominee and the transferor;

(4) whether they failed to record the conveyance;

(5) whether the transferor retains possession, dominion or control over the property; and

(6) whether the transferor continues to enjoy the benefits of the transferred property.

Giardino v. United States [97-2 USTC ¶50,943], 1997 WL 1038197 at *2 (W.D. N.Y. Oct. 29, 1997); United States v. Mayfield [95-1 USTC ¶50,066], 1994 WL 764114 at *5 (S.D. Ind. Dec. 22, 1994); Simpson v. United States [89-1 USTC ¶9285], 1989 WL 73212 at *6 (M.D. Fla. Apr. 6, 1989).

The United States argues that Mary Taylor is the nominee of Francis Taylor because "the Taylors ' divorce was a sham, designed and intended to place Francis Taylor's assets beyond the reach of the IRS." ( United States ' Mem. Supp. Mot. for Summ. J. against Mary Taylor at 29.) The case on which the United States relies, however, Boyter v. Commissioner [82-1 USTC ¶9117], 668 F.2d 1382 (4th Cir. 1981), is not clearly on point. The Boyters--husband and wife--sought to avoid the federal income tax's "marriage penalty" in 1975 and 1976 by divorcing from each other shortly before the end of each calendar year and then remarrying early in the following year. Thus, in 1975, the Boyters traveled to Haiti and obtained a divorce "on the ground of incompatibility of character, notwithstanding that the parties occupied the same hotel room prior to and immediately after the granting of the decree," Boyter [82-1 USTC ¶9117], 668 F.2d at 1384. The Boyters remarried in Maryland on January 9, 1975. Id. In November of 1976, the Boyters traveled to the Dominican Republic and obtained a divorce decree "on the ground of 'incompatibilities of temperaments existing between (the parties) that has made life together unbearable.' " Id. The Boyters remarried in February 1977. Id.

Recognizing that "the sham transaction doctrine has been applied primarily with respect to the tax consequences of commercial transactions," id. at 1387, the Fourth Circuit Court of Appeals held that, in principle, the doctrine might also apply to the conduct of the Boyters. ⁷ Boyter [82-1 USTC ¶9117], 668 F.2d at 1388. In reaching its holding, the Fourth Circuit reasoned that "[i]t is the prompt remarriage that defeats the apparent divorce when assessing the taxpayers' liability, just as the prompt reincorporation of a business enterprise in continuous operation defeats the apparent liquidation of the predecessor corporation." Id. at 1387 (emphasis added) (citing Atlas Tool Co. v. Commissioner [80-1 USTC ¶9177], 614 F.2d 860, 866-67 (3d Cir. 1980)).

In the present case, there has been no remarriage by the Taylors , let alone a prompt remarriage. Accordingly, the rule articulated in Boyter does not apply here. As for the six above-listed factors that courts generally consider in evaluating whether an individual is the nominee or alter ego of a taxpayer, the Court observes that the United States has not come forward with sufficient evidence to establish a genuine issue of material fact as to the last three. The nominee/alter ego doctrine bears a number of similarities to the fraudulent transfer doctrine. A critical distinction, however, is that the nominee/alter ego doctrine requires proof that the taxpayer retains control over and continues to enjoy the benefits of the property transferred. In this case, there is no evidence that Francis Taylor retains such control over the benefits payable under the Plans or that he has an unrestricted right to the funds Mary Taylor is to receive. The United States ' alter ego/nominee theory fails as a matter of law, and the Court will enter summary judgment against the United States on Count V.

Conclusion

Based on the foregoing, and all of the files, records and proceedings herein, IT IS ORDERED that the United States ' Motion to Alter or Amend the Judgment (Doc. No. 295) is GRANTED. The Court's Judgment (Doc. No. 294) is amended as follows:

1. That paragraph of the Judgment which ordered, adjudged and decreed that Counts III, IV, and V of the United States ' Answer, Second Amended Cross Claim, and Second Amended Counterclaim were dismissed as moot is VACATED;

2. Counts III and IV of the United States' Answer, Second Amended Cross Claim, and Second Amended Counterclaim are DISMISSED WITH PREJUDICE for lack of subject matter jurisdiction under the Rooker-Feldman doctrine; and

3. Count V of the United States ' Answer, Second Amended Cross Claim, and Second Amended Counterclaim is hereby DISMISSED WITH PREJUDICE. LET JUDGMENT BE ENTERED ACCORDINGLY

¹ See Mem. Supp. United States ' Mot. for Summ. J. against Mary Taylor at 25 (discussing application of the Texas Uniform Fraudulent Transfer Act in the context of the May 1, 1995 tax lien); United States ' Mem. Opp'n to Mary Taylor's Mot. for Summ. J. at 20 ("Given that the United States has already established its priority to the funds in question [secured by the May 1, 1995 tax lien], this Court need not consider Francis Taylor's fraudulent transfer.") (emphasis added); United States' Reply to Mary Taylor's Opp'n at 5 ("As noted previously, because the United States' tax liens [arising on May 1, 1995] encumbered the property in question before the transfer [accomplished by the QDRO], this Court need not consider the question of whether the transfer was fraudulent.") (emphasis added); see also United States' Opp'n to Francis Taylor's Mot. to Dismiss at 7 n.10 ("The court need not determine whether the Rooker-Feldman doctrine deprives it of jurisdiction over the United States' cross claim (i.e., that the transfer by Francis Taylor to Mary Taylor of his interests in the Plans was a fraudulent transfer), if it decides the lien priority issue contained in the pending cross-motions for summary judgment in favor of the United States.").

