6321 Conveyances to Related Parties page2

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RULING ON MOTION

LIVAUDIAS, JR., District Judge:

Defendant JEB Properties, Inc. ("JEB") has filed a motion for summary judgment, seeking judgment in its favor on the basis that there are no disputes as to any material facts, and it is entitled to judgment as a matter of law. The United States , appearing for the Internal Revenue Service ("IRS") opposes the motion.

I.

The facts underlying this motion and complaint concern the property inherited by the children of John Elms, Sr. John Elms, Sr., had three children, Joyce Elms ("Joyce"), John Elms, Jr. ("John, Jr."), and Regina Elms ("Regina"). He, either individually or through corporations and partnerships, owned both residential and commercial real estate and a business which operated amusements, i.e., jukeboxes, coin-operated pool tables, and arcade games, such as pinball, in various venues, including barrooms and lounges, in the New Orleans area. JEB contends that in 1969, either immediately prior to or following the death of Mr. Elms, Sr., a partnership known as Elm Realty Company was formed and Mr. Elms, Sr., transferred residential real estate he owned in the City of New Orleans to the partnership. The partners who owned Elm Realty Company were his children, Joyce, John, Jr., and Regina . The written partnership documents, if there were any, were not recorded. The residential property conveyed, and that later purchased by Elm Realty, included the area bounded by St. Charles Avenue, Seventh Street, Carondelet Street, and Eighth Street in New Orleans, and also included 3029 St. Charles Avenue, known as the Elms mansion.

Elms, Sr., also created TAC Amusement Company, later known as 'Elms, Roche & Lagarde, d/b/a TAC Amusement Company, a Louisiana partnership, on some unknown date. TAC Amusement Company was an operating business which owned various coin-operated amusement machines, commercial real estate, principally consisting of barrooms and lounges, and rented the coin-operated amusements to a variety of businesses located in New Orleans . The partners who owned TAC Amusement were the three children of Elms, Sr., i.e., Joyce, John, Jr., and Regina, and several trusts created for the benefit of Elms, Sr.'s grandchildren, including the Thomas J. Roche, Jr. John J. Elms, Sr., Testamentary Trust, and trusts for Faith M. Roche, Michael Elms Mauberret, Andrea B. Mauberret, John J. Elms, III, Patrick Elms, and Jennifer E. Elms.

In early 1984, Joyce, John, Jr., and Regina decided to transfer the property owned by the partnerships to themselves individually. On September 11, 1984, the Elms, Sr., children met and executed a number of legal documents. First, Elm Realty Company was dissolved, and it conveyed all of its immovable properties to its three partners, Joyce, John, Jr., and Regina . Second, TAC Amusement Company partnership was terminated, as all of the partners except John, Jr., withdrew, and he continued to operate the business. Third, TAC Amusement Company partnership transferred to the three-siblings and various trust entities the movable and immovable properties it owned. Fourth, an Act of Exchange was executed wherein Joyce and the trusts of her children, Thomas J. Roche, Jr., and Faith Elms Roche, received full ownership of the following properties: 1635-37 Eighth Street, 1632 Seventh Street, 1636-38 Seventh Street, 3018 Carondelet Street, 3029 St. Charles Avenue, 3005 St. Charles Avenue and 3012 Carondelet, all located in the square bounded by St. Charles Avenue, Carondelet street, Seventh Street, and Eighth Street, in New Orleans. In this exchange, John, Jr., Regina and the trusts of her children, Michael Elms Mauberret, and Andre B. Mauberret, received the nonresidential commercial property formerly owned by TAC Amusement Company and residential properties not in the St. Charles , Carondelet, Seventh, and Eighth Street block. Fifth and finally, Joyce executed a promissory note in the amount of $ 400,000 in favor of her sister, Regina , and secured it with a collateral mortgage on 3029 St. Charles Avenue .

On August 9, 1985, an Act of Exchange was executed by Joyce and the trusts of her children, Thomas J. Roche and Faith M. Roche, and JEB Properties, Inc., in which the real estate and improvements located at 3029 St. Charles Avenue ("the Elms mansion"), were transferred to JEB in consideration for 100 percent ownership interest of its common stock.

After John, Jr., ceased conducting business in TAC Amusement Company as a partner with his sisters, he and other persons formed another partnership known as Elms, Roche & Lagarde and it began doing business as TAC Amusement Company. Assessments were made by the Internal Revenue Service (IRS) against Elms; Roche & Lagarde d/b/a/ TAC Amusement Company, for unpaid FICA and withholding taxes, plus interest and penalties. The IRS gave notice and made demand for payment for the following amounts: (1) For the period ending June 30, 1983, $5,092.97 was assessed on May 18, 1987; (2) For the period ending September 30, 1983, $18,702.12 was assessed on May 18, 1987; and (3) For the period ending September 30, 1984, $40,233.45 was assessed on December 1, 1986.

On June 19, 1989, the IRS made another assessment against Elms, Roche & Lagarde d/b/a/ TAC Amusement Company for unpaid partnership penalties, for the year ending September 30, 1984, with interest, in the amount of $1,731.18, gave notice to Elms, Roche & Lagarde, and made demand for payment.

The IRS made yet another assessment against Elms, Roche & Lagarde d/b/a TAC Amusement Company for unpaid FUTA taxes, plus interest and penalties, gave notice, and made demand, for the following amounts: (1) For the period ending December 31, 1983, $22,265.15 was assessed on October 21, 1985 and (2) For the period ending December 31, 1984, $45,177.94 was assessed on December 23, 1985.

The final assessments were made by the IRS against Elms, Roche & Lagarde d/b/a TAC Amusement Company for unpaid trust fund recovery penalties as described in 26 U.S.C. §6672, with interest and penalties, gave notice and made demand, for the following amounts: (1) For the period ending June 30, 1983, $18,906.11 was assessed on November 30, 1987; (2) For the period ending September 30, 1984, $5,801.68 was assessed on November 30, 1987; (3) For the period ending March 31, 1985, $10,012.96 was assessed on November 30, 1987; and (4) For the period ending June 30, 1985, $33,430.53 was assessed on November 5, 1987.

Elms, Roche & Lagarde have not paid these assessments and as of June 30, 1995, it owed $312,888.36. On September 11, 1984, the partnership of Elms, Roche & Lagarde dissolved, all assets were delivered to the individual partners, but the liabilities stated herein to the United States were not paid. The United States contends that the transfer of property, particularly 3029 St. Charles Avenue , by Elm Realty to Joyce, John, Jr., and Regina was made to defraud creditors. By the complaint and amended complaint filed in the instant action, the United States seeks to assert a lien against the property located at 3029 St. Charles Avenue, which was transferred to JEB Properties, Inc., to foreclose on the lien, and to sell the property so that the proceeds may be applied to debts owed by Elms, Roche & Lagarde to the United States.

II.

The motion of JEB Properties, Inc., for summary judgment concerns the claim against it by which the United States seeks to assert its lien and foreclose on the property it owns at 3029 St. Charles Avenue . The United States contends that Elm Realty, which owned the property located at 3029 St. Charles Avenue at the time in question was merely the alter ego of TAC Amusement Company, and thus property owned by Elm Realty at the applicable time may be seized and sold in order to satisfy the debts of TAC. JEB, who is the current owner of the property by way of transfer by Joyce ¹ contends that there is no dispute as to any material issue of fact, that Elm Realty was not an alter ego of TAC and its property cannot be foreclosed upon in order to satisfy TAC's debts.

The motion for summary judgment by JEB does not concern the claims of the United States against the partnership and the two individuals, which is a collection action against the partnership and the partners. JEB's motion is directed to the United States' claim that it is entitled to foreclose on property owned by Elm Realty at the time in question to recover a liability of TAC Amusement on the basis that Elm Realty was an alter ego of TAC.

JEB contends that at all times prior to September 11, 1984, Elm Realty maintained separate accounting records from that of TAC Amusement and that both companies filed separate and independent partnership tax returns and provided Form K-1's to the partners for their personal income tax returns. It also maintains that neither Elm Realty nor TAC Amusement were insolvent, noting that John, Jr., borrowed substantial funds from Gulf Federal Savings Bank to pay tax liabilities and to purchase new equipment shortly before the partnership terminations and property conveyances occurred in 1984. Further, JEB notes that TAC Amusement and Elm Realty never jointly owned property at any time during their respective existences and operations. It asserts that JEB has been the sole owner of the property located at 3029 St. Charles Avenue since 1985, and that at no time did TAC Amusement ever hold title or have any ownership rights to the residential property owned by Elm Realty and particularly, it never owned or had any interest in 3029 St. Charles Avenue .

The plaintiff suggests that under the alter ego theories espoused in United States v. Jon-T Chemicals, Inc., 768 F.2d 686 (5th Cir. 1985) and Century Hotels v. United States [92-1 USTC ¶50,080], 952 F.2d 107 (5th Cir. 1992), Elm Realty was the alter ego of TAC Amusement and thus, the property of Elm Realty may be foreclosed upon to satisfy TAC Amusement's tax debts. In order to determine whether JEB is entitled to summary judgment on this claim, the factors necessary to establish such a claim must be examined.

The court in Jon-T Chemicals recognized that while under the doctrine of limited liability, the owner of a corporation is not liable for its debts, and thus corporate creditors have recourse only against the corporation, and not against parent corporations or shareholders, there are certain equitable exceptions to this norm. 768 F.2d at 690-691. The Jon-T Chemicals decision discusses the factors which underlie the determination whether a subsidiary is the alter ego of its parent, as follows:

(1) the parent and subsidiary have common stock ownership;

(2) the parent and subsidiary have common directors or officers;

(3) the parent and the subsidiary have common business departments;

(4) the parent and the subsidiary file consolidated financial statements and tax returns;

(5) the parent finances the subsidiary;

(6) the parent caused the incorporation of the subsidiary;

(7) the subsidiary operates with grossly inadequate capital;

(8) the parent pays the salaries and other expenses of the subsidiary;

(9) the subsidiary receives no business except that given to it by the parent;

(10) the parents uses the subsidiary's property as its own;

(11) the daily operations of the two corporations are not kept separate;

(12) the subsidiary does not observe the basic corporate formalities, such as keeping separate books and records and holding shareholder and board meetings.

768 F.2d at 691-692. The rationale for the doctrine is to protect innocent third parties from a loss when a parent establishes a subsidiary, undercapitalizes it, and dominates it to such an extent that the subsidiary is a mere conduit for the parent's business. 768 F.2d at 693.

The court in Century Hotels observed that the state and federal alter ego tests are essentially the same, and noted the following factors in addition to those recognized in Jon-T: (1) whether the taxpayer expended personal funds for the disputed property; (2) whether the taxpayer enjoyed the benefit of the disputed property; (3) whether a close family relationship existed between the taxpayer and the titleholder of the disputed property; (4) whether the taxpayer exercised dominion and control over the disputed property; (5) whether the record titleholder of the disputed property interfered with the taxpayer's use of the property; (6) whether the taxpayer owned the record titleholder to the disputed property; (7) whether the record titleholder observed corporate formalities; (8) whether the record titleholder maintained bank accounts, books and records; (9) whether the record titleholder and the taxpayer commingled funds; (10) whether the record titleholder transferred assets, property or funds to the taxpayer and vice versa; (11) whether the record titleholder was organized by the taxpayer; (12) whether the record titleholder had a distinct business with its own employees; (13) whether the record titleholder transacts the taxpayer's business; and (14) whether the record titleholder pays the taxpayer's personal obligations. [92-1 USTC ¶50,080], 952 F.2d at 110, n. 5.

In analyzing these factors in the context of the action sub judice, the United States points out that both Elm Realty and TAC Amusement made substantial loans to each other without observing any formalities, like the signing of notes, with the exception of bookkeeping entries, such as "due to" and "due from." No interest was charged or paid on the loans. The two partnerships were owned by family members and their children. Both partnerships owned a number of immovable properties, but some properties listed on one entity's books were actually properties of the other. ² The plaintiff also notes that there are 15 properties listed as Elm Realty properties on one document and as TAC Amusement's on other properties.

TAC Amusement's business properties were located at 4102 Washington Avenue , but the property was owned by Elm Realty, which neither charged nor collected any rent. Elm Realty had no individual office. Likewise, Elm Realty had no employees, while numerous persons were employed by TAC Amusement. As a rental business, Elm Realty would normally have funds with which to operate, but it had no capital. It's expenses were apparently paid by TAC Amusement. Elm Realty may not have kept any operational books or records.

JEB contends that there is no dispute as to any material fact, but many questions arise from the books and records of these two family-owned business partnerships. The plain language of Rule 56(c). pursuant to which the defendant seeks summary judgment, mandates entry of summary judgment against a party failing to make a sufficient showing to establish that there is a triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552 (1986). However, summary judgment is inappropriate if the evidence presented, viewed as a whole, could lead to different factual findings and conclusions, such as when there is a genuine disagreement as to the reasonable inferences to be drawn from undisputed facts, or when the evidence is subject to conflicting interpretations. Puckett v. Rufenacht, Bromagen & Hertz Inc., 903 F.2d 1014, 1016 (5th Cir. 1990).

Construing the evidence in the light most favorable to the opposer, there are certainly facts in the record from which a factfinder could decide the issue as to whether Elm Realty was the alter ego of TAC Amusement in either the plaintiff's or the defendant's favor. Both partnerships were owned by the same family members and funds were exchanged frequently between them. One company apparently conducted the business of the other, as Elm Realty was a rental business and there were rents to collect and presumably repairs to be made to the properties. Yet Elm Realty had no employees and no operating capital. Under these circumstances, because different factual interpretations can be made of the evidence presented, summary judgment is not warranted.

Accordingly, for the above and foregoing reasons,

IT IS ORDERED that the motion of JEB Properties, Inc., for summary judgment be and is hereby DENIED.

¹ All parties to this action agree that Joyce is not personally liable for any obligations asserted in this action. She was not deemed to be a responsible party by the IRS for the payment of those taxes, but on August 6, 1991, the IRS issued a Notice of Levy seeking to seize her home, 3029 St. Charles Avenue . She filed for protection in bankruptcy on August 9, 1991, under Chapter 11 of the Bankruptcy Code. The Bankruptcy Court ruled that TAC Amusement Company was a responsible party for the payment of various trust fund tax liabilities, and that she was obligated only to pay her virile share. She was ordered to pay a total of $5,148.15 in accordance the Plan of Reorganization confirmed by the Bankruptcy Court, and she paid that sum in full. She was not named as a defendant in this action.

Her brother, John J. Elms, Jr., was named a defendant, yet depositions in the record reflect he personally filed for bankruptcy protection, as did TAC Amusement Company.

² Two examples listed by the plaintiff are the property at 2929-2931. Melpomene Street , which was listed as having been owned by Elm Realty, but was an asset, of TAC Amusement, and 2801 Thalia Street , a TAC Amusement property, which was carried on Elm Realty's books.

 

 

[96-2 USTC ¶50,578] United States of America, Plaintiff v. Curtis Glenn Melcher, Peggy J. Melcher, Curtis Melcher as custodian for Desiree Neala Melcher and Tiffany Nealy Melcher, and Magna Bank of Springfield, Defendants

U.S. District Court, Cent. Dist. Ill., Springfield Div., 96-3097, 9/30/96

[Code Sec. 6321 ]

Tax lien: Property subject to: Gift: Transfer to related parties: Donative intent: State Uniform Transfers to Minors Act.--An individual who transferred the title to his home, subject to a tax lien for unpaid trust fund taxes, to his minor daughters with the individual serving as custodian under the state (Illinois) Uniform Transfers to Minors Act did not demonstrate that he had the required donative intent upon transferring the property to make a valid gift. Thus, his motion for summary judgment was denied. Although the taxpayer, by invoking the state uniform transfers to minors act, created a presumption that the transfer was a valid gift that established a custodial relationship, the government introduced evidence that the taxpayer continued to use the home and exercised all incidents of ownership.

ORDER

MILLS, District Judge:

This cause is before the Court on Defendants' Motion for Summary Judgment.

I. BACKGROUND

Curtis Glenn Melcher owes the United States Government money for back taxes, a liability he incurred as a result of participating in a business venture called Aircraft Modifications, Inc. The Government assessed Curtis Melcher $39,801.29 for unpaid trust fund taxes and filed a notice of federal tax lien against all his property. The Government filed this lawsuit seeking a judgment in the amount of the back taxes, an order clarifying the ownership of certain real property, and foreclosure of the federal tax liens currently on file against that property.

The main property in question is Melcher's family home. Curtis Melcher and his wife, Peggy Melcher, purchased the land upon which the home sits in the early 1970s and subsequently built their home. In 1986, Curtis Melcher executed a warranty deed by which be transferred his interest in the marital home to his children, Desiree and Tiffany Melcher. The deed stated that Melcher conveyed and warranted the property "to Curtis G. Melcher, as custodian for Desiree Neala Melcher and Tiffany Nealy Melcher under the Illinois Uniform Transfers to Minors Act."

