Fraudulent
Conveyances Part1 page5
United States of America
, Plaintiff(s) v. Edward Dean Christensen, et al., Defendant(s)
U.S.
District Court, Dist.
Utah
, Cent. Div., Civ. 86-C-1041-S, 10/4/90, 751 FSupp 1532
[Code Secs.
6321 and 7403
]
Lien for taxes: Creation of lien: Property subject to lien:
Fraudulent conveyance: Foreclosure.--Federal tax liens for taxes
owed and statutory additions were valid against an individual who failed
to file federal income tax returns for six consecutive years.
Conveyances of a residence and farm to relatives were fraudulent under
state law and were set aside. Federal tax liens attached to the
fraudulently conveyed property. The
U.S.
was granted judgment foreclosing its tax liens on the fraudulently
conveyed property and was authorized to sell such property to satisfy
the tax liens and additions to tax.
MEMORANDUM DECISION
SAM, District Judge:
The above-entitled matter
came before the court for trial on April 20, 1990. The court, having
considered the evidence presented at trial, the pre-trial and post-trial
briefs submitted by the parties, and being fully advised in this matter,
enters the following decision containing the court's factual findings
and legal conclusions.
FACTS
This is a civil action by
the United States to reduce to judgment the federal tax assessments
against Edward Dean Christensen, to set aside the conveyance of two
parcels of real property from defendant Edward Dean Christensen to
defendants Farrell H. Christensen, Cheryl Lynn Christensen, Steven Wayne
Christensen and Linda Ann (Christensen) Silver, and to foreclose the
federal tax liens against the interest of Edward Dean Christensen in
those parcels of real property. The first parcel of real property is
located at 387 North 300 East,
Richfield
,
Utah
. On that parcel of real property is located a house. Edward Dean
Christensen has resided in that house for 20 years. That parcel of real
property is sometimes referred to herein as "the Residence."
The second parcel of real property is approximately 40 acres in size and
is used for farming. That parcel of real property is sometimes referred
to herein as "the Farm."
Edward Dean Christensen is
the brother of defendant Farrell H. Christensen and the uncle of
defendants Steven Wayne Christensen, Cheryl Lynn Christensen and Linda
Ann (Christensen) Silver. Edward Dean Christensen is not married and has
no children.
Edward Dean Christensen
failed to file a federal income tax return for the years 1972, 1973,
1974, 1975, 1976 and 1977.
On January 18, 1978, Edward
Dean Christensen was convicted in the United States District Court for
the Eastern District of Washington on three counts of willful failure to
file federal tax returns for the years 1972, 1973 and 1974.
On November 22, 1982, the
United States Tax Court entered a decision determining Edward Dean
Christensen's federal tax liabilities for the years 1972, 1973, 1974,
1975, 1976 and 1977 to be as follows:
Tax Tax and
Period Penalties
1972 ......................................................... $13,486.69
6,743.35 3
1973 ......................................................... $22,024.63
11,012.31 3
1974 ......................................................... $16,629.20
8,314.60
1975 ......................................................... $22,178.98
5,544.75 1
1,108.95 2
1976 ......................................................... $14,603.41
3,650.85 1
730.17 2
1977 ......................................................... $ 427.00
106.75 1
21.35 2
------------------------
1 26 U.S.C., §6651(a) penalty.
2 26 U.S.C., §6653(a) penalty.
3 26 U.S.C., §6653(b) penalty.
On June 29, 1948, Louise
Christensen, (Edward Dean Christensen's mother) conveyed the Residence
to Edward Dean Christensen by Warranty Deed. The legal description of
that property is:
Commencing at the northeast
corner of Lot 4, Block 7, Plat "D", Richfield City Survey, and
running thence South 214.5 feet; thence West 214.5 feet; thence North
214.5 feet; thence East 214.5 feet to the place of beginning, containing
approximately 1.05 acres, situated in the Southwest quarter of the
Northeast quarter of Section
25 , Township 23 South, Range 3 West of the Salt Lake Base
and Meridian.
On May 10, 1957, Edward
Dean Christensen recorded a Warranty Deed with the Sevier County, Utah
Recorder conveying the Residence to Edward Dean Christensen and Clair M.
Christensen as joint tenants. On November 6, 1968, Clair M. Christensen
and Patricia M. Christensen recorded a Warranty Deed conveying their
interest in the Residence to Edward Dean Christensen.
On January 7, 1975, Edward
Dean Christensen recorded a Quit Claim Deed with the Sevier County
Recorder conveying his interest in the Residence to Edward Dean
Christensen, Trustee. On that same date, Edward Dean Christensen also
recorded a document entitled "Declaration of Trust"
("Declaration (A)").
Declaration (A) named as
beneficiaries of the trust Clair M. Christensen (Edward Dean
Christensen's brother), Merle C. Mortensen (Edward Dean Christensen's
aunt) and Una E. Christensen (Edward Dean Christensen's sister).
Declaration (A) provided that Edward Dean Christensen retained "the
power and the right at anytime during [his] lifetime to amend or revoke
in whole or in part the trust . . . without the necessity of obtaining
the consent of any beneficiary and without giving notice to any
beneficiary."
Declaration (A) also
reserved the right to Edward Dean Christensen to (a) place a mortgage or
other lien upon the property, and (b) "to collect any rental or
other income which may accrue from the trust property and, in [his] sole
discretion as trustee, either to accumulate such income as an addition
to the trust being held hereunder or pay such income to [himself] as an
individual."
By Warranty deed recorded
with the Sevier County Recorder on September 5, 1979, Edward Dean
Christensen, Trustee, conveyed the Residence to Eagle Trust.
By Warranty Deed dated
April 15, 1981 and signed by Edward Dean Christensen, Trustee, Eagle
Trust conveyed the Residence to Steven Wayne Christensen and Linda Ann
Christensen. That deed was not recorded until December 14, 1981. The
deed also directed that the real property tax notices be sent to Edward
Dean Christensen.
At the time the Residence
was conveyed to Steven Wayne Christensen and Linda Ann Christensen, both
of them were minors. Both were informed by their father, Clair
Christensen, that the Residence was being given to them on the
understanding that Edward Dean Christensen could continue to reside at
the Residence for as long as he desired.
Defendants Steven Wayne
Christensen and Linda Ann (Christensen) Silver did not pay defendant
Edward Dean Christensen any sum in exchange for the transfer to them of
the Residence.
From January 7, 1975 until
the present, Edward Dean Christensen has resided at the Residence.
Edward Dean Christensen has
never paid any rent to his niece and nephew for his occupation of the
Residence. The niece and nephew have never undertaken any act which
could be termed inconsistent with Edward Dean Christensen's ownership of
the Residence.
On June 4, 1974, Edward
Dean Christensen and Clair M. Christensen, as purchasers under a Uniform
Real Estate Contract, filed a Notice of Contract listing the Farm with
the Sevier County Recorder. The legal description of the Farm is:
The Northwest Quarter of
the Northwest Quarter of Section
16 , Township 23 South, Range 2 West, Salt Lake Meridian,
containing 40 acres. Together with all and singular tenements,
hereditament and appurtenances belonging or in any wise appertaining
thereto.
By Warranty Deed recorded
with the Sevier County Recorder on January 7, 1975, Edward Dean
Christensen transferred his interest in the Farm to himself as Trustee.
On that same date a Declaration of Trust ("Declaration (B)")
was recorded with the Sevier County Recorder by Edward Dean Christensen
listing the Farm. The beneficiaries of that trust were Don C.
Christensen (Edward Dean Christensen's brother) and Una Christensen
(Edward Dean Christensen's sister). Declaration (B) had identical terms
to Declaration (A). Thereafter, by Quit Claim Deed signed on February
28, 1975, but not recorded with the Sevier County Recorder until
September 6, 1977, Clair M. Christensen quit-claimed his interest in the
Farm to Edward Dean Christensen as trustee.
By Warranty Deed recorded
with the Sevier County Recorder on September 5, 1979, Edward Dean
Christensen, Trustee, conveyed the Farm to Eagle Trust.
By Warranty Deed signed
April 15, 1981, but not recorded with the Sevier County Recorder until
December 14, 1981, Eagle Trust conveyed the Farm to Farrell Christensen
and Cheryl Lynn Christensen. The deed was signed by Edward Dean
Christensen, Trustee. The deed directed that the real property tax
notices be sent to Edward Dean Christensen.
Defendants Farrell
Christensen and Cheryl Lynn Christensen did not pay Edward Dean
Christensen any sum in exchange for the transfer to them of the Farm.
Farrell Christensen is the brother and Cheryl Lynn Christensen the niece
of Edward Dean Christensen.
From January 7, 1975 until
the present, Edward Dean Christensen has had the use of the Farm,
including the receipt of rental payments for the use of the Farm.
Edward Dean Christensen has
never paid any rent to his brother or niece in connection with his use
of the Farm. Farrell Christensen and Cheryl Lynn Christensen have never
taken any action which could be termed inconsistent with Edward Dean
Christensen's ownership of the Farm.
DISCUSSION
Tax
Lien
Section
6321 of the Internal Revenue Code of 1986 (26 U.S.C.)
provides:
If any
person liable to pay any tax neglects or refuses to pay the same after
demand, the amount (including any interest, additional amount, addition
to tax, or assessable penalty, together with any costs that may accrue
in addition thereto) shall be a lien in favor of the United States upon
all property and rights to property, whether real or personal, belonging
to such person.
Accordingly, if, as here,
after assessment, notice and demand for payment, a taxpayer fails or
refuses to pay outstanding federal taxes, a lien attaches to all
property and rights to property belonging to him or her. Glass City
Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267-268 (1945).
"The statutory
language 'all property and rights to property', appearing in §6321
* * * is broad and reveals on its face that Congress meant to
reach every interest in property that a taxpayer might have." United
States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1985).
"Stronger language could hardly have been selected to reveal a
purpose to assure the collection of taxes." Glass City Bank
[45-2 USTC ¶9449 ], 326
U.S.
at 267.
The tax lien, created
automatically upon the assessment of the tax, continues until the tax
liability is satisfied or the lien becomes unenforceable by reason of
lapse of time. 26 U.S.C., §6322
.
A court proceeding to
obtain a judgment for unpaid tax assessments must be instituted within
six years after assessment, or prior to the expiration of any period for
collection agreed upon in writing by the taxpayer and the Internal
Revenue Service. 26 U.S.C., Sec.
6502(a) . The earliest assessment in the present case was
made against Edward Dean Christensen on March 21, 1983. Accordingly,
this action was timely filed for all taxable periods in suit. Utah Code
Ann., §78
-12-26(3) provides that an action to set aside a fraudulent
conveyance is barred if not brought within three years of the transfer.
There is no question that this action was not brought within that period
of time. However, case law is overwhelming in support of the proposition
that the United States is not bound by a state statute of limitations
unless Congress so provides. Congress has remained silent. See United
States v. Becker [65-1 USTC ¶9309 ], 241 F.Supp. 283 (D. Az. 1965)
(specifically ruling that the
Utah
statute of limitations does not bind the
United States
). It is clear, therefore, that the present action is not barred by the
Utah
statute of limitations.
As a result of the judgment
previously entered against Edward Dean Christensen as a sanction for his
failure to comply with the United States' discovery, the United States
is entitled to judgment in the amount of $165,101.75, plus statutory
additions and interest according to law.
Fraudulent
Conveyance
The relevant statutory
provision defining a fraudulent conveyance is found in Utah Code Ann., §25
-6-5 (1989). That section provides in relevant part:
(1) A
transfer made or obligation incurred by a debtor is fraudulent as to a
creditor, whether the creditor's claim arose before or after the
transfer was made or the obligation was incurred, if the debtor made the
transfer or incurred the obligation:
(a) with
actual intent to hinder, delay or defraud any creditor of the debtor;
.
. .
(2) To
determine "actual intent" under Subsection (1)(a),
consideration may be given, among other factors, to whether:
(a) the
transfer or obligation was to an insider;
(b) the
debtor retained possession or control of the property transferred after
the transfer;
(c) the
transfer or obligation was disclosed or concealed;
(d)
before the transfer was made or obligation was incurred, the debtor had
been sued or threatened with suit;
(e) the
transfer was of substantially all the debtor's assets;
(f) the
debtor absconded;
(g) the
debtor removed or concealed assets;
(h) the
value of the consideration received by the debtor was reasonably
equivalent to the value of the asset transferred or the amount of the
obligation incurred;
(i) the
debtor was insolvent or became insolvent shortly after the transfer was
made or the obligation was incurred;
(j) the
transfer occurred shortly before or shortly after a substantial debt was
incurred; and
(k) the
debtor transferred the essential assets of the business to a lienor who
transferred the assets to an insider of the debtor.
Equity will act to set
aside conveyances of land if they were fraudulently made to defeat the
collection of taxes.
United States
v. Phillips, 59 F.Supp. 1006, 1008 (S.D.
Ga.
1945).
In interpreting and
applying the law of fraudulent conveyances, the Utah Supreme Court in Dahnken,
Inc. of Salt Lake City v. Wilmarth, 726 P.2d 420, 423 (Utah 1986),
stated that "[a]lthough actual fraudulent intent must be shown to
hold a conveyance fraudulent . . . its existence may be inferred from
the presence of certain indicia of fraud or badges of fraud."
The courts have considered
the following to be among the badges of fraud:
1. insolvency of the
grantor;
2. inadequate
consideration;
3. the transfer of all of
the debtor's property;
4. the transfer was made in
anticipation of a suit or liabilities;
5. a close relationship
between the transferor and transferee;
6. the conveyance was not
made in ordinary course of business;
7. failure to record the
conveyance;
8. the retention of
possession by the transferor;
9. the reservation of an
interest or benefit by the grantor;
10. the security given by
the transferor is in excess of the debt;
11. secrecy or haste in the
transfer;
12. the state taxes or real
property taxes are paid by transferor.
See
generally, Dahnken, supra; Givan v. Lambeth, 351 P.2d 959, 962 (
Utah
, 1960); and United States v. Jones [86-2 USTC ¶9832 ], 631 F.Supp. 57, 59-60 (W.D. Mo. 1986).
With respect to the federal
income taxes which accrued or were assessed prior to and following the
conveyances of the Residence and Farm, the intent of the defendant
Edward Dean Christensen to defraud the United States (as both an
existing and subsequent creditor) was established at trial through the
proof of many of the badges of fraud. The badges of fraud which
characterized the transfers at issue here are:
First, all of the
conveyances in question were made for no consideration whatsoever.
Second, the government's
evidence at trial demonstrated that Edward Dean Christensen had been
convicted of willful failure to file federal income tax returns on
January 18, 1978. The conveyances at issue soon followed. It can be
concluded that an attempt to place the Residence and the Farm beyond the
reach of the
United States
was the major motivation for those conveyances.
Third, the conveyances were
made by Edward Dean Christensen to near relatives, his brother, nieces
and nephew, on December 14, 1981, and had the effect of rendering Edward
Dean Christensen insolvent or unable to pay his existing debts.
Fourth, the fact that
Edward Dean Christensen has continued to live in the Residence and use
the Farm also evidenced his fraudulent intent in conveying the subject
property to his niece and nephew.
Fifth, the transfers
preceding the transfers to Edward Dean Christensen's relatives
demonstrate a pattern of transferring property to hinder collection of
Edward Dean Christensen's federal tax liabilities. The transfers to the
trusts were made simply to interpose a buffer between the
United States
and Edward Dean Christensen.
Lastly, Edward Dean
Christensen failed, at trial, to articulate credible reasons for making
the conveyances in the manner in which he did. The claim that Edward
Dean Christensen transferred the property to his brother, nieces and
nephew in lieu of making a will or for estate planning purposes does
not, in view of the circumstances surrounding the conveyances, convince
the court that this was anything other than an attempt to hinder, delay
and defraud his creditors, including the United States. The court
specifically finds that the conveyances in question are fraudulent under
Utah Code Ann., §25
-6-5 (1989).
Section
7403 of the Internal Revenue Code of 1986 (26 U.S.C.)
provides in pertinent part that:
(c) Adjudication
and Decree.--The court shall, after the parties have been duly
notified of the action, proceed to adjudicate all matters involved
therein and finally determine the merits of all claims to and liens upon
the property, and, in all cases where a claim or interest of the United
States is established, may decree a sale of such property, by the proper
officer of the court, and a distribution of the proceeds of such sale
according to the interest of the parties and of the United States.
.
. .
Conclusions
Having considered the
evidence and testimony of record, the court finds that the
United States
is the holder of federal tax liens in the total amount of $165,103.75,
plus statutory additions to tax according to law.
The conveyances of the
above-described parcels of real property by Edward Dean Christensen are
fraudulent within the meaning of Utah Code Ann., §25
-6-5 (1989), and are hereby set aside.
The federal tax liens of
the
United States
attach to the property owned by Edward Dean Christensen, which
specifically include the above-described parcels of real property.
Accordingly, the United
States of America is granted judgment against Edward Dean Christensen in
the amount of $165,103.75, plus additions and interest according to law.
The
United States
is granted judgment foreclosing its federal tax liens on the parcels of
real property described above.
The
United States
is authorized to sell the parcels of real property which are the subject
of this action and described herein at a Marshal's sale, with the
proceeds to be paid as follows:
First, the costs of this
action, including the costs of this sale;
Second, the
United States
, to the extent of its federal tax liens plus any statutory additions to
tax; and
Third, the remainder, if
any, to be paid to Edward Dean Christensen.
United States of America, Plaintiff v. Gordon D.
Sellner, Roberta D. Sellner, as spouse of Gordon D. Sellner and Trustee
for the Gordon D. Sellner Trust, Bill Anderson, Trustee for the Gordon
D. Sellner Trust, and the Gordon D. Sellner Trust, Defendants
U.S.
District Court,
Dist.
Mont.
,
Missoula
Div., CV 88-20-M-CCL, 8/1/90
[Code
Secs.
677 , 6321
, 7401
and 7403
]
Assessment of tax: Correctness of: Grantor trusts: Lien for taxes:
Property subject to: Fraudulent conveyance: Foreclosures.--The
amount of a tax assessment against an individual, who had not filed a
federal income tax return since 1973 and who ignored administrative and
judicial processes that would have provided him with an opportunity to
challege the validity of the deficiency assessments made against him,
was upheld. The individual was found to be in default for the amount of
assessments that gave rise to liens filed by the IRS. His motion to set
aside the default was denied. He did not respond to the action filed by
the IRS to reduce to judgment the unpaid federal income taxes until the
morning of trial. Although the introduction of certificates of
assessment established a prima facie case, the IRS introduced sufficient
evidence at trial to establish the current balance of the assessments. A
trust created by the individual was invalid. The individual and his wife
transferred all their assets to the trust, but did not treat the assets
any differently than before. Trust funds were commingled with personal
funds and there was no distinction between trust-related income or
expenses and the family's personal income and expenses. Consequently,
the trust was a fraudulent conveyance and was set aside. The IRS's
motion for a forced sale of all real property was denied, however. The
individual and his wife were equal owners in the subject real property,
but the tax liens attached only to the husband's interest in the
property. Foreclosure and sale were limited to the husband's interest in
the property.
MEMORANDUM AND ORDER
LOVELL, District Judge:
This matter was brought on
for trial before the court, sitting without a jury.
The
United States
filed a complaint February 16, 1988, against Gordon Sellner seeking.to
reduce federal tax assessments to judgment, to set aside an allegedly
fraudulent conveyance of real property to the Gordon D. Sellner Trust,
and to foreclose federal tax liens on a parcel of real property held in
trust by the Gordon D. Sellner Trust. The
United States
also named as a party Roberta Sellner, in her capacity as Gordon's
spouse and as Trustee for the Gordon D. Sellner Trust. The
United States
Marshals Service personally served the summons and complaint March 14,
1988, on Gordon and Roberta by delivering the papers to Roberta.
Although Roberta refused service, the Marshal dropped the summons and
complaint at her feet.
Gordon Sellner failed to
reply or make an appearance, and on June 1, 1988, the court entered his
default. Despite the fact that Gordon Sellner filed a document with the
court October 12, 1988, stating Mr. Ed Dobson had been appointed as
counsel, no motion to set aside the default was made until the morning
of trial, February 12, 1990. Gordon Sellner stated that he was totally
frustrated by the process and believed he had no alternatives, and
therefore he ignored the government's case against him. The court found
this an insufficient reason to set aside the default and therefore
denied the motion.
BACKGROUND
Gordon Sellner has failed
to file a federal income tax return since 1973. Consequently, the
Internal Revenue Service made assessments against Gordon Sellner for
unpaid tax liabilities for each of the taxable years 1974 through 1982.