² Because the Rooker-Feldman doctrine is jurisdictional, the Court may, in any event, consider it sua sponte. Lemonds v. St. Louis County, 222 F.3d 488, 492 (8th Cir. 2000), cert. denied sub nom. Halbman v. St. Louis County , 121 S.Ct. 1168 (2001).

³ The Lemonds opinion was issued four months before the United States filed its opposition brief to Francis Taylor's motion to dismiss. It was not, however, cited by the United States .

⁴ The Lemonds court also discussed Johnson v. De Grandy, 512 U.S. 997 (1994), a case cited by the United States in support of its argument that, because it was not a party to the Texas divorce case, the Rooker-Feldman doctrine does not apply. The Lemonds panel noted that "[t]he absence of the United States from the state court proceedings was not critical to the outcome in De Grandy . . . since the Court additionally found, first, that the state court considered its own decision to have been a mere 'preliminary look' at the relevant claims and, second, that the United States 'ha[d] not directly attacked [the state court judgment] in this proceeding." Lemonds, 222 F.3d at 495 n.6.

⁵ "The prevailing view is that Rooker-Feldman is at least somewhat broader, or perhaps more rigid, than the state law of claim preclusion, a view that is sensibly based upon the notion that whether a state court judgment should be subject to collateral attack or review is an issue best left to the state courts." Fielder, 188 F.3d at 1036 (citing Kamilewicz v. Bank of Boston, 92 F.3d 506 (7th Cir. 1996), cert. denied, 520 U.S. 1204 (1997)).

⁶ Indeed, the case cited by the United States in support of its assertion pre-dates both the Feldman case from 1994 and the Rooker case from 1923. (See United States ' Opp'n to Mot. to Dismiss at 7 n.12 (citing McNeil v. McNeil, 78 F. 834 (N.D. Cal. 1897).)

 

 

[99-2 USTC ¶50,733] United States of America , Plaintiff v. Larry M. Barson, et al., Defendants

U.S. District Court, Dist. Utah , Cent. Div., 2:97-CV-551 C, 7/16/99

[Code Sec. 6321 ]

Tax liens: Property not subject to: Transfer of real property: Transfer to relatives: Fraudulent conveyance: Badges of fraud: Recording of deed: Not in anticipation of litigation: Insolvency.--Federal tax liens did not attach to a residence that a delinquent taxpayer transferred to his wife and child because the transfer did not constitute a fraudulent conveyance under state (Utah) law. Although the taxpayer transferred his interest in the property to relatives for no consideration and he continued to live in the residence rent-free, it did not appear that the conveyance was intended to defraud the government. The taxpayer promptly recorded the transfer and did not attempt to hide it in any way, there were no suits filed or threatened against him or his family before the transfer, he was not insolvent at the time of the transfer and he did not abscond or attempt to hide his assets after the transfer.

Kirk C. Lusty, Department of Justice, Washington , D.C. 20530 , for plaintiff. James C. Haskins, Haskins & Assocs., 357 S. 200 E., Salt Lake City, Utah 84111-2827, Stephen W. Lewis, P.O. Box 140874, Salt Lake City, Utah 84114-0874, for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

ALBA, Magistrate Judge:

The above-entitled case came before United States Magistrate Judge Samuel Alba for trial on May 12, 1999, with Kirk C. Lusty, Trial Attorney Tax Division, U.S. Department of Justice, representing the United States, James Haskins and Thomas N. Thompson of Haskins & Associates representing defendants Larry M. Barson, Irene Barson and Eric L. Barson, and Gale K. Francis, Utah State Assistant Attorney General representing the Utah State Tax Commission. The Court having considered the evidence presented at trial, the briefs submitted by the parties, and being fully advised in this matter, enters the following findings of fact and conclusions of law.

FINDINGS OF FACT

1. This action involves an undivided one-half interest in a parcel of real property located at 4081 South 6400 West, West Valley City , Utah , described in the Warranty Deed as "All of Lot 13, KING VALLEY SUBDIVISION NO. 1, according to the official plat thereof." Defendants Larry M. Barson, Irene Barson and Eric Barson reside at that property. For purposes of simplicity, this property will be referred to herein as "the Barson residence" or "the residential property."

2. As of April 28, 1998, Larry Barson is indebted to the United States for the following:

                Assessment

Tax Period         Due      Type of Tax    Tax Due   Penalty Due  Interest Due

1983 ..........  09/07/87   Income        $    0.00   $  418.59    $15,996.18

1984 ..........  08/31/87   Income        $4,267.00   $1,783.04    $14,017.21

1987 ..........  07/14/88   Income        $2,362.48   $  587.12    $ 3,386.13

1988 ..........  06/05/89   Income        $2,519.00   $  599.75    $ 3,100.53

1989 ..........  06/25/90   Income        $1,117.00   $  320.75    $ 1,332.85

1991 ..........  03/29/93   Income        $3,170.00   $  551.75    $ 2,022.38

1989 ..........  04/12/93   Civ. Penalty  $    0.00   $  500.00    $     0.00

1990 ..........  04/12/93   Civ. Penalty  $    0.00   $  500.00    $     0.00

1991 ..........  04/12/93   Civ. Penalty  $    0.00   $  500.00    $     0.00

 

3. The defendant Larry Barson is indebted to the State of Utah for unpaid Utah State income taxes for the calendar years 1980, 1981, 1982, 1987, 1988, 1989, 1990, 1991, 1993, 1994, 1995, 1996 and 1997, in the total amount of $21,026.89, including penalties assessed. Liens were created by the Utah State Tax Commission by the filing of Warrants for Delinquent Tax.