Essentially, the Government claims that when Curtis Melcher executed the 1986 deed he lacked donative intent. The Government claims that because Curtis Melcher has continued to use the property as his home, he must have transferred only bare legal title to his daughters and retained equitable ownership for himself. Under this theory, Curtis Melcher's daughters are only nominal owners of the property, while Curtis Melcher is the real owner.

II. SUMMARY JUDGMENT

Under Fed. R. Civ. P. 56(c), summary judgment "should be granted if the pleadings and supporting documents 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.' " Ruiz-Rivera v. Moyer, 70 F.3d 498, 500-01 (7th Cir. 1995). The moving party has the burden of providing proper documentary evidence to show the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). A genuine issue of material fact exists when "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). Courts must consider evidence in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970).

III. ANALYSIS

The effect of the transfer from Curtis Melcher to Desiree and Tiffany Melcher is the primary issue raised by Defendants' Motion for Summary Judgment. Defendants contend that the transfer was a gift and that it created a custodial relationship pursuant to the Illinois Uniform Transfers to Minors Act. ¹ Plaintiff argues that Curtis Melcher lacked the requisite donative intent when he made the transfer, rendering his children mere nominees, from whom the Government may collect Curtis Melcher's tax debt. See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140 ], 429 U.S. 338, 350-51 (1977).

In Dubisky v. United States [95-2 USTC ¶50,580 ], 62 F.3d 182 (7th Cir. 1995), cert. denied, 116 S. Ct. 1026 (1996), the United States Court of Appeals for the Seventh Circuit discussed a similar situation. In Dubisky, a father established trust accounts for his two sons. Id. at 184. He named himself as custodian of the funds and controlled the accounts. Id. The Government sought to levy on those accounts, claiming that the father had not actually intended to make a gift of the money. The district court entered judgment in favor of the United States after finding that the father lacked donative intent when he established the accounts, but had instead only intended to put his money out of his creditor's reach.

The Seventh Circuit affirmed. The court noted that "[a]lthough IUGMA §203 allows a gift to be made solely through compliance with its formalities, Illinois courts have held that the formalities only create a presumption of a gift, which can be rebutted by clear and convincing evidence of lack of donative intent." Id. at 185. The court also stated that the existence of donative intent is a question of fact. Id.

In this case, Defendants contend that Curtis Melcher made a gift pursuant to the Illinois Uniform Transfers to Minors Act. As evidence of this gift, Defendants offer the deed, which specifically invokes the Act. Based on this Deed, Defendants argue that the transfer was a gift and that Curtis Melcher was merely the custodian of the property until his daughters reached the age of majority. The Government responds that a genuine question of material facts exists regarding whether Curtis Melcher intended to make a gift of his share in the marital home. The Government argues that Melcher's continued use of the home and exercise all incidents of ownership are evidence that he lacked donative intent when he executed the deed to his daughters.

The question of Curtis Melcher's donative intent is central to this case. If he intended to make a genuine gift of the property to his children and to surrender both legal and equitable ownership of the property, then it appears that the United States cannot foreclose on its tax lien. If, on the other hand, he did not intend to make a gift of both legal and equitable rights, then the United States appears entitled to foreclose on its lien. Dubisky makes clear that the existence of donative intent is a question of fact.

At this point in this litigation, the evidence is split and is not very strong on either side. The parties have relied solely on the Complaint, Answer, and Counterclaim to develop the facts. As a result, only two facts relevant to the question of Curtis Melcher's intent are before the Court: (1) Curtis Melcher executed a deed that invoked the Illinois Uniform Transfers to Minors Act and purported to make a gift of the marital residence and (2) despite the purported gift, Curtis Melcher continues to use the property he purported to give away as his family home.

According to Dubisky, the fact that Curtis Melcher invoked the Illinois Uniform Transfers to Minors Act creates a presumption that the transfer to Desiree and Tiffany Melcher was a valid gift that established a custodial relationship. Under Dubisky, however, the Government may rebut that presumption with clear and convincing evidence that Curtis Melcher lacked donative intent. The only evidence the Government offers is that Curtis Melcher has continued to use the property as his family home, despite the 1986 transfer.

The Court is bound to view what little evidence the parties present in the light most favorable to the Government. The Government's current evidence is not overwhelming, but the Court finds that it creates a genuine issue of material fact regarding Curtis Melcher's intent when he executed the deed. Therefore, summary judgment is improper.

Ergo, Defendants' Motion for Summary Judgment (d/e 4) is DENIED.

¹ The Illinois Uniform Transfers to Minors Act, 760 ILCS 20/1-20/24, allows a transferor to establish a custodial relationship and nominate a custodian simply by reference to the act. 760 ILCS 20/4.

 

 

[96-1 USTC ¶50,194] United States of America , Plaintiff v. Kelly M. McCombs, Nancy Ellison, and Mary McCombs, Defendants

U.S. District Court, West. Dist. N.Y., 87-CV-1475L, 6/13/95, 928 FSupp 261. On remand from CA-2, 94-2 USTC ¶50,363

30 F3d 310.


[Code Sec. 6323 ]

Tax liens: Priority: Purchaser.--An IRS lien on a taxpayer's former property had priority over her transferee/daughters' interests because their assumption of the outstanding mortgages, which were 67% of the property's value, did not constitute adequate and full consideration, and thus, they were not "purchasers" under Code Sec. 6323 . The daughters, who recorded their purchase before the IRS filed a notice of its lien, had the burden of proof to show that they were entitled to protection as purchasers because they were seeking protection from a valid tax lien on the property. Moreover, the fair market value of the property, rather than its forced sale value, was the appropriate amount to be used to determine whether the consideration was adequate and full.

[Code Sec. 6323 ]

Tax liens: Priority: State law.--An IRS lien on a taxpayer's former property for payment of tax that was assessed after a conveyance to the taxpayer's daughters, was unenforceable against the daughters because the conveyance could not be set aside as fraudulent under state ( New York ) law. It was not constructively fraudulent under section 273 of the New York Debtor and Creditor law the government did not establish that the taxpayer had an actual intent under section 276 of the state law to defraud the government by preventing the collection of taxes. It was not clear from the record that the taxpayer knew of her indebtedness to the government at the time of the conveyance.

Peter Sklarew, Department of Justice, Washington, D.C. 20530, for U.S. Christopher S. Ciaccio, 30 W. Broad St., Rochester, N.Y. 14614, Arnold K. Petralia, Petralia, Webb & O'Connell, P.C., 240 Reynolds Arcade, Rochester, N.Y. 14614, Michael J. Mazzullo, 1411 Chili Ave., Rochester, N.Y. 14624, Peter H. Sparagna, Albany, N.Y. 12224, for defendant.

DECISION AND ORDER

FISHER, Magistrate Judge:

This matter is before the court on remand from the Second Circuit Court of Appeals, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d 310 (2d Cir. 1994), to consider the validity and priority of two federal tax liens as against transferees of the taxpayer's property. The two main issues to be resolved on remand involve the two federal tax liens against defendant Nancy McCombs-Ellison's former property at 74 Meadow Creek Lane , Monroe County , New York .

ISSUES

1. 1982 tax lien--Whether the government's 1982 tax lien on Nancy McCombs-Ellison's property is invalid against defendants Kelly McCombs and Mary McCombs (Nancy's daughters), subsequent transferees of the property, as "purchasers" under 26 U.S.C. §6323(a) , where the consideration in the form of an assumption of the outstanding balance of two mortgages worth $57,797.94 was given for property worth $85,657; and,

2. 1984 tax lien--Whether the government can validate its 1984 tax lien on Nancy McCombs-Ellison's former property by avoiding the 1982 transfer of the property to her daughters as a fraudulent conveyance under New York Debtor and Creditor Law §§273 and 276 .

INTRODUCTION

In a complaint filed November 24, 1987, the government sought a declaration of the validity of federal tax liens it had filed against the property of defendant Nancy McCombs-Ellison ( Nancy ), and an avoidance of the transfer of her property to her daughters, defendant Kelly McCombs (Kelly) and defendant Mary McCombs (Mary). It also sought foreclosure on these liens, and sale of the property to satisfy the liens. The matter was tried before the undersigned on March 19, 1992, pursuant to 28 U.S.C. §636(c) upon consent of the parties and by order of District Court Judge David G. Larimer, date February 28, 1992. This court issued a judgment finding that Nancy was liable for unpaid withholding taxes, and that the federal tax liens on Nancy's former property were prior to the interests of defendants Kelly, Mary, and defendant Robert McCombs (Robert), a mortgagee of Kelly's and Mary's interest in the property. This court also ordered a foreclosure sale of Nancy 's former property to satisfy the tax liens. United States v. McCombs-Ellison, 826 F. Supp. 1479 (W.D.N.Y. 1993).

Defendants appealed. The Court of Appeals affirmed that part of the judgment imposing taxpayer liability on Nancy and the validity of the 1982 tax lien thereunder; vacated the judgment setting aside the conveyance of property from Nancy to Kelly and Mary as fraudulent under New York Debtor and Creditor Law §§273 and 276 and the foreclosing of the 1982 and 1984 tax liens, and remanded for further proceedings; and reversed the judgment determining that the federal tax liens were prior to Robert's mortgage interest on the property. Following this ruling, the government petitioned the Court of Appeals for a rehearing. This petition was denied by the Court of Appeals by order dated October 3, 1994. See United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d 310 (2d Cir. 1994).

BACKGROUND

I. Findings of Fact

The following findings of fact are applicable to this disposition on remand. These are findings of fact the court made at trial in accordance with Fed. R. Civ. P. 52(a), and as corrected by the Second Circuit Court of Appeals.

In 1962, Robert and Nancy purchased property at 74 Meadow Creek Lane (Property) in Monroe County , New York . Nancy and Robert, who were legally married at the time, financed the purchase of the Property by giving a $30,000 mortgage to Columbia Banking, Saving and Loan Association (Columbia Bank). The couple divorced and Robert conveyed his interest in the property to Nancy by quit claim deed in 1978.

In 1979, Nancy entered into a restaurant business venture with Jon Ellison (Ellison). They formed two business entities, Spinnaker Pole Corporation (Spinnaker Pole), and another entitled The Port and Starboard (P & S). Nancy and Ellison purchased a restaurant, through P & S, on May 14, 1979 and leased it to Spinnaker Pole which ran the restaurant. P & S made a cash down payment and gave a purchase money mortgage to the sellers of the restaurant. Nancy helped finance this purchase with $50,000 she obtained by giving a second mortgage on the Property to Marine Midland Bank (Marine Midland).

In 1981, the sellers of the restaurant foreclosed on the mortgage from P & S. Shortly thereafter, Nancy and Ellison's two business entities filed for bankruptcy. Furthermore, Spinnaker Pole had failed to pay withholding and unemployment taxes for restaurant employees. This resulted in an assessment of tax liability by the Internal Revenue Service (IRS). On June 14, 1982, the IRS assessed liability of $26,925.79 (1982 tax lien) against Nancy and Ellison for unpaid taxes. ¹

On September 15, 1982, Nancy conveyed the Property at 74 Meadow Creek Lane to her daughters, Kelly and Mary, by warranty deed. The deed was recorded in the Monroe County Clerk's Office on September 16, 1982. As consideration for the conveyance, Kelly and Mary assumed the outstanding principal on both the Columbia Banking and Marine Midland mortgages in the amount of $10,469.29, and $47,328.65, respectively. No other consideration was recited in the deed. ² This conveyance took place eight days after an IRS agent allegedly left a "calling card" at Nancy 's house. On September 22, 1982, a notice of federal tax lien on the Property for the 1982 assessment was filed in the Monroe County Clerk's Office.

On April 16, 1984, the IRS issued another assessment of tax liability against Nancy and Ellison in the amount of $3,091.28 (1984 tax lien). This assessment was for other unpaid withholding taxes incurred by Spinnaker Pole. On June 21, 1984, the government filed notice of its tax lien on the Property in the Monroe County Clerk's Office.

In November, 1984, Kelly and Mary borrowed $53,000 from their father Robert, and gave him a mortgage on the Property for that amount in return. This money was used to pay off the Marine Midland mortgage on the Property. The mortgage was recorded in the Monroe County Clerk's Office on January 24, 1985. As of July 10, 1985, Kelly and Mary had paid down the outstanding balance on the Columbia Bank mortgage by $6,000.

II. Procedural Posture

The government filed its complaint on November 24, 1987 against Nancy, Ellison, Kelly, Mary, Robert and Columbia Bank. ³ It sought the following relief:

(1) Declare the federal tax liens assessed against all property and rights to property of defendant Nancy McCombs-Ellison valid;

(2) Enter judgment for the plaintiff against Nancy . McCombs-Ellison in the amount of $30,035.07 plus interest from the date of assessment;

(3) Set aside a transfer to defendants Kelly and Mary McCombs of property located at 74 Meadow Creek Lane , Rochester , New York , as fraudulent;

(4) Order that the federal tax liens on the property, located at 74 Meadow Creek Lane , Rochester , New York , be foreclosed and the property sold free and clear of titles, liens, claims or interests of any defendants.

In support of its claims, the government argued, inter alia, that its two tax liens on the Property were valid and prior to the interests of Kelly and Mary. With respect to its 1982 tax lien it maintained that although Kelly and Mary received transfer of the property from Nancy and recorded the deed before the government recorded its tax lien on the property, the government had a priority interest in the property because the tax lien attached to the property before the conveyance to Kelly and Mary took place, and Kelly and Mary were not "purchasers" under 26 U.S.C. section 6323(a) . See, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 321-22. In its argument to enforce the 1984 tax lien, the government sought to set aside the entire 1982 conveyance from Nancy to her daughters as fraudulent under New York law. Nancy did not own the Property at the time of the 1984 tax assessment. With the conveyance set aside, the Property would have still belonged to Nancy at the time of the 1984 assessment, and the federal tax lien could have attached to it. Id. [94-2 USTC ¶50,363 ], 30 F.3d at 322.

A bench trial on this matter was conducted on March 19, 1992. As evidence at trial, the government submitted 23 documents. The defendants stipulated that 22 of these exhibits should be entered, and reserved the right to impeach them during cross-examination of government witnesses. Unexpectedly, the government rested its case without calling any witnesses. Thus, defendants were not able to exercise their strategy of impeaching the evidence.

After the government rested its case, the defendants moved for "summary judgment," and in the alternative, moved to dismiss the complaint on the basis that the government did not establish its claims of Nancy 's tax liability or fraudulent conveyance. The court reserved decision.

Defendants' case entailed only calling Nancy as a witness. She testified as to the issues of her tax liability for unpaid withholding and unemployment taxes. (This is an important point because the defendants have the burden of proof on the federal issue of whether Kelly and Mary are "purchasers"). The defendants then rested their case, and renewed the motions for "summary judgment" and to dismiss the complaint. Decision was again reserved by the court.

After the trial, the parties filed post-trial briefs and had oral argument on the issues raised. The court issued a verdict and opinion finding, inter alia, that Nancy was liable for unpaid taxes in the amount claimed by the government; that the conveyance of the Property from Nancy to Kelly and Mary was fraudulent under New York law; that the government's tax liens on the Property were valid and prior to the interests of Kelly, Mary, and Robert. The court also ordered a foreclosure sale of the property. ⁴

The defendants appealed. The Second Circuit Court of Appeals affirmed the finding of Nancy 's tax liability; reversed the finding that the government's tax liens were prior to Robert's mortgage interest in the Property; and vacated and remanded the finding of a fraudulent conveyance of the Property from Nancy to her daughters. It also vacated the finding that Kelly and Mary were not "purchasers" under 26 U.S.C. §6323(a) , because the court did not make this determination based on federal law. Specifically, the Court of Appeals directed this court to separately consider the government's theories for enforcing each of the tax liens. See, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 321-22.

The government petitioned the Second Circuit Court of Appeals for rehearing and sought the following relief:

(1) That the District Court, on remand, should determine whether the consideration paid by Kelly and Mary for the property was fair consideration in relation to the property's fair market value;

(2) that the parties should be allowed, on remand, to present further evidence to establish that fair market value of the property at the time of the transfer;

(3) that the District Court, on remand, be allowed to consider whether the value of Kelly and Mary's assumption of the existing mortgages as consideration for transfer of the property should be less than the face value of the mortgages; and

(4) that the District Court be free on remand to consider the fraudulent conveyance theory with respect to both the 1982 and 1984 assessments.

Appellee's Petition for Rehearing, dated August 25, 1994, at 12. The Second Circuit denied this petition without opinion, by order dated October 3, 1994.

Therefore, established in this case for remand are the findings that Nancy is personally liable for the unpaid withholding and unemployment taxes and that the 1982 tax lien validly attached to the property. Further established is that Robert's mortgage interest on the Property has priority over both of the government's tax liens. This leaves the court on remand to determine the validity and priority of the 1982 and 1984 tax liens as against Kelly and Mary.