In the spring of 1977, four years after Gordon Sellner had stopped
filing federal income tax returns, the Sellners executed a declaration
of trust which designated Roberta Sellner and a Mr. Bill Anderson as the
trustees of the Gordon Sellner Trust. On the same day the trust was
created, Roberta Sellner transferred all of her interest in their real
property to Gordon for $10.00 consideration. Two days later, Gordon
transferred all of his interest in the real property, including the
interest he had received from Roberta, to the trustees of the Gordon
Sellner Trust. In return, the trust paid Gordon $10.00. The following
day, Bill Anderson resigned as trustee and Gordon Sellner replaced him.
On October 1 and 21, 1985,
the Internal Revenue Service filed notices of federal tax liens against
Gordon Sellner with the Clerk and Recorder of Lake County, Montana. The
I.R.S. filed additional notices of federal tax liens on April 10, 1987,
against the Gordon Sellner Trust as agent, alter ego, nominee, and
transferee of Gordon Sellner. The liens applied to all property and
rights to property belonging to Gordon Sellner for the amount of unpaid
taxes, penalties, interest, and costs that may accrue.
The issues for the court to
decide at trial were: what was the amount of the tax assessment against
Gordon Sellner; could the United States levy against the property which
Gordon Sellner had transferred to the Gordon Sellner Trust because the
trust is invalid; and, if the Internal Revenue Service is allowed to
levy against the property transferred to the trust, what is the interest
of Roberta Sellner in the subject property.
AMOUNT
OF TAX ASSESSMENTS AGAINST GORDON SELLNER
At trial, plaintiff
United States
called Merrill Alling, an adviser with the Collection Unit of the
Internal Revenue Service, who testified as follows: Exhibits 1.1 through
1.10 are I.R.S. Forms 4340, Certificates of Assessments and Payments for
Gordon Sellner for individual tax returns for the tax years 1974 through
1982. The forms were prepared at Alling's request from computer
printouts produced at the
Ogden
,
Utah
, I.R.S. center. Attached to the forms is a certificate of official
record by the I.R.S. District Director certifying the forms are true
Forms 4340 which show the assessments and payments for Gordon Sellner
for tax years 1974 through 1982. The current balances as of February 12,
1990, for each of the tax years, including penalties and interest, were
as follows:
1974 .......................................................... $ 57,138.89
1975 .......................................................... $ 67,460.29
1976 .......................................................... $ 70,543.32
1977 .......................................................... $ 74,281.34
1978 .......................................................... $ 80,369.85
1979 .......................................................... $ 89,087.23
1980 .......................................................... $102,592.77
1981 .......................................................... $ 53,401.51
1982 .......................................................... $ 4,475.20
The total amount of tax
assessments on February 12, 1990, was $599,351.04. The forms show no
payment on the assessments has been made.
Exhibits 7 through 10 are
copies of the notices of federal tax liens filed by the Internal Revenue
Service with the Clerk and Recorder of Lake County, Montana. The
exhibits show the liens filed in 1985 and 1987 and that the amounts of
the liens were derived from the 4240 Forms (Certificates of Assessments
and Payments) for Gordon Sellner. Pursuant to the notice, the liens were
levied against all property belonging to Gordon Sellner as well as the
Gordon D. Sellner Trust as agent, alter ego, nominee, and transferee of
Gordon Sellner.
VALIDITY
OF THE TRUST
Following the evidence
introduced by the
United States
concerning the amount of tax assessments which the government seeks to
reduce to judgment, the
United States
offered evidence on its contention that the Gordon D. Sellner Trust was
an invalid trust created for the purpose of avoiding collection of taxes
owed by Gordon Sellner.
The
United States
called Mr. Bill Anderson, one of the original co-trustees of the Gordon
D. Sellner Trust, who testified as follows: Sellner often talked about
taxes and in 1977, Sellner approached
Anderson
with the idea of creating a trust.
Anderson
understood from Sellner that one of the reasons for the trust was to
avoid payment of taxes. On April 16, 1977,
Anderson
went to the Sellner house and together with Roberta Sellner, assisted in
creating the trust by becoming a trustee. Three days later,
Anderson
resigned as trustee because his wife did not want him involved in not
paying taxes.
On cross-examination,
Anderson
testified he, as well as his wife, had no knowledge about trusts; he had
never been called or referred to as a "straw man" during the
process of creating the trust; and that he didn't believe he was doing
anything illegal.
The United States then
called Gordon Sellner as an adverse witness who testified to the
following: He did not sign or file a tax form since 1974 because he
believed, among other things, that it compromised his constitutional
guarantees and that he did not believe in supporting certain acts which
the government funded, such as abortion. He formed a trust in lieu of a
will to protect his assets for his children so they would not have to
pay estate taxes. All property, real and personal, was placed in the
trust. He purchased the trust document package for $2,000 from the
Institute of Individual Religious Studies (IOIRS). Government's exhibit
4 is the Declaration of Trust signed by him, Roberta Sellner, and Bill
Anderson. It states the purpose of the trust is to maximize Gordon
Sellner's rights under the Constitution and to sustain his religious
beliefs, which include caring for his family. Although the Declaration
also included the following stated purpose and religious beliefs, he was
unsure of their meaning: "Luke 16:1-13, The parable of the
unfaithful steward; Luke 10:7, For the labourer is worthy of his
hire, and Mencius: for land laws, nothing is better than aids,
nothing is worse than taxes." Upon completion of the trust document
package, Sellner sent it to Mr. Peter R. Stromer, counsel for the
Institute
of
Individual Religious Studies
, who reviewed the documents and replied by letter that they had been
properly executed.
On March 23, 1988, each of
the members of the Sellner family who owned a beneficial interest in the
trust purported to transfer their interests to "Lord God" who
they believe to be the beneficial owner of all property in the trust
because Sellner had no faith in the court or the government. Sellner
admitted this transfer occurred one week after the government had served
the summons and complaint in this action.
After setting up the trust,
he viewed the real and personal property which had been transferred to
the trust not as his own but as belonging to somebody else. However, he
did not ask permission to use any of the property, nor did he treat the
property differently. The only difference was in his mind in that he had
peace of mind knowing his family would be provided for in the event of
his death. In return for transferring all property to the trust, he
received food, clothing, and living expenses from the trust.
On direct examination,
Gordon Sellner testified to the following additional statements: He did
not transfer any property or assets to the trust to make himself
insolvent nor did he intend to defraud anyone by the transfer. He was
concerned about how to provide for his family, especially his youngest
daughter who is mentally handicapped and who cannot care for herself. He
has no objection to paying income taxes but believed he did not make
enough money to require the filing of a return, and that in any event
the I.R.S. would file his returns for him.
Following the testimony of
Gordon Sellner, the parties stipulated to submitting the deposition
testimony of Roberta Sellner in lieu of her testifying at trial. The
deposition testimony of Roberta reflects the following: She became a
co-trustee of the Gordon Sellner Trust along with Bill Anderson. She
understood her duties and obligations were unchanged by the creation of
the trust. She opened a checking account in the name of the trust
shortly after its creation and deposited money that Gordon gave her. Any
bills which were related to operating the family home, like monthly
payments on the contract for deed to purchase the real property, light
bills, phone bills, and laundry soap were paid for out of the trust
account. After about two years, the trust account was closed for lack of
funds and all bills were paid out of the Sellner's personal checking
account. Trust funds and personal funds were not kept separate and no
accounting was ever made to separate the trust finances from personal
finances. If she received wages for services, she might pay federal
income taxes as long as they didn't undermine God's laws such as
supporting abortion. However, since she had not been employed after
1967, she has not been required to pay taxes and therefore has not
determined whether or not she would pay federal income taxes.
Although she was aware that
her husband had not filed federal income tax returns since 1974, she
never considered what action the Internal Revenue Service might initiate
to recover the unpaid taxes. She recalled reading a letter addressed to
Gordon from the I.R.S. giving notice of the amount of taxes her husband
was deficient in paying, but she did not consider it important. Although
she and her husband may have discussed the letter, they did not appeal
the amount of the deficiency or take any other action. Creating the
trust was not related to the deficiency notice in any way but rather was
a method of transferring all their personal belongings and real property
to the children.
The court then met in
chambers to consider the testimony of Valerie Sellner, the youngest
Sellner child, who is mentally handicapped. Defense counsel proposed
that the purpose of the testimony was to establish Valerie's dependency
on Roberta Sellner, on the theory that such dependency is an additional
factor for the court to consider in determining Roberta Sellner's
interest in the property, should the trust be declared invalid and the
I.R.S. be allowed to levy execution against Gordon Sellner's interest in
the Sellner property. It became apparent the witness was not competent
to testify because of her mental condition and the court so found after
taking notice of her condition. Thereupon, each side rested and the case
was deemed to have been submitted.
FINDINGS
OF FACT
1. Gordon Sellner has
failed to file federal income tax returns since 1974.
2. Gordon and Roberta
Sellner purchased certain property in
Lake County
,
Montana
, in 1971 on a contract for deed. The property is described as follows:
Front part W1/2 SW1/4 or
Tract 1, Section
29 , Township 23, Range 17, located in
Lake County
,
Montana
.
3. The Internal Revenue
Service sent and Gordon Sellner received a notice of deficiency which
included a notice of his right to contest the amount of the deficiency
through an appeal.
4. Gordon Sellner ignored
the notice of deficiency from the I.R.S.
5. The I.R.S. filed notices
of federal tax liens on October 1 and 21, 1985, and April 10, 1987, with
the Clerk and Recorder in
Lake County
,
Montana
, where the subject property exists. The notices filed in 1985
identified Gordon Sellner as the taxpayer against whom the I.R.S. filed
the liens, while the notices filed in 1987 identified the Gordon Sellner
Trust as the agent, alter ego, nominee, or transferee of Gordon Sellner.
The amounts of the liens were derived from the certificate of
assessments and payments for which Gordon had been previously notified
by the I.R.S.
6. The
United States
filed suit against Gordon Sellner, and Roberta Sellner as spouse and as
trustee of the Gordon Sellner Trust, on February 16, 1988. The complaint
alleged the specific amount of the assessments made by the I.R.S.
against Gordon Sellner for each year beginning with tax year 1974
through tax year 1982 and the specific real property upon which the
I.R.S. had placed liens. The complaint stated the purpose of the suit
was to reduce the federal tax assessments to judgment, set aside the
fraudulent conveyance of real property, and to foreclose the federal tax
liens on that property.
7. The
United States
Marshals Service personally served the summons and complaint on Gordon
and Roberta Sellner [sic] March 21, 1988, by exhibiting and delivering
the same to Roberta Sellner, his wife, a person of suitable age and
discretion residing with him.
8. Gordon Sellner failed to
answer, respond, or otherwise appear in the case and the court entered
his default June 1, 1988.
9. Gordon Sellner did not
move to set aside the default until the morning of the trial February
12, 1990, and provided no good cause for the motion. Judgment by default
against Gordon Sellner and in favor of the
United States
should therefore be entered.
10. The amount of federal
income tax deficiency, including taxes, penalties and interest to
February 12, 1990, is $599,351.04 as established by the form 4340
Certificates of Assessments and Payments together with the testimony of
Merrill Alling, custodian of records for the I.R.S.
11. On April 16, 1977, four
years after Gordon Sellner decided not to file federal income tax
returns, Roberta Sellner transferred all of her interest in the above
described property to Gordon Sellner for $10.00 consideration. Using a
trust package supplied by the
Institute
of
Individual Religious Studies
, Bill Anderson and Roberta Sellner executed a "Declaration of
Trust" and created the Gordon D. Sellner Trust on April 16, 1977.
Gordon Sellner then transferred all of his interest in real and personal
property, including the interest previously transferred to him by
Roberta, to the Gordon D. Sellner Trust for $10.00 consideration on
April 18, 1977. Bill Anderson resigned from the trust April 19, 1977,
and Gordon Sellner replaced him as co-trustee with Roberta Sellner.
12. After transferring all
their property to the trust, neither Gordon nor Roberta treated the
property any differently than before. Although a separate checking
account was kept for two years, trust funds were commingled with
personal funds and there was no distinction between trust-related
income/expenses and the Sellners' personal income/expenses.
13. The Gordon D. Sellner
Trust is a fraudulent conveyance and should be set aside.
14. Once the trust is set
aside, Gordon Sellner and Roberta Sellner are owners in equal shares of
the subject property against which the I.R.S. has placed a lien for
non-payment of federal income taxes by Gordon Sellner.
CONCLUSIONS
OF LAW
1. Where the court has
entered default of a defendant on the grounds defendant has failed to
appear or otherwise respond, the court will set aside the default where
defendant shows mistake, inadvertence, surprise, or excusable neglect.
Fed. R. Civ. P. 60(b)(1). A party seeking relief based on excusable
neglect must plead and prove it. Cessna Finance Corp. v. Bielenberg
Masonry Contracting, Inc., 715 F.2d 1442 (10th Cir. 1983). Here,
Gordon Sellner's justification--that he was totally frustrated by the
process--is insufficient justification for the court to set aside his
default. After default was entered, Gordon Sellner had several
opportunities to move to set aside default but he failed to do so, even
though he had counsel four months prior to trial. Although default
judgments are not favored, a workable system of justice does not allow
for parties to appear at their pleasure.
Id.
at 1444.
2. In the absence of an
administrative or judicial-level contention by the taxpayer that
assessments reflected by the Certificates of Assessments are incorrect,
the assessments are prima facie correct and therefore adequate evidence
of the amount of the taxpayer's tax liability. United States v.
Voorhies [81-2 USTC ¶9710 ], 658 F.2d 710, 715 (9th Cir. 1981). Here,
the only taxpayer with standing to challenge the validity of the
assessments was Gordon Sellner, who chose not to attack the assessments
until after default had been entered. See Al-Kim, Inc. v. United
States [79-2 USTC ¶9631 ], 610 F.2d 576, 579 (9th Cir. 1979)
("Neither the Internal Revenue Code nor the decisions of this court
support any right of third parties to contest the merits of a tax
assessments.") Gordon Sellner chose not to seek an administrative
appeal of the amount of tax the I.R.S. claimed he owed when it sent the
notice of deficiency and he continued to ignore the claims for
deficiency after the I.R.S. filed liens against his property. Finally,
Gordon Sellner did not respond, except on the morning of trial, to the
civil action filed by the
United States
to reduce to judgment the unpaid federal income taxes.
Defendant Gordon Sellner
argues that although a presumption of correctness attaches to the
assessment, and although the introduction of the certificates of
assessments establish a prima facie case, the government must support
the assessments with a minimal evidentiary foundation which Defendant
contends the government did not do. United States v. Stonehill [83-1
USTC ¶9285 ], 702 F.2d 1288 (9th Cir. 1983), cert.
denied, 465
U.S.
1079 (1984), Weimerskirch v. Commissioner [79-1 USTC ¶9359 ], 596 F.2d 358 (9th Cir. 1979). However, Stonehill
and Weimerskirch did not involve a taxpayer who had ignored the
administrative and judicial processes that would have provided an avenue
to attack the validity of the assessments. Here, the court found Gordon
Sellner in default for the amount of assessments which gave rise to the
liens filed by the I.R.S. The government then introduced sufficient
evidence at trial to establish the current balance of the assessments.
3. The trust created by
Gordon Sellner is an invalid trust. Sellner used forms and materials
purchased from the Institute of Individual Religious Studies 1
which have been uniformly rejected by the courts as a sham. Neely v.
United States [85-2 USTC ¶9791 ], 775 F.2d 1092 (9th Cir. 1985). The facts
here are strikingly similar to Neely. In Neely, the
taxpayers transferred the title of all their assets to a trust while
retaining the use and enjoyment of the assets. The court found this to
be a sham transaction because it had no economic effect other than to
create income tax losses.
Id.
at 1094. Moreover, the court found that a trust arrangement may not be
used to turn the personal activities of the family into trust activities
with family expenses becoming expenses of trust administration.
Id.
Here, the Sellners admitted they did not treat their property
differently after transferring it to the trust. Roberta further admitted
that common household expenses were paid for out of the trust account
until the bank closed the account for lack of funds; thereafter, the
trust funds were commingled with personal funds and no accounting was
ever made to distinguish the use of funds.
Defendants contend the
government failed to show there was any fraudulent transfer and as such
the transfer to the trust is valid under
Montana
law. Defendant's argument is without merit. Where there is lack of
consideration, a threat of litigation, and the debtor retains the
property, the "badges of fraud" are present and the conveyance
should be set aside. Montana National Bank V. Michels, 631 F.2d
1260 (
Mont.
1981).
4. The trust having been
set aside, it is clear that Gordon and Roberta Sellner are equal owners
in the subject real property. It is equally clear that the tax liens
attach only to Gordon Sellner's interest in the property. In such a
situation, the court may order the entire property sold and the proceeds
of the sale distributed according to the interests of the parties even
where one party is a non-delinquent spouse protected from creditors by a
state-imposed homestead exemption. United States v. Rodgers [83-1
USTC ¶9374 ], 461 U.S. 677 (1983). Here, the property is
estimated to be worth $39,000, while Gordon's liability to the I.R.S. is
nearly $600,000. If the court orders a forced sale, the I.R.S. and
Roberta Sellner would share equally in the proceeds after the Marshal's
fees and the balance for the contract for deed are paid. The I.R.S.
would then have a deficiency judgment against Gordon for the remaining
balance of unpaid taxes.
In determining whether to
authorize a sale under 26 U.S.C. §7403
where interest of a nondelinquent third party is involved,
the court has limited discretion which "should be exercised
rigorously and sparingly, keeping in mind the government's paramount
interest in prompt and certain collection of delinquent taxes."
Id.
at 711. Some of the factors a court should consider under Rodgers
are: (1) the extent to which the United States' financial interests will
be prejudiced if relegated to a forced sale of partial interest; (2)
whether the nonliable party with a separate interest had a legally
recognized expectation that the property would be subjected to forced
sale by the delinquent taxpayer (excepting proceedings under §7403
or eminent domain actions); (3) the likely prejudice to the
third party both in personal dislocation costs and in undercompensation
if the entire property is sold; and (4) the relative character and value
of the nonliable and liable interests held in the property: e.g.,
if the nonliable party has 99% of the interest, there would be little
reason to authorize the sale.
Id.
at 709-711. See also United States v. Gibson [87-2 USTC ¶9494 ], 817 F.2d 1406 (9th Cir. 1987) (While section
7403 does not require the court to authorize a forced sale
under absolutely all circumstances, discretion is almost always limited
to the consideration of the four factors set out in Rodgers where
the independent interest of third parties are involved. Moreover, where
the court relied exclusively upon the prejudice taxpayer's spouse would
suffer, the court abused its limited equitable discretion.).
In the instant case the
court is faced with an extremely difficult set of considerations.
Roberta Sellner has not been employed outside the home since 1967. She
has three children living at home, one of whom has a severe mental
handicap which requires full-time care. The only assets appear to be the
small parcel of land on which the Sellners reside in a trailer house.
Roberta owns coequally with Gordon all their assets.
The government produced no
evidence at trial that suggests Roberta had a legally recognized
expectation that the property would be subjected to forced sale by her
husband's actions. The evidence did show, however, that the idea to
create the trust started with Gordon, who sought out and executed the
so-called IOIRS trust documents.
On the other side of the
equation stands the government which has a paramount interest in the
collection of taxes. A forced sale of only a portion of the property may
not produce a significant recovery of the taxes owed by Gordon.
Moreover, to allow Gordon to escape responsibility for avoiding several
years of taxes would send the wrong message to others who believe they
can circumvent their duty to pay taxes by using sham transactions such
as the IOIRS trust.
The court having weighed
and considered all of these factors, the appropriate remedy is to allow
the I.R.S. to foreclose its lien and to sell at public sale all right,
title, and interest of Gordon D. Sellner. Accordingly,
IT IS HEREBY ORDERED that
default having been entered June 1, 1988, against Gordon Sellner, the
clerk is directed to enter judgment in favor of the
United States
and against Gordon Sellner in the amount of $599,351.04.
IT IS FURTHER ORDERED that
the transfer of property by Roberta Sellner to Gordon Sellner dated
April 27, 1977, deed file number 233838 of the records of Lake County,
Montana, and the transfer of property by Gordon Sellner to the Gordon
Sellner Trust, also dated April 27, 1977, deed file number 233839 of the
records of Lake County, Montana, are hereby set aside.