4. Larry M. Barson and his wife, Irene Barson, purchased the residential property in June of 1978. When the residence was first purchased, the title to that property was taken by Larry M. Barson and Irene Barson as joint tenants. Irene Barson received the down payment for the purchase of the residential property as a gift from her parents.

5. The property was purchased, in part, by assuming a prior mortgage in the amount of $23,934.65, from the Farmers Home Administration, and by borrowing the additional amount of $13,420.00 from the mortgage company. The mortgage payments have always been, and continue to be, made by Irene Barson from a separate bank account held in her name only.

6. On February 28, 1983, Defendant Larry M. Barson transferred his undivided one-half interest in the residential property by quitclaim deed to his wife and son, Defendants Irene B. Barson and Eric L. Barson. The transfer was recorded by the Salt Lake County Recorder's Office on February 28, 1983. At the time of the transfer, Eric Barson was not yet three years old. The timing of the transfer coincided with marital difficulties the Barsons were experiencing.

7. No consideration was paid to Larry Barson for the conveyance of his interest in the residential property, and neither Irene Barson nor Eric Barson were informed of the conveyance until several years later.

8. Since the time Larry Barson conveyed his interest in the residential property, he has continued to live there with his wife and son. Although Larry Barson has never paid any rent to his wife or son for his continued occupancy of the residential property, he contributes approximately $500.00 per month toward family living expenses. That money is deposited into a bank account controlled by Irene Barson.

9. The Barsons consider the mortgage payment to be Irene Barson's responsibility, even though Larry Barson has never obtained a release of his obligation on the mortgage with the Farmers Home Administration.

10. The utilities associated with the Barson residence are listed in Larry M. Barson's name.

11. Irene Barson claims that she and Larry M. Barson had an understanding that the Barson residence would belong to her. She admits, however, that there are no written documents reflecting their understanding. Additionally, despite that "agreement," title to the residence was placed in both Larry Barson's and Irene Barson's names.

12. In 1980 and succeeding years, Larry M. Barson did not file federal income tax returns, and at some point during that time, he stopped having any sums withheld from his wages for payment of federal taxes. Mr. Barson admits that when he stopped the withholdings from his wages, he did not do anything else to see that the federal taxes were paid. However, at the time of the transfer at issue in this case, Defendant Larry Barson was unaware of any outstanding federal or state tax liabilities. It should be noted that the United States has not established that Larry Barson had a federal tax liability for the 1980 or 1981 tax periods. Additionally, an assessment for Larry Barson's 1982 tax liability was not made until until October 21, 1985, some two and one-half years after the transfer. ¹

13. As of 1985, the Internal Revenue Service took no action to seize and sell the realty at issue in this case because there was no equity in the Barson home, since there was more owed on the home than it was worth at the time.

14. At the time of the transfer at issue in this case, Defendant Larry M. Barson owned a truck with an estimated value of $3,000.00; tools with an estimated value of $1,000.00; and household furnishings with an estimated value of $3,000.00. Additionally, Larry Barson was employed by the Utah Transit Authority from 1980 through approximately January, 1985, and has worked periodically as an independent contractor for A-1 Pioneer since November of 1986.

Based on the foregoing Findings of Fact, the Court adopts the following:

CONCLUSIONS OF LAW

1. The United States of America filed its complaint in the instant action on July 15, 1997.

2. The Court has jurisdiction of this action under 28 U.S.C. §§1340 and 1345, and 26 U.S.C. §7402. Venue is proper pursuant to 28 U.S.C. §1396. Additionally, the United States Magistrate Judge has jurisdiction of this case by consent of all of the parties, in accordance with 28 U.S.C. 636(c)(1). An Order of Reference to that effect was entered on April 27, 1999, by United States District Judge Tena Campbell.

3. Section 6321 of the Internal Revenue Code of 1986 (26 U.S.C.) provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321.

4. Accordingly, if, as here, after assessment, notice and demand for payment, a taxpayer fails or refuses to pay outstanding federal taxes, a lien attaches to all property and rights to property belonging to him or her. Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267-268 (1945).

5. "The statutory language 'all property and rights to property,' appearing in 6321 ***** is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-720 (1985). "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. at 267.

6. The tax lien created automatically upon the assessment of the tax continues until the tax liability is satisfied or the lien becomes unenforceable by reason of lapse of time. 26 U.S.C., §6322.

