Fraudulent Conveyances Part2 page1

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United States of America v. Thomas W. Purcell, Constance M. Purcell, John R. Gingras, David Stevenson, Main Line Federal Savings and Loan Association, Commonwealth of Pennsylvania State Employees Retirement System

U.S. District Court, East. Dist. Pa. , CIV. 89-3642, 9/30/91, 798 FSupp 1102.

[Code Sec. 6321 ]

Tax liens: Fraudulent conveyances: Conveyances to third parties.--A real estate conveyance between an individual taxpayer (against whom the IRS assessed tax deficiencies) and his wife after the deficiencies arose was not valid under state ( Pennsylvania ) law. The taxpayer did not show that he was solvent at the time of the transfer or that the transfer was made for fair consideration. As such, the transfer was set aside as fraudulent even without an intent to defraud. Alternatively, the court held that the transfer was also fraudulent with an actual intent to defraud. The court did not, however, foreclose federal tax liens on a different property that was transferred by the taxpayer to a third party. The transfer was made, and the IRS had actual notice of such, before any assessments were made against the taxpayer.

MEMORANDUM

O'NEILL, JR., District Judge.

I. Introduction

This is a non-jury action brought by the United States to reduce to judgment certain federal tax assessments made against defendant Thomas W. Purcell for the tax years 1980-1986. The government seeks to set aside as fraudulent the conveyance of real property located at 211 Cricket Avenue , Ardmore , Pennsylvania from defendant Thomas Purcell to himself and defendant Constance Purcell as tenants in the entireties. The government seeks to foreclose existing federal tax liens on the Cricket Avenue property. The government also seeks to foreclose federal tax liens on real property located at 328 Locust Avenue , Ardmore , Pennsylvania .

I held a non-jury trial and the parties have submitted their proposed findings of fact and conclusions of law and supporting memoranda. This Memorandum constitutes my findings of fact and conclusions of law pursuant to Fed.R.Civ.P. Rule 52(a).

For the reasons that follow, I conclude that the transfer of property from Mr. Purcell to himself and Mrs. Constance Purcell was fraudulent, either by intent or by law. Therefore, I will enter judgment in favor of the United States and against defendants Thomas and Constance Purcell. I conclude that if the federal tax lien attached to the Locust Avenue property the IRS does not qualify for the protection of the Pennsylvania recording statutes because it had notice of the transfer of Mr. Purcell's interest in the Locust Avenue property to defendant Gingras. I therefore will enter judgment in favor of defendant Gingras and against the United States . I also will enter judgment in favor of the remaining defendants.

II. Findings of Fact

1. By his own description, Mr. Purcell is a "tax protester" and has for a number of years been a member of the Committee for Constitutional Taxation.

2. Mr. Purcell filed individual federal income tax returns for 1980 and 1981 in which he objected to listing any items of income or deductions and claimed the Fifth Amendment privilege.

3. On March 12, 1984, Mr. Purcell was notified of deficiencies for the 1980 and 1981 tax years and advised that a tax deficiency would be assessed against him unless he petitioned the Tax Court within 90 days. The deficiencies listed were:

                     Additions to Tax Under 26 U.S.C.

Tax Year             --------------------------------

 Ended      Tax    §6651(a)  §6653(a)(1)   §6653(a)(2)

12/31/80  $12,886   $3,322       $644           --

12/31/81   11,483    2,871        574     50% of

                                          interest due

                                          on $11,483

The Notice of Deficiency also informed Mr. Purcell that there were deficiencies due to penalties under 26 U.S.C. §6654 in the amounts of $822 for 1980 and $880 for 1981.

4. On April 18, 1985, the United States Tax Court entered an Order and Decision in the case of Thomas W. Purcell v. Commissioner of Internal Revenue, Dkt. No. 17466-84. The Tax Court ordered and decided that the taxpayer owed all deficiencies listed in the Notice of Deficiency.

5. On September 9, 1985, the Internal Revenue Service made assessments and notices of demand and payment against Mr. Purcell for the 1980 and 1981 tax years. The IRS assessments were for the amounts in the Tax Court Order and Decision, except that the IRS added a negligence penalty pursuant to 26 U.S.C. 6653(a)(2) as permitted by the Tax Court.