IT IS FURTHER ORDERED that
the government's motion for a forced sale of the entire property is
DENIED. Foreclosure and sale is limited to the interest of Gordon D.
Sellner in and to the real property. The government shall file with the
court a proposed decree of foreclosure on or before August 31, 1990.
The clerk is directed
forthwith to notify counsel of entry of this order.
1
It is ironic that the acronym for this organization, (IOIRS) suggests
the eventual consequences of using such documents to avoid taxes, namely
the purchaser will find himself saying, "I owe the I.R.S."
United States of America
, Plaintiff-Appellee v. Elmer L. Denlinger, Myrle Denlinger, and
Church
of
St. Matthew
, Defendants-Appellants
(CA-7),
U.S. Court of Appeals, 7th Circuit, 91-3183, 12/29/92, Affirming a
District Court decision, 90-2
USTC ¶50,432
[Code Sec.
6321 ]
Tax liens: Ownership of property: Fraudulent conveyances: Third
party.--The foreclosure on and sale of the taxpayer's residence to
satisfy tax liens were not barred because the taxpayer fraudulently
conveyed his property to a religious organization in an attempt to
defeat the IRS's interest as a creditor. In addition, the taxpayer's
ex-wife had no interest in the property since state law (
Indiana
) abolished dower and curtesy and the property was transferred to the
religious organization. The third-party transfer was not intended to
defraud his ex-wife, so it was not voidable as to her. The transfer was
voidable as to the IRS because the intent was to defraud the IRS.
Fraudulent intent was inferred from the timing of the transfer, the fact
that income tax returns were incomplete or not filed, and the fact that
the taxpayer and his ex-wife continued to live at the property after the
transfer.
Before CUMMINGS and MANION,
Circuit Judges, and ZAGEL, District Judge. 1
ZAGEL, District Judge:
Elmer L. Denlinger, a
chiropractor, filed (in 1977) a tax return for the year 1975 and wrote
in only his name, occupation, filing status (married, filing separately)
and the names of dependents. He objected to giving any other
information. He listed neither income nor tax due for 1975. The record
does not disclose any return filed for 1976, 1977, 1978 or 1979.
Denlinger evidently paid no income tax from 1975 through 1979. The
Internal Revenue Service ("I.R.S.") asserted deficiencies for
those years. Denlinger sought review in the Tax Court, but failed to
appear for the trial. The Tax Court upheld the deficiencies, and the
I.R.S. assessed taxes, penalties and interest. On October 30, 1987, the
I.R.S. filed notices of federal tax liens against Elmer Denlinger's home
and land in
Elkhart
,
Indiana
.
The
United States
went to court to reduce the assessments to judgment and to foreclose the
liens. To foreclose, the district court had to set aside a transfer of
property. The district court granted this relief and did so on summary
judgment. We review its decision de novo. Rush v. McDonald's Corp.,
966 F.2d 1104, 1110 (7th Cir. 1992).
The property came to
Denlinger by quitclaim deed from his mother. Although he was married to
Myrle Denlinger at the time of transfer, his wife's name was not
included on the deed. Nonetheless, the Denlingers lived on the property,
paying real estate taxes and utility bills. On March 9, 1976, Elmer
Denlinger transferred the property to the Life Science Church which was
located on the property. The transfer was made absent consideration.
After a while, the church changed its name to the White Light Church of
Jesus the Christ. Then after some more time, that church transferred the
property to the
Church
of
St. Matthew
on December 27, 1983. Despite these transfers, the Denlingers continued
to live on the property, paying the bills and the real estate taxes
attributable to this property. Through all of this time, Elmer Denlinger
owed federal income taxes, a proposition he did not challenge in
district court.
The property was subjected
to one other form of transfer. This tax case was filed in 1986 and
effectively lost by the Denlingers and the
Church
of
St. Matthew
when the district court granted summary judgment on July 27, 1990. Some
months later, Elmer and Myrle Denlinger divorced. The state court
divorce decree, entered by agreement of both Denlingers, awarded the
property to Myrle Denlinger. Supposedly, only Myrle Denlinger continued
to reside on the property after the divorce. Yet the record does not
disclose that Elmer Denlinger ever changed his residence. On June 7,
1991, when the district court granted final judgment to the
United States
, it noted, quite correctly, that the divorce decree "does not
alter the impact of the federal tax lien on that real estate or the
court's . . . determination with respect to foreclosure." On the
day of transfer the lien and the right to foreclose accompany the
property exactly as does the earth within its boundaries. And the lien
has priority. J.D. Court, Inc. v. United States [83-2
USTC ¶9454 ], 712 F.2d 258, 260-61 (7th Cir. 1983).
Elmer Denlinger does not
fight the judgments based on the I.R.S. assessments, but Myrle Denlinger
and the
Church
of
St. Matthew
are fighting the foreclosure here, as they did below. Judge Miller found
that Myrle Denlinger had no interest in the property and that the
transfers to the Church were fraudulent. He was right to do so, and we
affirm.
The basic rules are simple.
State law determines what interest, if any, a taxpayer has in property. Aquilino
v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 513 (1960). Tax liens are
effective against every interest in property accorded a taxpayer by
state law. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-21 (1985). A court may
require sale of a property to enforce a lien. United States v.
Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 682-83 (1983).
Myrle Denlinger argues that
she has an interest in the property. Whatever interest she has
diminishes the interest that Elmer Denlinger (or the Church) would have.
Her claim always lacked promise because her name never appears in the
record of title and
Indiana
courts regard record title as the highest evidence of ownership, not
easily defeated. Knightstown Lake Property Owners Assoc., Inc. v. Big
Blue River Conservancy Dist., 383 N.E.2d 361, 366 (Ind. Ct. App.
1978). This is the rule everywhere in
America
. Rufford G. Patton, American Law of Property §17.34 (A. James
Casner ed., 1952 & Supp. 1977). A non-record claim of title, i.e.,
a claim of equitable title, must be proved by the person asserting it. Aircraft
Acceptance Corp. v. Jolly, 230 N.E.2d 446, 518 (Ind. Ct. App. 1967).
At one time Myrle Denlinger did not think she had any interest in the
property. At deposition she said:
Q. Did you file a vow of
poverty also:
A. No. Because I own
nothing anyway.
Q. You had no property of
your own?
A. I have nothing. Well,
the car's in my name now.
She
obviously attached a great deal of significance to ownership of
record--she equated having her name on the title with having an
ownership interest in the property. By her own testimony, Myrle
Denlinger defeats any argument that she believed she had an
interest in the property.
Her views, though, do not
control the matter. Many people have interests in property when they
think they do not, and it is often the Internal Revenue Service that
first informs them of this fact. Whatever interest she has can arise
only from the facts that (1) Elmer Denlinger acquired and owned the
property while they were married and (2) she and her husband always
resided on the property. The two facts are too little.
Indiana
recognizes tenancy by the entirety but only where, unlike here, the deed
conveys to both husband and wife. Citizens Nat'l Bank of
Whitley
County
v. Stasell, 408 N.E.2d 587, 592 (Ind. Ct. App. 1980), reh'g
denied, 415 N.E.2d 150 (Ind. Ct. App. 1980). The rule is not new.
Chandler
v. Cheney, 37 Ind. 391, 394-95 (1871). Dower would work for
Myrle Denlinger, but the Indiana Legislature abolished dower and
curtesy.
Ind.
Code Ann. §29
-1-2-11 (Burns 1989). Furthermore, an
Indiana
statute allows a husband to convey property he owns in his own name
without the consent or signature of his wife--an act which extinguishes
any right the wife may have in the property by virtue of marriage.
Ind.
Code Ann. §29
-1-2-3.1 (Burns 1989). Here, Elmer Denlinger did make such a
conveyance. Consequently, without dower, there is no way Myrle Denlinger
can establish any interest in the property. And, in
Indiana
, she is without dower.
The
Church
of
St. Matthew
claims record title and the full interest in the property. Under
Indiana
law, this interest can be defeated if the property was conveyed
"with the intent to hinder, delay or defraud creditors or other
persons of their lawful . . . debts," in which case, the conveyance
"shall be void as to the persons sought to be defrauded."
Ind.
Code Ann. §32
-2-1-14 (Burns 1989). Of course, there is no evidence and no
claim that the church conveyance was intended to defraud Myrle
Denlinger, so it is not voidable as to her.
The issue still remains,
however, whether the conveyance to the Church was intended to defraud
the government, so that it is voidable as to the I.R.S. Proof of
fraudulent intent need not be made by direct evidence under
Indiana
law. Nader v. Commissioner [63-2 USTC ¶9730 ], 323 F.2d 139, 140-41 (7th Cir. 1963); Heaton
v. Shanklin, 18 N.E. 172, 172 (
Ind.
1888).
Indiana
courts have regarded certain actions as badges of fraud and the
concurrence of several of them as a critical circumstance. One badge of
fraud is the transfer of property when a suit is pending or expected.
Arnold
v. Dirrim, 398 N.E.2d 442, 446-47 (Ind. Ct. App. 1979). Another
is a transfer which renders the debtor insolvent or greatly diminishes
his estate. Jackson v. Russell, 533 N.E.2d 153, 155 (Ind. Ct.
App. 1989), cert. denied, 494
U.S.
1004 (1990). So, too, is a transfer where the transferor retains the
benefit and control of the property, as well as a transfer for little or
no consideration.
Jackson
v. Farmers State Bank, 481 N.E.2d 395, 406 (Ind. Ct. App. 1985);
Arnold, 398 N.E.2d at 447; Russell, 533 N.E.2d at 155. The
concurrence of such badges is said to "create . . . an overwhelming
presumption of fraud" or to "raise . . . a strong inference of
fraudulent intent." Arnold, 398 N.E.2d at 446-47; Jackson,
481 N.E.2d at 406.
Each of these badges is
pinned to the conveyance that Judge Miller found fraudulent. The
transfer to the Life Science Church was made near the time that the 1975
tax and the 1975 tax return were due, a return which when filed must
have been known by Elmer Denlinger to be an invitation to legal action
by the I.R.S. There was no consideration for the conveyance. He lived on
the property, never leaving it. His control is further shown by the fact
that when the
Life
Science
Church
changed its name to the White Light Church of Jesus the Christ, it was
Elmer Denlinger who filed an affidavit to secure the change of title.
Elmer Denlinger admitted that during 1975 and 1976 he transferred
essentially all of his property and right to property to others,
emptying his estate. On this record, Judge Miller found that no
"reasonable trier of fact could infer that Mr. Denlinger's
intention was anything other than fraudulent," that he intended
"to defraud creditors by the transfer of the Lake Property"
and that "no evidence . . . would support a contrary
inference."
In fact, no innocent
explanation for any of these badges of fraud is offered. Where all
circumstantial evidence points to fraudulent intent, at least some of it
has to be explained away. Neither summary judgment nor directed verdict
can be avoided by simply saying, "nevertheless, it is not so."
The Denlingers apparently are asking this Court, as they did the
district court, to eschew summary judgment simply because motive and
intent are material. We cannot. Rush, 966 F.2d at 1109. Indeed,
the opposite outcome is warranted. Because the Denlingers "fail[]
to indicate any motive or intent to support [their] position" of
innocent conveyance, McMillian v. Svetanoff, 878 F.2d 186, 188
(7th Cir. 1989), the judgment is
AFFIRMED. 2
1
The Honorable James B. Zagel, District Judge of the United States
District Court for the Northern District of Illinois, is sitting by
designation.
2
There is a question of substitution of parties. On September 23, 1991,
Elmer Denlinger died of gunshot wounds. At oral argument, we were told
that the president of the
Life
Science
Church
, now the White Light Church of Jesus the Christ, had been charged with
a crime in connection with this death. Myrle Denlinger seeks to
substitute herself for her divorced husband. She could do so as his
personal representative or heir. We ordered that she and the five
children of Elmer Denlinger identify the parties in interest to Elmer's
estate by December 20, 1991. Only Myrle Denlinger responded, and her
response is nothing more than a reassertion of arguments of her superior
interest already rejected on appeal. Myrle Denlinger has presented no
facts to show that she is either an heir under a will or a personal
representative by appointment. Accordingly, we deny her motion to
substitute parties.
United States of America
, Plaintiff v. Jay Rode, Judith Rode, Jay Rode II, Jack Rode and Jeff
Rode, Defendants
U.S.
District Court, West.
Dist.
Mich.
, So. Div., G87-844-CA1, 6/27/90, 749 FSupp 1483
[Code Secs.
61 , 162
, 170
, 446
, and 6653
]
Who is the taxpayer: Reconstruction of income: Fraud: Penalties.--Bingo
proceeds were fraudulently received by the taxpayers under the guise
that they were raising funds for sham churches. The amount of proceeds
included in the taxpayers' income was estimated by the court, which
rejected IRS estimates. Income from the sale of equipment, however, was
not included in the taxpayers' income since the IRS failed to establish
how much should be included. Deductions for charitable contributions,
rental expenses, and the costs of renovating a building were disallowed
due to a lack of evidence and to witnesses who lacked credibility. A
penalty for fraudulently failing to report bingo proceeds was imposed
against the taxpayers.
[Code Sec.
6321 ]
Lien for taxes: Fraudulent conveyance.--A conveyance of farmland
by parents to their sons was rejected as a fraudulent attempt to avoid
an IRS tax lien, having been made at a time when the parents knew of a
U.S. Tax Court judgment against them and knew of further IRS audits of
their income. The sons made no payments on notes that they allegedly
drafted to pay for the farm, and documents setting the terms of the sale
were postdated by over a year. In consequence, foreclosure of a federal
tax lien against the farm was allowed.
OPINION
INTRODUCTION
GIBSON, District Judge:
In this action, the
United States
seeks to reduce to judgment federal income tax assessments for the tax
years 1977, 1978 and 1980 against the defendants Jay and Judith Rode. 1
The government also seeks to set aside, as a fraudulent conveyance, the
transfer of a farm located at
1566 Ten Mile Road
,
Sparta
,
Michigan
from Jay and Judith Rode to their sons, defendants Jay Rode II, Jack
Rode and Jeff Rode, and to foreclose its federal tax lien on the
property. Following a bench trial commencing on March 27, 1990 and
concluding on March 28, 1990 and pursuant to Rule 52(a) of the Federal
Rules of Civil Procedure, the Court makes the following findings of fact
and conclusions of law.
FINDINGS
OF FACT
1.
1980 TAX YEAR
Beginning in 1976 and
continuing through the early to mid-1980s, the taxpayers operated bingo
games. The Rode family initially operated these games in
Grand Rapids
,
Michigan
from 1976 to 1979. Starting in 1980, they moved their bingo operations
to
Portland
and
Salem
,
Oregon
.
These games were originally
operated in
Michigan
under the guise of the
Universal
Life
Church
. At that time, the Universal Life Church of Modesto, California enjoyed
tax-exempt status under the Internal Revenue Code of the
United States
. 2
Due to that status, the church was entitled to bingo licenses under
Michigan
law. Defendant Jay Rode, upon the representation that he was a minister
associated with this church, received the necessary licenses to conduct
bingo in
Michigan
. These licenses were subsequently revoked by the Commissioner of
Lottery when it was learned that Jay Rode falsely represented that his
church was associated with the
California
church. This revocation was upheld when Jay Rode sought judicial review
of the Commissioner's decision. Universal Life Church, Inc. v.
Commissioner of Lottery, 96
Mich.
App. 385, 292 N.W.2d 169 (1980).
After the revocation of the
Michigan
licenses, defendant Jay Rode, representing himself as a director of fund
raising activities for the
Universal
Life
Church
, sought and received a bingo license from the Oregon Department of
State. In mid-February, the Rodes began operating bingo games in
Salem
. They also commenced bingo operations in
Portland
no later than March of 1980. Both games were operated under the guise of
the
Universal
Life
Church
. Sometime in 1981, the taxpayers began operating their games under the
guise of the
Science
Christians
United
Truth
Church
. In the mid-1980s, they began to conduct their games under the guise of
the First Family Life Christian Church.
There was extensive
testimony from defendant Jeff Rode 3
at trial concerning the Oregon bingo operations. Jeff Rode was
responsible for the day-to-day management of the
Salem
bingo games after his arrival in
Oregon
in October of 1980. His sister managed the
Portland
bingo operations. However, both of them reported to their father,
defendant Jay Rode. According to Jeff Rode, it was their father who
determined how the bingo operations would be run and how the bingo
revenues would be spent.
He also testified that his
parents considered the bingo operations to be a means of earning a
living, not a fund raising activity for a church. He specifically
mentioned that they purchased several automobiles and a motorhome for
themselves with bingo proceeds. He further stated that his father's goal
was to earn, through the operation of bingo games, a million dollars for
each member of his family.
The other evidence
presented to the Court at trial is consistent with this testimony of
defendant Jeff Rode. For example, an account, entitled "
Universal
Life
Church
--Special Fund Raising Account," was established with the United
States National Bank of
Oregon
. According to the bank signature cards, the only people authorized to
use this account on behalf of the church were defendants Jay and Judith
Rode. Furthermore, there is no evidence before the Court that would
indicate that the monies deposited into this account were used for the
type of activities, e.g., evangelical, missionary or charitable
activities, normally associated with religious institutions.
In the spring of 1983, Jay
and Judith Rode's 1980 federal income tax return was audited by Revenue
Agent James Knight. He requested that they meet with him and produce
various documents relating to their 1980 return. Agent Knight received
no cooperation from these defendants during the course of his audit.
During the course of the
audit, the Internal Revenue Service (hereinafter "IRS")
concluded that the net proceeds from the bingo operations should be
included in Jay and Judith Rode's gross income. The IRS determined that
once the net proceeds were included in the taxpayers' gross income, they
realized taxable income of $404,403.00 for 1980, 4
giving rise to a tax liability of $192,670.00. The IRS further
determined the failure to claim this sum as income was due to fraud,
giving rise to a fraud penalty of $96,335.00.
The IRS made this
determination in the following manner. Beginning, in late 1981, persons
or entities conducting bingo in
Salem
,
Oregon
were required to file reports with the Salem Police Department. These
reports indicated the number of players per bingo session, the gross
profit per session, and the net profit per session. The IRS obtained the
reports filed by Jay and Judith Rode for five days in November of 1981,
eighteen days in April of 1982 and five days in February of 1983. The
IRS averaged the net profit per session during these time periods and
projected this average over that portion of the 1980 calendar year
during which the bingo games operated in
Salem
,
Oregon
.
The IRS also divided this
number, the average net profit, by the average number of players per
session as reflected in the same police reports. This calculation
resulted in the net profit per player per session for the
Salem
bingo operations. The figure was $3.98. During the course of the audit
in 1983, Agent Knight discovered an article in the newspaper, The
Oregonian, which discussed Jay and Judith Rode's bingo operations in
Portland
and
Salem
. This article stated that the
Portland
operation averaged approximately 350 players per session during 1983.
Using the
Salem
bingo net profit per player per session, the IRS projected the profits
for the
Portland
bingos based on an average of 350 players per session.
Based upon these
calculations, the IRS determined that Jay and Judith Rode earned gross
profits of $486,611.00 during 1980 from their bingo operations. The IRS,
based upon Agent Knight's review of the cancelled checks from the
above-mentioned Special Fund Raising Account, also gave Jay and Judith
Rode deductions totalling $87,436.00. These deductions resulted in Jay
and Judith Rode having a taxable income of $399,175.00 from the bingo
operations.
In its proposed finding of
facts, the government has admitted that due to start up difficulties
both the
Salem
and
Portland
bingos averaged far fewer players per session in 1980 than that
estimated by the IRS based on figures from subsequent years.
Accordingly, in its proposed findings of fact, the government has
recalculated Jay and Judith Rode's 1980 taxable income.
The government now
maintains that Jay and Judith Rode underreported their gross income for
the 1980 tax year by $270,508.96. In support of this figure, the
government relies heavily on the testimony of defendants Jeff Rode and
Jay Rode II and the deposit records from the Special Fund Raising
Account.
The government reached its
conclusion regarding Jay and Judith Rode's 1980 income in the following
manner. According to the plaintiff, the testimony of both Jeff Rode and
Jay Rode II reveals that the family deposited the revenues from its
Portland
and
Salem
bingo operations in separate accounts and that the funds deposited into
the Special Fund Raising Account were the proceeds of only the
Salem
bingo proceeds. The government further maintains that their testimony
also indicates that the patronage of both bingo operations by customers
was comparable in 1980. From this testimony, the government has
concluded that the funds deposited into the Special Fund Raising Account
during 1980, $122,754.48, are the net profits from the
Salem
bingo. It has also concluded that a second account with a similar level
of deposits must have been in existence during 1980 since the
Portland
and
Salem
proceeds were kept in separate accounts and both bingos experienced
comparable levels of profitability in 1980.