DISCUSSION

A. 1982 Tax Lien

The first issue to be addressed on remand has to do with the priority of the 1982 tax lien. The Second Circuit has already determined that a valid tax lien attached to Nancy 's Property for her unpaid tax liability on the 1982 assessment. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 321-22. It left for this court to resolve the relative priority of this lien and in doing so, "determine only whether or not Kelly and Mary are 'purchasers' under [26 U.S.C.] §6323(a) ." Id. [94-2 USTC ¶50,363 ], 30 F.3d at 329. ⁵

Section 6323(a) gives protection to certain third parties who have an interest in a taxpayer's property from federal tax liens. It provides, in relevant part, that a federal tax lien "shall not be valid as against any purchaser ... until notice thereof ... has been filed ..." 26 U.S.C. §6323 [a] [emphasis supplied]). In this case on remand, "[w]here, ... appellants [Kelly and Mary] recorded the conveyance before the government recorded its tax liens, a finding that appellants are protected persons under section 6323(a) would render their interests in the Property prior to that of the tax liens." United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 321.

(a) Burden of Proof

A sub-issue to be addressed with discussion of the 1982 tax lien is which party has the burden of proof. The Second Circuit gave no indication in its direction for remand as to which party has the burden of proof on the issue of whether Kelly and Mary are "purchasers" under section 6323(a) . Furthermore, burden of proof was not addressed with regard to the "purchasers" issue in the verdict and opinion after trial. ⁶ Case law interpreting section 6323 indicates that the burden of proof should be placed on Kelly and Mary.

The government argues that the defendants have the burden of proof by virtue of the statutory framework of section 6323(a) . The government has a lien on the Property by virtue of its tax assessment against Nancy . 26 U.S.C. §6321 . This lien, however, is not valid against a "purchaser" until notice is filed. 26 U.S.C. §6323(a) . It has been held that a third party seeking to invalidate a federal tax lien in an interpleader action bears the burden of proving that she is entitled to the protection of section 6323 as to her interest in a tax debtor's property. Resolution Trust Corporation v. Gill, 960 F.2d 336, 344 (3d Cir. 1992) (alleged holder in due course of checks drawn on taxpayer's bank accounts had burden of proving that she was a purchaser and came within the shelter provision making a federal tax lien invalid as against her interest under 26 U.S.C. §6323 [b][1][A] in an interpleader action); Texas Oil & Gas Corporation v. United States [72-2 USTC ¶9653 ], 466 F.2d 1040, 1054 (5th Cir. 1972), cert. denied 410 U.S. 959 (1973); Rodeck v. United States, 697 F. Supp. 1508, 1511 (D.Minn 1988) (claimant in interpleader action bore the burden of proving that she was a "purchaser" and entitled to protection of section 6323 [a]); STV Engineers, Inc. v. Ash, 1986 WL 3862, 57 A.F.T.R.2d 86-1137, 86-1141, 86-1 U.S.T.C. ¶9352 (E.D.Pa. 1986) (claimant transferee of taxpayer's interest in annuity had burden to prove in interpleader action that he was a "purchaser" and gave "adequate and full consideration" to gain priority over government claimant's federal tax lien); aff'd, 806 F.2d 251, 254 (3d Cir 1986); see also, MacKenzie v. United States [40-1 USTC ¶9229 ], 109 F.2d 540, 542 (9th Cir. 1940) (legislative history of section 6323 , as interpreted through a predecessor statute, reveals that burden of proof is on party seeking protection of the statute); but see, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 333 ("... to deprive a person of protection under section 6323 [a], a federal statute, the burden and risk of persuading the fact finder that Robert had actual knowledge of a fraudulent conveyance rested with the government"). Although Kelly and Mary are not claimants in an interpleader action, but rather defendants in the government's action pursuant to 26 U.S.C. §7403 , they are nonetheless seeking the protection of §6323 .

Defendants argue that the government has the burden of proof to show that Kelly and Mary are not "purchasers" under section 6323(a) because they affirmatively alleged this point in their complaint. Additionally, since the Second Circuit allocated the burden of proof to the government on the fraudulent conveyance issue with respect to the 1984 tax lien, defendants claim that this allocation should be followed for decision on the "purchasers" issue. Alternatively, defendants contend that they merely have the burden of production on the "purchasers" issue, to show that they gave consideration for the transfer of the Property, and that the government has the burden of going forward to show that the consideration was inadequate. This argument is not persuasive. The fact is that Kelly and Mary are seeking protection from an already valid tax lien on the property. Therefore, defendants have the burden of proof to show that they are entitled to protection as "purchasers."

(b) Adequate and Full Consideration

In order to determine whether Kelly and Mary are "purchasers" under section 6323(a) , the court must determine whether Nancy's conveyance of the Property to Kelly and Mary in exchange for their assumption of the mortgages on the Property constituted a purchase, "for adequate and full consideration in money or money's worth," 26 U.S.C. §6323(h)(6) . The term "money or money's worth" encompasses "money, a security ..., tangible or intangible property, services and other consideration reducible to a money value." 26 C.F.R. §301.6323(h)-1(a)(3) . To qualify as "adequate and full consideration," the consideration given for a transaction must bear "a reasonable relationship to the true value of the interest in the property acquired." 26 C.F.R. §301.6323(h)-1(f)(3) . Courts have required that the consideration and property value in this equation be relatively close. See, United States v. Carson, 741 F. Supp. 92, 95 (E.D.Pa 1990) (taxpayer's daughter did not qualify as a "purchaser" where the $1.00 she gave as consideration for the repurchase of three properties from the taxpayer was not "adequate and full consideration"); STV Engineers, Inc. v. Ash, 1986 WL 3862, 57 A.F.T.R.2d at 86-1141, 86-1 U.S.T.C. ¶9352 (dictum) (purchase of annuity by transferee from taxpayer was not for "adequate and full consideration" as a matter of law where under transferee's calculation of annuities' value, value of annuity acquired was 25% more than the value of the consideration given); United States v. Mac Cement Finishing Corporation [83-1 USTC ¶9183 ], 546 F. Supp. 52, 53 (N.D.N.Y. 1982) (consideration given in the form of cash and an assumption of a mortgage for the acquisition of taxpayer's property that was only forty-five percent of the property's fair market value was not "adequate and full consideration"); United States v. Paladin [82-1 USTC ¶9360 ], 539 F. Supp. 100, 103 (W.D.N.Y. 1982) ("[b]ecause the assignment of the insurance proceeds ... was supported by consideration in the amount of only one dollar, it was not supported by adequate and full consideration"); District Divine Science Church of Allen County v. United States, 80-1 U.S.T.C. ¶9119 , 1979 WL 1523 (N.D.Ind. December 4, 1979) (consideration in the form of a mortgage assumption worth $42,794.19 in exchange for a purchase of property worth at least $59,000 was not adequate and full consideration).

Accordingly, the court must compare the value of the consideration given by Kelly and Mary to the "true value" of the property. The findings of fact made at trial pursuant to Fed. R. Civ. P. 52(a) reveal that Nancy conveyed the Property to Kelly and Mary for their assumption of two mortgages on the Property with an outstanding value of $57,797.94. This and one dollar are the only values for consideration that have been put forth on the record. Additionally, the assessed value of the Property at the time of the 1982 transfer was found at trial to be $85,657.00. United States v. McCombs-Ellison, 826 F. Supp. at 1496 n.24, 1497; see also, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 327. Thus the purported value of the consideration is 67% of the purported value of the property.

Proceeding on remand based upon these findings of fact would raise the issue of whether $57,797.94 was "adequate and full consideration" for a purchase of property valued at $85,657.00. Although this seems to be a simple enough comparison, neither the government nor the defendants feel that these are the proper values to use in resolving the "adequate and full consideration" issue. Both parties do agree that no new evidence should be submitted in the case for determination on remand. Government letter dated October 7, 1994 at 5; ⁷ defendants' letter dated September 30, 1994 at 1 ¶3 (citing, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 329). But they both assert that factors calling for an adjustment of these figures may be inferred from findings of fact already in the record.

The only direction given by the Second Circuit for remand on the "adequate and full consideration" issue was that it be determined as a matter of federal law. The court stated:

... on remand, the district court should be guided in its analysis of whether Mary and Kelly are "purchasers" under section 6323(a) by applicable federal, rather than state, law.

United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 330 (citing, United States v. Paladin [82-1 USTC ¶9360 ], 539 F. Supp. at 103 ["(t)he requirement of adequate and full consideration (under section 6323 [h][6]) is a matter of federal rather than state law and must be strictly applied"] [citations omitted]). The Second Circuit did not advise specifically how the consideration and property value are to be measured. By contrast, it did so in respect to the determination of the "fair consideration" issue under New York fraudulent conveyances law. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 327.

The factors cited by the parties calling for an adjustment of the "adequate and full consideration" equation, the comparison of consideration to property value, will be analyzed below to determine whether they are proper considerations under federal law and also whether they are established findings of fact in the record.

1. Value of Consideration

The parties disagree over how to measure the value of the consideration given by Kelly and Mary in exchange for the Property. The consideration stated in the deed was the assumption of the two mortgages on the property with an outstanding value of $57,797.94. Defendants have shown by a preponderance of the evidence that the mortgage assumptions should be counted at face value in determining whether they gave "adequate and full consideration" in acquiring the Property.

The issue is whether mortgage assumptions given as consideration by transferees should be measured at face value in determining "adequate and full consideration" under section 6323(h)(6) , where the original mortgagor was not released from personal liability to the mortgagees, and the transferees had to borrow $53,000 from their father to pay off the mortgages less than two years after the transfer.

In order to qualify as a "purchaser" under section 6323(a) , the consideration given in exchange for a conveyance of a taxpayer's property must be "adequate and full consideration in money or money's worth." 26 U.S.C. §6323(h)(6) . The term "money or money's worth" encompasses "money, a security ..., tangible or intangible property, services and other consideration reducible to a money value." 26 C.F.R. §301.6323(h)-1(a)(3) . Mortgage assumptions have been measured at face value under federal law when determining the value of consideration. See, Enochs v. Smith [66-1 USTC ¶9378 ], 359 F.2d 924, 926 (5th Cir. 1966) (assumption of liability by assignee of taxpayer's property treated at face value for evaluating consideration under section 6323 [a] [overruled other grounds by, 26 U.S.C. §6323(h)(6) ]); United States v. Mac Cement Finishing Corporation [83-1 USTC ¶9183 ], 546 F. Supp. at 53 (assumption of mortgage by transferee of taxpayer's property counted at face value for measuring consideration); District Divine Science Church of Allen County v. United States, 80-1 U.S.T.C. ¶9119 , 1979 WL 1523.

The defendants contend that the mortgage assumptions should be measured at face value because the Second Circuit measured them at face value in its decision. This is not entirely correct. The Second Circuit's determination in this respect was based upon New York law for the fraudulent conveyance claim. This analysis was for the 1984 assessment only. The appellate court, however, directed this court to make the purchasers determination under federal law.

The government next argues that the mortgage assumptions should be counted at less than face value for two reasons. First, the assumptions should only be valued to the extent that the original mortgagor, Nancy, was released from liability to the mortgagees. Government letter dated September 23, 1994 at 2-3. Second, according to the government's theory, Kelly's and Mary's inability to pay off the mortgages after the assumption of liability means that the consideration was not in "money or money's worth" because an empty promise is not reducible to a money value. It asserts that this inability to pay under the assumptions should render the consideration valueless. See annotation, Assumption of Mortgage as Consideration for Conveyance Attacked as in Fraud of Creditors, 6 A.L.R. 2d 270, 274 (standing for the proposition that under state law a grantee's inability to pay an assumed debt "will in some cases be sufficient to set aside an conveyance.") Additionally, the government contends that this factor should be considered in valuing the consideration under federal law, because this factor is considered in determining whether a conveyance is fraudulent under state law. See, Government's petition for rehearing, at 7-8; United States v. Chapman [85-1 USTC ¶9337 ], 756 F.2d 1237, 1241 n.3 (5th Cir. 1985) (Texas law of fraudulent conveyances); Midland-Guardian of Pensacola, Inc. v. Carr, 288 F. Supp. 499, 501 (E.D.La 1968) (Louisiana law); United States v. Troyer [91-2 USTC ¶50,401 ], 1991 WL 207474 (N.D.Ind 1991) (Indiana law), aff'd without published opinion, 983 F.2d 1074 (7th Cir. 1992); Schmitt v. Morgan, 98 A.D.2d 934 (3d Dep't. 1983) ("fair consideration" under New York Debtor and Creditor Law §273 ), appeal dismissed, 62 N.Y.2d 914 (1984). None of these cases, however, speak to valuation of consideration under section 6323(a) , (h)(6) or any other federal statute.

Finally, the government asserts that, because it is defendants' burden to prove that the consideration was adequate and have not done so, the government's argument should prevail. The government points to facts in the record that demonstrate Kelly's and Mary's inability to pay. First, the outstanding balance on the Marine Midland mortgage increased after the property was transferred, until Robert loaned them the money to pay it off. Government's letter dated October 7, 1994 at 5. The amount owed on the Marine Midland mortgage in March, 1983, was $51,621.68 (it is not clear whether this figure includes both principal and interest or just principal). Trial Exhibit 13, Civil Action Narrative Report prepared by Internal Revenue Officer Richard P. Shimko, dated September 19, 1985. At the time of the November, 1984 discharge of the mortgage, the amount of principal and interest due was $55,000. Id. Robert was given a mortgage on the property securing $53,000 in January, 1985. Additionally, there is no indication in the record that either of the mortgagees released Nancy from personal liability after the assumptions by Kelly and Mary. Nonetheless, it is inconclusive whether these factors should be applied under federal law.

Defendants counter this argument by saying that Kelly's and Mary's inability to pay, or Nancy's liability on the mortgage are not proper issues because the Marine Midland mortgage was in fact paid off, and payments were made on the Columbia Bank mortgage as well. These were findings of fact made at trial.

While a transferee's inability to pay an assumed debt and the absence of a novation to the transferor by the creditor would seem to be relevant factors in measuring the value of consideration, as they are under various state fraudulent conveyance laws, it is not clear that federal law applies these factors. The government has suggested that this issue may require briefing, over and above the correspondence submitted by the parties for remand. Nevertheless, the court finds that the mortgage assumptions should be counted at face value since they were in fact paid off.

Of course it would be unnecessary to reach this issue if the court determines that $57,797.94 of consideration in exchange for property worth at least $85,657.00 is not "adequate and full consideration." Before that decision can be made, it must also be determined how federal law properly measures property value under section 6323(a) , (h)(6) .

2. Value of the Property

The analysis of "adequate and full consideration" also requires a determination of the value of the property acquired by a transferee. The parties disagree over both the factual findings as to the property value itself and the correct standard at which to measure the property value in this equation--fair market value or forced sale value.

Stepping away from the parties' disagreement for a moment, IRS regulations instruct that "adequate and full consideration" under 26 U.S.C. §6323(h)(6) means that the consideration given for a transaction must bear "a reasonable relationship to the true value of the interest in the property acquired." 26 C.F.R. §301.6323(h)-1(f)(3) (emphasis added). Therefore, "the true value of the interest in the property acquired[,]" by Kelly and Mary must be ascertained.

There has been little case law under section 6323(h)(6) discussing how to measure the true value of an interest in real property. Fair market value has been used as a benchmark. See, United States v. Mac Cement Finishing Corporation [83-1 USTC ¶9183 ], 546 F. Supp. at 53 (decision based upon parties' stipulated facts). Neither the statute nor the regulation mention the terms fair market value or forced sale value. Presumably, either value could be used in a particular case if it reflects the true value of the real property.

The government claims that the fair market value is the correct standard to use and that that value is $110,000. Government letter dated September 23, 1994 at 3-4. Defendants claim that $85,657 is the established fair market value of the Property. Defendants' letter dated September 30, 1994 at 1. Defendants further assert that forced sale value is the appropriate standard because, inter alia: (1) the Second Circuit required this value to be used for the fraudulent conveyance issue and did not intend to have conflicting property values between the government's two claims; and (2) Nancy was under a compulsion to sell the property in 1982 due to impending foreclosure on the property's mortgages. Defendants' letter dated September 30, 1994 at 1-2. As for determining forced sale value, the defendants' claim that it should be no more than 70% of fair market value. Id. at 3. Defendants arrived at this figure through an interpretation of an Internal Revenue Service collection manual. Id. (attachment). The government's evidence at trial puts the forced sale value at 80% of fair market value. Trial Exhibit 13.

Again, the regulation does not set either value as the benchmark. Therefore, it is appropriate to analyze the evidence presented at trial to determine what the true value of the interest in the property acquired by Kelly and Mary. It must also be kept in mind that defendants have the burden of proof to show that they are "purchasers."