6. Mr. Purcell's unpaid assessed balance for the 1980 tax year is $27,529.07. His unpaid assessed balance for the 1981 tax year is $25,523.62.

7. Mr. Purcell does not dispute the accuracy of any of the figures he reported on his tax returns for the tax years 1982, 1983, 1984, 1985 or 1986.

8. Mr. Purcell filed a delinquent tax return which showed a deficiency for the 1982 tax year. On October 21, 1985, the IRS made an assessment and notice of demand and payment against Mr. Purcell in the following amounts: (1) $3620 in tax deficiency; (2) $353.07 in estimated tax penalty; (3) $905 in delinquency penalty; (4) $470.60 in failure to pay tax penalty and (5) $1383.28 in interest. On February 10, 1986, the IRS made an additional assessment and issued a notice and demand for the 1982 tax year in the following amounts: (1) $208 in negligence penalty; (2) $133.50 in delinquency penalty; (3) $534 in audit deficiency; (4) $409.30 in interest and (5) $54.30 in failure to pay tax penalty.

9. Mr Purcell's unpaid assessed balance for the 1982 tax year is $8,071.05.

10. Mr. Purcell filed a delinquent tax return which showed a deficiency for the 1983 tax year. On August 12, 1985, the IRS made an assessment and issued a notice and demand for payment against Mr. Purcell in the following amounts: (1) $3125 in tax deficiency; (2) $781.25 in delinquency penalty; (3) $171.87 in failure to pay tax penalty and (4) $621.35 in interest. On August 18, 1987, the IRS made an additional assessment and issued a notice and demand for the 1983 tax year in the following amounts: (1) $376 in audit deficiency; (2) $94 in delinquency penalty; (3) $203.52 in negligence penalty; (4) $193.05 in interest.

11. Mr. Purcell's unpaid assessed balance for the 1983 tax year is $5,566.04.

12. On March 17, 1986, the IRS made an assessment and issued a notice and demand for payment against Mr. Purcell for the 1984 tax year. Mr. Purcell's unpaid assessed balance for the 1984 tax year is $3,584.05. The assessed balance results from the tax deficiency reported by Mr. Purcell on his filed tax return.

13. On August 10, 1987, the IRS made an assessment and issued a notice and demand for payment against Mr. Purcell for the 1985 tax year. Mr. Purcell's unpaid assessed balance for the 1985 tax year is $5,650.42. Except for an IRS imposed charge of $28 for fees and costs, the assessed balance results from the tax deficiency reported by Mr. Purcell on his filed tax return.

14. On August 24, 1987, the IRS made an assessment and issued a notice and demand for payment against Mr. Purcell for the 1986 tax year. Mr. Purcell's unpaid assessed balance for the 1986 tax year is $6,833.01. The assessed balance results from the tax deficiency reported by Mr. Purcell on his filed tax return.

15. There was no credible testimony challenging the amounts of the assessments against Mr. Purcell.

16. The assessed balance does not include interest and penalties which accumulate pursuant to law after the date of assessment. The overall balance of taxes, penalties and interest owed by Mr. Purcell through November 5, 1990 is $141,698.59.

17. On August 26, 1986, the government recorded a Notice of Federal Tax Lien against Mr. Purcell with the Prothonotary of Montgomery County, Pennsylvania. The Notice was for $64,666.29 and concerned the tax years 1980, 1981, 1982 and 1984.

18. On April 30, 1987, the government recorded a Notice of Federal Tax Lien against Mr. Purcell with the Prothonotary of Montgomery County, Pennsylvania. This Notice was for $69,393.76 and concerned the tax years 1980, 1981, 1982, 1983 and 1984.

19. On December 8, 1988, the government recorded a Notice of Federal Tax Lien against Mr. Purcell with the Prothonotary of Montgomery County in the amount of $11,141.42 and concerning the tax years 1985 and 1986.