To further support its
conclusion that two bank accounts were in existence in 1980, the
government notes that defendant Jeff Rode testified that before he moved
to Oregon he sold some of his father's farm and tool and die equipment
for $25,000.00, an amount that the government has included as income in
its recalculation of Jay and Judith Rode's 1980 income. According to the
government, since the transaction records of the Special Fund Raising
Account do not indicate that a $25,000.00 deposit was made in 1980, the
Court must conclude that there must have been another account and these
funds were deposited into the second account.
The Court finds the
government's argument unpersuasive for a number of reasons. First, the
failure of the transaction records for the Special Fund Raising Account
to indicate the existence of a $25,000.00 deposit does not necessarily
mean that a second account existed. This omission could just as easily
mean that the funds were not deposited until some time in 1981. Second,
defendant Jeff Rode's own testimony reveals that he did not arrive in
Salem
,
Oregon
until October of 1980, several months after the commencement of the
bingo operations. Furthermore, a review of his direct testimony
indicates that the only bank account that he was aware of was the
Special Fund Raising Account and that he had no knowledge of where the
proceeds from the
Portland
bingo operation were deposited. Therefore, the Court finds that the
testimony of Jeff Rode and the lack of a $25,000.00 deposit into the
Special Fund Raising Account during 1980 does not establish that the
defendants had two bank accounts during 1980.
Moreover, the Court finds
that Jay Rode II was not a credible witness and his testimony was
dubious. For example, at trial, this witness testified that he
specifically remembered the seating capacity that the fire marshal
established for the
Salem
bingo hall before it was remodeled sometime in late 1980 or early 1981.
Yet, this witness, despite his apparent keen memory, could not remember
the seating capacity of the bingo hall after the remodeling. Even more
remarkable, though, was the inability of this witness to recall the
address of any of his three former residences in
Oregon
. The inability to remember an address is obviously inconsistent with
the ability to remember the specific seating capacity of a bingo hall
several years after the hall was no longer in use. Due to the selective
and inconsistent memory of this witness, the Court finds that his
testimony lacks credibility.
Since there is a lack of
any credible testimony before it to the contrary, the Court finds that
the Special Fund Raising Account was the only account maintained by the
Rodes during 1980. Consistent with that finding, the Court also finds
that all bingo proceeds from both the
Salem
and
Portland
operations were deposited into this account.
In addition to rejecting
the government's revised estimate of the defendants' 1980 bingo income
for these reasons, the Court also rejects it because the evidence
presented at trial suggests a means by which the 1980 net bingo revenue
can be established in a manner that is more reasonable and objective
than the way utilized by the government in its revised 1980 income
assessment. It is this manner that the Court will use in determining the
bingo revenue.
The starting point of the
Court's calculation is Plaintiff's Exhibit 16. This exhibit consists of
the "Pay Out Desk Tally Sheets" for three sessions at the
Portland
bingo hall. The three sessions were held on August 1, 1980, August 21,
1980 and an unknown date. This exhibit indicates that an average of 42.6
people were present at these three sessions. Although this sample is
extremely small, it is the only evidence before the Court indicating the
number of players per session in 1980 at either bingo hall. Moreover,
the testimony given by various witnesses at trial indicates that the
Salem
bingo hall was averaging approximately forty players per session in
August of 1980. Thus, this evidence is consistent with the testimony at
trial that the
Portland
and
Salem
bingo operations experienced similar levels of patronage in 1980, a
position taken by the government in its proposed findings of fact, and
the Court finds as such.
Furthermore, the Court also
believes that these figures are significant for another reason as well.
From the testimony at trial, the Court finds that both bingo operations
experienced start up difficulties and that business improved at both
bingos as 1980 progressed. Since the operations were started no later
than March of 1980, the month of August approximately corresponds to the
midpoint of the defendants' bingo operations in 1980. Using patronage
figures from that month as an average for the entire year takes into
account the growth experienced by the bingo operations in 1980 and
compensates for the lower level of patronage experienced by the bingo
halls in the spring of 1980 and the higher patronage levels they enjoyed
towards the end of 1980.
The remaining information
that the Court needs is also readily provided by testimony given at
trial. The testimony of various witnesses at trial indicates that
between five and ten sessions were held per week at both the
Portland
and
Salem
bingo halls. In accordance with this testimony, the Court will base its
calculations on an average of eight sessions per week. A review of the
testimony before the Court also indicates that the
Portland
bingo games began operation around the first of March and the
Salem
games in mid-February. Accordingly, the Court will assume in its
calculation that the
Portland
games were operational for forty-four weeks and
Salem
bingo games were operational for forty-six weeks in 1980. The last piece
of information needed by the Court is garnered from Agent Knight's
testimony that the average net profit per player at the
Salem
bingo hall was $3.98 based upon the records he reviewed from the Salem
Police Department. By using this figure for 1980, the Court makes the
rational assumption that a similar level of profitability per player was
enjoyed by the bingo operations in 1980.
When these figures are
inserted into the following equation, the net bingo revenue for 1980 is
$122,074.56. The equation is as follows:
(total number of weeks of bingo operations)
x (average number of sessions per week)
x (average number of players per session)
x (average net profit per player per session).
When the values for these variables, as determined above by the Court,
are inserted into this equation, the net revenue is:
[(44 -
Portland
) + (46 -
Salem
)] x (8) x (42.6) x ($3.98) = $122,074.56.
In
further support of its finding that this amount is the most accurate
representation of the net revenue, the Court notes that this figure is
within a few dollars of the amount of deposits, $122,754.48, made into
the Special Fund Raising Account in 1980, the account into which the
Court has found all bingo proceeds were deposited in 1980.
In its proposed findings of
fact, the government asserts that its initial decision to grant Jay and
Judith Rode $87,436.00 in deductible expenses for the 1980 tax year was
excessive. In support of its position, the government correctly asserts
that the testimony of various witnesses indicates that the defendants
used the
Salem
bingo hall as a residence as well as a business. Since personal living
expenses are not deductible and the defendants did not establish at
trial what portion of the
Salem
bingo hall was used as a residence and what portion was used for
business purposes, the government maintains that the defendants should
receive no deduction for the rent and utilities paid by them on the
Salem
bingo hall. In accordance with this position, the government, in its
proposed findings of fact, has reduced the amount of deductions the
defendants are entitled to $42,095.00.
Jay and Judith Rode through
the testimony of Jack Rode and Jay Rode II, not through records or other
receipts, assert in their proposed findings of fact that they are
entitled to a deduction for the amounts spent by them in remodeling the
Salem
and
Portland
bingo halls. Like his brother Jay, the Court finds the testimony of Jack
Rode not to be credible and of no value. At trial, this witness had the
remarkable ability to recall how much money was spent for remodeling and
what items were purchased as part of the remodeling. Yet, when
questioned on cross-examination about his own personal business, one
started several years after the bingo hall was remodeled, the witness
could not intelligently discuss its operations. Therefore, the Court
finds that the testimony of Jack Rode lacks credibility due to its
selective and inconsistent nature.
2.
1977 and 1978 TAX YEARS
The sole issues before the
Court with respect to the 1977 and 1978 tax years relate to the
disallowance of three deductions. They are as follows:
1. A claimed deduction of
$30,278.00 on their 1977 return for charitable contributions.
2. A claimed deduction of
$7,500.00 on their 1978 return for charitable contributions.
3. A claimed deduction of
$34,373.00 on their 1978 return for expenses incurred with respect to
rental property.
The
IRS maintains that it disallowed each deduction due to the failure of
Jay and Judith Rode to substantiate that they were entitled to the
deduction.
At trial, they produced no
credible evidence that would support their contention that they are
entitled to these three deductions. There is a lack of documentary
evidence that would buttress the position of the defendants. The only
evidence that supports their contention is the testimony of Jay Rode II,
he turned fifteen on October 19 of that year, who stated that during
1978 his father gave him rental checks for their
Grand Rapids
bingo halls of approximately $3,000.00 per month to deliver to the
landlord. Given that the Court has found Jay Rode II not to be a
credible witness, the Court finds this testimony to be of no value.
3.
THE CONVEYANCE
As mentioned earlier by the
Court, the government also seeks to set aside, as a fraudulent
conveyance, the transfer of a farm located at
1566 Ten Mile Road
,
Sparta
,
Michigan
from Jay and Judith Rode to their sons, defendants Jay Rode II, Jack
Rode and Jeff Rode. The real estate in question actually consists of two
adjacent parcels. The larger of the two parcels was acquired by Jay and
Judith Rode in 1967 for $65,000.00 and the second parcel was purchased
in 1978 for $10,000.00.
Defendant Jeff Rode
testified at trial that he travelled from
Michigan
to
Oregon
for a vacation in July of 1980. When he returned to
Michigan
in August, his father and his brother, Jack, accompanied him. Subsequent
to this trip, documents transferring the two parcels of land to Jay and
Judith Rode's sons were recorded with the Kent County Registry of Deeds
on October 16, 1980.
These documents indicate
that the parcels of land were transferred to the sons on September 4,
1979. The testimony of Jeff Rode indicates that the documents were
post-dated at the insistence of his father. Since the defendants, in
their proposed findings of fact, do not challenge this testimony and
there is no evidence to support a contrary finding, the Court finds that
the transfer documents were post-dated and the transfer actually
occurred in the late summer or early autumn of 1980.
As consideration, Jeff Rode
testified that the brothers gave their parents one dollar and the 1980
apple crop which had a value of approximately $14,000.00. 5
They also assumed the outstanding land contracts on the property. Jeff
Rode further testified that he has never made a payment on the land
contract. Testimony was given that the brothers borrowed $95,000.00
dollars from the
Universal
Life
Church
on September 1, 1985 to pay off the balances of the outstanding land
contracts on the real property and gave the church a mortgage and
promissory note in return. However, neither the mortgage or the note was
introduced at trial and no evidence was presented that payments had been
made on the note by the brothers. Furthermore, the parties stipulated at
trial that the mortgage had not been recorded with the Kent County
Registry of Deeds.
Based upon this testimony,
the Court finds the following. No payments were made by the sons on
either the notes they assumed at the time the land was transferred to
them or the note they supposedly received from the
Universal
Life
Church
. The only consideration given by the brothers for the farm was the 1980
apple crop.
In addition to these
findings, the Court finds that the United States Tax Court had entered a
decision against the defendants for tax years 1975 and 1976 on August
13, 1980. Also, prior to the transfer of the real property, the
defendants had knowledge that the IRS was auditing tax returns they had
filed in previous years.
CONCLUSIONS
OF LAW
1.
1980 TAX YEAR
The Court must first
address whether the revenue generated from the bingo games should be
considered part of Jay and Judith Rode's 1980 income. The evidence
before the Court indicates that none of these proceeds were used for
activities normally associated with religious institutions. The evidence
also indicates that they exercised complete control over the bingo
proceeds and that these proceeds were used for the personal needs of the
Rode family. The Court concludes that the corporate entity, the
Universal
Life
Church
, should be disregarded and holds that the bingo proceeds are income to
Jay and Judith Rode. E.g., Lettinga v. Agristor Credit Corp., 686
F.2d 442, 446 (6th Cir. 1982).
In an action to collect
taxes, the government has the initial burden of proving that taxes are
owed. This burden is usually met by means of an assessment. It has long
been held that the Commissioner may estimate assessments by any
reasonable method and such estimates will be accorded a presumption of
correctness and will be overturned only if the taxpayer shows by a
preponderance of the evidence that the assessment is erroneous. E.g.,
Coleman v. United States [83-1 USTC ¶9288 ], 704 F.2d 326, 329 (6th Cir. 1983).
However, the mere fact that
a taxpayer establishes that an assessment is incorrect does not relieve
him of his tax obligation. Rather, unless the taxpayer provides that no
deficiency exists, this Court is required to determine the correct
figure. E.g., Taylor v. Commissioner [71-2
USTC ¶9521 ], 445 F.2d 455, 460 (1st Cir. 1971).
In the present case, Jay
and Judith Rode, as the government readily concedes, have established
that the assessment for tax year 1980 was erroneous. However, since they
have not shown that no underreporting of income occurred and the Court
has found the government's proposed revised figure to be excessive and
not, supported by a rational factual basis, the Court concludes that its
figure, $122,074.56, is the amount of income received by them from their
bingo operations in 1980.
The Court further concludes
that Jay and Judith Rode are entitled to business deductions of
$42,095.00. From the testimony at trial, it is rather obvious that the
Rode family maintained the
Salem
bingo hall as both a residence and a business establishment. If a
taxpayer uses his residence as his place of business, he is entitled to
deduct only that portion of rent and similar expenses that are
attributable to the place of business as a business expense. 26 U.S.C. §262
; 26 C.F.R. §1.262-1(3)
. Moreover, the taxpayer bears the burden of establishing
that he is entitled to a deduction. Wolter Constr. Co. v.
Commissioner [80-2 USTC ¶9799 ], 634 F.2d 1029, 1039 (6th Cir. 1980). Since
Jay and Judith Rode have presented no evidence to the Court establishing
or even suggesting what portion of the
Salem
bingo hall was used for business purposes, the Court concludes that they
are entitled to no deduction for expenses incurred at the
Salem
bingo hall.
Furthermore, the Court
concludes that Jay and Judith Rode are not entitled to deduct the costs
incurred in the renovation of the
Portland
and
Salem
bingo halls. No records or receipts were introduced that would establish
the amount of money expended by them to renovate these halls. Moreover,
as stated previously, the oral testimony of Jack Rode and Jay Rode II
regarding these incurred expenses was not credible. Therefore, the Court
concludes that they have not carried their burden of establishing that
they are entitled to deduct these expenses.
Id.
Accordingly, the Court concludes that they realized a net profit of
$79,979.56 from their bingo operations in 1980. The Court further
concludes that this amount should have been included in their gross
income for that tax year.
The Government also
maintains that the $25,000.00 that Jay Rode received from the sale of
some farm and tool and die equipment should be included in Jay and
Judith Rode's 1980 income. The Court concludes that this position is
without serious merit.
As a general rule, gains
and losses from the sale of depreciable property used in a trade or
business are to be included in the calculation of gross income. 26
U.S.C. §1231(a)
. If the gains from such sales exceed losses, the gains and
losses are to be treated as long-term capital gains or losses.
Id.
§1231(a)(1)
. If losses exceed gains, the gains and losses are to be
treated as ordinary gains and losses. 6
Id.
§1231(a)(2)
. Moreover, a gain occurs only when the property is sold for
more than its adjusted basis and a loss occurs whenever depreciable
property is sold for less than its adjusted basis.
Id.
§1001
.
In the present case, there
is simply no evidence establishing how the sale of the questioned
equipment should be treated. No testimony was given that would assist
the Court in determining whether this sale was the only sale of
depreciable property entered into by Jay and Judith Rode during tax year
1980. Moreover, assuming that this transaction was the only sale of such
property during 1980, there is no evidence before the Court establishing
the adjusted basis of the equipment at the time of its sale. Unless the
Court is willing to engage in guess, speculation or conjecture, it
cannot determine whether the Rodes realized a gain or a loss as a result
of this sale. Accordingly, the Court concludes that the inclusion of
this sale in their gross income for tax year 1980 would be improper and
concludes that the defendants underreported their 1980 income by
$79,979.56.
The government further
maintains that Jay and Judith Rode's failure to include the bingo income
in their 1980 income was the result of fraud. If the government proves,
by clear and convincing evidence, that an underpayment of taxes is due
to fraud, there shall be added to the tax an amount equal to 50 percent
of the underpayment. 7
Id.
§§6653(b), 7454(a)
.
A number of indicia of
fraud have been relied on in internal revenue cases seeking the
imposition of a fraud penalty. These indicia of fraud include:
(1) the taxpayer's failure
to file tax returns;
(2) the taxpayer's failure
to report income over an extended period of time;
(3) the taxpayer's failure
to furnish the Government with access to his records;
(4) the taxpayer's failure
to keep adequate books and records;
(5) the taxpayer's
experience and knowledge, especially of the tax laws;
(6) the taxpayer's
concealment of bank accounts from the IRS; and
(7) the taxpayer's
willingness to defraud another in a business transaction.
Solomon
v. Commissioner
[84-1 USTC ¶9450 ], 732 F.2d 1459, 1461-62 (6th Cir. 1984).
The Court believes that a
number of these indicia are present in this case. Jay and Judith Rode
did not cooperate with the IRS during the course of its 1980 audit. See
26 C.F.R. §1.6001-1(e)
. From their complete reliance upon oral testimony at trial
to substantiate their claimed deductions, it is rather obvious that they
also failed to keep adequate books and records of their business
activities. See 26 U.S.C. §6001
; 26 C.F.R. §1.6001-1(a)
. Moreover, they received their bingo licenses in
Michigan
only because they made false and misleading representations to the
Commissioner of Lottery. Furthermore, they operated their bingo games in
Oregon
under the guise of a number of churches with the intent of earning
income for themselves.
From this evidence, there
is undoubtedly clear and convincing proof that the taxpayers engaged in
fraudulent behavior. Accordingly, the government may assess a fraud
penalty of fifty percent to the taxes owed by Jay and Judith Rode as a
result of their bingo activity.
2.
1977 and 1978 TAX YEARS
The sole issues before the
Court with respect to the 1977 and 1978 tax years relate to the
disallowance of three deductions. They are as follows:
1. A claimed deduction of
$30,278.00 on their 1977 return for charitable contributions.
2. A claimed deduction of
$7,500.00 on their 1978 return for charitable contributions.
3. A claimed deduction of
$34,373.00 on their 1978 return for expenses incurred with respect to
rental property.
The
IRS maintains that it disallowed each deduction due to the failure of
Jay and Judith Rode to substantiate that they were entitled to the
deduction.
At trial, Jay and Judith
Rode failed to establish that they made the claimed contributions or
incurred the claimed expenses. They failed to introduce any records into
evidence that would substantiate that they are entitled to deduct the
expenses incurred with respect to the rental property. Rather, they
presented only the discredited oral testimony of Jay Rode II.
Furthermore, the Rodes also failed to present any evidence to the Court
that would indicate that the alleged contributions qualify for a
deduction under Section
170 of the Internal Revenue Code. 26 U.S.C. §170
.
It is a well settled
principle of tax law that a taxpayer has the burden of establishing that
he is entitled to a deduction. Wolter, 634 F.2d at 1039. Due to
the failure of the Rodes to introduce at trial written records
establishing both the existence of and the amount of these questioned
expenditures, the Court concludes that they have not met this burden.
Therefore, they have failed to prove that the assessments for tax years
1977 and 1978 are erroneous.
3.
THE CONVEYANCE
For the plaintiff to
prevail on the issue of whether the transfer of real property was a
fraudulent conveyance, it must establish that the conveyance was
fraudulent under state law. Commissioner v. Stern [58-2
USTC ¶9594 ], 357 U.S. 39, 47 (1958).
Michigan
law provides that "every conveyance made and every obligation
incurred with actual intent . . . to hinder, delay or defraud either
present or future creditors, is fraudulent as to both. . . ."
Mich.
Comp. Laws Ann. §566.17. The party seeking to have the transfer set
aside must prove the existence of fraud by clear and convincing
evidence. Martin v. Bank of
Germantown
(In re Martin), 761 F.2d 1163, 1165-66 (6th Cir. 1985); Lackawanna
Pants Mfg. Co. v. Wiseman, 133 F.2d 482, 486 (6th Cir. 1943); Borock
v. Bidlofsky (In re Bidlofsky), 57 Bankr. 883, 893 (Bankr. E.D.
Mich. 1985).
By reason of its nature, it
is usually very difficult to prove fraud by direct evidence and such
proof is not required. United States v. Leggett, 292 F.2d 423,
426 (6th Cir. 1961), cert. denied, 368 U.S. 914 (1962). Thus, the
issue of fraud is commonly determined by certain recognized indicia.
Although these indicia are not conclusive, the occurrence of several of
them "will always make out a strong case." Timmer v.
Pietrzyk, 272
Mich.
238, 242, 261 N.W. 313, 314 (1935).