At trial, the court found the value of the property to be at least $85,657. United States v. McCombs-Ellison, 826 F. Supp. at 1496 n.24, 1497. The government produced documentary evidence of a higher fair market value but the court did not accept this because the government's figure was not entirely accurate and there was no testimonial evidence to support it. Id. Additionally, the government produced Nancy 's statement in an IRS form from January, 1983, that stated the current value of the property to be $110,000. Trial Exhibit 22. ⁸ Nonetheless, the $85,657 figure was not appealed and the Second Circuit did not disturb this finding of fact. Therefore, the $85,657 figure should be used on remand.

Now that the fair market value of the property has been established, it must be determined whether the fair market value or the forced sale value represents the true value of the interest acquired in the Property. The defendants' argument to use forced sale value, merely because the Second Circuit directed the use of such standard for the fraudulent conveyance claim, is not persuasive. The fraudulent conveyance issue is a matter of New York law. The Second Circuit directed this court to decide the section 6323(a) issue under federal law. Federal law does not mandate using forced sale value, as apparently the Second Circuit believed that the New York law of fraudulent conveyance does.

Additionally, defendants have not otherwise shown that a forced sale value should be applied. They argue that this value is appropriate because bank foreclosure on the Property's mortgages was imminent before the transfer to Kelly and Mary. As indicated in the report of an IRS agent, Nancy stated to him that she transferred the property to her daughters because she was unable to make the mortgage payments. Trial Exhibit 13, ¶4. This is insufficient to satisfy defendants' burden to show that a forced sale value should be applied, in that it does not show that the Property was not worth fair market value to Kelly and Mary. Defendants did not put on any evidence at trial in support of the Property's forced sale value. Furthermore, Kelly and Mary have not asserted that they are bona fide bargain purchasers to warrant any discount in the fair market value. Therefore, based upon the evidence at trial, the true value of the interest in the property acquired by Kelly and Mary is $85,657.

The value of the consideration is $57,797.94 and the value of the interest acquired in the property is $85,657. The consideration is 67 percent of the property value. This consideration does not bear "a reasonable value to the interest in the property acquired." See, 26 C.F.R. §301.6323(h)-1(f)(3) . Kelly and Mary did not, therefore, give "adequate and full consideration" for the conveyance. Hence, they are not "purchasers" under section 6323(a) and do not have priority over the 1982 federal tax lien.

II. 1984 Tax Lien

The government has sought to enforce its 1984 tax lien on the Property by setting aside the 1982 conveyance from Nancy to Kelly and Mary as fraudulent under New York law. It has put forth two theories in support of its claim. Its first argument is that the conveyance was constructively fraudulent under section 273 of New York Debtor & Creditor Law because inter alia, it was made for inadequate consideration. Second, the government contends that the conveyance should be disallowed because Nancy had actual intent to defraud the government from recovering its unpaid withholding taxes. Setting aside the conveyance under either theory is necessary for the government to enforce its 1984 tax lien on the Property. Since the unpaid tax was assessed after the 1982 conveyance, the Property did not belong to Nancy at the time of assessment. Therefore the lien could not attach to it. See, 26 U.S.C. §§6321 , 6322 .

A. Section 273 Claim

Section 273 provides:

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

New York Debtor & Creditor Law §273 . The government has the burden of proof on the element of fair consideration. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 326. The Second Circuit corrected a conclusion of law in the Verdict and Opinion after trial that allocated this burden to the defendants. Id. at 323; United States v. McCombs-Ellison, 826 F. Supp. at 1496.

In order to succeed on its claim, the government must prove that there was a conveyance from Nancy to Kelly and Mary; that Nancy was insolvent or would have become insolvent after the transfer; and that the conveyance was not made for fair consideration. The first two elements are not in dispute. Therefore, the only element at issue on remand is whether the conveyance was made for fair consideration. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 323.

Fair consideration is defined in New York Debtor & Creditor Law §272 . That section provides that:

Fair consideration is given for property, or obligation,

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

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

New York Debtor & Creditor Law §272 . This determination must be made upon a review of the particular facts and circumstances of each case. Orbach v. Pappa, 482 F. Supp. 117, 119 (S.D.N.Y. 1979) (citing Halsey v. Winant, 258 N.Y. 512, 523 [1932], cert. denied, 287 U.S. 620 [1932]). As section 272 implies, it is necessary to compare the value of the consideration to the value of the property.

The Second Circuit Court of Appeals directed that:

"[i]n our view, therefore, the government's fraudulent conveyance claim under section 273 rises or falls on whether it can prove that consideration of $57,797.94 is disproportionately unequal to the value of the Property as considered in the context of a forced foreclosure proceeding."

United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 327.

In vacating this court's judgment on the section 273 issue, the Second Circuit found that the court made an incorrect ruling of law and an erroneous factual finding. The incorrect legal ruling was with regard to the burden of proof issue in the fair consideration analysis. The erroneous factual finding made at trial was that the daughters took the Property subject to the Marine Midland mortgage. The Second Circuit explicitly stated that it was only reviewing the fair consideration issue, "simply to correct a factual finding by the magistrate judge that we believe to be both 'clearly erroneous' and material to the determination that the consideration was not fair under section 273 ." Id. at 326. The finding that the Property was worth $85,657 was not questioned by the Second Circuit, nor was the application of that property value to the determination of the fair consideration issue. Furthermore, the Second Circuit referred to "fair market value" several times during its discussion of section 273 . Nevertheless, the Second Circuit instructed this court to now use another figure in the fair consideration equation; one that reflects "the value of the Property as considered in the context of a forced foreclosure proceeding." Id. at 327. Accordingly, such a figure will be used in the analysis on remand.

As established at trial, the value of the Property was found to be "at least $85,657." United States v. McCombs-Ellison, 826 F. Supp. at 1497. The government put forth higher figures as being the value of the property, but these were found to be not credible. Id. at 1496 n.24. Whereas the parties have both asserted in correspondence to the court after remand of this case that no new evidence should be considered, the $85,657 figure should be used on remand in formulating the value of the Property in the context of a forced foreclosure proceeding.

Now before the court are two possible measurements for determining the forced sale value of the Property. The defendants argue that this value should be no more than 70% of the Property's fair market value, while government evidence submitted at trial puts the measurement at 80% of fair market value. ⁹ The 80% measurement should be followed because it is the only figure actually in evidence. Trial Exhibit 13.

The defendants' argument in support of using the 70% figure to measure the forced sale value is that an IRS Manual on collection procedures puts the forced sale value at no more than 70% of fair market value. See, Defendants' letter dated September 30, 1994 (attachment). Defendants claim that, since this is an Internal Revenue Service manual, its content should be taken by the court as an admission against the government's interest. It further states that the court should take judicial notice of the measurement of forced sale value stated therein.

A court may take judicial notice of a fact at any time during a proceeding. Fed. R. Evid. 201(f). This rule helps defendants because their information was not entered as evidence at trial. Consequently, it would not be proper for the court to make this further finding of fact were it not to conduct further evidentiary hearings, unless it took judicial notice of this fact. Nevertheless, it is not proper for the court to take judicial notice of this fact. A forced sale value of property set at 70 percent of fair market value is "subject to reasonable dispute" in that it is not "generally known within the territorial jurisdiction of the court[,]" and it is not "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b). Therefore, the court should not take judicial notice of this fact. Since the 70% measurement should not be considered for this reason, the only evidence of forced sale value in the record is the 80% value contained in the government's proof. Accordingly, the 80% of fair market value measurement is accepted by the court.

To calculate the value of the Property in the context of a forced foreclosure proceeding, the court must take 80% of the $85,657 value of the Property. This results in a figure of $68,525.60. Hence, the determination of fair consideration becomes whether $57,797.94 is disproportionately small to the $68,525.60 forced sale value of the Property. This consideration is 84% of the appropriate value of the Property. This consideration value does not appear to be disproportionately small to the value of the Property. Therefore, the government has not upheld its burden of proof on this issue.

Although the government has not proven that the value of the consideration was inadequate, the conveyance may still be set aside if the government can prove that the Property was conveyed with a lack of good faith. New York Debtor & Creditor Law §272(b) ; ¹⁰ Southern Industries, Inc. v. Jeremias, 66 A.D.2d 178, 182 (2d Dep't. 1978) ("but in addition [to the exchange of equivalent value], [ §272(a) ] requires that the transfer must be made in 'good faith' ").

Therefore, the next issue presented is whether the government has sustained its burden of proof to show that the defendants did not act in good faith with respect to the 1982 conveyance. ¹¹ Good faith, as interpreted under §272 , means, "a failure to deal honestly, fairly and openly." Southern Industries, Inc. v. Jeremias, 66 A.D.2d at 183. This good faith must be present with both the transferor and the transferee. Julien J. Studley, Inc. v. Lefrak, 66 A.D.2d 208, 213 (2d Dep't. 1979), aff'd, 48 N.Y.2d 954 (1979); In re Ahead By A Length, Inc., 100 B.R. 157, 169 (Bnkrtcy S.D.N.Y. 1989); In re Checkmate Stereo & Electronics, Ltd., 9 B.R. 585, 617 (Bnkrtcy E.D.N.Y. 1981); aff'd, 21 B.R. 402 (E.D.N.Y. 1982). A lack of good faith may be found in a situation where a transferee knows of the transferor's poor financial condition when the conveyance takes place. In re Fill, 82 B.R. 200, 218 (Bnkrtcy S.D.N.Y. 1987); In re Checkmate Stereo & Electronics, Ltd., 9 B.R. at 617. Additionally, a lack of good faith can be shown where there is knowledge that the conveyance "will hinder, delay, or defraud others." Southern Industries, Inc. v. Jeremias, 66 A.D.2d at 183 [citing, Sparkman & McClean Company v. Derber, 4 Wash. App. 341 [Wash. App. 1971]).

The government has not sustained its burden of proof to show that either Nancy, or Kelly and Mary, lacked good faith in the conveyance to show a lack of fair consideration under section 272 . ¹² It is established that Nancy was willful in her failure to pay withholding taxes, resulting in tax liability underlying both the 1982 and 1984 tax liens. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 320-21. It was not clear from the record, however, when exactly she became aware of the responsibility to pay these taxes, knowledge of such responsibility which resulted in the finding of willfulness. United States v. McCombs-Ellison, 826 F. Supp. at 1490. The findings of fact in this case also show that an IRS agent left a calling card at Nancy 's home eight days before the conveyance of the Property. This calling card informed Nancy of the 1982 tax assessment liability. The record also indicates that Nancy 's purported reason for making the 1982 conveyance was that she was unable to keep making payments on the two mortgages on the property. Trial Exhibit 13, ¶4. Additionally, Nancy was going to be married to Ellison shortly after the 1982 conveyance. See, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 328.

These facts do not demonstrate that the daughters lacked good faith in receiving the property. Although Kelly and Mary knew of Nancy 's inability to make payments on the mortgages on the Property, the government has not shown that they had knowledge that the conveyance would hinder creditors' collection of their debts. The daughters assumed the Columbia Bank and Marine Midland mortgages. Therefore, these creditors would not ostensibly be hindered in the collection of their debt. Since the government has not shown that the daughters knew of the tax assessments, they could not have knowledge that the conveyance would hinder the government as a creditor. Furthermore, the pending marriage of Nancy to Ellison at the time of the conveyance provides an inference of good faith to the conveyance. This demonstrates that the Property was conveyed to keep title in the family and not to hinder the collection of debts by creditors.

The government has also not sustained its burden to prove that Nancy lacked good faith in the 1982 conveyance with respect to the 1984 tax lien. They have not shown that Nancy had knowledge that the 1982 conveyance would hinder the government in the collection of the 1984 tax lien.

It has been established that Nancy willfully failed to pay withholding taxes, and this partially resulted in the assessment of the 1984 tax lien (unpaid withholding taxes for the period of October 1, 1981 through June 30, 1982). United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 320-21. This conclusion was reached because she knew that taxes were due and that she could not afford to pay them, yet paid other creditors at the time. Id. United States v. McCombs-Ellison, 826 F. Supp. at 1490-91.

Significant to the analysis of Nancy 's good faith is that the assessment for the 1984 tax lien was obviously made after the 1982 conveyance, April 16, 1984. At trial, the court found that it was not clear exactly when Nancy became aware of her responsibility to pay the withholding taxes. United States v. McCombs-Ellison, 826 F. Supp. at 1490. Although the record shows that she had knowledge of the 1982 tax lien at the time of the 1982 conveyance, this does not mean she had knowledge of the 1984 tax lien at this time, or its underlying liability for unpaid withholding taxes for the period of October 1, 1981 through June 30, 1982.

It is not clear from the evidence at what time Nancy became aware of the responsibility to pay the taxes due on the 1984 assessment. The government has not shown that Nancy had knowledge that the 1982 conveyance would hinder the government in the collection of its 1984 tax lien. Hence, the government has not shown that Nancy lacked good faith in the conveyance with respect to the 1984 tax lien. Consequently, there is not sufficient proof to show that the conveyance was made for a lack of fair consideration, and the government cannot set aside the 1982 conveyance to enforce the 1984 tax lien under a section 273 constructive fraud theory.

B. Section 276 Claim

The government has also sought to set aside Nancy 's conveyance to her daughters and to enforce the 1984 tax lien on the theory that Nancy had an actual intent to defraud the government from collecting the tax debt, under section 276 of New York Debtor & Creditor Law.

Section 276 provides:

Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.

New York Debtor & Creditor Law §276 . The burden of proof is allocated to the party who seeks to set aside the conveyance. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 328 (citing, Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 126 [2d Dep't. 1986], appeal dismissed, 69 N.Y.2d 875 [1987]). Furthermore, proof must be shown by clear and convincing evidence. ACLI Government Securities, Inc. v. Rhoades, 653 F. Supp. 1388, 1394 (S.D.N.Y. 1987) aff'd, 842 F.2d 1287 (2d Cir. 1988).

Factors from which a fraudulent conveyance may be inferred under section 276 include, "the relationship among the parties to the transaction and the secrecy of the sale, or [the] inadequacy of consideration and hasty, unusual transactions." United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 328 (quoting, In re Grand Jury Subpoena Duces Tecum Dated September 15, 1983, 731 F.2d 1032, 1041 [2d Cir. 1984] [citing United Parcel Service, Inc. v. Jay Norris Corporation, 102 Misc.2d 231, 233 (N.Y.Supt.Ct. 1979); Gafco, Inc. v. H.D.S. Mercantile Corporation, 47 Misc.2d 661, 664-65 (N.Y.C.Civ.Ct. 1965)]). Actual intent to defraud can also be shown by the "transferor's knowledge of the creditor's claim and his own inability to pay it." ACLI Government Securities, Inc. v. Rhoades, 653 F. Supp. at 1394. The adequacy of the consideration in the transaction is not an issue. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 327-28.

The government must show, therefore, that Nancy intended to defraud the government from collecting the taxes underlying the 1984 tax lien. Because it is not clear from the facts that Nancy had knowledge of her indebtedness to the government for the taxes comprising the 1984 tax lien at the time of the conveyance, the government has not upheld its burden of proof.

There are two tax liens at issue. The 1982 tax lien was for unpaid withholding taxes incurred by Spinnaker Pole from October 1, 1979 through September 30, 1981. The 1984 tax lien is comprised of unpaid withholding taxes for the period from October 1, 1981 through June 30, 1982. The assessment for the 1982 tax lien was made by the IRS on June 14, 1982. The assessment for the 1984 tax lien, however, was not made until April 16, 1984.

A contingent liability for withholding taxes arises in a responsible party when the taxes are withheld from an employee's wages. Kalb v. United States [74-2 USTC ¶9760 ], 505 F.2d 506, 509 (2d Cir. 1974), cert. denied, 421 U.S. 979 (1975). A responsible party is personally liable for payment of the withholding taxes if she was willful in not paying them. 26 U.S.C. §6672(a) . Although Nancy was found to be willful in not paying withholding taxes for Spinnaker Pole, the government has not shown that she knew of her indebtedness to the government for the taxes comprising the 1984 tax lien at the time of the 1982 conveyance.

The unpaid withholding taxes comprising the 1984 tax lien were due when the wages were paid to the employees for that tax period, sometime after June 30, 1982. The record is not clear as to when this occurred. This is not as important as is the time that Nancy realized the taxes were due. It is also not clear at what time Nancy became aware that withholding taxes were due and that she was responsible for paying them. United States v. McCombs-Ellison, 826 F. Supp. at 1490. Nancy did know of her indebtedness to the government for the 1982 tax lien, when she conveyed the Property on September 15, 1982. An IRS agent had left a calling card at her residence eight days before this conveyance. There is no indication, however, that she was alerted to the fact that subsequently assessed withholding taxes were past due at this time.

It is only Nancy 's actual intent to defraud the government with regard to the collection of taxes in the 1984 tax lien that is at issue, and not the government's collection of the 1982 tax lien. The effect of the conveyance upon the government's collection of the 1982 tax lien is irrelevant. The government has only sought to enforce the 1984 tax lien under the section 276 theory. Additionally, the Second Circuit noted in its opinion on the appeal that the 1982 and 1984 tax liens "are temporally distinct debts[.]" United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 329 n.3. According to this reasoning, Nancy 's knowledge of the former debt does not necessarily imply knowledge of the latter. Therefore, it is necessary to determine whether at the time of the 1982 conveyance, Nancy was aware that the taxes comprising the 1984 tax lien were due.