7. A court proceeding to collect unpaid tax assessments must be instituted within ten years after assessment, or prior to the expiration of any period for collection agreed upon in writing by the taxpayer and the Internal Revenue Service. 26 U.S.C., §6502(a). The earliest assessment in the present case was made against the defendant, Larry M. Barson on August 31, 1987. Accordingly, this action was timely filed for all taxable periods in suit. ²

8. The relevant statutory provision defining a fraudulent transfer is found in §25-6-5 of the Utah Code Annotated, which states:

(1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation incurred, if the debtor made the transfer or incurred the obligation:

(a) with actual intent to hinder, delay or defraud any creditor of the debtor; or

(b) without receiving a reasonably equivalent value in exchange for the transfer or obligation; and the debtor:

(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.

9. "Actual intent" under the Uniform Fraudulent Transfer Act is determined by considering, inter alia, whether:

(2)(a) the transfer or obligation was to an insider;

(b) the debtor retained possession of the property transferred after the transfer;

(c) the transfer or obligation was concealed;

(d) before the transfer was made or obligation incurred, the debtor had been sued or threatened with suit;

(e) the transfer was of substantially all the debtor's assets;

(f) the debtor absconded;

(g) the debtor removed or concealed assets;

(h) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(i) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(j) the transfer occurred shortly before or shortly after a substantial debt was incurred; and

(k) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Utah Code Ann. §25-6-5(2).

10. With respect to a claim arising before a transfer of property has occurred:

(1) A transfer made or obligation incurred by. a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if:

(a) the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation; and

(b) the debtor was insolvent at the time or became insolvent as a result of the transfer or obligation.

(2) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at the time, and the insider had reasonable cause to believe that the debtor was insolvent.

Utah Code Ann. §25-6-6.

11. "Insolvency" under the Fraudulent Transfer Act is defined as follows:

(1) A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation.

(2) A debtor who is generally not paying his debts as they become due is presumed to be insolvent.

. . . .

(4) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this chapter.

(5) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.

Utah Code Ann. §25-6-3.

12. In cases decided under the earlier version of the Utah Uniform Fraudulent Conveyance Act, the courts recognized common elements or "badges of fraud" in determining fraudulent intent. These "badges of fraud," which are in many cases identical or are similar to the factors entitled to "consideration" under Utah Code Ann. §25-6-5, are therefore still relevant in determining whether a particular transfer was fraudulent. The existence of one or more of these badges in a case does not necessarily constitute fraud per se, nor is the presence of one or more of the elements conclusive. In Dahnken, Inc. of Salt Lake City, 726 P.2d 420 ( Utah 1986), the Utah Supreme Court stated:

Although actual fraudulent intent must be shown to hold a conveyance fraudulent pursuant to 25-1-7, its existence may be inferred from the presence of certain indicia of fraud or "badges of fraud" [citations omitted].

Id. at 423.

13. In United States v. Christensen [90-2 USTC ¶50,543], 751 F. Supp. 1532, 1536 (D. Utah 1990), appeal dismissed, 961 F.2d 221 (10th Cir. 1992), this Court considered the following to be among the "badges of fraud":

1. insolvency of the grantor;

2. inadequate consideration;

3. the transfer of all of the debtor's property;

4. the transfer was made in anticipation of a suit or liabilities;

5. a close relationship between the transferor and transferee;

6. the conveyance was not made in the ordinary course of business;

7. failure to record the conveyance;

8. the retention of possession by the transferor;

9. the reservation of an interest or benefit by the grantor;

10. the security given by the transferor is in excess of the debt;

11. secrecy or haste in the transfer;

12. the state taxes or real property taxes are paid by transferor.

Id. at 1536; see also Dahnken, Inc. of Salt Lake City v. Wilmarth, 726 P.2d 420 ( Utah 1986); Meyer v. Great American Corp., 569 P.2d 1094 ( Utah 1977); Boccalero v. Bee, 126 P.2d 1063, 1065 ( Utah 1942).

14. Some of the factors used in determining whether Larry Barson actually intended to defraud the United States when he transferred his undivided one-half interest in the residential property to his son and wife are present here.

(a) An "insider" is defined under the Act as, inter alia, "a relative of the debtor or of a general partner of the debtor." Utah Code Ann. §26-6-2(7)(a)(i). The transfer in dispute in this case, whether to defendant Larry M. Barson's wife, Irene, and their son, Eric, or only to Eric, as the defendant intended, was to an "insider" as that term is defined in the statute. Utah Code Ann. §25-6-5(2)(a).

(b) Larry Barson continued to live in the residential property after he transferred his interest to his son and wife. Utah Code Ann. §25-6-5(2)(b).

(c) Larry Barson did not receive any consideration for the conveyance of his interest in the residential property. ³ Utah Code Ann. §25-6-5(2)(h).

15. Other factors used in determining fraudulent intent are not present here and the court cannot conclude that Larry Barson transferred his interest in the residential property with actual intent to hinder, delay or defraud the United States .

(a) Defendant Larry M. Barson caused the transfer in dispute in this case to be recorded contemporaneously with the transfer, and made no attempt to conceal the transfer in any fashion, and disclosed it by filing the deed of record. Utah Code Ann. §25-6-5(2)(c).

(b) None of the defendants in this case had been sued or threatened with suit before the disputed transfer was made. Utah Code Ann. §25-6-5(2)(d).