In the present case,
several indicia of fraud surround the transfer of the farm to the sons
of Jack and Judith Rode. The transfer was between close family members
and the sons gave only the 1980 apple crop as consideration for the
farm. Moreover, the transfer documents recorded with the Kent County
Registry of Deeds were backdated by over a year. Furthermore, all three
of the Rodes' sons testified that the purpose of the transfer was to
keep the farm in the family. Finally, at the time of the transfer, a
judgment had been entered against the defendants by the U.S. Tax Court
and they had been notified that the IRS would be auditing additional
returns filed by them.
Accordingly, the Court
concludes that the conveyance of the real property from defendants Jay
and Judith Rode to their three sons was fraudulent as to the
United States
and is hereby set aside. Since the
United States
has federal tax liens on this property and there are outstanding tax
assessments, the plaintiff may foreclose its liens.
SUMMARY
In accordance with its
findings of fact and conclusions of law, the Court concludes that
defendants Jay and Judith Rode underreported their 1980 taxable income
by $79,979.56 and that this underreporting was the result of their
fraud. Furthermore, the Court concludes that Jay and Judith Rode have
failed to establish that the tax assessments against them for tax years
1977 and 1978 are erroneous. Finally, the Court finds that the transfer
of the real property located at
1566 Ten Mile Road
,
Sparta
,
Michigan
by Jay and Judith Rode to their sons, defendants Jay Rode II, Jack Rode
and Jeff Rode, was a fraudulent conveyance and that the
United States
may foreclose its outstanding tax liens on this property.
ORDER
In accordance with the
Opinion dated June 27, 1990, IT IS HEREBY ORDERED that the plaintiff,
United States of America, is entitled to a deficiency judgment against
the defendants Jay and Judith Rode for tax years 1977 and 1978 in the
amounts of $8,904.00 and $15,289.00, respectively, plus interest as
provided for in Section
6601(a) of the Internal Revenue Code.
IT IS FURTHER ORDERED that
the plaintiff is entitled to a deficiency judgment against the
defendants Jay and Judith Rode for tax year 1980 in the amount that
corresponds to their failure to report $79,979.56 as taxable income plus
interest as provided for in Section
6601(a) of the Internal Revenue Code.
IT IS FURTHER ORDERED that
the plaintiff is entitled to assess a fraud penalty of 50% against the
defendants Jay and Judith Rode for tax year 1980 as a result of their
failure to report $79,979.56 as taxable income plus interest as provided
for in Section
6601(e) of the Internal Revenue Code.
IT IS FURTHER ORDERED that
the transfer of real property located at 1566 Ten Mile Road, Sparta,
Michigan by defendants Jay and Judith Rode to defendants Jay Rode II,
Jack Rode and Jeff Rode IS HEREBY SET ASIDE as a fraudulent conveyance
and the plaintiff may foreclose its tax liens on said property after a
final judgment has been entered by this Court.
IT IS FURTHER ORDERED that
the plaintiff shall submit a final judgment, subject to approval by the
defendants, to this Court in accordance with this Opinion and Order by
July 16.
IT IS SO ORDERED.
1
At trial, the taxpayers agreed to consent to judgment for tax years 1982
and 1983.
2
By a letter ruling, dated August 24, 1984, the tax exempt status of the
Universal Life Church of Modesto, California was revoked, effective May
1, 1977. The
Claims Court
subsequently affirmed this revocation. Universal Life Church, Inc. v.
United States [87-2 USTC ¶9617 ], 13 Cl.Ct. 567 (1987).
3
Jeff Rode currently goes by the name of Jeff Farrell.
4
Defendants Jay and Judith Rode reported their taxable income for 1980 as
$5,277.79.
5
This figure is from the Schedule F filed by defendants Jay and Judith
Rode as part of their 1980 income tax return.
6
With the implementation of the 1986 Tax Reform Act and its provisions
taxing both capital gains and ordinary income at the same effective
rate, this section of the Internal Revenue Code is, in effect, a relic
from a previous era.
7
Subsequent amendments to this section have increased the fraud penalty
to 75%. Moreover, under these amendments, once the IRS has established
that any portion of an underpayment is the result of fraud, the entire
underpayment is attributed to fraud unless the taxpayer establishes
otherwise. These provisions are now contained in Section
6663 of the Internal Revenue Code, not Section 6653(b).
Harris Bank/Glencoe-Northbrook, N.A., Plaintiff v.
American National Bank & Trust Company of
Chicago
as Trustee u/t/a Dated June 16, 1967, Trust No. 25124, et al.,
Defendants
U.S.
District Court, No.
Dist.
Ill.
, East. Div., 88 C 1207, 6/29/89
[Code Sec.
6321 ]
Lein for taxes: Property subject to tax lien: Fraudulent
conveyances.--Whether a husband's transfer of property to his wife
was a fraudulent conveyance was a factual issue that could not be
decided on summary judgment. Although the property was transferred
before the tax liability and resulting tax liens arose, Illinois law
allows creditors to satisfy their claims from transferred property when
a party strips himself of all his property in contemplation of incurring
future debt, particularly when the transfer is made to a near relative
in a way that allows the transferor to enjoy the property while putting
it out of the reach of creditors. Since the record indicated that the
husband may have made the transfers to inhibit the collection of his
withholding tax liabilities incurred in the year after the transfer, the
IRS was entitled to a factual hearing to determine the husband's intent
in making the transfer.
MEMORANDUM OPINION AND ORDER
LEINENWEBER, District
Judge:
Crossdefendant, Sondra
Fishman ("Sondra"), has filed a motion for summary judgment on
Count II of the crossclaim and counterclaim of the
United States
. Count II seeks a declaration that a transfer of property from her
husband, Jordan Fishman ("
Jordan
"), on January 30, 1981 is void as a fraudulent conveyance and that
the property transferred be returned to
Jordan
so as to subject it to tax liens filed only against
Jordan
. The tax liens seek to collect tax obligations owed by
Jordan
as a responsible person for failure to pay withholding taxes for the
fourth quarter 1980 and for succeeding quarters totaling $614,682.32. Of
this total, $607,000 accrued after January 30, 1981. On that date
approximately $40,000 was due. 1
The parties agree for
purposes of setting aside a fraudulent conveyance,
Illinois
substantive law applies.
Sondra's basic contention
is that since the vast majority of the tax claims against
Jordan
arose out of transactions and conduct occurring after the conveyance,
the
United States
is not entitled to satisfy these claims from the property transferred.
She cites a number of cases holding that "only existing creditors
can be hindered, delayed or defrauded."
However in
Illinois
the doctrine is applicable to those cases in which a party strips
himself of all his property in contemplation of incurring future
liability. Mattingly v. Wulke, 2 Ill.App.169 (1878), cited in 20
I.L.P. "Fraudulent Conveyances", §63
, p.118.
"The rule is
applicable to transactions between husbands and wives...and a conveyance
by an insolvent husband to his wife, made with a view to indebtedness to
be contracted is fraudulent as to his creditors." (emphasis
supplied)
Id.
, citing Bridgeford v.
Riddell, 55 Ill.261 (1870).
This is especially true
when the debtor makes a voluntary conveyance to a near relative so as to
retain enjoyment of all the benefits of the property but at the same
time places the property beyond the reach of his creditors. Natl.
City Bank of
Ottawa
v. Cowdin, 257 Ill.App.369, rev'd. on other grounds, 343 Ill.430,
175 N.E.411.
It appears from the factual
recitations in Sondra's brief, as well as paragraph 13 of her Local Rule
12(e) statement, that the corporation for which
Jordan
was a responsible person did not pay withholding tax liabilities
accruing at the time of and for at least the year following the transfer
to his wife. Therefore the effect of the transfers apparently was to
inhibit the collection of these tax liabilities.
Jordan
's intent is a material issue. Intent is normally a question of fact not
appropriate for summary judgment. Sahagian v. Dickey, 827 F.2d
90, 100 n.8 (7th Cir. 1987).
Therefore there are factual
issues concerning
Jordan
's solvency at the time of the transfer and his intent at the time of
the transfer, all of which are material to Count II of the
crossclaim/counterclaim. Accordingly, summary judgment is precluded by
Rule 56, Fed.R.Civ.P.
IT IS SO ORDERED.
1
Approximately $32,000 was paid by Fishman.
United States of America
, Plaintiff-Appellee v.
Lawrence
W. Berman
, Marilyn Berman, and Forex Corporation, Defendants-Appellants
(CA-6),
U.S. Court of Appeals, 6th Circuit, 88-3803, 9/7/89, 884 F2d 916,
Affirming a District Court decision, 88-2 USTC ¶9550
[Code Secs.
6303 and 6321
]
Statute of limitations: Notice and demand for tax: Fraudulent
conveyances: Circumstantial evidence: Collateral estoppel.--The
taxpayers appeal from a decision rendered by the district court in a
case that was remanded from the appellate court. The lower court's
rulings that assessments made against the taxpayers were not barred by
the statute of limitations and were not invalidated by the government's
lack of notice of demand were affirmed. This issue had not been raised
at the trial level and, although the taxpayers contended that the
district court refused to allow them to amend their pleadings to include
this defense, the court determined that such refusal did not violate
Federal Rule of Procedure 15(a). The court further ruled that inferences
of actual fraud were properly drawn from the circumstances of the real
property conveyances. Allegations made by the taxpayers that the
government should have been collaterally estopped from raising the
fraudulent conveyance issue regarding one property transfer because the
issue should have been litigated in a state court action were also
rejected. A final argument, that notice was required after a deficiency
assessment before the assessment may be reduced to judgment, was also
without merit.
Albert Richter, Columbus,
Ohio 43215, William S. Rose, Jr., Assistant Attorney General, Gary R.
Allen, Murray S. Horwitz, William S. Estabrook III, Department of
Justice, Washington, D.C. 20530, for plaintiff-appellee. Lawrence W.
Berman, 1362 Haddon Rd., Columbus, Ohio 43209, pro se. William H.
Bluth, 665 S. High St., Columbus, Ohio 43215, for defendant-appellant.
Before MERRITT and NELSON,
Circuit Judges and BROWN, Senior Circuit Judge.
BROWN, Senior Circuit
Judge:
The Appellants ("the
Bermans") appeal the district court's determination reducing to
judgment the government's income tax assessments, interest, and
penalties and setting aside two real estate conveyances as being
fraudulent. The Bermans assert, inter alia, that this action is
barred by the applicable statute of limitations, that the district court
erred in finding fraud in the conveyances, that the government was
collaterally estopped from asserting fraud, and that the court erred in
rejecting the Bermans' claim that notice and demand were necessary for
maintaining an action for collection of a deficiency assessment. We find
merit in none of the Bermans' contentions and, accordingly, affirm the
judgment of the district court.
STATEMENT
OF FACTS
On September 30, 1975, the
Internal Revenue Service (IRS) received the Bermans' joint tax return
for the year ending December 31, 1972, which reported a tax liability of
$67,368. 1
No payment, however, was submitted with the return. 2
On November 3, 1975, the Bermans were assessed $101,323.97 for unpaid
taxes, interest, and penalties for the 1972 tax year.
On January 21, 1976, Mr.
Berman transferred certain real property he owned (the Alum Creek
property) to Forex Corporation (Forex), the shares of which were wholly
owned by Mr. Berman at the time of the transfer. On the same date, the
Bermans also transferred their jointly-owned residence (the
Haddon Road
property) to Forex. Following the transfers, the Bermans continued to
reside at the
Haddon Road
residence and continued to pay real estate taxes on both properties. Mr
Berman's father also continued to operate a business on the Alum Creek
property following the conveyance to Forex without paying rent to Forex.
Later in 1976, Mr Berman transferred his shares of Forex to his sister.
The IRS audited the
Bermans' 1972 tax return and found that they had understated their tax
liability by $27,936. On July 11, 1978, the IRS made a deficiency
assessment against the Bermans which, with interest and penalties,
amounted to $44,749.45.
On April 5, 1976, the
government filed a notice of federal tax lien on all property owned by
the Bermans. The basis of this lien was the November 3, 1975 assessment.
On December 21, 1977, the government filed another notice of federal tax
lien on all property of "Forex Corporation, Nominee of Lawrence M.
and Marilyn L. Berman." This lien, which also was based on the
November 3, 1975 assessment, specified the Alum Creek and
Haddon Road
properties. On August 4, 1978, the government filed two additional
notices of federal tax lien--one on the property of the Bermans, the
other on the property of Forex--in the amount of $44,749.45 each, the
basis of which was the July 11, 1978 deficiency assessment.
In 1980, Railroad Savings
and Loan, a creditor of the Bermans, filed suit in state court to
foreclose on its first-lien mortgage on the
Hadden Road
property. The suit named the Bermans and the
United States
as defendants. The state court found that the federal tax liens were
invalid. The government filed a motion to set aside this determination,
which was denied, but did not appeal the ruling.
On October 29, 1981, the
government filed this action in federal district court to reduce the
1975 assessment and the 1978 deficiency assessment to judgment, to
foreclose on the tax liens notice of which it had filed, and to set
aside as fraudulent the Bermans' conveyances to Forex of the Alum Creek
and
Haddon Road
properties. 3
The district court held that notice and demand are prerequisites to the
creation of a federal tax lien and to the maintenance of a civil
action by the government to reduce tax assessments to judgment. Because
the court found that such notice and demand were not given here, the
court denied relief to the government. On appeal, this court reversed
the district court's holding and remanded, United States v. Berman
[87-2 USTC ¶9460 ], 825 F.2d 1053 (6th Cir. 1987) (Berman I),
determining that notice and demand are not prerequisites to the
maintenance of a civil action to reduce tax assessments to judgment. 4
On remand, the Bermans
contended that, even if, as this court held on appeal, notice and demand
were not necessary prerequisites to reducing the assessments to
judgment, this action was barred because the assessments were not
properly made and the action to collect the taxes was not filed within
three years of the date on which the return was filed. The Bermans rely
on 26 U.S.C §6501(a)
for this proposition. The government contended that while the
action was timely filed, in any event, the Bermans could not rely on the
limitations defense because they had not asserted this defense when the
case was first before the district court. The district court agreed with
the government that it should not entertain the statute of limitations
defense since it was not asserted until the case was before it on
remand.
The district court also set
aside the real property transfers to Forex, finding them constructively
and actually fraudulent, contrary to the Bermans' contention that the
evidence did not support such findings.
The Bermans also contended,
on remand, that while it was not necessary to provide notice and make
demand for payment to maintain an action to reduce an assessment to
judgment, such notice and demand were necessary to reduce the deficiency
assessment to judgment. The government asserted that the Bermans'
contention was in conflict with the finding of this court on appeal, and
the district court agreed, pointing out that this court had drawn no
distinction, for this purpose, between an assessment and a deficiency
assessment.
The district court
thereupon granted relief to the government in the amount of $126,124.09,
representing unpaid taxes, interest, and penalties attributable to the
November 3, 1975 assessment (minus a credit conceded by the government)
and the amount of the deficiency attributable to the July 11, 1978
assessment. The court did not, contrary to the government's request,
include in the judgment the interest and penalty associated with the
1978 deficiency assessment. The Bermans now appeal these determinations
by the district court on remand.
DISCUSSION
The Bermans assert a number
of contentions on appeal which we address in turn.
The
Statute of Limitations
Under 26 U.S.C. §6501(a)
, 5
the government must assess the tax within three years after the return
is filed and, if an assessment is not timely made, the government cannot
maintain an action to collect the tax after the three years have
expired. If the assessment was made within its period of limitation, §6502(a)(1)
6
provides that an action to collect the tax may be brought within six
years of the assessment. The Bermans contend that the assessments
in this case were not properly made due to lack of adequate notice and
demand, and that, therefore, they were entitled to rely on the
three-year statute of limitations of §6501(a)
, which had expired when this action was filed. The
government contends, on the contrary, that notice and demand are not
prerequisites to a valid assessment, that valid assessments were made
within three years of the filing of the return, and that, therefore, the
action was timely filed within the six-year period allowed by §6502(a)(1)
. The government contends that, in any event, the district
court correctly decided, on remand, that the Bermans should not be
allowed to rely on the limitations defense since they did not assert it
when the case was first before the district court.
During the original
district court consideration of this matter, the government asserted in
its post-trial brief that lack of notice and demand "does not
invalidate the assessment." Joint Appendix at 30. In response to
this contention, the Bermans failed to assert that the proper notice and
demand were prerequisites to a valid assessment, that there was no such
notice and demand, and therefore the three-year limitations statute
applied. On appeal in Berman I, this court declined to address
the statute of limitations issue because the "[d]efendants did not
perfect an appeal from the trial court's judgment" and because
"it appears that this argument is being raised for the first time
on appeal." Berman I, 825 F.2d at 1056 n.3. 7
The district court on remand held that the earlier failure of the
Bermans to raise the statute of limitations defense in their post- trial
brief prevented them from asserting this defense on remand.
The Bermans now contend
that the district court abused its discretion in refusing to allow them
to amend their pleadings to include the statute of limitations defense,
in violation of "the spirit of" Federal Rule of Civil
Procedure 15(a). Rule 15(a) provides that "a party may amend the
party's pleading only by leave of court or by written consent and leave
shall be freely given when justice so requires." The record before
this court shows that the Bermans never actually moved for leave to
amend their pleadings pursuant to Rule 15(a). Nonetheless, since the
parties treat this issue as one of a denial of a motion to amend, we do
likewise. Since the denial of a motion for leave to amend is reviewed
under the abuse of discretion standard, Troxel Mfg. Co. v. Schwinn
Bicycle Co., 489 F.2d 968, 970 (6th Cir. 1973), cert. denied,
416 U.S. 939 (1974), we shall review the district court's refusal to
address the statute of limitations defense under the same standard.
The Supreme Court in Foman
v. Davis, 371 U.S. 178, 182 (1962), stated that leave to amend
pursuant to Rule 15(a) shall be "freely given" absent
"any apparent or declared reason--such as . . . repeated failure to
cure deficiencies by amendments previously allowed . . .." In this
case, the district court determined that the Bermans were barred from
asserting the statute of limitations defense on remand because they had
failed to raise it in response to the government's assertion in its
post-trial brief that notice and demand were not necessary to a valid
assessment. In effect, therefore, the district court refused to allow
amendment of the Bermans' defenses because they had failed to cure this
deficiency when they had the opportunity. The district court, therefore,
declared a reason for its refusal and we believe the court did not, on
this record, abuse its discretion in so ruling.
The
Conveyances to Forex
The Bermans next contend
that the district court erred in concluding that the transfers of the
Alum Creek and
Haddon Road
properties were fraudulent. The court found that the transfers were both
actually and constructively fraudulent. 8
The district court found
actual fraud in the transfers of the Alum Creek and Haddon Road
properties by the Bermans to Forex, in violation of Ohio Revised Code §1336.07.
That section defines actual fraud as follows:
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 or
future creditors.
In an action to set aside a
conveyance based on actual fraud, clear and convincing evidence is
required. Household Fin. Corp. v. Altenberg,
5 Ohio St.
190, syllabus at 1, 214 N.E.2d 667 (1966). This was recognized by the
district court. Because of the difficulty of obtaining direct evidence
of actual fraud, inferences can be drawn from the circumstances
surrounding the transaction in order to prove actual fraud. Stein v.
Brown,
18 Ohio St.
3d 305, 308, 480 N.E.2d 1121, 1124 (1985); In re Maston, 44
Bankr. 880, 882 (Bankr. S.D.
Ohio
1984); In re
Poole
, 15 Bankr. at 431-32. These "indicia" or "badges of
fraud" include "inadequate consideration; transfer of the
debtor's entire estate; the debtor's insolvency as a result of the
transfer; the relationship of the parties to the transfer; the
reservation of an interest in the transferred property; and a threat or
pendency of litigation." Cardiovascular & Thoracic Surgery
v. DiMazzio, 37
Ohio
App. 3d 162, 166, 524 N.E.2d 915, 918 (Ohio Ct. App. 1987).
At trial, Mr. Berman
testified (1) that Forex was not actively transacting business
immediately before or after the transfers; (2) that, after the
conveyances, Forex very probably had no assets other than the Alum Creek
and Haddon Road properties; (3) that Forex had no employees other than
Mr. Berman and that he did not receive salary or dividend income from
Forex; (4) that Mr. Berman was aware that he had not paid any of the
liability reported on his 1972 tax return; (5) that Mr. Berman's father
continued to operate a business on the Alum Creek property after its
transfer to Forex, without paying rent to Forex; (6) that Mr. Berman
personally continued to pay the real estate taxes on the Alum Creek and
Haddon Road properties following the transfers to Forex; (7) that the
articles of incorporation of Forex were cancelled by the State of Ohio
some time in 1977; and (8) that in 1976, Mr. Berman transferred his
shares of Forex to his sister.