The government disputes the Second Circuit's observation that the 1982 and 1984 tax liens are distinct debts. ¹³ Government letter dated September 23, 1994 at 5. It maintains that Nancy 's intent to defraud should be determined by looking at all of the facts and circumstances of the case. Id. Presumably, this means that Nancy 's intent can be determined by looking at her knowledge of the 1982 tax lien and her subsequent actions.

In support of this position, the government argues that the two tax liens are not distinct debts, "but rather a gradually accumulating liability for transactional taxes over an unbroken continuum." Government letter date September 23, 1994 at 5. This observation comports with the nature of withholding tax liability. See, Kalb v. United States [74-2 USTC ¶9760 ], 505 F.2d at 509 (liability for withholding taxes arises at the time that the taxes are withheld from paid wages). Indeed, the two tax liens in this case are for unpaid withholding taxes from two contiguous periods of time.

The question as to Nancy's actual intent thus becomes whether it is a proper inference to conclude that, when Nancy got notice that withholding taxes were due under the 1982 assessment, she also became aware that withholding taxes were due for a subsequent contiguous period, although they had not yet been assessed The evidence stated above of Nancy's knowledge of her indebtedness to the government for the taxes under the 1984 tax lien is not strong enough to support a conclusion by clear and convincing evidence of her actual intent to defraud.

Admittedly, there is some indicia of fraud surrounding the 1982 conveyance. Nancy did have a close relationship with the transferees, her daughters, and she continued to live on the property after the transfer. Evidence also demonstrates that Nancy was unable to pay the tax assessments. United States v. McCombs-Ellison, 826 F. Supp. at 1498. This showing is insufficient to meet the burden of proof in light of the uncertainty surrounding Nancy 's knowledge of the 1984 assessment liability at the time of the conveyance. Furthermore, there is evidence in the record to rebut the government's showing of fraud. See, In re Fill, 82 B.R. at 226. The record indicates that Nancy 's purported reason for making the 1982 conveyance was that she was unable to keep making payments on the two mortgages on the property. Trial Exhibit 13, ¶4. Additionally, Nancy was going to be married to Ellison shortly after the 1982 conveyance and wanted to keep the property in the McCombs family. See, United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 328. These facts show reasons for the transfer, other than to defraud the government.

The government's proof does not fail because the tax assessment occurred after the conveyance of property. See, United States v. Cohn [88-1 USTC ¶9281 ], 682 F. Supp. 209, 217 (S.D.N.Y. 1988). It fails because of the uncertainty of Nancy 's knowledge of her indebtedness to the government for the 1984 tax lien. The other indicia of fraud surrounding the 1982 conveyance are not enough to show that Nancy had actual intent to defraud the government in the collection of the 1984 tax lien.

Since the government has not proven that the 1982 conveyance should be set aside under either the section 273 or section 276 theories, the 1984 tax lien may not be enforced against the Property.

CONCLUSION

The government has priority over defendants Kelly McCombs and Mary McCombs with regard to the 1982 tax lien because defendants have not sustained their burden of proof to show that they are "purchasers" under section 6323(a) . However, the government may not enforce the 1984 tax lien against Nancy McCombs-Ellison's former property, because the government has not sustained its burden of proof to show that the conveyance was constructively fraudulent due to a lack of fair consideration under section 273 , or that Nancy McCombs-Ellison had an actual fraudulent intent under section 276 .

Kelly and Mary do not have priority over the 1982 federal tax lien because they have not sustained their burden of proof to show that they are "purchasers" under 26 U.S.C. §6323(a) . However, since the government has not proven that the 1982 conveyance was fraudulent under either the section 273 or section 276 theories and that it should be set aside, the 1984 tax lien may not be enforced against the Property.

Kelly and Mary are entitled to equitable subrogation under 26 U.S.C. §6323(a) only to the extent of the difference between what Robert's $53,000 interest is and the amounts ultimately paid by Mary and Kelly to discharge the two prior mortgages on the Property. United States v. Baron, 996 F.2d 25, 29 (2d Cir 1993). This is ordered in the court's discretion, particularly in light of the discussion of equitable subrogation concerning Robert's interest by reference to the undisturbed findings of fact relative to Mary's and Kelly's lack of notice. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 330-33. Accordingly, the relative priorities are, contrary to the government's argument in its letter of October 7, 1994, as follows:

(1) First priority to Robert for $53,000

(2) Second priority to Mary and Kelly for the difference between Robert's $53,000 interest, and the amount Mary and Kelly paid to ultimately discharge the two prior mortgages on the Property, which may not necessarily be the $4,798 figure cited by the government but is easily settled by the parties from financial records;

(3) Third priority to the 1982 tax lien;

(4) Fourth priority to Mary and Kelly for the surplus.

The foregoing is the Decision and Order of this court.

SO ORDERED.

¹ A tax lien is deemed to arise on the property of a taxpayer at the time of assessment. 26 U.S.C. §§6321 , 6322 .

² The Court of Appeals corrected a finding of fact that the court had made at trial, that Kelly and Mary had taken the property "subject to" the Marine Midland Bank mortgage. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 327.

³ The matter has since been discontinued against Ellison and Columbia Bank. See , United States v. McCombs-Ellison, 826 F.Supp 1479, 1483 n. 1 (W.D.N.Y. 1993).

⁴ The foreclosure sale was stayed pending the appeal of the judgment.

⁵ Although the government claims that this court may consider its argument of fraudulent conveyance with respect to the 1982 tax lien, this is contrary to the Second Circuit's direction for remand. The Second Circuit clearly stated that only the section 6323(a) argument may be considered in the disposition of the 1982 tax lien because that was the theory under which the government proceeded at trial. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 329.

⁶ The burden of proof issue was previously decided only under the New York law of fraudulent conveyance, and found by the Second Circuit to be incorrectly allocated to the defendants.

⁷ The government asked in its petition for rehearing to the Second Circuit, that it be able to present more evidence on this issue of the Property's fair market value. Petition for Rehearing at 7. It now apparently abandons that request, judging by the position taken in its letter.

⁸ Defendants object to this evidence as hearsay because Nancy 's statement cannot be entered as an admission against Kelly and Mary. Defendants' letter dated October 14, 1994 ¶14. The government disagrees with this hearsay contention. Government letter dated September 23, 1994 at 3.

⁹ Important to this analysis is the fact that no finding of the "fair market value" of the Property was made at trial. The figure of "at least $85,657[,]" see, 826 F.Supp at 1497, represents what may be the property's "fair salable value" under New York Debtor & Creditor Law §271(1) . This is not necessarily the "fair market value." Therefore, it may be inaccurate to calculate the forced sale value, which apparently requires a preliminary finding of the fair market value, based on the $85,657 figure.

¹⁰ This good faith requirement is present in both subparagraphs of New York Debtor & Creditor Law §272 .

¹¹ Even in light of the Second Circuit's direction on remand, the burden of proof could still shift to the transferees to show a presence of good faith. See, In re Fill, 82 B.R. 200, 218-19 (S.D.N.Y. 1987) (burden on transferee to prove fair consideration due to intra-family conveyance). A fair reading of the appellate court's opinion only directs the burden of proof to be placed on the government for proving the first element of fair consideration (that the consideration was not disproportionately small to the value of the property), but not necessarily on the second element of good faith. Good faith was not addressed in this context at trial. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 326 n.1.

¹² The consideration of Nancy 's intent to hinder creditors in this analysis of fair consideration, overlaps with the analysis of actual intent to defraud under New York Debtor & Creditor Law section 276 (although the burden of proof on the government is greater in the latter analysis). Therefore, the good faith analysis may also require the bootstrapping of the 1984 tax lien with the 1982 tax lien as suggested by the Second Circuit in its direction on remand. United States v. McCombs [94-2 USTC ¶50,363 ], 30 F.3d at 328-29 n.3.

¹³ The Second Circuit suggested that you may want to consider "bootstrapping" Nancy 's knowledge of the 1982 assessment to prove her actual intent to defraud the government in its collection of taxes for the 1984 tax lien. In its argument on remand, the government does not feel that the "bootstrapping" of the 1984 tax lien with the 1982 tax lien "is a real issue." Government letter dated September 23, 1994 at 5. Instead the government disputes the Second Circuit's characterization of the two tax liens as distinct debts. Id. At any rate, due to the government's position and that the Second Circuit's comment was only a suggestion, whether New York law permits the "bootstrapping" of these two debts need not be considered.

 

 

[93-2 USTC ¶50,639] United States of America , Plaintiff v. Wendell H. Hoffmann, Helen M. Hoffmann, Rowene Visser, Saundra Dymock, Tamera Hoffmann, Rodney M. Hoffmann, Marlin W. Hoffmann, and Gary J. Hoffmann, Defendants

U.S. District Court, Dist. Utah , No. Div., 92-NC-0125-S, 10/22/93

[Code Sec. 6013 ]

Joint returns: Innocent spouse.--The wife of a taxpayer found liable for the fraud penalty was entitled to innocent spouse relief. She did not participate in or have knowledge of her husband's business or the omission of income from their joint return, she did not make unusual or lavish expenditures, and her level of education was limited. Therefore, it would have been inequitable to have held her liable for the tax attributable to the understatements.

[Code Sec. 6321 ]

Fraudulent conveyances.--A transfer of real property from a mother to her children did not constitute a fraudulent conveyance under state ( Utah ) law even though the transfer was without consideration. She did not transfer the property with actual intent to hinder, delay or defraud the government. The children held legal title to the property because the transfer was recorded and there was no evidence that the property was transferred in anticipation of a suit.

[Code Sec. 6653 , prior to repeal by P.L. 101-239 ]

Fraud: Omission of income.--A husband was liable for the fraud penalty assessed on a joint return because the understatement of income for the years at issue was caused by his actual, intentional wrongdoing that was purposefully designed to evade taxes. There was a consistent and substantial understatement of income, and many of the transactions of the business he controlled were made in cash to avoid producing records.

Kirk C. Lusty, Robert P. McIntosh, Department of Justice, Washington , D.C. 20530 , for plaintiff. Wendell H. Hoffmann, pro se. Michael T. Roberts, for Helen M. Hoffmann, Rowene Visser, Saundra Dymock, Tamera Hoffmann, Rodney M. Hoffmann, Marlin W. Hoffmann, and Gary J. Hoffmann.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SAM, District Judge:

The above-entitled matter came before the court for trial without a jury from September 23, 1993 through September 27, 1993. Plaintiff was represented by Kirk Lusty, Esq. and Robert P. McIntosh, Esq.; defendants Helen M. Hoffmann, and Rowene McCollum (formerly Rowene Visser), Saundra Dymock, Tamera Hoffmann, Rodney M. Hoffmann, Marlin W. Hoffmann, and Gary J. Hoffmann (hereafter "Hoffmann children") were represented by Michael T. Roberts, Esq.; Wendell H. Hoffmann was pro se. The court, having considered the evidence presented at trial, the briefs submitted by the parties, and being fully advised in the premises, enters the following findings of fact and conclusions of law in favor of defendants Helen M. Hoffmann and the Hoffmann children and against defendant Wendell H. Hoffmann.

FINDINGS OF FACT

1. This action was brought at the direction of the Attorney General of the United States and at the request and with the authorization of the Chief Counsel of the Internal Revenue Service, a delegate of the Secretary of the Treasury, pursuant to Sections 7401 and 7403 of the Internal Revenue Code of 1986 (26 U.S.C.).

2. By Order dated September 2, 1993, the Court granted the United States' Motion for Partial Summary Judgment with respect to the tax liability ¹ against Wendell and Helen Hoffmann in the amount of $113,193.39 as of June 23, 1993, plus interest according to law and less applicable credits. The Court reserved for decision at trial the merits of the fraud penalties assessed against the taxpayers for 1983 and 1984; whether Helen Hoffmann is relieved from the liability as an "innocent spouse" under 26 U.S.C. §6013(3) ; and whether the conveyance of real property described below was a fraudulent conveyance under Utah law or whether the Hoffmann children held title to the real property as nominees of Helen Hoffmann.

3. This action involves a parcel of real property located at 4140 Madison Avenue, Ogden, Utah ("the property") legally described as follows:

All of lots 40 to 45, Block 24: South Ogden Plat A and part of the vacated street described as follows: Beginning at the southeast corner of Lot 40, running east 8 feet; thence north 83 feet; thence along a curve to the left, north 16 14' 21" east 27.05 feet; thence along a curve to the right 45.22 feet to the northeast corner of lot 45; thence north 89 02' west to the northwest corner of Lot 45; thence south to the southwest corner of Lot 40; thence south 89 02' east to beginning.

All of lots 8, 9, and 10, Block 24, South Ogden Plat A, South Ogden City, Weber County, Utah, together with the vacated alley abutting lots 8, 9, 10, 43, 44, & 45. Together with the east 1/2 of the vacated alley abutting said Lots 40, 41, & 42 on the West.

Wendell Hoffmann and Helen Hoffmann reside on that parcel of property.

4. In the early 1960s, Wendell Hoffmann transferred his interest in the property to Helen Hoffmann. Although Wendell Hoffmann continued to live in the home on a part-time basis, Helen Hoffmann thereafter regarded the home as her own home.

5. Defendant Helen Hoffmann is a seventy-two (72) year old taxpayer, who married pro se defendant Wendell Hoffmann in 1930.

6. Helen Hoffmann is the mother of six children, who are also named as defendants in this action. The names of the six children are as follows: Rowene McCollum, Saundra Dymock, Tamera Hoffmann, Rodney M. Hoffmann, Marlin W. Hoffmann, and Gary J. Hoffmann.

7. Helen Hoffmann is an austere and hardworking person, who has been required to work outside the home for most of her marriage to meet daily household and personal expenses.

8. Helen Hoffmann never received any money from Wendell Hoffmann save a $400.00 allowance per month early in their marriage until approximately 1972. Helen used the allowance to meet household expenses. In 1983, Helen again received $400.00 per month when she quit her job at the bakery where she worked.

9. Shortly after the Hoffmanns were married, Helen Hoffmann would ask Wendell Hoffmann about their income; however, Wendell refused to disclose to Helen his income and kept secret his financial status.

10. To salvage her marriage, Helen Hoffmann made it a practice not to inquire into Wendell Hoffmann's financial affairs and dealings.

11. Wendell Hoffmann and Helen Hoffmann filed joint federal income tax returns for the years 1981, 1982, 1983 and 1984.

12. The joint federal income tax returns of Wendell and Helen Hoffmann for the years 1981, 1982, 1983 and 1984 contained substantial understatements of tax attributable to one spouse, Wendell Hoffmann. The returns showed as "total income" $2,667.00, negative $10,614.00, $8,982.00, and $3,575.00 for 1981 through 1984, respectively.

13. The substantial understatements of tax contained on the 1981, 1982, 1983 and 1984 federal income tax returns of Wendell and Helen Hoffmann were attributable to grossly erroneous items of unreported income of one spouse, Wendell Hoffmann, and fraudulent business deductions of Hoffmann Health and Research, subsequently known as Energy Evaluation and Research (hereafter referred to collectively as "Hoffmann Health and Research") which was under the exclusive control of Wendell.

14. Helen Hoffmann has never benefitted from the grossly erroneous items attributable to Wendell Hoffmann for the years 1981, 1982, 1983 or 1984.

15. Wendell Hoffmann now only lives with Helen Hoffmann a few days each week. Wendell does not provide any financial support to Helen.

16. Hoffmann Health and Research was a family owned and operated business of Wendell Hoffmann that sold vitamin and mineral supplements and other products. It was primarily a mail order business, with 98 percent of its customers outside the State of Utah . As of January 1984, by its own account, the receipts of Hoffmann Health and Research were roughly $15,000.00 per month for the mail orders. At all relevant times, Wendell worked in the business full time primarily developing vitamin and mineral supplements and other products for sale.

17. In addition to the money received by mail, there was significant other income received by Wendell. Several times each year Wendell made trips to various cities in the United States where he lectured regarding Hoffmann products and methods for maintaining good health. He was paid for these lectures. He also sold books he had printed during these trips. Helen was unaware of money received on these trips, she was never shown any of it and never accounted for any of it. She testified that "Wendell has always been extremely secretive concerning his income."

18. Throughout Helen Hoffmann's married life with Wendell, she struggled financially. Helen described it as being kept on a "shoestring".

19. Helen Hoffmann's lifestyle did not change during the years 1981 through 1984. Helen continued to make very little money and she received little or no financial support from Wendell.

20. Helen Hoffmann was not involved in the management or operation of Wendell Hoffmann's business, Hoffmann Health and Research.

21. Wendell Hoffmann did not discuss with Helen Hoffmann the details of business management and finances of his business.

22. Helen Hoffmann did not know the income or financial status of Hoffmann Health and Research. Helen did not know if Wendell's business lost or made money.