(c) The mortgage obligations against the subject realty are not included as debts for the purpose of determining whether a party is insolvent under the Act. Utah Code Ann. §26-6-3(5). Defendant Larry M. Barson had no other outstanding debts at the time of the transfer, and was unaware of any specific tax liabilities at the time the transfer was made. Defendant Larry M. Barson's assets at the time of the disputed transfer included an automobile with an estimated value of $3,000.00; tools with an estimated value of $1,000.00; and household furnishings with an estimated value of $3,000.00. He was also employed with the Utah Transit Authority during that period. Consequently, as of February, 1983, when the disputed transfer was made, Defendant Larry M. Barson was not insolvent. Utah Code Ann. §25-6-5(2)(i). Further, the transfer was not of "substantially all of the debtor's assets." Utah Code Ann. §25-6-5(2)(e).

(d) Defendant Larry M. Barson has not absconded. Utah Code Ann. §25-6-5(2)(f).

(e) Defendant Larry M. Barson has not removed or concealed assets. Utah Code Ann. §25-6-5(2)(g).

(f) There is no evidence that the transfer at issue occurred shortly before or shortly after a substantial debt was incurred. Utah Code Ann. §25-6-5(2)(j). The tax assessments in this case were made well after the disputed transfer.

16. As of February, 1983, the Defendant Larry M. Barson did not engage, and was not about to engage, in a business or transaction for which his remaining assets were unreasonably small in relation to the business or transaction. Utah Code Ann. §25-6-5(b)(i).

17. As of February, 1983, the Defendant Larry M. Barson did not incur, nor did he reasonably believe he would incur, debts beyond his ability to pay as they became due. Utah Code Ann. §25-6-5(b)(ii).

18. The court finds no basis in fact or law to conclude that the transfer at issue was a fraudulent conveyance within the meaning of the Act.

19. There are no particular factors that establish that property held in the name of one individual is actually the property of another. However there are several common factors that indicate that property held by one party actually belongs to another party. ⁴ The party holding title to the property of another is often termed the "nominee" of the other party. The Court, in Towe Antique Ford Foundation v. I.R.S. [92-1 USTC ¶50,115], 791 F. Supp. 1450 (D. Mont. 1992), aff'd [93-2 USTC ¶50,430], 999 F.2d 1387 (9th Cir. 1993), summarized the factors various courts have considered to be relevant in determining if an individual holds property as the "nominee" of another. Those factors are as follows:

1. No consideration or inadequate consideration paid by the nominee;

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

3. Close relationship between the transferor and the nominee;

4. Failure to record conveyance;

5. Retention of possession by the transferor;

6. Continued enjoyment by the transferor of benefits of the transferred property.

Id. at 1454.

20. Considering the above factors, the court finds that Eric Barson and Irene Barson do not hold legal title to the property as nominees of Larry M. Barson. As set forth above, while some of the factors exist in this case, the court finds no evidence that the residential property was transferred by Larry Barson to Eric Barson and Irene Barson in anticipation of suit or based on any awareness of a federal tax liability. Furthermore, the conveyance of the residential property was recorded contemporaneously with the transfer. Consequently, Eric Barson and Irene Barson hold legal title to the residential property in question.

21. Any conclusion of law set forth herein which is more properly characterized as a finding of fact, shall be deemed to be a finding of fact.

Accordingly, the court finds and orders as follows:

A. That the conveyance of the real property described in paragraph 13 of the complaint to defendants Eric Barson and Irene Barson was not a fraudulent conveyance.

B. That defendants Eric Barson and Irene Barson do not hold title to the real property described in paragraph 13 of the complaint as the nominees of defendant Larry M. Barson.

C. That the federal tax liens of the United States may not attach to the real property described in paragraph 13 of the complaint.

¹ The only evidence before the court concerning any outstanding federal tax liability for Larry Barson prior to the transfer at issue, is found in the Proof of Claim for Internal Revenue Taxes, filed by the United States in the Bankruptcy proceeding involving defendant Larry M. Barson (Exhibit 13). The Proof of Claim reflects that Larry Barson's tax due for the 1982 tax period was $3,768.00, not including penalties and interest, and that the assessment of that tax was made on October 21, 1985.

² In their opening statement, defendants Larry M. Barson, Irene Barson and Eric Barson claimed that the United States ' fraudulent transfer claim is barred by the applicable statute of limitations. The defendants did not cite any authority in support of that proposition. That same claim, however, has been rejected by this Court. In United States v. Christensen [90-2 USTC ¶50,543], 751 F. Supp. 1532 (D. Utah 1990), appeal dismissed, 961 F.2d 221 (10th Cir. 1992), (now) Chief Judge David Sam stated:

Utah Code Ann. §78-12-26(3) provides that an action to set aside a fraudulent conveyance is barred if not brought within three years of the transfer. There is no question that this action was not brought within that period of time. However, case law is overwhelmingly in support of the proposition that the United States is not bound by a state statute of limitations unless Congress so provides. Congress has remained silent. See United States v. Decker [65-1 USTC ¶9369], 241 F. Supp. 283 (D. Az. 1965) (specifically ruling that the Utah statute of limitations does not bind the United States ). It is clear, therefore, that the present action is not barred by the Utah statute of limitations.

Id. at 1535. Concomitantly, the instant action is not barred by the Utah statute of limitations governing fraudulent transfer claims. Additionally, it should also be noted that the United States ' "nominee" claim does not arise under the Utah Fraudulent Transfer Act. Thus, even if the United States ' fraudulent transfer claim were time barred, the "nominee" claim would not be time barred.