Considering the evidence
upon which the district court relied, we believe the district court did
not clearly err in inferring actual fraud from these indicia.
Collateral
Estoppel
The Bermans next contend
that the government should have been precluded from raising the issue of
whether the property conveyances were fraudulent because that issue
"could and should have been litigated in state court" in the
suit brought by Railroad Savings against the Bermans and the government.
In that proceeding, the court found that the federal tax liens against
the
Haddon Road
property were invalid, apparently because the court determined that the
property had been conveyed to Forex before the government's lien was
filed. In its motion to set aside the state court judgment, however, the
government, according to the Bermans, actually raised the alternative
argument that the conveyances to Forex were fraudulent. On the one hand,
therefore, the Bermans contend in their brief that the government should
have made the fraud assertion in the state court and, at the same time,
also contend that it was made and was overruled. Our record does not
show the basis for denial of the government's motion to set aside the
judgment in state court. Although we are uncertain as to whether the
state court actually addressed the issue of fraudulent conveyance, we
will nevertheless consider the Bermans' collateral estoppel argument.
Collateral estoppel applies
(1) when the issue presently asserted was actually litigated in an
earlier trial, (2) when it was actually and necessarily determined by a
court of competent jurisdiction, and (3) when preclusion in the second
trial does not work an unfairness. Otherson v. Department of Justice,
I.N.S., 711 F.2d 267, 273 (D.C. Cir. 1983). Unfairness can result
when "the party to be bound lacked an incentive to litigate in the
first trial."
Id.
See also Crowder v. Lash, 687 F.2d 996, 1010 (7th Cir. 1982).
Here, the government argues that it did not have an incentive to
adequately litigate this issue in the state trial since the proceeds
from the sale of the
Haddon Road
property would have been exhausted after distribution to Railroad
Savings, which held a priority lien. Moreover, the issue of whether the
conveyance of the
Haddon Road
property, which was the concern of the state court proceeding, was
fraudulent is distinct from the issue of fraud with respect to the Alum
Creek conveyance. Accordingly, we find that the Bermans' collateral
estoppel argument is without merit. 9
The
1978 Deficiency Assessment
The Bermans also contend
that this court's holding in Berman I that notice and demand were
not necessary for an action to reduce the 1975 assessment to judgment is
inapplicable to the 1978 deficiency assessment. The Bermans cite
26 U.S.C. §6213(a)
10
as support for their contention that notice is required after a
deficiency assessment before the assessment may be reduced to judgment. 11
This contention was made on remand to the district court and the
district court overruled the contention pointing out that this court in Berman
I made no such distinction between an action to reduce an assessment
to judgment and an action to reduce a deficiency assessment to
judgment. The Bermans assert in their brief in support of this appeal
that: "[t]his issue has been diligently pursued throughout this
litigation . . . ." Brief for Appellants at 19. Thus, the Bermans
concede that they presented this very contention to this court in Berman
I; therefore, this contention was overruled. We therfore conclude
that this court's prior ruling on this issue is the law of the case. See
Piambino v. Bailey, 757 F.2d 1112, 1119 (11th Cir. 1985), cert.
denied, 476
U.S.
1169 (1986). 12
CONCLUSION
In sum, we conclude that
the district court was within its discretion in refusing to entertain
the Bermans' statute of limitations argument, that the court did not err
in finding actual fraud in the conveyances to Forex, that the government
was not collaterally estopped from asserting that the conveyances were
fraudulent, and that the court correctly rejected the Bermans'
contention that notice and demand were necessary for reduction of the
deficiency assessment to judgment.
For the foregoing reasons,
we AFFIRM the judgment of the district court.
1
At trial, Mr. Berman testified that the return was filed in 1973. Joint
Appendix at 104-05. The government contended that the return was filed
in 1975, after the last extension for filing had expired. Joint Appendix
at 170. Apparently, however, the government did not assert in the
proceedings below that the return was overdue.
2
Mr. Berman testifed that, at the time he filed the 1972 return, he did
not believe that he still owed the 1972 tax "because in the
subsequent tax year to this return, I took substantial losses, and I
thought they would offset any tax due the IRS." Joint Appendix at
105. This assumption on Mr. Berman's part was in error.
3
At argument it was conceded that, in fact, the prior foreclosure by
Railroad Savings and Loan of its first-lien mortgage on the
Haddon Road
property left nothing for the government with respect to that property.
4
In Berman I, the government did not appeal the district court's
refusal to enforce the federal tax liens.
5
26 U.S.C. §6501(a)
provides:
Except as otherwise
provided in this section, the amount of any tax imposed by this title
shall be assessed within 3 years after the return was filed (whether or
not such return was filed on or after the date prescribed) . . . and no
proceeding in court without assessment for the collection of such tax
shall be begun after the expiration of such period.
6
26 U.S.C. §6502(a)(1)
provides:
Where the assessment of any
tax imposed by this title has been made within the period of limitation
properly applicable thereto, such tax may be collected by levy or by a
proceeding in court, but only if the levy is made or the proceeding
begun--(1) within 6 years after the assessment of the tax . . ..
7
The Berman I court also stated that "[o]
ur
understanding of the trial court's opinion is that the court did find
that proper assessments were made. This understanding is based not only
upon a reading of the opinion, but, under the trial court's reasoning,
if proper assessments had not been made there would have been no reason
for the court to go on to rule that notice of assessment and demand for
payment had not been made." Berman I, 825 F.2d at 1056 n.3.
8
The district court found the conveyances to be constructively fraudulent
under Ohio Revised Code §1336.04. That statute defines constructive
fraud as occurring when a conveyance renders the person making the
conveyance insolvent and when fair consideration is not given. The
district court determined that fair consideration was not given by Forex
in exchange for the properties and that the Bermans had failed to prove
their solvency following the transfers. The Bermans contend that the
district court erroneously placed upon them the burden of proving their
solvency. It is not necessary for this court to address the issue of
constructive fraud, however, since we believe the district court did not
err in finding actual fraud.
9
Res judicata is also inapplicable as there was no adjudication between
the present parties in the state trial since both the government and the
Bermans were defendants in the state action and neither filed a
cross-claim against the other. See American Triticale, Inc. v. Nytco
Serv., Inc., 664 F.2d 1136, 1147 (9th Cir. 1981).
10
26 U.S.C. §6213(a)
provides:
Within 90 days, or 150 days
if the notice is addressed to a person outside the United States, after
the notice of deficiency authorized in section
6212 is mailed (not counting Saturday, Sunday, or a legal
holiday in the District of Columbia as the last day), the taxpayer may
file a petition with the Tax Court for a redetermination of the
deficiency. Except as otherwise provided in section
6851 , 6852
or 6861
, no assessment of a deficiency in respect of any tax imposed
by subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or proceeding
in court for its collection shall be made, begun, or prosecuted until
such notice has been mailed to the taxpayer, nor until the expiration of
such 90-day or 150-day period, as the case may be, nor, if a petition
has been filed with the Tax Court, until the decision of the Tax Court
has become final. Notwithstanding the provisions of section
7421(a) , the making of such assessment or the beginning of
such proceeding or levy during the time such prohibition is in force may
be enjoined by a proceeding in the proper court, including the Tax
Court. The Tax Court shall have no jurisdiction to enjoin any action or
proceeding under this subsection unless a timely petition for a
redetermination of the deficiency has been filed and then only in
respect of the deficiency that is the subject of such petition.
11
Contrary to the Bermans' contention, §6213(a)
does not require notice of a deficiency assessment before the
assessment can be reduced to judgment. That section instead deals with
the notice required so that a taxpayer may petition for a
redetermination of the deficiency assessment.
12
The Bermans also contend that the district court erroneously awarded
interest and penalties attributable to the 1978 deficiency assessment
which had been specifically excluded in the original district court
decision. However, the final amount awarded by the district court on
remand was $126,124.09, which, the court stated, "does not include
two other assessments of July 11, 1978, for $6,984.00 and $9,829.45,
which this Court had determined had not been sufficiently
established." Joint Appendix at 213-14.
Letitia Simpson, formerly known as Letitia S.
Woodard v.
United States of America
. United States of America v. Robert S. Woodard, Letitia Simpson,
formerly known as Letitia S. Woodard, The Homeowner's Association of
Plummer's Cove, Inc., Lynwood Roberts, Tax Collector, Duval County,
Florida, and the American National Bank of Florida
U.S.
District Court, Mid. Dist. Fla., Jacksonville Div., 87-526-Civ-J-12,
87-837-Civ-J-12, 4/6/89
[Code Secs.
6321 and 6331
]
Tax liens: Levies: Fraudulent conveyance: State law.--A
conveyance of property from a taxpayer to his former spouse was set
aside due to its fraudulent nature, resulting in the foreclosure of
federal tax liens against the property. The court found that the
taxpayer, with his then wife's consent, concocted a scheme to transfer
his assets to her in an effort to avoid payment of his income tax
liability stemming from his trafficking in drugs. Because such
conveyance constituted fraud under state (
Florida
) law, the government could have its liens foreclosed, even though the
conveyance of the property occurred prior to the existence of the liens.
[Code Secs.
6323 and 7426
]
Wrongful levy action: Nominee v. purchaser: Priority of competing
claims.--A wrongful levy action against the government was dismissed
because the government's liens against the levied property were superior
to the claims of the individual who brought the action. The individual
was considered to be merely a nominee of the taxpayer, who was the
individual's former spouse and who was determined to be the real owner
of the property when the government's liens were filed. An alleged
conveyance of the property to the former spouse by the taxpayer while
they were married was set aside due to fraud. Although the individual
was subsequently awarded the property as alimony when she and the
taxpayer were divorced, the government's liens had already been
perfected and, therefore, were superior to the individual's claims. The
individual did not qualify for the protection given to the purchasers
under Code Sec.
6323 because her receipt of the property was due to the
relinquishment of marital rights, which is not considered a
"purchase" for these purposes.
MEMORANDUM
MORTON, Senior District
Judge:
These cases involve the tax
liability of Robert E. Woodard, (hereinafter "taxpayer") and
the title to real estate claimed by Letitia Simpson. The tract of land
is a residence located at
2715 Cove View Drive
,
Jacksonville
,
Florida
, more fully described as follows:
A part of Lots 1 and 2 as
shown on plat of E.D. Plummer's Subdivision of a part of the Eleanor
Pritchard Grant, Section
40 , Township 3 South, Range 27 East, as recorded in Plat
Book 6, page 62, of the current public records of Duval County, Florida,
more particularly described as follows:
For a point of reference
commence at the intersection of the southerly line of said Lot 2 with
the southwesterly right of way line of Scott Mill Road (as now
established as an 80 foot right of way); thence South 60 degrees 25
minutes and 30 seconds west, along the southerly line of said Lot 2, a
distance of 650.56 feet; thence north 29 degrees, 34 minutes 30 seconds
west, a distance of 40.67 feet; thence north 2 degrees 34 minutes 32
seconds west, a distance of 41.88 feet to the point of beginning; thence
north 82 degrees 13 minutes 53 seconds west, a distance of 135.00 feet;
thence north 24 degrees 45 minutes 30 seconds east, a distance of 78.58
feet; thence south 63 degrees 20 minutes 53 seconds east, a distance of
130.00 feet; thence south 28 degrees 21 minutes 36 seconds west, a
distance of 34.90 feet to the point of beginning.
SUBJECT to those Covenants
and Restrictions contained in instrument recorded in Official Records
Book 4241, page 899 and First Amendment recorded in Official Records
Book 4241, page 917, Duval County, Florida; easements recorded in
Official Records Book 3663, page 1009, and Official Records Book 3894,
page 672.
The
United States of America
seeks to set aside an alleged fraudulent conveyance of subject property
to Simpson and to foreclose the federal tax liens against the same.
Simpson brings a wrongful levy action against the Government.
On February 3, 1986, an
assessment of federal income taxes was made against taxpayer for taxes,
a civil fraud penalty, and interest for the year ending December 31,
1977. A notice of this lien was recorded in the Public Records of Duval
County. A nominee notice of lien was likewise filed against Letitia S.
Simpson (nee Woodard) on July 26, 1986, with respect to subject
property. A notice of seizure of subject property was served on Simpson
on April 2, 1987, and this wrongful levy suit was instituted.
Taxpayer and Simpson were
married on April 4, 1981. They were divorced on February 27, 1987. No
children were born to this union and Simpson was awarded the subject
property as alimony in solido.
At the time of the
marriage, Simpson owned no real estate, stocks, bonds or savings account
in excess of $5,000. Shortly before her marriage she filed bankruptcy.
Her work history reflected that she had been employed as a receptionist
for Amtrak and the United States Postal Service. Her annual salary did
not exceed $20,000 and was used to support herself and her son. Prior to
her marriage her assets were practically nil.
After her marriage, her
annual earnings did not exceed $14,000 and were expended for herself and
her son. Therefore, she came to the marriage practically denuded of
assets.
Taxpayer decided to
purchase the subject property. The purchase contract and closing
statement were prepared and signed by both husband and wife, taxpayer
and Simpson. The warranty deed was prepared reflecting that both persons
were the purchasers. At the closing of the transaction, taxpayer had his
name expunged therefrom by crossing it out. The deed dated February 28,
1985, in its corrected condition, therefore, reflected the purchaser as
Letitia S. Woodard (Simpson). The reason given for striking the name of
taxpayer from the deed was his anticipated 1977 tax liability.
At the time of the real
estate transfer to Simpson, both taxpayer and Simpson were aware that
taxpayer was under investigation by the Criminal Investigation Division
of the Internal Revenue Service, and his 1977 tax return was being
examined by the IRS Audit Division. The awareness existed prior to the
transfer of the property to Simpson.
The purchase price of the
property was $125,000, of which $95,000 was paid by taxpayer from funds
which he had accumulated prior to the marriage (proceeds of two
properties purchased by taxpayer prior to marriage and sold before the
subject real estate closing). The balance of the purchase price was
acquired by the execution of a nonsecured promissory note signed by both
husband and wife, but based on previous personal relationship of
taxpayer to the bank president and taxpayer's past business experience.
This note was not paid at maturity and has been reduced to judgment. All
payments credited thereon came from taxpayer.
Simpson asserted that she
contributed marital funds to the purchase price of the property for
minor repairs and condominium dues. This is not credible evidence, and
this court completely discounts it except that while she was living in
the condominium without her former husband, she may have paid some
monthly dues.
Taxpayer testified that he
did not intend to make a gift of subject property to Simpson, and the
court so finds. Taxpayer transferred stock in B & W Woodard, Inc.,
again as part of a scheme to prevent payment of taxes due the
United States
. This scheme was known to Simpson who admits that she did not give any
consideration for this asset and knew that it was not a gift. In short,
taxpayer, with Simpson's knowledge, consent and connivance, concocted
the scheme to transfer his assets to his then wife in an effort to avoid
payment of his income taxes.
Simpson relies somewhat on
the fact that on February 23, 1987, in the divorce proceeding, the judge
awarded her the subject property and charged her with the payment of the
$30,000 bank note. However, the federal tax liens were recorded on June
3, 1986, and July 29, 1986 (nominee). She had made no payments on the
bank note.
Simpson's credibility was
destroyed, and no credibility is given to her testimony. What is
confronted here is that the taxpayer was a trafficker in drugs, was
caught at least twice, and his wife (Simpson) was aware of his resulting
tax problems. They both participated in a scheme to defraud the IRS by a
fraudulent conveyance of his assets to avoid payment of the taxes.
The real estate taxes due
Duval County were stipulated.
The foregoing facts are
accordingly found, adjudged and decreed.
CONCLUSIONS
OF LAW
This court has jurisdiction
over the action instituted by Letitia Simpson pursuant to 26 U.S.C. §7426
. This court has jurisdiction over the action instituted by
the
United States
pursuant to 26 U.S.C. §§7402
and 7403
, and 28 U.S.C. §§1340 and 1345.
On January 25, 1989, this
court granted partial summary judgment in favor of the United States and
held that taxpayer, with respect to the assessment for his 1977 income
tax liabilities made on February 3, 1986, was indebted to the United
States in the total principal amount of $124,995.09, as of September 1,
1987, with interest and statutory additions thereafter as provided by
law.
A federal tax lien arises
upon assessment and attaches to all property and rights to property
belonging to a taxpayer. 26 U.S.C. §§6321
and 6322
. Here, the federal tax lien arose on February 3, 1986, when
the assessment was made against taxpayer for his income tax liabilities
for the year 1977. The filing of the Notices of Federal Tax Lien on June
3, 1986, and July 29, 1986, perfected this lien interest against certain
creditors of the taxpayer. 26 U.S.C. §6323
;
Fla.
Stat. §695.01(1). The issue herein is whether taxpayer had an interest
in the subject real property to which the tax lien could attach. The
determination of the nature of the interest is made according to state
law, while the priority of competing claims to the property is made
pursuant to federal law. Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509 (1960).
I.
Fraudulent Conveyance Action
Section 726.01 of the
Florida Statutes provides that "[e]very . . . conveyance . . . of
lands . . . made . . . [in] fraud . . . to delay, hinder, or defraud
creditors . . . shall be . . . deemed . . . utterly void. . . ."
The
United States
may seek relief under the applicable fraudulent conveyance law if a
taxpayer disposes of property prior to the existence of federal tax
liens. Commissioner v. Stern [58-2 USTC ¶9594 ], 357 U.S. 39 (1958); United States v.
Kaplan, 227 F.2d 405 (5th Cir. 1960).
To establish a fraudulent
conveyance there must be a creditor to be defrauded, a debtor intending
fraud, and a conveyance of property which is applicable to the payment
of the debt due. United States v. Fernon [81-1
USTC ¶9287 ], 640 F.2d 609, 613 (5th Cir. 1981); United
States v. Ressler [77-1 USTC ¶9459 ], 433 F.Supp. 459 (S.D. Fla. 1977), aff'd
[78-2
USTC ¶9571 ], 576 F.2d 650 (5th Cir. 1978), cert. denied,
440 U.S. 929 (1979); Bay View Estates Corp. v. Southerland, 114
Fla.
635, 154 So. 894 (
Fla.
1934). In
Florida
, the party seeking to set aside a fraudulent conveyance must establish
these factors by a preponderance of the evidence. Wieczoreck v. H
& H Builders, 475 So. 2d 277 (
Fla.
1985).
For the purposes of a
fraudulent conveyance action, the
United States
is deemed a creditor with standing to institute such an action from the
date the taxes become due and owing. United States v. Hickox, 356
F.2d 969, 972 (5th Cir. 1966); United States v. Kaplan, 267 F.2d
114 (2d Cir. 1959); United States v. Schroeder [85-2 USTC ¶9709 ], 56 A.F.T.R. 2d 85-5971 (N.D. Ill. 1985); United
States v. Ressler [77-1 USTC ¶9459 ], 433 F.Supp. 459 (S.D. Fla. 1977); United
States v. St. Mary [72-1 USTC ¶9319 ], 334 F.Supp. 799 (E.D. Pa. 1971). In this
case, the United States became a creditor of the taxpayer on April 15,
1978, the date the taxpayer's 1977 federal income tax return and payment
were due, over six years prior to the transfer to Simpson. Therefore,
the United States has standing to challenge the conveyance of the
subject real property to Simpson, pursuant to Fla. Stat. §726.01.
The second requirement,
that there be a debtor intending fraud, was established both by evidence
of actual fraud, and from inferences raised by the "badges of
fraud" present herein. The court finds that taxpayer intended to
actually defraud the
United States
at the time the subject real property was transferred to Simpson by
directing that title to the subject real property be placed in her name.
United States v. Fernon, 640 F.2d at 609; Wieczoreck v. H
& H Builders, 450 So.2d 867 (Fla. App. 5th Dist. 1984); Bay
View Estates v. Southerland, supra, 154 So. at 900. Additional
evidence of taxpayer's actual intent to defraud the
United States
is his pattern of placing assets, such as the Lakeside Drive Property
and the shares of B & W Woodworks, Inc., in Simpson's name for the
avowed purpose of avoiding anticipated federal tax liabilities and
liens.
Assuming arguendo that
actual fraud is absent, courts look to certain "badges of
fraud" to discern a debtor's intent, such as the lack of
consideration for the transfer, a close family relationship, pending or
threatened litigation, and insolvency or substantial indebtedness of the
transferor. Fernon, 640 F.2d at 613; Ressler, 433 F.Supp.
at 464; Cleveland Trust Co. v. Foster, 93 So. 2d 112 (
Fla.