23. Helen Hoffmann did not know that Wendell had stored money in bottles in the basement. Wendell had told his son Gary Hoffmann that there was money in the basement and instructed Gary to never tell anyone. Gary never did count the money and does not know even approximately how much money was stored in the bottles.

24. During the years 1981 and 1982, Helen had employment as a cook with a bakery business owned by her daughter, Rowene.

25. In addition to working at the bakery, Helen occasionally helped Wendell. Her work included mailing statements to customers. Helen also helped pack boxes containing the products that were shipped to customers and clean the business premises. Helen was not paid for her work.

26. From 1981 to 1984, Wendell and Gary Hoffmann did the "bookkeeping" at Hoffmann Health and Research. Wendell would put the bills in a check book and Gary would write checks to pay the bills and balance the bank statements. Gary would insert the invoice information on a computer. All of the financial information about Wendell's business was stored on the computer in the years 1981 through 1984. A general ledger was not kept. Gary never calculated the amounts of gross receipts or income for Wendell's business; Gary did not consider the money his and was not really interested. In 1981 Gary had just arrived home from his mission for his church and was attending school full-time and working part-time. He would come in to Wendell's business an hour or two a night to do the book work.

27. Helen Hoffmann was not involved in the bookkeeping at Hoffmann Health and Research. Helen Hoffmann did not know how to gain access to the computer where the financial information of the business was stored. Helen did not work on ledgers and rarely, if ever, made deposits at the bank.

28. Helen Hoffmann generally did not receive the mail for Hoffmann Health and Research, which came to a separate mail box from that addressed to the home. In 1982, when Wendell's business moved to Riverdale, the mail was delivered directly to the business. Helen did not open the mail at Riverdale.

29. In 1984, Wendell's children purchased the inventory from Hoffmann Health and Research and started a company called Dynapro. Helen helped the children by doing packaging. In later years Helen did some statement work and may have made some deposits. Helen was not paid for her services to Dynapro in 1984. Helen was simply trying to help her children succeed in their new business, and did not wish to be compensated initially. In mid 1985, when Dynapro became profitable, Helen was paid an hourly wage for her services.

30. Helen Hoffmann did not know that Wendell Hoffmann received a promissory note for $51,320.00 for the sale of the inventory in Hoffmann Health and Research. Helen Hoffmann was not involved in the negotiations and meetings between Wendell and his children with respect to the sale of the inventory.

31. Both Wendell and Helen had little, if any, formal post-high school education. Helen Hoffmann is an unsophisticated taxpayer. Helen did not graduate from high school and did not receive a high school diploma until over twenty years later; she has never taken any college courses or post-secondary courses; and she has no formal training in bookkeeping, accounting, money management or finances.

32. Helen Hoffmann has never prepared a tax return and has little or no understanding of tax returns.

33. The income tax returns were prepared by Earl McEwen, a friend of the Hoffmanns, who at one time had worked with Helen at H&R Block, where she was a receptionist. Helen Hoffmann did not participate in the preparation of the returns. The extent of Helen Hoffmann's involvement was to provide her W-2 forms for the accountant. Helen Hoffmann did not review the materials and information that Wendell Hoffmann provided his accountant to use in preparing the returns. Helen did not review the returns in any detail. She also never asked McEwen any questions about the returns or discussed the returns with him in any way. In signing the returns, Helen Hoffmann did not know that there were substantial understatements.

34. During 1983, Wendell made an investment reported on Schedule K-1 of American Deseret, Ltd. (or American Factoring Corp.) in the amount of $110,000.00. Of this amount, the Internal Revenue Service obtained copies of customer receipts of cashier's checks totalling $85,000.00, each drawn in amounts less than $10,000.00. Three separate checks were purchased on July 22, 1983. The cashier's checks listed the purchaser as "Pyramid Trust", an entity created by Wendell Hoffmann purporting to be an off-shore trust.

35. Helen Hoffmann was completely unaware of Wendell Hoffmann's investments. Helen had never heard of R.W. Ashworth Well #1, R.H. Tinsley Well #1, and H H&D Investments. Helen recalled hearing the names of American Deseret, Ltd. and Pyramid Trust, but she did not know the amount or the source of the investments. Helen was shocked when she learned that $110,000.00 had been invested in American Deseret, Ltd.

36. Despite having reported total income in the amount of only $4,610.00 over a four year period, and despite reporting a negative total income of $10,614.00 in 1982, Wendell purchased with cash in 1982 a Subaru automobile for $8,778.15 and a used recreational vehicle for $6,100.00.

37. Although Hoffmann Health and Research employed two other individuals, paying them $15,893.00 and $3,147.12 respectively in 1983, the wages were not reported and no employee withholding or FICA taxes were paid.

38. In early 1985, the Internal Revenue Service began an audit of the taxpayers for the years 1981 through 1984. A revenue officer secured consents for extension of time in which to assess tax, which were signed by the taxpayers on April 10, 1985 and December 2, 1985.

39. The taxpayers were first contacted by the Internal Revenue Service by letter dated March 18, 1985, wherein the Internal Revenue Service requested financial documents and information from the taxpayers.

40. The taxpayers and the Internal Revenue Service were unable to agree on the correct tax liability, and the audit was closed "unagreed" in July 1986.

41. By letter dated September 17, 1986, the Internal Revenue Service sent its "30-day letter" to the taxpayers outlining the right to request an appeals conference and informing that "If we don't hear from you within 30 days, we will have to process your case on the basis of the adjustments shown in the examination report."

42. In a Supporting Statement, the Appeals Officer for the IRS determined that the designated cash transactions related only to Wendell Hoffmann. The Supporting Statement then refers to only Wendell Hoffmann as "the taxpayer".

43. Helen Hoffmann originally conceived the idea to transfer her home to her children in 1975, following conversations with her co-employees. Helen Hoffmann decided that when she reached sixty-five (65) years of age she would transfer the home and property to her children for estate planning purposes.

44. Helen Hoffmann turned sixty-five on July 18, 1986. Less than two months following her birthday, Helen Hoffmann discussed with Richard Dymock (husband to defendant Saundra Dymock) her desire to have a trust or some form of estate plan to transfer the property to her children. Richard Dymock referred attorney Keith Larson, of Salt Lake City , Utah , to Helen Hoffmann to do her estate work.

45. Approximately ten (10) days prior to meeting with Keith Larson, Richard Dymock set up an appointment for Helen Hoffmann to visit Keith Larson's office. On September 18, 1986, Richard Dymock went with Helen Hoffmann to Keith Larson's office.

46. Helen Hoffmann requested that attorney Keith Larson help her transfer the property to her children. Upon the advice of Keith Larson, Helen Hoffmann signed a quit claim deed prepared by Mr. Larson on September 18, 1986, which transferred the home and property to Helen Hoffmann's children.

47. Helen Hoffmann conveyed the real property, which is the subject of this action, to her six adult children. Title to the real property is held in the names of the Hoffmann children as tenants in common pursuant to quit claim deeds dated September 18, 1986 signed by Helen Hoffmann.

48. In 1988, Helen Hoffmann became aware, when she received a property tax notice for part of the property, that the quit claim deed drafted on September 18, 1986 did not convey her entire property. Helen Hoffmann went to the County Recorder 's Office on February 5, 1988 to seek an explanation. She was told there was a mistake in the legal description of the property in the first quit claim deed. That same day, the Recorder's Office drafted a second quit claim deed to convey the remaining property to the children. The Recorder's Office drafted the date September 18, 1986 on the deed to reflect that a mistake had been made. The deed was recorded on February 4, 1988.

49. The quit claim deeds were recorded with the Clerk and Recorder of Weber County, Utah on September 19, 1986 and February 4, 1988.

50. Helen Hoffmann did not make the transfer of the property in anticipation of a suit or liabilities.

51. Helen Hoffmann knew that the IRS was conducting an audit; however, she did not believe nor suspect that there would be an assessment or liability. Helen Hoffmann transferred the property with good intentions and in good faith. Helen Hoffmann did not believe the tax audit was relevant to her wanting to transfer the property and home to her children. Helen Hoffmann was not concerned about the tax audit; she did not believe there would be an assessment against her because she had always paid her taxes and because she trusted that Wendell Hoffmann and his accountant accurately reported Wendell Hoffmann's income. Helen Hoffmann did not mention the tax audit to either Richard Dymock or Keith Larson.

52. Wendell and Helen Hoffmann had been audited before by the State of Utah and were not assessed a tax deficiency.

53. On May 1, 1985, Richard Bunker, a CPA in Salt Lake city , was given power of attorney to assist in gathering materials for the IRS. Helen Hoffmann has never personally talked with Richard Bunker. Helen Hoffmann did not meet Richard Bunker until sometime in 1993.

54. Helen Hoffmann has never opened any mail from the IRS addressed to Wendell Hoffmann and Helen Hoffmann. Helen Hoffmann considered the IRS audit to be Wendell Hoffmann's business; she never discussed the tax audit with Wendell Hoffmann.

55. On an unknown date, the IRS issued an Examination Report with tax assessment findings to Wendell and Helen Hoffmann. Helen Hoffmann did not have knowledge of the Examination Report until a period of time after September 18, 1986.

56. When Helen Hoffmann finally did observe the Examination Report, she was surprised to find an assessment and shocked at the amounts assessed in excess of $311,000, plus undetermined penalties. Helen Hoffmann could not and did not believe that she would be personally liable for the tax assessment because she had paid her taxes.

57. On July 1, 1987, Wendell and Helen Hoffmann signed Form 870-AD consenting to assessment and collection of the tax deficiencies.

58. Pursuant to the agreement, on October 5, 1987 a delegate of the Secretary of the Treasury made federal income tax assessments against defendants, Wendell Hoffmann and Helen Hoffmann, for unpaid income taxes, plus interest, penalties and fees for the periods and in the amounts set forth in the United States' complaint.

59. Timely notice and demand for payment of the assessments described in ¶12 of the complaint was made against defendants Wendell Hoffmann and Helen Hoffmann.

60. The conveyance of the property by Helen Hoffmann to the children was made without any consideration.

61. Helen Hoffmann has had the continuous use and enjoyment of the property since she conveyed that property to the children.

62. Wendell Hoffmann and Helen Hoffmann have not paid any rent to the children for the use of the property.

63. Helen Hoffmann did not reserve an interest or benefit when she transferred the property; her occupation of the property is as a tenant at will.

64. The Hoffmann children paid the property taxes and utilities on the property after Helen Hoffmann conveyed it to them in 1986. The property taxes, insurance, telephone and utility expenses since February 1987 have been paid from a checking account titled "Six-H Trust" with Weber Credit Union. The account was owned by Tamera Hoffmann, Wendell and Helen's daughter. Helen Hoffmann did not contribute any money to help pay taxes and utilities. The monies used to pay the taxes and utilities were from the checking account maintained by the Hoffmann children. Helen Hoffmann did become a co-signer on the checking account owned by her children only after her daughter Tamera Hoffmann insisted that Helen Hoffmann help write checks from the account to pay property taxes and other household expenses in order to alleviate Tamera Hoffmann's heavy work load. Helen Hoffmann always considered the assets in the account to belong solely to her children. Helen Hoffmann did not deposit any of her assets into the checking account.

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

CONCLUSIONS OF LAW

 

1. With respect to the fraud penalties, the United States bears the burden of proving fraud by clear and convincing evidence. Zell v. Comm'r [85-2 USTC ¶9698 ], 763 F.2d 1139, 1142 (10th Cir. 1985). This burden is met by showing actual, intentional wrongdoing with a purpose to evade a tax believed to be owing. Zell [85-2 USTC ¶9698 ], 763 F.2d at 1142-43.

2. Fraud may be proved by circumstantial evidence. Laurins v. Comm'r [89-2 USTC ¶9636 ], 889 F.2d 910, 913 (9th Cir. 1989); Edelson v. Comm'r [87-2 USTC ¶9547 ], 829 F.2d 828, 832 (9th Cir. 1987)

3. Such evidence includes: (1) understatement of income; (2) inadequate records; (3) failure to file returns; (4) implausible or inconsistent explanations of behavior; (5) concealing assets; and (6) failure to cooperate with tax authorities. Id.

4. The consistent and substantial understatement of income is itself evidence of fraud. Lollis v. Comm'r [79-1 USTC ¶9379 ], 595 F.2d 1189, 1191 (9th Cir. 1979); Laurins [89-2 USTC ¶9636 ], 889 F.2d at 913. The substantial understatement of income over a period of years may establish the basis in and of itself on which fraudulent intent to evade taxes may be found. Ehlers v. Vinal [66-1 USTC ¶9339 ], 253 F. Supp. 58 (D. Neb. 1966) aff'd, [67-2 USTC ¶9612 ], 382 F.2d 58.

5. In this case there is a clear and substantial understatement of income in each of the years involved, and the parties (excluding Wendell Hoffmann) so stipulated before trial.

6. Other indicia of fraud exist. Many of the business transactions of Hoffmann Health and Research were conducted in cash, including making payroll and buying supplies with cash. Wendell Hoffmann also purchased personal items with cash, including a new automobile and a recreational vehicle. The use of cash management or other methods to avoid making records of transactions is an indication of fraud. Scallen v. Comm'r [89-1 USTC ¶9369 ], 877 F.2d 1364 (8th Cir. 1989); Stainer v. Comm'r [65-2 USTC ¶9550 ], 350 F.2d 217 ( Wis. 1965).

7. The circumstances under which Wendell Hoffmann made investments in American Deseret, Ltd. indicate fraud. First, he created a fictitious entity known as "Pyramid Trust", purported to be an off-shore trust. Second, he made the investment by purchasing cashier's checks in the name of the trust with which he made the investment. Third, each of the checks were made in amounts less than $10,000.00, even though this required purchasing three separate checks on July 22, 1983 to invest the amount desired. The explanations put forth by Mr. Hoffmann for this unusual behavior are implausible.

8. The court concludes that Wendell Hoffmann is liable for the fraud penalties assessed against him for his actual, intentional wrongdoing purposefully designed to evade the taxes believed to be owing.

9. With respect to the "innocent spouse" defense, the taxpayer has the burden of proving that she satisfies each element of the defense. Shea v. Comm'r [86-1 USTC ¶9150 ], 780 F.2d 561, 565 (6th Cir. 1986); Stevens v. Comm'r [89-1 USTC ¶9330 ], 872 F.2d 1499, 1504 (11th Cir. 1989). The elements to be proved are: (1) that a joint return was made for a taxable year; (2) on the return there was a substantial understatement of tax attributable to grossly erroneous items of the other spouse; (3) in signing the return she did not know, and had no reason to know of the substantial understatement; and, (4) taking into account all facts and circumstances, it would be inequitable to hold her liable for the tax attributable to the understatement. 26 U.S.C. §6013(e); Stevens [89-1 USTC ¶9330 ], 872 F.2d at 1504.

10. A failure to prove any one of the elements will prevent the taxpayer from obtaining relief. Shea [86-1 USTC ¶9150 ], 780 F.2d at 565.

11. The parties have stipulated that Wendell Hoffmann and Helen Hoffmann filed joint federal income tax returns for the years 1981, 1982, 1983 and 1984; that the joint federal income tax returns of Wendell and Helen Hoffmann for the years 1981, 1982, 1983 and 1984 contained substantial understatements of tax; and the substantial understatements were attributable to grossly erroneous items of unreported income and fraudulent business deductions of Hoffmann Health and Research.

12. Therefore, the remaining issues to be proved by Helen Hoffmann are: (1) that the unreported income and fraudulent business deductions of Hoffmann Health and Research were attributable to Wendell only; (2) that, in signing the return, she did not know, and had no reason to know, of the substantial understatements; and, (3) taking into account all facts and circumstances, it would be inequitable to hold her liable for the tax attributable to the understatements.

13. The court concluded that Wendell Hoffmann is solely liable for the fraud penalties, and the court further concludes that the understatements were attributable to Wendell only.

14. In any event, it is clear that Helen Hoffmann established that she did not know, and had no reason to know, of the substantial understatements. The test for determining whether a taxpayer has "reason to know" of the understatement is whether a reasonable person, ² in the same position as the taxpayer, would infer that omissions or erroneous deductions had been made. Shea [86-1 USTC ¶9150 ], 780 F.2d at 565-66.

15. Some of the facts that courts look to in determining a reason to know include: (1) unusual or lavish expenditures; (2) the spouse's participation in the business affairs or bookkeeping; (3) the "guilty" spouse's refusal to be forthright about the couple's income; and (4) the alleged innocent spouse's level of education. Sanders v. United States [75-1 USTC ¶9297 ], 509 F.2d 162, 167 (5th Cir. 1975); Stevens [89-1 USTC ¶9330 ], 872 F.2d at 1505.

16. The court has concluded that Helen did not participate in or experience unusual or lavish expenditures and that her level of education was limited.