³ The court does not find this factor highly significant because there is some question as to whether Larry Barson's undivided one-half interest in the residential property had any value at the time of the transfer. At least as of 1985, it appears that there was little, if any, equity in the residential property.

⁴ These factors are the functional equivalent of the "badges of fraud" historically used by courts to determine whether a particular transfer was fraudulent as to a creditor.

 

 

[97-2 USTC ¶50,974] In re Carlos J. Klutts, Cynthia Klutts, Debtors. United States of America (Internal Revenue Service), Plaintiff v. Carlos J. Klutts, et al., Defendants

U.S. Bankruptcy Court, West. Dist. Tex., Austin Div., 96-11577FM, 11/17/97

[Code Sec. 6321 ]

Liens for taxes: Property transferred to third parties: Fraud.--

A federal tax lien filed subsequent to the sale of real property was not valid since the IRS did not establish an actual intent to defraud by the taxpayer or that the property was transferred without the receipt of its reasonably equivalent value. The IRS presented no evidence and no indicia of fraud was present. The taxpayers sold the property to their parents for good and valuable consideration and did not retain possession or any incidents of ownership. There was no evidence that the conveyance was in anticipation of suit, that there was a transfer of all of the taxpayers' assets, or that the parents had knowledge that the taxpayers owed the IRS money.

MEMORANDUM OPINION

MONROE, Bankruptcy Judge:

The Court held a hearing on July 7, 1997, on the Motion of Klutts Land, Inc. to Dismiss ("Motion"). On June 26, 1997, Klutts Land, Inc. filed a Notice of Intent to Present Matters Outside the Pleadings Re: Adversary Complaint and Request that 12(b)(6) Motion by Treated as One for Summary Judgment ("Request"). The IRS failed to respond and the Court granted the Request. At the conclusion of the hearing the Court made findings on the record of those facts established by summary judgment evidence. The Court took one legal issue under advisement. Counsel for both parties were requested to file briefs on that issue. To date no briefs have been received from either counsel. Therefore, the Court has conducted its own independent legal research on the issue. This Memorandum Opinion is issued as a statement of material facts that are not in genuine dispute and conclusions of law under Bankruptcy Rule 7056. In addition, those findings stated on the record are incorporated herein by reference as well.

Facts Not in Genuine Dispute

Klutts Land, Inc. is a Texas corporation which was incorporated on May 5, 1969, by Alvis Vandygriff, Frank Scolfield and James K. Presnal. From the inception of the corporation, Barney C. Klutts and Hazel Joyce Klutts (the "Parents" of Debtor Carlos J. Klutts") have been members of the board of directors. Mr. Klutts is the president and registered agent for the corporation. Mrs. Klutts is the secretary/treasurer. There are no other officers. Neither of the Debtors, Carlos Klutts or his wife, Cynthia, have ever been on the board of directors, nor have they ever been officers of Klutts Land, Inc. Barney and Joyce Klutts, the sole shareholders of Klutts Land, Inc., formed it for the purpose of buying, selling, and developing real estate. This is the only business the corporation has been involved in since its inception. The Debtors have never owned any interest in Klutts Land, Inc.

On March 1, 1991, Debtor's Parents purchased 68.93 acres of land situated in the Francis Berry Survey, A-2, in Caldwell County , Texas from the Debtors ("Tract One"). The consideration paid for the purchase was the assumption of the Debtors' first lien indebtedness owed to Victoria Bank and Trust as successor in interest to First National Bank of San Marcos which was then in the approximate amount of $192,000.

Subsequently, on May 2, 1991, Debtor's Parents negotiated a payoff of that debt; and, in fact, they did pay it off with their personal funds thereby securing a release of the lien.

On January 15, 1993, Klutts Land, Inc. purchased in the ordinary course of its business Lot 20, Stratford Place, in Travis County, Texas from Sage Land Company ("Tract Two"). The settlement statement reflects that the purchase price paid for this property was $105,000. There is no dispute that the Debtors had no part in the purchase of this property by Klutts Land, Inc.

On October 19, 1993, Klutts Land, Inc. transferred Tract Two to the Debtor's Parents in exchange for Tract One. The issues of equal consideration or gain on the transaction are not material for purposes of this Memorandum Opinion. The IRS alleges it had an enforceable lien on Tract One on the date that the Debtor's Parents purchased the property from the Debtors, March 1, 1991, and that their lien is enforceable against Tract One in the hands of Klutts Land, Inc. However, it was not until February 10, 1992, that the IRS filed its first tax lien of record against the Debtors, Carlos and Cynthia Klutts.

On December 2, 1993, the Debtor's Parents created the Stratford Place Trusts, and named Mr. Alan Bergstrom as Trustee. They then transferred Tract Two into that trust. The beneficiaries of the trust are the Debtors and the Debtors' children. The extent of the IRS claim against Tract Two is not an issue in Klutts Land, Inc.'s Motion and is not dealt with herein.

Issue

Did the IRS have a lien on Tract One it can enforce against Klutts Land, Inc.?

Conclusions of Law

The first lien filed of record by the IRS against the Debtors was on February 10, 1992, almost one year after the Debtors sold Tract One to Debtor's Parents for an effective consideration of $192,000.