1957); Stephens v. Kies Oil Co., 386 So.2d 1289 (Fla. App. 3rd
Dist. 1980). The presence or absence of a particular badge of fraud is
not deemed conclusive; for example, it is not necessary that the debtor
be insolvent at the time of the conveyance to disregard the transaction.
United States
v. Fernon, 640 F.2d at 613, n. 10; Weathersbee v. Dekle,
145 So. 198 (
Fla.
1933); Banner Construction v.
Arnold
, 128 So.2d 893, 896 (Fla. App. 1st Dist. 1961). Indeed, a transfer
to a close family relation creates a prima facie case of fraud,
and must be met by evidence on the part of the transferee.
United States
v. Ressler, 433 F.Supp. at 464; Scott v. Dansby, 334
So.2d 331 (Fla. App. 1st Dist. 1976); Gyorok v.
Davis
, 183 So.2d 701 (Fla. App. 3rd Dist. 1966); Money v. Powell,
139 So.2d 702 (Fla. App. 2d Dist. 1962); Nally v. Olsson, 134
So.2d 265 (Fla. App. 2d Dist. 1961); Tornwall v. Carter, 106
So.2d 96 (Fla. App. 2d Dist. 1958).
Besides the evidence that
taxpayer committed actual fraud, the evidence also established the
following badges of fraud: (1) that taxpayer caused title to the subject
real property to be placed in Simpson's name; (2) that taxpayer and
Simpson were married at the time of the transaction; (4) that taxpayer
did not intend the subject real property to be a gift to Simpson; and
(5) that taxpayer caused the title to other assets, such as the Lakeside
Drive property and the share of B&W Woodworks, Inc., to be placed in
Simpson's name. I hold that taxpayer's intent to defraud the United
States and place his assets beyond the reach of the United States is
inferred from the aforementioned badges of fraud, and that Simpson
failed to rebut with credible evidence the prima facie case of
fraud established by the fact that she received title to the subject
real property at the direction of a close relative, her then husband.
The evidence established
that there was a conveyance of property that would have been available
to satisfy the taxpayer's unpaid income tax liabilities. The evidence
demonstrated that the property transferred by the taxpayer was the
proceeds from the sale of two properties owned by him, which he sold to
obtain the funds to purchase the subject real property, but directed
that title thereto be placed in Simpson's name. Had these events not
occurred, the assets used to purchase the subject real property would
have been subject to the lien of the
United States
. That there was no direct transfer from taxpayer to Simpson does not
change the applicability of the fraudulent conveyance statute. When a
debtor purchases property and title is taken in the name of another, the
transaction can be attacked under the fraudulent conveyance provisions. Beall
v. Pinckney, 150 F.2d 467 (5th Cir. 1945); First State Bank v.
Fitch, 141 So. 294 (
Fla.
1932); Webster v. Brown, 109 So. 320 (
Fla.
1926); Nissim Hadjes, Inc. v. Hasner, 408 F.2d So.2d 869 (Fla.
App. 3rd Dist. 1982).
The evidence clearly
establishes (much more than a mere preponderance) that subject real
property was fraudulently conveyed to Simpson, within the meaning of
Fla. Stat. §726.01. Accordingly, this court holds that the conveyance
to Simpson was void, and that taxpayer has all rights to and interest in
the subject real property, even though title thereto is held in
Simpson's name. The federal tax liens in taxpayer's name attached to
that interest, and may be foreclosed by a sale of the subject real
property in accordance with 26 U.S.C. §7403
.
II.
Wrongful Levy Action
A federal tax lien arises
upon assessment and attaches to all property and rights to property
belonging to the taxpayer, 26 U.S.C. §§6321
and 6322
, and the federal tax liabilities can be collected by levy
upon all property and rights to property of a taxpayer. 26 U.S.C. §6331
. Here, it is uncontroverted that the United States has a
lien for unpaid federal taxes attaching to all property and rights to
property belonging to taxpayer, and that the subject real property was
seized for payment of taxpayer's federal tax liabilities on April 2,
1987. The issue before this court is whether taxpayer had a property
interest in the subject real property seized from Simpson as his
nominee, which action Simpson contends was wrongful.
The parameters of a
wrongful levy suit are defined by 26 U.S.C. §7426
. That statute allows third parties to sue the
United States
where a levy has been made upon property, and enjoin a sale of the
property if a sale would irreparably injure rights in property that a
court determines are superior to the rights of the
United States
. 26 U.S.C. §7426(b)(1)
. The initial burden is upon Simpson to show that she holds
title or some other ownership interest in the property at issue. Morris
v. United States [87-1
USTC ¶9241 ], 813 F.2d 343, 345 (11th Cir. 1987). This
burden was met by both the stipulation at the opening of the trial by
the United States that record title to the subject real property was in
Simpson's name, and the introduction of the February 28, 1985 Warranty
Deed. The burden then shifts to the
United States
to establish a nexus between the taxpayer and the property substantial
evidence. Morris, id. However, Simpson retains the final
obligation of persuading the court that the levy should be overturned. Morris,
id.
It is well settled that
bare legal title is not determinative of all property rights;
Florida
law recognizes that true ownership or an ownership interest may rest
with a party who is not the titleholder of record. Towerhouse
Condominium, Inc. v. Millman, 475 So.2d 674 (
Fla.
1985). Other federal courts have uphold nominee Notices of Federal Tax
Lien. G.M. Leasing v. United States [77-1 USTC ¶9140 ], 429 U.S. 338, 350-351 (1977) (the IRS is
authorized to file liens against property in the hands of a third party
"straw man or alter ego" and also to levy against such
property); Baldassari v. United States, 78-2
USTC ¶9560 (Cal. Ct. App. 1978) (nominee liens may be filed
under circumstances in which the IRS has reasonable cause to believe
that the property against which the lien is filed may have been
transferred to a third party to avoid creditors including the federal
government).
The determination of
whether an individual is the nominee of the taxpayer is dependent upon
the facts and circumstances of each case.
United States
v. Williams, 581 F.Supp. 756 (N.D.
Ga.
1982). The factors to be considered in determining whether a third party
is the nominee of the taxpayer are: (1) whether the taxpayer expended
personal funds for the property; (2) whether the taxpayer enjoys the
benefits of the property; (3) the close family relationship between the
taxpayer and the titleholder; (4) whether the taxpayer exercises
dominion and control over the property; and (5) whether the record
titleholder interferes with the taxpayer's use of the property. See United
States v. Miller Bros. Const. Co. [74-2 USTC ¶9817 ], 505 F.2d 1031 (10th Cir. 1974); Krivo
Industrial Supply Co. v. National Distillers and Chemical Co., 483
F.2d 1098, 1103-1106 (5th Cir. 1973); United States v. Williams,
supra; Loving Saviour Church v. United States [83-1 USTC ¶9215 ], 556 F.Supp. 688, 692 (D.S.D. 1983), aff'd,
728 F.2d 1085 (8th Cir. 1984); United States v. Pittman 70-1 USTC
¶933 (E.D. Wis. 1970); United States v. Venable, Civil No.
C84-2551A (N.D. Ga. May 20, 1986).
The evidence introduced at
trial established the aforementioned elements. The subject real property
was purchased with taxpayer's assets, taxpayer lived in the subject real
property with Simpson after it was purchased, and taxpayer caused the
title to the property to be placed in his then wife's name to avoid the
anticipated federal tax lien.
Substantial evidence
introduced by the
United States
established a nexus between taxpayer and the property, namely that the
subject real property was acquired with taxpayer's assets and not
Simpson's assets, and that Simpson holds title to the subject real
property as his nominee. Simpson has failed to introduce evidence to
sustain her ultimate burden of persuasion that the levy was wrongful.
Accordingly, this court finds that taxpayer holds all beneficial
interest in the subject real property. This beneficial interest is
superior to any interest of Simpson therein, based upon record title or
alleged financial contributions to the purchase price of the property.
The federal tax lien attached to taxpayer's interest, and the seizure of
the subject real property to collect taxpayer's 1977 federal income tax
liabilities was proper. See Williams v.
United States
, 581 F.Supp. 756 (N.D. Ga. 1982) (although legal title was in the
name of Helen Williams, she held title to real property as the nominee
of her son Robert); see also United States v. Pittman, 70-1
USTC ¶9333 (E.D. Wisc. 1970), rev'd on other grounds [71-2
USTC ¶9650 ], 449 F.2d 623 (7th Cir. 1971); W. Plumb,
Federal Tax Liens, (3rd ed. 1972) p. 19 n.48 ("Property held in
the name of a nominee is subject to lien, not for taxes of the nominee .
. . but for those of the true owner . . . ." [Citations omitted].)
Simpson's claim of interest
in the subject real property based on the assignment in the divorce
proceeding of the liability for the $30,000 promissory note is rejected
by this court. This assignment in the divorce proceeding is only binding
on taxpayer and Simpson, and not upon a nonparty to that action such as
the American National Bank of
Florida
. Firestone v. Firestone, 263 So.2d 223 (
Fla.
1972); Donner v. Donner, 302 So.2d 452 (Fla. App. 3rd Dist.
1974); see Davis v. Davis, 98 So.2d 777 (
Fla.
1957); Blake v. Blake, 172 So.2d 9 (Fla. App. 3rd Dist. 1965).
Additionally, the American National Bank of
Florida
has recorded a judgment against both taxpayer and Simpson, and the only
evidence of payment of this liability was the recent collection of
$8,800 from taxpayer.
III.
Priority of Competing Claim
The determination of the
priority of competing claims to the subject real property is made
pursuant to federal law. Aquilino v. United States, supra.
While recognizing that
Simpson was awarded the subject real property as lump sum alimony in
connection with her divorce from the taxpayer, this determination is
only binding on taxpayer and Simpson, and neither controlling on a
nonparty claimant such as the United States, Firestone v. Firestone,
263 So.2d 223 (Fla. 1972); Donner v. Donner, 302 So.2d 452 (Fla.
App. 3rd Dist. 1974); see Davis v. Davis, 98 So.2d 777 (Fla.
1957); Blake v. Blake, 172 So. 2d 9 (Fla. App. 3rd Dist. 1965),
nor binding upon this court. Commissioner v. Bosch [67-2
USTC ¶12,472 ], 387 U.S. 456 (1967).
The interest of the
United States
arose and attached to all of taxpayer's property and rights to property
upon the assessment, made on February 3, 1986. 26 U.S.C. §§6321
and 6322
. This interest was perfected against other creditors or
purchasers when the Notice of Federal Tax Lien was filed, here on June
3, 1986. 26 U.S.C. §6323(f)
;
Fla.
Stat. §695.01(1). Any interest that Simpson received as lump sum
alimony vested on February 23, 1987, the date the final divorce decree
was entered. Canakaris v. Canakaris, 382 So.2d at 1201; Keller
v. Belcher, 256 So.2d 561, 563 (Fla. App. 3rd Dist. 1972). Because
the final divorce degree was entered after both the Notice of Federal
Tax Lien in the name of Robert E. Woodard was recorded, and after the
Notice of Federal Tax Lien denoting Simpson as the nominee of taxpayer
was recorded on July 29, 1986, any interest that vested in Simpson upon
the entry of final divorce decree was subject to these tax liens. Prewitt
v. United States [86-2
USTC ¶9513 ], 792 F.2d 1353 (5th Cir. 1986) (interest
obtained pursuant to a divorce decree held inferior to the interest of
the United States pursuant to a prior recorded Notice of Federal Tax
Lien). Therefore, as a matter of law any purported interest obtained by
Simpson in the subject real property pursuant to final divorce decree is
inferior to the interest of the United States in this property because
it was obtained after the federal tax lien attached to the property.
Additionally, Simpson does
not qualify for the protection given to purchasers under 26 U.S.C. §6323(a)
or the regulations promulgated pursuant thereto. Section
6323 provides that the lien imposed by section
6321 is valid against any purchaser, once that interest is
perfected according to state law. Section
6323(h)(6) further defines 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. Specifically excluded from the
definition of "money or money's worth" is the relinquishment
of marital rights. Treas. Reg.
§301.6323(h)-1(a)(3) . Here, because the subject real
property was awarded to Simpson to compensate her for relinquishing her
marital rights, she is not a purchaser of the subject real property for
money or money's worth entitled to the protections of 26 U.S.C. §6323
. Fla. Stat. §61.11; Bezanilla v. Bezanilla, 65 So.2d
754 (
Fla.
1953); Harris v. United States [85-2
USTC ¶9511 ], 588 F.Supp. 835, 838 (N.D. Tex. 1984), aff'd
[85-2 USTC ¶9511 ], 764 F.2d 1126, 1129 (5th Cir. 1985).
On January 25, 1989, this
court entered partial summary judgment holding that the claims of the
United States
are superior to the claims of the American National Bank of
Florida
in the subject real property. Simpson has conceded that the American
National Bank has a lien upon the subject real property.
The parties have stipulated
that the claim of defendant Lynwood Roberts, Tax Collector,
Duval County
,
Florida
, for unpaid ad valorem taxes with respect to the subject real
property, is superior to the claim of the
United States
to the subject real property.
The Homeowner's Association
of Plummer's Cove, Inc., failed to appear and introduce evidence that it
has a lien upon the subject real property. This court finds that any
lien that this defaulting party may have upon the subject real property
is inferior to the lien of the
United States
. See Thompson v.
Adams
, 685 F.Supp. 842, 844-5 (M.D. Fla. 1988).
Based on the foregoing,
this court holds that the
United States of America
has a valid federal tax lien for taxpayer's federal income tax
liabilities for the period ending December 31, 1977, which may be
foreclosed against all his property and rights to property. This federal
tax lien has attached to the taxpayer's interest in the subject real
property, and said interest is superior to the interest of Simpson, the
American National Bank of Florida, and the Homeowner's Association of
Plummer's Cove, Inc., in the subject real property. This lien is to be
foreclosed against the subject real property, and the subject real
property is to be sold pursuant to 26 U.S.C. §7403
and 28 U.S.C. §2001
, pursuant to a separate order of this court. The United
States is directed to prepare an Order of Sale, pursuant to 28 U.S.C. §§2001
, 2002
, within 20 days of the date of this order, directing that
the property be sold by the U.S. Marshal, and the proceeds of the sale
be applied as follows: first, to the United States Marshal for the costs
of the sale; second, to Lynwood Roberts, Tax Collector, Duval County,
Florida, for satisfaction of the unpaid ad valorem taxes
described hereinabove; and third, to the United States, for satisfaction
of the federal tax liabilities of Robert E. Woodard for the period
ending December 31, 1977. In the unlikely event that proceeds remain
after satisfaction of the lien of the United States, the Clerk of this
court is to notify Simpson, the American National Bank of Florida, and
the Homeowner's Association of Plummer's Cove, Inc., of the amount
remaining, so that said parties may assert whatever claims they may have
to the undistributed proceeds.
To the extent that the
proceeds of the sale of the subject real property are insufficient to
satisfy the claims of the United States against taxpayer, judgment will
be issued in favor of the United States against taxpayer in the amount
of his unpaid federal tax liabilities for the period ending December 31,
1977, plus interest and statutory additions as provided by law.
An appropriate order will
be entered.
United States of America
, Plaintiff v. John W. Hart, et al., Defendants
U.S.
District Court, Cent.
Dist. Ill., Springfield Div., 86-3141, 1/5/89
[Code Sec.
6321 ]
Tax protestors: Constitutional arguments: Jurisdiction: Frivolous
claims: Fraud: Conveyances, fraudulent: Lien for taxes.--A tax
protestor's claim that he was not a citizen of the United States and,
thus, was not subject to the Internal Revenue Code was completely
without merit. The taxpayer's conveyance of his interest in the family
residence to his wife was fraudulent. The government met the requisite
standards under the Federal Code of Civil Procedure for summary judgment
in the action to reduce to judgment the federal tax assessments against
the taxpayer and to set aside the fraudulent conveyance, and the
taxpayer failed in his contention that the court lacked subject matter
jurisdiction.
ORDER
MILLS, District Judge:
This cause is before the
Court on a motion to dismiss for lack of subject matter jurisdiction
filed on behalf of Defendant John Hart. Also before the Court is a
motion for summary judgment filed on behalf of Plaintiff, the
United States of America
.
I--Facts
Plaintiff asserts that on
May 14, 1984, a delegate of the Secretary of the Treasury made
assessments in accordance with law against Defendant John Hart for
unpaid federal income taxes. Plaintiff asserts that the delegate gave
notice of the assessments and made demand for payment thereof. Defendant
John Hart has failed to pay the assessments and remains indebted to the
United States
. Plaintiff's complaint alleges that as a result of Defendant John
Hart's failure to pay the assessments, a federal tax lien attached to
all the property of John Hart, including that which was allegedly
fraudulently conveyed.
Plaintiff instituted this
action to reduce to judgment the federal tax assessments against
Defendant John Hart, to set aside an alleged fraudulent conveyance by
Defendant John Hart to his wife, Defendant Vera Hart, and to foreclose
the outstanding federal tax liens.
II--Motion
to Dismiss for Lack of Subject Matter Jurisdiction
Defendant, John Hart,
alleges that this Court has no jurisdiction over the subject matter of
this case because "the income tax invoked by [the Internal Revenue
Code] does not apply to defendant who is a free born, lifelong, citizen
of the sovereign state of
Illinois
." See Defendant's Motion for Dismissl of the Complaint for Want of
Subject Matter Jurisdiction. Defendant's argument appears to be that he
is a citizen of the State of
Illinois
only and is not a citizen of the
United States
. Thus, Defendant asserts, because Defendant is not a citizen of the
United States
, he is not governed by federal law such as the Internal Revenue Code.
The Court finds Defendant
John Hart's argument to be completely frivolous and meritless. First,
Defendant admitted in his "plea to jurisdiction" (d/e 8) that
he is a
United States
citizen. Second, Defendant has submitted a copy of his birth certificate
showing that he was born in the
United States
. Finally, the "tax protestor" type of argument that Defendant
John Hart raises has been rejected so often and by so many courts that
citation of authority is unnecessary. Defendant's argument has
absolutely no basis in fact or law.
III--Summary
Judgment Standard
Under Fed. R. Civ. P.
56(c), summary judgment should be entered "if the pleadings,
depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law." Unquestionably, in determining
whether a genuine issue of material fact exists, the evidence is to be
taken in the light most favorable to the moving party. Adickes v.
S.H. Kress & Co., 398
U.S.
144, 158-59 (1970). Nevertheless, the rule is also well established that
the mere existence of some factual dispute will not frustrate an
otherwise proper summary judgment. Anderson v. Liberty Lobby, Inc.,
477
U.S.
242, 247 (1986). Thus, the "preliminary question for the judge [is]
not whether there is literally no evidence, but whether there is any
upon which a jury could properly proceed to find a verdict for the party
producing it upon whom the onus of proof is imposed."
Id.
at 251 (quoting Improvement Co. v. Munson, 14 Wall. 442, 448
(1872)); see also Celotex Corp. v. Catrett, 477
U.S.
317, 322 (1986). Applying this standard, the Court now turns to the case
at bar.
IV--Plaintiff's
Motion for Summary Judgment
The
United States
, in its motion for summary judgment and the supporting documents,
asserts that it has established a prima facie case of liability
against John Hart and that Defendant John Hart cannot meet the burden
placed on him by law to show that the tax assessments at issue are
incorrect and the correct amount of tax liability. Plaintiff further
asserts that the conveyance by John Hart to Vera Hart of his interest in
his residence was fraudulent in law.
The Government establishes
its prima facie case of liability by introducing into evidence
certified copies of the federal tax assessment. United States v.
Rindskopf, 105 U.S. 418 (1881); Welch v. Helvering [3
USTC ¶1164 ], 290 U.S. 111 (1933). The certificate of
assessments and payments establishes the Government's prima facie
case and places the burden of proof on the taxpayer. The certificate is
self-authenticating under Fed. R. Evid. 902(4).
Once the Government has
established its prima facie case of liability, the burden of
proof is placed on the taxpayer to show that the assessment is incorrect
and to show the correct amount of tax due. United States v. Janis
[76-2
USTC ¶16,229 ], 428 U.S. 433 (1976); Louis v. Reynolds,
284 U.S. 281 (1932).
The majority of courts to
have considered the question have ruled that a taxpayer's uncorroborated
testimony alone is insufficient to meet the taxpayer's burden of proof. Mays
v. United States, 85-2
USTC ¶9490 (11th Cir. 1985); L.J. Walker v. Commissioner
[85-1
USTC ¶9218 ], 757 F.2d 36 (3d Cir. 1985); Griffin v.