17. It is also clear that Helen was not involved with Wendell's business affairs. Although the evidence did indicate Wendell's refusal to be forthright, based on all the facts and circumstances the court concluded Helen had no reason to know of the businesses or Wendell's omissions from gross income.

18. The court finds it would be inequitable to hold Helen Hoffmann liable for the tax attributable to the understatements.

19. The remaining issues to be decided are whether the Hoffmann children hold title to the real property as nominees of Helen Hoffmann or whether the conveyance of the real property constituted a fraudulent conveyance within the meaning of the Utah Fraudulent Conveyance Act, §§25 -1-4 and 25-1-7. Section 25 -1-4 provides as follows:

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

20. The parties have stipulated that the transfer by Helen to the children was made without any consideration.

21. The statutory presumption under Utah Code Ann. §25 -1-4 is rebutted by evidence showing an honest intention and good faith by Helen Hoffmann when she transferred the property to the Hoffmann children.

22. Section 25 -1-7 of the Utah Code provides guidance for determining whether the conveyance was fraudulent. That section provides:

Every conveyance made, and every obligation incurred, with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors is fraudulent as to both present and future creditors.

23. Although §25 -1-7 requires proof of actual intent to defraud a creditor, this court has previously held that "although actual fraudulent intent must be shown to hold a conveyance fraudulent . . . its existence may be inferred from the presence of certain indicia or badges of fraud." United States v. Christensen [90-2 USTC ¶50,543 ], 751 F.Supp. 1532, 1536 (D. Utah 1990) appeal dismissed 961 F.2d 221 (1992). Such "badges of fraud" include: (1) insolvency of the grantor; (2) inadequate consideration; (3) the transfer of all 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; and (12) the state taxes or real property taxes are paid by the transferor. Id.

24. Although, as in Christensen, the conveyance in this case was made for no consideration, other indicia or badges of fraud are absent. It cannot be concluded that the conveyance was made in anticipation of the tax liabilities and that "an attempt to place the residence . . . beyond the reach of the United States was a major motivation" for the conveyance. See Christensen [90-2 USTC ¶50,543 ], 751 F.Supp. at 1537.

25. Helen Hoffmann did not transfer property to the Hoffmann children with actual intent to hinder, delay or defraud the government.

26. The conveyance was made to near relatives, the taxpayer's children, pursuant to an estate plan contemplated for years preceding the actual transfer. The court finds no basis in fact or law to conclude the transfer was a fraudulent conveyance.

27. Finally, the Hoffmann children do not hold legal title to the property as nominees of Helen Hoffmann. Courts consider the following factors to be relevant in determining whether an entity is the nominee of an individual: (1) no consideration or inadequate consideration paid by the nominee; (2) the property is placed in the name of the nominee in anticipation of a suit or occurrence of liabilities while the transferor continues to exercise control over the property; (3) a close relationship exists between the transferor and the nominee; (4) failure to record the conveyance; (5) retention of possession by the transferor; and (6) continued enjoyment by the transferor of benefits of the transferred property. E.g., Towe Antique Ford Foundation v. I.R.S. [92-1 USTC ¶50,115 ], 791 F.Supp. 1450, 1454 D. Mont. 1992) aff'd [93-2 USTC ¶50,430 ], 999 F.2d 1387 (9th Cir. 1993). As explained above, while some of the factors exist in this case, the court finds no evidence that the property was transferred in anticipation of a suit. Furthermore, the transfer was recorded, and Helen Hoffmann occupies the premises as a tenant at will. Consequently, the Hoffmann children hold legal title to the property in question.

28. 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 Wendell Hoffmann is indebted to the United States in the amounts of $13,953.51 and $4,771.36 for the fraud penalties assessed for the years 1983 and 1984 respectively, less applicable credits, plus interest, and other additions according to law accruing after October 5, 1987;

B. That Helen Hoffmann does qualify as an "innocent spouse" and is relieved of liability for the tax assessment made against Wendell Hoffmann and Helen Hoffmann for unpaid federal income taxes for the calendar years 1981, 1982, 1983 and 1984.

C. That the defendant Rowene McCollum (formerly Rowene Visser), Saundra Dymock, Tamera Hoffmann, Rodney M. Hoffmann, Marlin W. Hoffmann, and Gary F. Hoffmann, hold legal title to the real property described in paragraph 16 of the complaint;

D. That the conveyance of the real property described in paragraph 16 of the complaint to defendants, Rowene McCollum (formerly Rowene Visser), Saundra Dymock, Tamera Hoffmann, Rodney M. Hoffmann, Marlin W. Hoffmann, and Gary J. Hoffmann, was not a fraudulent conveyance;

C. That the defendants Rowene McCollum (formerly Rowene Visser), Saundra Dymock, Tamera Hoffmann, Rodney M. Hoffmann, Marlin W. Hoffmann, and Gary J. Hoffmann do not hold title to the real property described in paragraph 16 of the complaint as the nominees of the defendant, Helen Hoffmann.

D. That the liens by virtue of the assessments set forth in paragraph 12 of the complaint, on all property belonging to Helen Hoffmann, are invalid.

E. That the federal tax liens against the defendant Helen Hoffmann may not be foreclosed upon the real property described in paragraph 16 of the complaint.

F. All parties to bear their own costs.

¹ The government excluded consideration of fraud penalties assessed for the years 1983 and 1984 from the motion.

² A "reasonable person" is defined as one of ordinary intelligence, or of superior intelligence if the taxpayer had superior intelligence. Shea [86-1 USTC ¶9150 ], 780 F.2d at 565 quoting Restatement (Second) of Agency §9, comment d (1958).

 

 

[93-1 USTC ¶50,230] United States of America, Plaintiff v. Robert H. Peterson, Hoang Loan Mai Peterson, individually and as Trustee of "Mai Irrevocable Trust", Mai Irrevocable Trust, Ronnie S. Peterson, Larry L. Peterson, Susan J. Peterson, Robert L. Peterson, and Federal National Mortgage Association, Defendants

U.S. District Court, West. Dist. Wash., at Seattle, C91-1522C, 2/11/93

[Code Secs. 6321 and 6325 ]

Lien for taxes: Revocation of release of lien: Fraudulent conveyance.--The IRS was entitled to enforce its tax liens against a family's home that had been fraudulently conveyed by the husband to the wife and children and, subsequently, by the wife and children to a trust. In addition, the IRS was entitled to revoke the erroneous release of its tax lien that followed the taxpayers' discharge in bankruptcy and to reinstate the lien. The transfers were fraudulent because they were not supported by adequate consideration, the taxpayers were indebted to the United States when the transfers were made, and the conveyances rendered the husband and wife insolvent when they were made. The evidence submitted by the IRS was sufficient to satisfy the authentication requirements, was admissible, and was not contradicted by the taxpayers. Although the taxpayers' personal tax liability was discharged in bankruptcy, the secured tax lien was not affected by the bankruptcy proceedings and was not time-barred.

Diane E. Tebelius, 800 5th Ave., Seattle, Wash. 98104, Thomas J. Sawyer, Emily J. Kingston, W. Carl Hankla, Department of Justice, Washington, D.C. 20530, for plaintiff. Gary John Krohn, Treece, Richdale, Malone, Corning & Abbott, 1718 N.W. 56th St., Seattle, Wash. 98107, Paul Eugene Simmerly, 11911 NE First St., Bellevue, Wash. 98005, Robert H. Peterson, 120 N. 49th St., Seattle, Wash. 98103, for defendant. (For Peterson, R.H.) James Dudley Porter, 800 5th Ave. , Seattle , Wash. 98124 , for defendant (For Fed. Natl. Mortgage Assn.)

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

COUGHENOUR, District Judge:

This Matter is before the Court on the government's Motion for Summary Judgment, Defendants' Cross-Motion for Summary Judgment, and defendants' "Objection to or in the Alternative and Motion to Strike Evidence Not Authenticated and Affidavits Not Based Upon Personal Knowledge." Neither party requests oral argument. After reviewing all submitted documents and being fully informed, the Court finds as rules as follows:

I. Factual Background

The government is suing to enforce tax liens against defendants' home. Defendants Mr. and Mrs. Peterson incurred the federal tax liabilities underlying these liens between tax years 1978 and 1981. According to the government, the tax liabilities stem from the Petersons' investment in an abusive tax shelter. As a result of their involvement in the tax shelter, the Petersons were audited by the IRS, which led to the issuance of a statutory notice of deficiency.

The Petersons petitioned the United States Tax Court, challenging the validity of the deficiency notice. However, the Petersons twice failed to appear at hearings in that action, and their petition was dismissed. The Tax Court also found the Petersons liable for taxes and penalties for the tax years 1978 through 1981. Nevertheless, the Petersons again failed to pay, despite notice and demand by the IRS. This resulted in statutory liens arising against all of the Petersons' property pursuant to 26 U.S.C. §6321 , and Notices of Federal Tax Liens were recorded with the King County Auditor. Together, these notices listed unpaid balances of about $87,700.

On August 15, 1977, the Petersons acquired their home on which the government now seeks foreclosure. On November 9, 1984, Mr. Peterson quitclaimed his interest in the property to his wife and children, with the only purported consideration being "love and affection." Third Declaration of W. Carl Hankla, Exhibit M. The conveyance evidently left Mr. Peterson insolvent, as his post-conveyance assets consisted only of an old car and "his two hands." Deposition of Ronald Peterson, p. 28, 11. 2-11.

The following year, Mr. Peterson decided that it would be financially prudent to place the house in a trust. Accordingly, on November 12, 1985, five quitclaims deeds were executed from Mrs. Peterson and each of the Petersons' four children to the Mai Irrevocable Trust. The only consideration for these five quitclaim deeds was "mutual best and financial survival." Third Declaration of W. Carl Hankla, Exhibits N through R. These conveyances were made while the Petersons' Tax Court case was pending.

On March 15, 1989, the Petersons filed a petition under Chapter 7 of the Bankruptcy Code, listing tax shelter promissory notes and federal tax liabilities as their only debts. Because the Petersons received a discharge on June 28, 1989, the government acknowledges that the Petersons no longer have any personal liability for those taxes pursuant to 11 U.S.C. §§523 and 524. The IRS, however, erroneously released its liens on the Peterson's home on the basis of the bankruptcy discharge. In the course of preparing for this litigation, the IRS was informed by the Department of Justice that the liens had been erroneously released. To correct its error, the IRS revoked the releases and reinstated the liens in accordance with §6325(f)(2) of the Internal Revenue Code. Accordingly, the liens are currently in effect.

II. Analysis

A. The Fraudulent Conveyances

The government asks the Court to set aside as fraudulent the 1984 conveyance of the Peterson home to Mrs. Peterson and their four children and the 1985 conveyance of that same property from Mrs. Peterson and the children to the Mai Irrevocable Trust.

Under the Uniform Fraudulent Conveyance Act, codified at RCW 19.40 et seq., fraud may be presumed upon a showing of the transferor's post-conveyance insolvency coupled with a lack of adequate consideration. RCW §19.40.040. The purpose of this statute is clear: to prevent debtors from insulating assets from creditors by simply transferring nominal ownership to friends and loved ones. Here, the United States argues that the 1984 conveyance was fraudulent because: (1) Mr. Peterson was indebted to the United States when the conveyance was made; (2) the conveyance was made without adequate consideration; and (3) the conveyance rendered him insolvent.

There is no dispute that the Petersons were indebted to the United States for failure to pay all taxes due during the tax years 1978 through 1981. First Declaration of W. Carl Hankla, Exhibits B through E (Form 4340 Certificates of Assessments and Payments). And because a debt for federal taxes is deemed to arise at the time when the tax return is due, it is of no import that the tax liability assessments here were not made until after the first conveyance of the Peterson home. See , United States v. Voorhies [81-2 USTC ¶9710 ], 658 F.2d 710, 714 (9th Cir. 1981).

Next, the Court finds that there was insufficient consideration to support the purported conveyance. Indeed, Mr. Peterson admitted in his deposition that he received no consideration for transferring his interest in the house to his wife and children during the following exchange:

Q: Was [sic] any money changed hands? Did your children pay any money to you for those--

A: How would you do that with your family? Jesus Criminy. It isn't like, you know, dealing with some outside person.

Deposition of Ronald H. Peterson, p. 32, 11. 7-11. Moreover, the deed Mr. Peterson signed states that the transfer was made only for "love and affection." Third Declaration of W. Carl Hankla, Exhibit M.

Lastly, the Court concludes that the government has established that Mr. Peterson was rendered insolvent by the 1984 conveyance. Again, the Court relies on Mr. Peterson's deposition testimony:

Q: When you transferred the property into the trust, did you have any other assets at that point to speak of?

A: Oh, the car I guess. I kept my two hands. That's my assets.

Q: Did you transfer any other assets into the trust?

A: No. It wasn't--why would you want to put your car in trust? That's practically all the assets I have. I have no insurance. I have no life insurance. I have no bank account. I have no secret hoard. No, I haven't got anything. My life is my family.

Deposition of Ronald H. Peterson, p. 28, 11. 2-11.

Because the evidence indicates that all three elements of a fraudulent conveyance are satisfied, the government has established a prima facie case that the 1984 conveyance was fraudulent under RCW 19.40 et seq., the applicable law at that time. ¹

Similarly, the Court finds that the 1985 conveyance of the Peterson home from Mrs. Peterson and her children to the Mai Irrevocable Trust was fraudulent under RCW 19.40 et seq. First, Mrs. Peterson's quitclaim deed is fraudulent because it rendered her insolvent at a time when she, like her husband, was indebted to the United States for back taxes. See, First Declaration of Revenue Officer John Atkinson, paragraph 4 (an IRS Revenue Officer could find no assets belonging to Mrs. Peterson other than the home). Second, the conveyance was made without adequate consideration because the deed lists as consideration only "[m]utual best interest and financial survival," and it bears a stamp indicating that no money changed hands and no excise taxes were paid on the transfer. Third Declaration of Carl Hankla, Exhibit N.

As for the purported transfers of the children's interests in the house to the trust, the Court concludes that these were also invalid because their purported titles were created as a result of the 1984 fraudulent transfer from Mr. Peterson. Insofar as the 1984 conveyance is invalid, the Peterson children had no valid interests to transfer. Moreover, as with Mrs. Peterson, the children did not receive adequate consideration for executing the quitclaim deeds, as the deed recited that the sole consideration was "mutual best interest and financial survival."

In sum, the Court finds that the government has established a prima facie case that the 1984 and 1985 conveyances were fraudulent under RCW 19.40 et seq.

B. The Petersons' Arguments

In opposition to the government's motion for summary judgment and in their cross-motion for summary judgment, the Petersons do not present evidence to contradict the government's position that the 1984 and 1985 conveyances were fraudulent. Instead, the Petersons rely on a variety of collateral arguments. The major ones are discussed in turn.

First, the Petersons challenge the evidentiary value of the government's exhibits submitted to support its motion for summary judgment. In their "Objection to or in the Alternative and Motion to Strike Evidence Not Authenticated and Affidavits Not Based Upon Personal Knowledge," the Petersons ask the Court not to consider most of the documents filed by the United States . Subsequent to the Petersons' motion, however, the government submitted certified copies of the notices of federal tax liens, the tax court docket sheet, the various deeds relevant to these motions, and the revocation of release of lien documents. These documents, which satisfy the authentication requirements of Federal Rules of Civil Procedure 44(a) and 56(e), are clearly admissible evidence, and therefore may be considered by the Court on summary judgment. Likewise, the Petersons' contention that the declarations submitted by the government are inadmissible is misplaced, as they fully conform with the requirements set forth in Federal Rule of Civil Procedure 56(e).

Second, the Petersons argue that res judicata bars this action because the government failed to assert its claims during the bankruptcy proceedings in 1989. However, the Supreme Court has unambiguously held that a creditor's lien on real property passes through Chapter 7 bankruptcy unaffected, and that a secured creditor is not required to take any action in a bankruptcy proceeding to preserve its secured claim. Dewsnup v. Timm, 112 S. Ct. 773, 778 (1992). Accordingly, the Petersons' res judicata argument lacks merit.

Third, the Petersons contend that this action to set aside the 1984 and 1985 conveyances is time barred because it was not brought within the four-year statute of limitations under the UFCA, RCW 19.40 et seq. This argument is also without merit. It is well settled that the United States as a sovereign entity is not bound by statutes of limitation or laches when enforcing its rights. United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414, 416 (1940); United States v. Wurdemann [81-2 USTC ¶9757 ], 663 F.2d 50, 51 (8th Cir. 1981).

In sum, the Petersons have not adduced any evidence to contradict the government's showing that the 1984 and 1985 conveyances were fraudulent under the UFCA. There is also no legal or factual basis for the Petersons' cross-motion for summary judgment. The Court therefore GRANTS the government's motion for summary judgment and DENIES defendants' cross-motion for summary judgment. In addition, the Petersons' "Objection to or in the Alternative and Motion to Strike Evidence Not Authenticated and Affidavits Not Based Upon Personal Knowledge" is without merit and is DENIED. Finally, because the government has been granted summary judgment, its pending motion to strike jury demand is STRICKEN as MOOT.