The IRS, however, contends that the transfer from the Debtors to the Debtor's Parents was a fraudulent transfer and that, therefore, the Debtors were the legal owners of Tract One at the time the first federal tax lien was filed. But, the IRS failed to submit any summary judgment evidence on that issue. Their argument is, therefore, totally devoid of any substantiation or merit as we shall more fully illustrate later.

Next, the IRS argues that pursuant to 26 U.S.C. §6321 ¹ a lien attached to Tract One while the Debtors owned it, and that under 26 U.S.C. §7425 notice of the transfer of that property had to be given to the United States or the lien followed the property as a matter of law. ²

There is no dispute that the first federal tax lien filed of record was filed long after the date that the Debtors sold Tract One to the Debtor's Parents. The IRS did not favor us with the date of their alleged §6321 lien; but, even assuming its existence of March 21, 1991, subsequent purchasers for value, without notice, would acquire title to the property free from it. Thus, it is clear that the entire success of the IRS's argument hinges on whether or not the Debtors' sale of Tract One to the Debtor's Parents was fraudulent.

The Fifth Circuit has held that if a taxpayer transfers property prior to the time a tax lien arises, the United States may set aside the transfer if it is fraudulent under the law of the state where the property is located. United States v. Jones [86-2 USTC ¶9832], 631 F. Supp. 57 (D.C. W.D. Mo. 1986) citing, United States v. Kaplan, 277 F.2d 405, 408 (5th Cir. 1960) (emphasis added).

The Court in Jones looked to applicable Missouri state law and found several "badges of fraud," i.e. (1) the taxpayers had transferred almost all of their assets at a time when they were facing three different foreclosure actions and federal tax liens, (2) the transfers occurred at a time when the taxpayers were insolvent, (3) the consideration was less than one-sixth the purchase price of two years before, (4) the transfer was subject to a secret trust in favor of the debtors and their son, and (5) the debtors had unlimited use of the property and bore substantially all the responsibilities of ownership.

As in Missouri, Texas has adopted the Uniform Fraudulent Transfer Act. In pertinent part, it states that a transfer is fraudulent as to present and future creditors if,

". . . .the debtor made the transfer or incurred the obligation:

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or

(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due." (emphasis added).

Tex. Bus. & Com. Code Ann. §24.005 (Vernon Supp. 1997).

Thus, if reasonably equivalent value is not paid for the property or if actual intent to hinder, delay, or defraud established, then the transfer is fraudulent.

Even though the Texas statute provides two alternative grounds for inferring a fraudulent transfer, none of the cases the Court has researched, including the Texas cases, have treated inadequate consideration as a separate grounds for inferring fraudulent transfer. They have considered inadequate or no consideration as merely one element in proving fraudulent intent, i.e. an "indicia of fraud".

Thus, the Fifth Circuit in applying Texas law has stated,

"[when several of these indicia of fraud are found, they can be the proper basis for an inference of fraud. . . . Such indicia of fraud, we stated, include (1) the debtor's transfer of valuable property without consideration; (2) a close personal relationship between the parties to the conveyance; (3) the debtor's retention of possession and indicia of ownership of the property; and (4) the debtor's transfer of all of his property, especially if to different members of his family, leaving him unable to pay his debts." (citations omitted) (emphasis added).

Roland v. U.S. [88-1 USTC ¶9219], 838 F.2d 1400, 1402 (5th Cir. 1988).

In Roland the taxpayers had transferred their home to themselves and to their 15 year old son as Trustee's of a "church" existing solely on paper, without consideration. Proceeds from a subsequent sale of their home were then used to purchase property in Detroit, Texas. The deed of trust to that property listed the son as buyer. However, the taxpayers made the mortgage payments, and lived continuously on the property while their son remained in Irving to finish high school. The Rolands also paid or helped their son pay the taxes, utility bills, and the insurance on the Detroit property. No rental income was ever reported by the son. Although the taxpayers did not transfer all of their assets, the Fifth Circuit found that the facts were sufficient indicia of fraud and upheld the right of the IRS to levy on the property to satisfy back taxes.

Once these indicia of fraud are shown, and the presumption of fraud arises, then the burden shifts to the defendant to establish that the transfer was not fraudulent. U.S. v. Kaplan, 277 F.2d 405, 408-9 (5th Cir. 1960).

Here the IRS must, therefore, establish a presumption of fraud. If they have failed to do so, then the case is ripe for summary judgment. BMG Music v. Martinez, 74 F.3rd 87, 90 (5th Cir. 1996).

In BMG the Fifth Circuit held that,

"[i]ntent to defraud, however, can be decided as a matter of law. For example, summary judgment is appropriate in "intent to defraud" cases when the defendant admits the fraud, the conveyance instrument is fraudulent on its face, the defendant retains an interest in the property inconsistent with the conveyance alleged, or the evidence indisputably reveals that the transfer was made without an intent to defraud."

BMG, 74 F.3rd at 90.

Thus, the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits on file (none were filed by the IRS) must show pursuant to the Texas fraudulent transfer statute (1) actual intent of the debtors to hinder, defraud or delay or, in the alternative, (2) that reasonably equivalent value was not received for the property. If they do not, but instead indisputably reflect that the transfer was made without an intent to defraud, then the matter is ripe for a motion for summary judgment.