United States [79-1
USTC ¶16,310 ], 588 F.2d 521 (5th Cir. 1979); United
States v. Pierce [80-1
USTC ¶16,329 ], 609 F.2d 407 (9th Cir. 1979). Defendant John
Hart has introduced no evidence to suggest that the certificates of
assessment are invalid. Furthermore, it appears that Defendant John Hart
could not introduce any such evidence. In his response to Plaintiff's
request for production of documents, Defendant asserts that any records
he may have had that pertain to his financial status "have long
been disposed of via the Litchfield landfill."
The Court finds as a matter
of law that Defendant John Hart has failed to meet his burden of proof
to show that the assessments involved herein are incorrect and has
failed to meet his burden of proof to show the correct amount of the
taxes involved. Thus, summary judgment in favor of Plaintiff, the
United States of America
, will be allowed as to this issue.
V--Alleged
Fraudulent Conveyance
1
On September 14, 1977,
Defendant John Hart gave a quit claim deed for his interest in his
residence to his wife, Defendant Vera Hart, in exchange for her alleged
interest in the business property which John Hart operated as a tavern.
Defendants John and Vera Hart claim that Vera acquired a one-half
interest in the tavern property because of her marriage to Defendant
John Hart. Defendants John and Vera Hart also claim that Vera acquired a
one-half interest in the tavern property by way of a contract to
purchase the property from Adeline Hart, Defendant John Hart's mother.
The contract allegedly required $16,000 to be paid by John and Vera Hart
at the rate of $194.13 per month from January 1, 1973, through December
1, 1982. Thus, Defendants assert, John Hart's conveyance of his interest
in his residence was for full consideration and not fraudulent.
State law governs the
determination of a taxpayer's legal interest in property. Aquilino v.
United States [60-2 USTC ¶9538 ], 363 U.S. 509 (1960); Avco Delta Corp.
v. United States [72-1
USTC ¶9359 ], 459 F.2d 436 (7th Cir. 1972). Under
Illinois
law, a court may find a fraudulent conveyance where there has been fraud
in law or fraud in fact. Wilkey v. Wax, 82
Ill.
App. 2d 67 (1967). Fraud in fact requires proof of a specific intent to
defraud creditors. Montgomery Ward & Co. v. Simmons, 128
Ill.
App. 2d 186 (1970). In order to find fraud in law, a court must find
that there has been a voluntary gift of property, that there is an
existing or contemplated indebtedness against the donor, and that the
donor failed to retain sufficient property to pay the indebtedness. Mills
v. Susanka, 394
Ill.
439 (1946).
The Court finds that the
conveyance on September 14, 1977, by John Hart to Vera Hart of his
interest in his residence was a voluntary gift at a time when there was
an existing or contemplated indebtedness against Defendant John Hart and
that John Hart failed to retain sufficient property to pay the
indebtedness.
Defendant John Hart asserts
that the disputed conveyance was not fraudulent because it was for full
consideration, being given in exchange for Defendant Vera Hart's alleged
interest in the tavern property. The Court finds, however, that
Defendant Vera Hart had no interest in the tavern property which she
could convey. John and Vera Hart claimed that Vera acquired a one-half
interest in the tavern property because of her marriage to John. This is
equivalent to claiming that the interest was acquired in exchange for
"love and affection." "Love and affection," however,
has been held to be insufficient consideration to support a conveyance
that will withstand attack as a fraudulent conveyance. Cairo Lumber
Co. v. Ladenberger, 313
Ill.
App. 1 (1941).
Defendants John and Vera
Hart also assert that Vera acquired a one-half interest in the tavern
property by reason of a contract to purchase the property from Adeline
Hart. The contract, however, is undated and unrecorded. No warranty deed
of record was ever issued by Adeline Hart pursuant to the contract.
Furthermore, the Government has submitted five deeds establishing that
Adeline Hart owned the tavern property from June 20, 1962, through
January 16, 1986, except for a brief period in 1985 when the tavern
property was owned by Classic Leasing Company pursuant to a tax sale.
The Government has clearly established that on September 14, 1977, Vera
Hart had no interest in the tavern property which she could transfer to
John Hart. Thus, Defendant John Hart's transfer on September 14, 1977,
of his interest in the residential property in exchange for Vera Hart's
alleged interest in the tavern property was without consideration and
was a voluntary gift.
The second element the
Court must consider in determining whether the disputed conveyance was
fraudulent is whether it was made at a time when there was an existing
or contemplated indebtedness against the donor. Susanka, 394
Ill.
at 448. A federal tax lien arises as of the date of the assessment and
attaches to all property owned by the taxpayer on the date of the
assessment. I.R.C. §§6321
, 6322
. In this case, the date of the assessment was May 14, 1984.
It is not necessary, however, that the assessment occurred before the
date of the disputed transfer. "Indebtedness" means any
liability that may have been incurred. Hoffman v. Freedman, 81-2
USTC ¶9610 (N.D. Ill. 1981). In this case, the taxes which
were not paid by Defendant John Hart were for the years 1976, 1977,
1978, 1979, 1980, and 1981. John Hart transferred his interest in his
residence on September 14, 1977. Obviously, Defendant John Hart was
indebted to the
United States
when he transferred his interest in his residence to Defendant Vera
Hart. The fact that the transfer was before the date of the assessment
is irrelevant.
The final element the Court
must consider is whether Defendant John Hart retained sufficient assets
to pay the indebtedness. Clearly, he did not. John Hart, in response to
an interrogatory served by the Government, stated that on September 14,
1977, his only asset was $5,000 in cash. He also stated that he had no
liabilities. The Court has already held, however, that on September 14,
1977, Defendant John Hart was indebted to the Government for 1976 income
taxes. He owed approximately $13,000 in income taxes for 1976. When he
transferred his interest in his residence on September 14, 1977, he did
not retain sufficient assets to pay the debt which he owed.
Plaintiff has established
that the conveyance on September 14, 1977, by John Hart of his interest
in his residence to Vera Hart in exchange for her alleged interest in
the tavern property was fraudulent in law. Thus, Plaintiff's motion for
summary judgment will be allowed as to this issue.
Ergo, for the
reasons discussed above, the motion to dismiss filed on behalf of
Defendant John Hart is DENIED. The motion for summary judgment filed on
behalf of Plaintiff, the
United States of America
, is ALLOWED.
1
Plaintiff, United States of America, and Defendant, the State of
Illinois, have stipulated that if Plaintiff is successful in setting
aside the transfer by John Hart of his interest in his residence as a
fraudulent conveyance, then the federal tax liens arising from the May
14, 1984, assessments, plus statutory interest, which are involved in
this action shall enjoy priority over the tax claims of the State of
Illinois arising from filings by the Illinois Department of Revenue on
December 2, 1981, and March 29, 1983. They further stipulate that any
proceeds from a foreclosure that become available to satisfy the claims
of the taxing authorities shall be applied first to satisfy in full the
claim of the United States, and thereafter to the claim of the State of
Illinois.
United States of America v. John R. Montgomery, et
al
U.S.
District Court, West.
Dist. Tex., Austin Div., Civ. A-87-CA-122, 11/3/88
[Code Secs.
6321 and 6322
]
Lien for taxes: Conveyance: Avoidance of tax.--The attempted
transfer of real property, worth over $52,000, to a trust set up by the
transferor for $10 was ineffective to prevent the foreclosure of a tax
lien against the land, according to a U.S. district court for Texas.
Taxes had been assessed that gave rise to tax liens on all property and
rights to property of the taxpayer. Under state (
Texas
) law, the trust was not valid since there were no beneficiaries. The
conveyance, which was null and void because it was made without fair and
adequate or valuable consideration, was set aside and the lien was
imposed.
Christopher S. Cole,
Department of Justice, Dallas, Tex. 75242-0599, for U.S. John R.
Montgomery, Route 1, Box 103, Fredericksburg, Tex. 78624, pro se.
ORDER
NOWLIN, District Judge:
Before the Court is
Plaintiff's motion for Summary Judgment, as well as Defendants'
response. The Court has considered the Motion, response, and supporting
briefs, as well as the rest of the file, and is of the opinion that the
Motion is meritorious and should be Granted. Accordingly, the Court will
enter summary judgment against John R. Montgomery, and John R.
Montgomery as a trustee of the D. & R. Cave Creek Trust.
This suit was originally
brought against John Montgomery, individually and as trustee of the D.
& R. Cave Creek Trust; Minerva Montgomery, individually and as
trustee of the D. & R. Cave Creek Trust; and against Leo Itz as
trustee of the D. & R. Cave Creek Trust. On May 8, 1987, pursuant to
Plaintiff's moving for default judgment under Federal Rule of Civil
Procedure 55(b)(2), the Court entered judgment against Minerva
Montgomery, individually and as trustee of the D. & R. Cave Creek
Trust, and against Leo Itz as trustee of the D. & R. Cave Creek
Trust. Accordingly, John Montgomery, individually and in his trustee
capacity is the only remaining Defendant.
I. STANDARD
OF REVIEW
The Court may only grant
summary judgment under FED. R. Civ. P. 56(c) if the record reveals no
genuine issue as to any material fact and the moving party is entitled
to judgment as a matter of law. Celotex Corp. v. Catrett, 106
S. Ct.
2548, 2552-53 (1986). In deciding whether to grant summary judgment, the
Court should view the evidence in the light most favorable to the party
opposing summary judgment and indulge all reasonable inferences in favor
of that party. Pharo v. Smith, 621 F.2d 656, 664 (5th Cir. 1980).
II. FINDINGS
OF FACT
The Court hereby finds that
there is no genuine issue as to any of the following material facts:
1. This case involves an
attempted transfer of real property located at Route 1,
Box 103
,
Fredericksburg
,
Gillespie County
,
Texas
, to the D. & R. Cave Creek Trust. The property is described in the
Warranty Deed, attached hereto as "Appendix A."
2. On October 20, 1981,
John R. Montgomery and Minerva Montgomery executed a warranty deed
(attached hereto as "Appendix A") purporting to transfer two
tracts of land (one 1.44 acre tract and one 15 acre tract) in
Gillespie County
,
Texas
to the D. & R. Cave Creek Trust for $10.00 in silver.
3. On a tax receipt for
1983,
Gillespie
County
appraised the 1.44 acre tract at a taxable value of $18,530.00, and the
15 acre tract at a taxable value of $33,750.00. The taxable value of the
16.44 acres purportedly conveyed thus totaled $52,280.00.
4. The trust had no
beneficiaries at the time the warranty deed was executed and has never
had any beneficiaries.
5. The Internal Revenue
Service assessed taxes against John R. Montgomery and Minerva Montgomery
for the tax years 1977 through 1981. Notice of an assessment for 1977 in
the amount of $1,353.00 was mailed on May 11, 1981. Notice of an
assessment for 1978 in the amount of $1,436.00 was mailed on September
21, 1981. Notice of an assessment for 1979 in the amount of $1,913.00
was mailed on September 21, 1981. Notice of an assessment for 1980 in
the amount of $886.00 was mailed on August 8, 1983. Finally, notice of
an assessment for 1981 in the amount of $906.00 was mailed on December
19, 1983. The total amount of assessments for 1977 through 1981,
excluding penalties and interest, is $6,494.00.
6. John R. Montgomery and
Minerva Montgomery have failed to satisfy fully the assessment made
against them by the Internal Revenue Service.
III. CONCLUSIONS
OF LAW
The Internal Revenue Code
imposes a tax lien in favor of the
United States
upon "all property and rights to property, whether real or
personal," belonging to any person who fails to pay taxes for which
he is liable. 26 U.S.C. §6321
. Unless another date is specifically fixed by law, the lien
imposed by section
6321 arises at the time the assessment is made. 26 U.S.C. §6322
.
The
United States
may seek relief under applicable fraudulent conveyance laws of the state
in which the property and taxpayers are located. Commissioner v.
Stern [58-2 USTC ¶9594 ], 357 U.S. 39, 45 (1958); United States
v. Chapman [85-1
USTC ¶9337 ], 756 F.2d 1237, 1240 (5th Cir. 1985). Given
that John Montgomery resides in
Texas
and that the property is located in
Gillespie County
,
Texas
,
Texas
law on fraudulent conveyance applies. Section 24.02(a) of the Texas
Business and Commerce Code Annotated (
Vernon
1968) applies to this cause of action. 1
Section 24.02(a) provides:
A
transfer of real or personal property, a suit, a decree, judgment, or
execution, or a bond or other writing is void with respect to a
creditor, purchaser, or other interested person if the transfer, suit,
decree, judgment, execution, or bond or other writing was intended to
(1) delay or hinder any
creditor, purchaser, or other interested person from obtaining that to
which he is, or may become, entitled; or
(2) defraud any creditor,
purchaser, or other interested person of that to which he is, or may
become, entitled.
Texas
courts have interpreted
section 24.02(a) to mean that " 'a conveyance which is found to be
fraudulent as to creditors is wholly null and void as to such
creditors,' and 'the legal as well as the equitable title remains in the
debtor for the purpose of satisfying debts.' " Chapman, 756
F.2d at 1240 (quoting Texas Sand Co. v. Shield, 381 S.W.2d 48, 54
(
Tex.
1964)).
The
United States
is and was an existing creditor of John Montgomery. Taxes have been
assessed against John Montgomery for the years 1977 through 1981.
Pursuant to 26 U.S.C. §§6321
and 6322
, these assessments gave rise to tax liens in favor of the
United States upon all property and rights to property of the Defendant
at the time the assessments were made.
On the date of the
conveyance, the Internal Revenue Service had mailed notices of tax
assessments against the
Montgomerys
as follows: $1,353.00 on May 11, 1981, $1,436.00 on September 21, 1981,
and $1,913.00 on September 21, 1981. Plaintiff alleges that the
Montgomerys
intended to delay and hinder the
United States
from collecting taxes, to defraud the government by transferring the
real estate after these tax assessments were made, and that they
intended to defraud, delay, and hinder as to taxes which would become
due in the future. The Court agrees that the October 20, 1981 attempt to
transfer the 16.44 acres owned by John R. Montgomery and Minerva
Montgomery was a void transfer under section 24.02 with respect to the
Internal Revenue Service's assessments for tax years 1977, 1978 and
1979.
Under
Texas
laws, a trust cannot be created unless there is a beneficiary. Wortham
v. Baxter, 571 S.W.2d 539, 544 (Tex. Civ. App.--Eastland 1978, writ
ref'd n.r.e.); Morrison v. Parish, 384 S.W.2d 764, 766 (Tex. Civ.
App.--Texarkana 1964, writ dism'd w.o.j.). If there is no beneficiary,
then a valid trust is not created, and the property reverts back to the
person establishing the trust. Brelsford v. Scheltz, 564 S.W.2d
404, 406 (Tex. Civ. App.--Houston [1st Dist.] 1978, writ ref'd n.r.e.); Morrison,
385 S.W.2d at 766. In response to a request for admission, Plaintiff
John Montgomery stated, "[t]he terms of the trust contract were
carried out upon the execution of the trust and there were no
beneficiaries then or now." Accordingly, the D. & R. Cave Creek
Trust is not a valid trust under
Texas
law, and the property reverts to the grantors, John R. Montgomery and
Minerva Montgomery.
Furthermore, under
Texas
law, a deed for nominal consideration is not effective against a
creditor of the grantor where the consideration is grossly inadequate
when compared to the value of the land conveyed. Brown v. Naman,
111 S.W.2d 351, 353-54 (Tex. Civ. App.--Waco 1937, writ dism'd w.o.j.).
The deed from the
Montgomerys
purports to transfer 16.44 acres for $10.00 in silver.
Gillespie
County
appraised the same 16.44 acres at $52,280.00. The Court finds that the
consideration is grossly inadequate when compared to the value of the
land conveyed. Therefore, the transfer of the 16.44 acres from John R.
Montgomery and Minerva Montgomery to the D. & R. Cave Creek Trust is
not effective against the Internal Revenue Service, their creditor.
ACCORDINGLY, IT IS ORDERED
that Plaintiffs' Motion for Summary Judgment is GRANTED.
IT IS FURTHER ORDERED that
Plaintiff, the
United States of America
, shall have and recover from Defendants John R. Montgomery and John R.
Montgomery as trustee of the D. & R. Cave Creek Trust, the amount of
$6,494.00 plus penalties and statutory interest as allowed by law, and
less subsequent payments and credits actually applied to outstanding
amounts.
IT IS FURTHER ORDERED that
federal tax liens encumber all the property rights in or to property of
the Defendants John R. Montgomery and John R. Montgomery as trustee of
the D. & R. Cave Creek Trust, in the parcel of real estate described
in the warranty deed from John R. Montgomery and Minerva Montgomery to
the D. & R. Cave Creek Trust, which is recorded in volume 144, pages
992 and 994 of the Deed Records of Gillespie County, Texas, a copy of
which is attached hereto as Exhibit A.
IT IS FURTHER ORDERED that
the transfer of the property described in Exhibit A from John R.
Montgomery to D. & R. Cave Creek Trust was a conveyance made without
fair and adequate or valuable consideration, that such conveyance is set
aside as null and void in accordance with TEX. BUS. & COMM. CODE
ANN. §24.02, and that the
United States of America
is entitled to foreclose the federal tax liens against such property.
IT IS FURTHER ORDERED that
the D. & R. Cave Creek Trust, not having any beneficiaries, fails as
a matter of law and is hereby declared null and void.
JUDGMENT
This action came on for
consideration before the Court, and the issues having been duly
considered;
IT IS HEREBY ORDERED that
Plaintiffs' Motion for Summary Judgment is GRANTED.
IT IS FURTHER ORDERED that
Plaintiff, the
United States of America
, shall have and recover from Defendants John R. Montgomery and John R.
Montgomery as trustee of the D. & R. Cave Creek Trust, the amount of
$6,494.00 plus penalties and statutory interest as allowed by law, and
less subsequent payments and credits actually applied to outstanding
amounts.
IT IS FURTHER ORDERED that
federal tax liens encumber all the property rights in or to property of
the Defendants John R. Montgomery and John R. Montgomery as trustee of
the D. & R. Cave Creek Trust, in the parcel of real estate described
in the warranty deed from John R. Montgomery and Minerva Montgomery to
the D. & R. Cave Creek Trust, which is recorded in volume 144, pages
992 and 994 of the Deed Records of Gillespie County, Texas, a copy of
which is attached hereto as Exhibit A.
IT IS FURTHER ORDERED that
the transfer of the property described in Exhibit A from John R.
Montgomery to D. & R. Cave Creek Trust was a conveyance made without
fair and adequate or valuable consideration, that such conveyance is set
aside as null and void in accordance with TEX. BUS. & COMM. CODE
ANN. §24.02, and that the
United States of America
is entitled to foreclose the federal tax liens against such property.
IT IS FURTHER ORDERED that
the D. & R. Cave Creek Trust, not having any beneficiaries, fails as
a matter of law and is hereby declared null and void.
1
Section 24.02(a) was amended and recodified as section 24.005 effective
September 1, 1987. The Historical Notes to
Tex.
Bus. & Com. Code Ann. sections 24.005 and 24.007 (
Vernon
1987), state that the 1987 Act applies only to transfers made on or
after the effective date of the Act.
United States of America
, Plaintiff v. David W. Freeman and Barbara M. Freeman, Defendants
U.S.
District Court, No.
Dist. W.Va., Civ. 81-357-E, 8/12/88
[Code Secs.
6321 , 6322
, 6323
and 7403
]
Tax liens: Validity of lien: Conveyances by taxpayer: Fraudulent
conveyance: Real property: Period of lien: Limitations.--The
taxpayer's conveyance of his interest in real property to his common-law
wife was set aside and the IRS's tax liens were enforced. The conveyance
at issue in the instant case had previously been set aside by a court of
competent jurisdiction and that action was not open to collateral attack
by the taxpayer and his wife. Moreover, even had there not been a
previous judgment on the issue, the conveyance to the wife could not be
permitted to stand because it was fraudulent. The conveyance was made at
a time when the taxpayer was facing litigation, it was made without any
consideration, and the taxpayer retained possession and control of the
property. Further, under state (
West Virginia
) law, a transfer of property without valuable consideration is void
with respect to creditors whose debts existed at the time of the
transfer. Thus, since the IRS's tax liens predated the transfer, the
transfer was void with respect to those claims. The IRS's claim was not
time-barred even though it was made after the expiration of the state
statute of limitations because that statute did not apply to the
United States
. Accordingly, the property was ordered sold to satisfy the tax liens,
with the common-law wife to receive one-half of the proceeds.