The United States is directed to submit a proposed order to enforce its liens against the Petersons and this judgment within thirty (30) days of the date of this Order. The government's request for costs is DENIED.

The Clerk of this Court is directed to enter judgment pursuant to this Order, and to send copies of this Order and the judgment to counsel for the plaintiff, and to defendants, appearing pro se herein.

¹ Washington adopted the Uniform Fraudulent Transfer Act effective July 1, 1988. RCW 19.40.010. At the time of the 1984 and 1985 conveyances, however, fraudulent conveyances were governed by the Uniform Fraudulent Conveyance Act, which thus applies here. RCW 19.40 et seq.

 

 

[94-1 USTC ¶50,023] United States of America , Plaintiff v. Arthur D. Dalessandro, Defendant

U.S. District Court, Mid. Dist. Pa., 3:CV-93-00105, 12/10/93

[Code Secs. 6321 , 6322 and 6323 ]

Assessment and collection: Tax liens: Real estate: Deeds: "Purchaser": Recording.--The government's tax lien did not attach to an individual's alleged interest in real estate because, under state (Pennsylvania) law, the individual had conveyed his interest to his son before the government made assessments. It did not matter that the deed had not been recorded because the government had possession of the deed for investigative purposes two years before it began making assessments and, thus, had actual notice of the prior conveyance to the son. The son's interest was first in time, and therefore first in right, even though he was not a "purchaser" under Code Sec. 6323 because of his failure to record the deed.

John A. Morano, Jr., 309 Federal Bldg., Scranton, Pa. 18501, Shannon L. Hough, Angelo A. Fratarelli, Department of Justice, Washington, D.C. 20530, for plaintiff. Mark A. Ciavarella, Jr., 63 West River St. , Wilkes-Barre , Pa. 18702 , for defendant.

OPINION

MUIR, District Judge.

I. Introduction.

This action was commenced by the United States on January 22, 1993, by the filing of a complaint. Count I of the complaint seeks to reduce to judgment certain federal tax assessments made against Arthur D. Dalessandro for the taxable years 1982, 1983, 1984, 1985, 1986, 1987, 1988, and 1989. Count II seeks to foreclose existing federal tax liens on shares of stock and real estate owned by Dalessandro. Defendant stipulated to the assessments and the amounts due to the Government which form the basis of Count I, liquidated the shares of stock and turned over the proceeds to the Government. However, Defendant contends that the tax liens do not attach to the real estate located at 19 Fordham Road in Wilkes-Barre , Pennsylvania . Defendant's contention is the only issue in this matter. We set the matter for trial.

On August 10, 1993, counsel for both parties met with the Court in Williamsport at the final pre-trial conference. At that conference the parties stated that there were no disputed facts and that they wished the matter submitted to the Court on a Case Stated. On August 18, 1993, pursuant to this Court's order of August 11, 1993, counsel for both parties stipulated that the principal balance owed by Dalessandro as of August 17, 1993, was $32,710.99, the interest balance owed by Dalessandro as of June 30, 1993, was $21,186.39, and the daily accrual interest rate for the third quarter of 1993 was seven percent.

On September 1, 1993, counsel for both parties filed a Case Stated, supported by respective memoranda of law. On September 29, 1993, we issued an order stating that the Case Stated was deficient in that no date of delivery to David Dalessandro of the deed from Defendant and his wife was stipulated to by the parties. The parties were given the opportunity to stipulate to the date of delivery, or, in the alternative, stipulate that there was no delivery of the deed to David Dalessandro.

On October 20, 1993, the parties filed a statement that they were unable to stipulate as to whether there was a valid delivery of the deed from Defendant and his wife to David Dalessandro. On November 23, 1993, we held a hearing to determine whether delivery of the deed occurred and, if so, the date thereof. The following are the Case Stated adopted by this Court and the Court's additional findings of fact, discussion, and conclusions of law.

II. Case Stated.

1. The Defendant and Florence G. Dalessandro were married on September 30, 1956.

2. On May 28, 1969, the Defendant and Florence G. Dalessandro purchased real estate situated at 19 Fordham Road , Oakwood Park , Wilkes-Barre , PA (" Fordham Road property").

3. On April 2, 1980, the Defendant filed a Complaint in Divorce against Florence G. Dalessandro in the Court of Common Pleas of Luzerne County, PA (Case No. 1070-C of 1980).

4. On March 30, 1985, the Defendant and Florence G. Dalessandro executed a deed ("Deed") conveying their entire interest in the Fordham Road property to their son, David Dalessandro.

5. The conveyance referred to in the preceding paragraph was done in consideration of one dollar ($1.00).

6. On May 13, 1986, a hearing was held concerning the divorce proceedings described in paragraph 3.

7. During the hearing described in the preceding paragraph, the Deed was admitted into evidence as Court Exhibit 35-A.

8. Subsequent to the hearing described in paragraph 6, the Court of Common Pleas of Luzerne County ordered the Deed held in escrow pending the resolution of the divorce proceedings described in paragraph 3.

9. The Deed was not recorded prior to the court's order described in the preceding paragraph.

10. The Court of Common Pleas of Luzerne County retained possession of the Deed until August 31, 1989.

11. On August 31, 1989, the Court of Common Pleas of Luzerne County released the Deed to the custody of Alan Celusniak, Special Agent, Internal Revenue Service.

12. On May 26, 1992, the Defendant and Florence G. Dalessandro entered into a stipulation resolving the divorce proceedings described in paragraph 3.

13. On May 26, 1992, Court of Common Pleas Judge Richard D. Grifo released the Deed to the Defendant.

14. On June 22, 1992, and again on October 26, 1992, counsel for the Defendant wrote to Special Agent Alan Celusniak of the Internal Revenue Service and requested that the Deed be returned to the Defendant.

15. The Internal Revenue Service has been unable to locate the Deed.

16. To date, no documents evidencing the conveyance described in paragraph 4 have been recorded.

17. On September 9, 1991, a delegate of the Secretary of the Treasury made the following assessments against the defendant for federal income taxes, accrued interest and penalties according to law:

                      Type of  Amount of Tax

Taxable Period          Tax      Assessed      Interest    Penalty

1983 ................  1040     $  9,691.00   $11,596.95  $10,644.48

1984 ................  1040     $ 12,939.00   $12,382.88  $12,661.44

1985 ................  1040     $ 28,275.00   $21,232.77  $24,754.39

 

18. Proper notice and demand for payment was made on September 9, 1991, the date of assessment.

19. On December 16, 1991, a delegate of the Secretary of the Treasury made the following assessments against the Defendant for federal income taxes, accrued interest and penalties according to law:

                        Type of  Amount of Tax

Taxable Period            Tax      Assessed     Interest    Penalty

1986 ..................  1040      $7,968.00    $5,016.87  $2,906.45

1987 ..................  1040      $6,446.00    $3,827.87  $3,472.48

 

20. Proper notice and demand for payment was made on December 16, 1991, the date of assessment.

21. On August 31, 1992, a delegate of the Secretary of the Treasury made the following assessments against the defendant for federal income taxes, accrued interest and penalties according to law:

                        Type of  Amount of Tax

Taxable Period            Tax      Assessed     Interest    Penalty

1988 ..................  1040      $8,117.00    $4,313.05  $2,435.00

1989 ..................  1040      $1,341.00    $  127.04  $  268.00

 

22. Proper notice and demand for payment was made on August 31, 1992, the date of assessment.

23. As of January 8, 1993, the Defendant was indebted to the Plaintiff in the amount of $186,899.17, which sum includes interest and penalties that have accrued under law since the respective dates of assessment.

24. On June 16, 1992, the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239221173) in the amount of $214,813.02, representing unpaid income taxes for the years 1982 through 1985, against the defendant in the office of the Prothonotary in Luzerne County , PA.

25. On June 23, 1992, the plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239222099) in the amount of $15,891.32, representing unpaid income taxes for the year 1986, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

26. On July 22, 1992, the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239225387) in the amount of $13,746.35, representing unpaid income taxes for the year 1987, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

27.On July 24, 1992, the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239224835) in the amount of $29,637.67, representing unpaid income taxes for the years 1986 and 1987, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

28. On October 5, 1992, the Plaintiff recorded a Notice of Federal Tax Lien (lien serial number 239231558) in the amount of $16,601.09, representing unpaid income taxes for the years 1988 and 1989, against the Defendant in the Office of the Prothonotary in Luzerne County , PA.

29. On or about January 27, 1993, the Defendant paid $148,436.53 towards the liability referenced in paragraph 23.

30. The funds used to make the payment described in the preceding paragraph were derived from the sale of the shares of stock described in paragraph 21 of the Complaint.

31. The Defendant is currently indebted to the Plaintiff in the amount of $55,694.68, plus interest and penalties which will continue to accrue until the entire liability is paid.

III. Additional Findings of Fact.

1. In March, 1985, Defendant Dalessandro delivered to his son, David Dalessandro, who was then 21 years of age a deed to the Fordham Road property.

2. The deed at that time was signed only by Defendant Dalessandro.

3. On March 30, 1985, David Dalessandro took the deed to his mother, who had an interest in the property, obtained her signature, took her to a notary before whom she acknowledged her signature, and redelivered the deed to his father, Defendant Dalessandro, a Judge, to do with it whatever remained to be done.

IV. Discussion.

This opinion addresses the issue of whether the federal tax liens that arose in 1991 and 1992 attached to the property that was allegedly conveyed to Defendant Dalessandro's son in 1985. The IRS had notice of the conveyance and the son's interest in the property on August 31, 1989.

The Government contends that, since the deed to the Fordham Road property was not recorded as required by 21 Pa.C.S. §444 (1970), the conveyance was fraudulent and void. The Government argues that because of lack of recordation its tax liens attached to the property on the date of the first assessment. 21 Pa.C.S. §444 provides:

All deeds and conveyances . . . shall be recorded in the office for the recording of deeds where such lands, tenements or hereditaments are lying and being, within ninety days after the execution of such deeds or conveyance, and every such deed and conveyance that shall at any time after the passage of this act be made and executed in this commonwealth, and which shall not be proved and recorded as aforesaid, shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for a valid consideration, or any creditor of the grantor or bargainor in said deed of conveyance . . . .

The Government asserts that the conveyance was void as to the Government, a creditor of Defendant Dalessandro, because of the grantee's failure to record the deed within 90 days of the date of conveyance.

The Government contends that David Dalessandro is not protected as a "purchaser" of the Fordham Road property under Section 6323(a) of the Internal Revenue Code, 26 U.S.C. §6323(h)(6) (1989). Section 6323(h)(6) defines a "purchaser" as "a person who, for adequate and full consideration in money or money's worth, acquires an interest in property which is valid under local law against subsequent purchasers without actual notice." Therefore, the Government concludes that the interest, if any, which he acquired was not valid under Pennsylvania law against subsequent purchasers without actual notice since it was not perfected as against bona fide purchasers under Pennsylvania law.

Dalessandro argues that the United States may not claim the protection of either Section 351 or section 444 of the Pennsylvania recording statute. Section 351 provides:

All deeds, conveyances, contracts, and other instruments of writing . . . shall be recorded in the office for the recording of deeds in the county where such lands, tenements, and hereditaments are situate. Every such deed, conveyance, contract, or other instrument of writing which shall not be acknowledged or proved and recorded, as aforesaid, shall be adjudged fraudulent and void as to any subsequent bona fide purchaser or mortgagee or holder of any judgment, duly entered in the prothonotary's office of the county in which the lands, tenements, or hereditaments are situate, without actual or constructive notice unless such deed, conveyance, contract, or instrument of writing shall be recorded, as aforesaid, before the recording of the deed or conveyance or the entry of the judgment under which such subsequent purchaser, mortgagee, or judgment creditor shall claim.

21 Pa.C.S. §351 (1970)

Dalessandro asserts that under Pennsylvania law the tax liens cannot attach to the Fordham Road property since the property was conveyed to his son prior to the filing of the tax liens and the IRS had knowledge of this conveyance two years prior to the filing of its tax liens. Dalessandro contends that on August 31, 1989, IRS Special Agent Celusniak obtained possession of the deed to further his investigation of Dalessandro and thus had notice of the prior conveyance of the property to David Dalessandro.

It is well settled that once a tax assessment is made, a lien arises in favor of the United States "upon all property and rights to property whether real or personal, owing to such person." 26 U.S.C. §§6321 -22. This Court must look to state law to determine whether the taxpayer, Defendant Dalessandro, has a property interest, and then to federal law to determine the priority of competing interests. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-14 (1960).

At the hearing to determine whether there was a delivery of the deed from Defendant and his wife to their son, David Dalessandro, David Dalessandro testified that in March, 1985, Defendant Dalessandro delivered to him a deed to the Fordham Road property; that the deed was signed by only his father; that he took the deed to his mother, obtained her signature, took her to a notary public for acknowledgment of the deed, and returned the deed to his father, Defendant Dalessandro, to complete the processing of the transaction.

We are of the view that a valid delivery of the deed to the Fordham Road property occurred on March 30, 1985 from Defendant and his wife to David Dalessandro.

Both parties agree that the federal tax liens arose subsequent to the conveyance of the Fordham Road property. The parties disagree on the application of the notice provisions of the Pennsylvania recording statutes. Section 351 expressly provides a notice exception which states that the statute does not protect those subsequent purchasers who had actual or constructive notice of an unrecorded deed. United States v. Purcell, 798 F. Supp. 1102, 1115 (E.D. Pa. 1991) (O'Neill, J.), aff'd per curiam, 972 F.2d 1334 (1992). The Pennsylvania Supreme Court has held the notice provision is implicit in section 444 . Smith v. Miller, 296 Pa. 340, 344, 145 A. 901 (1929).

In Purcell, the United States brought an action to reduce to judgment federal tax assessments made against a taxpayer. In that case, Defendant Purcell conveyed his interest in real property to Gingras for valuable consideration. The IRS, through its revenue agents, had notice of the conveyance prior to the filing of tax liens against Purcell. Purcell, 798 F. Supp. at 1109. Gingras waited five years until he recorded his deed. Id.

The parties in Purcell disagreed whether section 351 or section 444 applied. The court stated that it did not need to resolve the issue of which statute applied because "the government had notice of the transfer of Mr. Purcell's interest in the . . . property to [the purchaser] before the Internal Revenue Service assessed Mr. Purcell and filed its tax liens. The Government therefore is disqualified from the protection of either Pennsylvania recording act." Id. at 1115. The court held that the purchaser's interest in the real property was superior to the IRS's lien Id.

Under Pennsylvania law, either actual or constructive notice of a prior deed may defeat a subsequent claimant's interest in property. The Pennsylvania Supreme Court has stated that "a fundamental rule construing recording laws generally [is] that actual notice of an unrecorded instrument, if received by a subsequent lienor before his interest attaches, is equivalent to the constructive notice which the recording provides." In Re 250 Bell Road, 479 Pa. 222, 227 n.l, 388 A.2d 297, 299-300 n.1 (1978). The Government contends that focusing on the question of whether the IRS had notice of the conveyance prior to its federal tax assessments against Dalessandro is irrelevant. The Government argues that the real issue is whether Defendant Dalessandro "had, on the date the federal tax liens against him arose, a sufficient interest in [the Fordham Road property] to which the tax liens would attach."

On August 31, 1989, the IRS, through Special Agent Celusniak, took possession of the deed to the Fordham Road property. On September 9, 1991, the IRS made its first assessments against Dalessandro for federal income taxes. Clearly, the IRS had notice of the conveyance of the Fordham Road property by Dalessandro to his son, prior to the date that the tax assessments against Dalessandro arose.

The fact that David Dalessandro was not a "purchaser" under 26 U.S.C.A. §§6323(a) & (h)(6) is not determinative in this matter. Under Pennsylvania law the conveyance of the Fordham Road property to David Dalessandro was valid and prior in time to the federal assessment. At the time the taxes were assessed Defendant Dalessandro had no interest in the Fordham Road property.

The federal rule of priority is first in time, first in right. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81 (1954). We are of the view that as a matter of state law David Dalessandro's interest is valid against the IRS interest.

V. Conclusions of Law.

1. On March 30, 1985, a valid delivery of the deed to the Fordham Road property from Defendant and his wife to David Dalessandro occurred.

2. The IRS had notice of the conveyance of Dalessandro's interest in the Fordham Road property prior to the date that the tax assessments arose.

3. David Dalessandro's interest in the Fordham Road property was first in time to that of the IRS because the tax lien arose after Defendant Dalessandro deeded his interest in the property to his son.

4. The United States 's federal tax liens did not attach to the Fordham Road property.

An appropriate order will be entered.

ORDER

Judgment is entered in favor of Defendant Arthur D. Dalessandro and against the United States as to the validity of its claimed tax liens against the property known as 19 Fordham Road , Oakwood Park , Wilkes-Barre , Pennsylvania , in accordance with our opinion.