Here, the IRS has shown neither actual intent or lack of adequate consideration. In fact, the IRS has produced no evidence at all.

First, there is no evidence that property was sold for other than a reasonably equivalent value. The Debtor's Parents gave valuable consideration for the property. They assumed the first lien indebtedness on the property in the amount of $192,000, which indebtedness they later paid in full. No evidence has been produced by the IRS to show that the property was actually worth more than $192,000. Thus, this indicia of fraud does not exist.

Secondly, the IRS has not established an intent to defraud. The only possible indicia of fraud present is that the Debtors (1) sold the property to their paternal parents in 1991 for good and valuable consideration, (2) that the paternal parents conveyed that property to a corporation they owned in trade for a different piece of property almost 2 1/2 years later in 1993, and (3) 6 weeks later the paternal parents placed Tract Two into a trust for the Debtors and their children. This does not, without more, create even a fact issue.

The undisputed facts establish that the 1991 sale of Tract One was an arms-length transaction. There is no evidence that the Debtor's Parents had knowledge of the, as of yet, unrecorded IRS tax lien. There is no evidence that the Debtor's Parents had knowledge that the Debtors owed the IRS any money. There is no evidence that the Debtors were rendered insolvent by this transaction. There is no evidence that this was a transfer of all or nearly all of the Debtors' assets. There is no evidence that this was a conveyance in anticipation of suit. The transfer documents contained no unusual clauses. Lastly, there was no retention of possession by the Debtors or any incidents of ownership of Tract One.

The IRS has failed miserably to come forward with even a scintilla of evidence to support their bold allegations.

The Fifth Circuit has stated that,

"summary judgment is appropriate in any case 'where critical evidence is so weak or tenuous on an essential fact that it could not support a judgment in favor of the non-movant' ".

Little v. Liquid Air Corp., 37 F.3rd 1069, 1075 (5th Cir. 1994) (en banc) (citing Armstrong v. City of Dallas, 997 F.2d 62 (5th Cir. 1993)).

Rule 56(c) governs summary judgments. Summary judgment must be rendered forthwith if,

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

Rule 56(c) of the Federal Rules of Civil Procedure.

Once the moving party has met this burden by establishing an absence of a genuine issue of material fact, as they have here, it is incumbent upon the non-moving party to submit "competent summary judgment evidence" that there is indeed a "material factual dispute." Clark v. America's Favorite Chicken Co., 110 F.3d 295,297 (5th Cir. 1997) citing McCallum Highlands, Ltd. v. Washington Capital Dus. Inc., 66 F.3d 89, 92 (5th Cir. 1995) (citing Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc)).

Moreover,

"[u]nsupported allegations or affidavit or deposition testimony setting forth ultimate or conclusory facts and conclusions of law are insufficient to defeat a motion for summary judgment. Duffy v. Leading Edge Products. Inc., 44 F.3d 308, 312 (5th Cir. 1995) (citing Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986)."

Clark, 110 F.3d at 297.

The IRS has failed to met their required burden. ³ In fact, they have failed to submit to submit any competent summary judgment evidence to controvert the movant. Klutts Land, Inc. has, on the other hand, met their burden of proof by establishing that no genuine issue of material facts exists and that they are entitled to summary judgment as a matter of law.

As such, an Order of even date herewith will be entered in accordance with this Court's Memorandum Opinion.

¹ Section 6321 states,

"[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

26 U.S.C. §6321.

² Section 7425 states in pertinent part,

". . . a sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property--

(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale in the manner prescribed in subsection (c)(1). . ."

26 U.S.C. §7425(b).

³ The non-movant's burden was discussed at length by the Fifth Circuit in Little v. Liquid Air Corp., 37 F.3d at 1075. The Fifth Circuit said,

"[t]his burden is not satisfied with 'some metaphysical doubt as to the material facts,' Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356 by 'conclusory allegations' Lujan, 497 U.S. at 871-73, 110 S.Ct. at 3180, by 'unsubstantiated assertions,' Hopper v. Frank, 16 F.3d 92 (5th Cir. 1994), or by only a 'scintilla' of evidence, Davis v. Chevron U.S.A., Inc., 14 F.3d 1082 (5th Cir. 1994)".

 

 

[97-2 USTC ¶50,639] United States of America v. JEB Properties, Inc., Regina Keever, John Elms, Jr., and Elms, Roche & Lagarde, a dissolved Louisiana partnership

U.S. District Court, East. Dist. La., CIV. 95-3449, 6/17/97

[Code Secs. 6321 and 6323 ]

Lien for taxes: Transferred assets: Family transfers: Alter ego.--Summary judgment was denied on the issue of whether the IRS could foreclose upon a residential property that had been owned by a realty partnership in order to satisfy the tax liabilities of an amusement company partnership. The realty partnership had distributed the property to its partners who were members of the same family and were the partners of the amusement partnership. A genuine issue of material fact existed as to whether the real estate partnership was the alter ego of the partnership that owned the amusement company. Funds were frequently transferred between the two enterprises without observing traditional business formalities and properties listed on one entity's books were actually owned by the other. Moreover, since the realty company had no employees or investment capital, the amusement company appeared to have conducted the daily operations of the rental business.