20. On or about May 8, 1975, Mr. Purcell and Ellen C. Purcell, his then current and now former wife, acquired certain real property located at 211 Cricket Avenue , Ardmore , Montgomery County , Pennsylvania .

21. A purchase money mortgage dated May 8, 1975 and recorded May 9, 1975 was granted on the property in favor of Fidelity Bond and Mortgage Company in the amount of $25,000. On or about August 11, 1985, Fidelity Bond and Mortgage Company assigned the mortgage on the Cricket Avenue property to the Commonwealth of Pennsylvania State Employee Retirement Fund . The assignment was recorded on September 15, 1985.

22. By indenture dated July 30, 1979 and recorded August 30, 1979 with the Prothonotary of Montgomery County, Mr. Purcell and Ellen C. Purcell transferred the Cricket Avenue property to Mr. Purcell exclusively.

23. By indenture dated April 19, 1984 and recorded April 25, 1984 with the Office for Recording of Deeds of Montgomery County, Mr. Purcell transferred the Cricket Avenue property from himself and defendant Mrs. Constance Purcell.

24. At the time of the 1984 conveyance of the Cricket Avenue property, Mr. Purcell was indebted to the United States for more than $40,000. This amount includes: (1) the amount owing for the 1980 and 1981 tax years, which at the time of the statutory notice of deficiency was $32,808.00, not including the penalty to be calculated under 26 U.S.C. §6653(a)(2); (2) the amount owing the 1982 and 1983 tax years, which was $7,655 in tax alone, without interest or penalties.

25. At the time of the 1984 conveyance of the Cricket Avenue property, Mr. Purcell owed two lots worth between $17,000 and $20,000 in Accomack County , Virginia .

26. At the time of the 1984 conveyance of the Cricket Avenue property, Mr. Purcell owned a painting business. The business had approximately $5,000 to $6,000 in accounts receivable and approximately $1000 in accounts payable at the time of the marriage.

27. Mr. and Mrs. Purcell did not establish that at the time of the 1984 conveyance, the value of Mr. Purcell's assets was more than the amount required to pay his existing debts, including his tax liability to the United States .

28. In 1979, Mr. Purcell bought out Ellen C. Purcell's one half interest in the Cricket Avenue property for $16,000.

29. In 1989, Mr. and Mrs. Purcell listed the Cricket Avenue property for sale for $149,000 and received an offer of $134,900.

30. At the time of the 1984 conveyance, therefore, the Cricket Avenue property was worth between $32,000 and $134,900.

31. Mr. Purcell received nothing of monetary value, except one dollar, in return for his conveyance of the Cricket Avenue property to Mrs. Purcell and himself.

32. Mr. and Mrs. Purcell failed to establish by clear and convincing evidence that Mrs. Purcell gave fair consideration for the conveyance of the Cricket Avenue property.

33. Prior to executing the indenture to himself and Mrs. Purcell, Mr. Purcell had received notice of the deficiency for the 1980 and 1981 tax years.

34. At the time of the 1984 conveyance, Mr. Purcell was aware that he was indebted to the government for the 1982 and 1983 tax years.

35. The Court does not find Mr. Purcell's testimony that he believed the IRS would not pursue him for the taxes owed to be credible.

36. Prior to her marriage, Mrs. Purcell knew Mr. Purcell was a tax protester and that he did not pay taxes.

37. Although Mr. Purcell explained his beliefs about the constitutionality of the income tax system to Mrs. Purcell, she continued to file her own tax returns and to pay taxes. Mrs. Purcell never claimed the Fifth Amendment privilege on her tax returns, as her husband did. Mrs. Purcell files individual tax returns rather than file jointly with her husband.

38. Mr. and Mrs. Purcell married on February 25, 1984.

39. Both Mr. and Mrs. Purcell testified that they entered into a Contract to Marry on February 20, 1984. Under the terms of the Contract to Marry, Mr. Purcell in consideration of her promise to marry him. Mr. Purcell testified that he believed that this document transferred the property.

40. The Contract to Marry was not drafted by an attorney but by Mr. Purcell without the assistance of an attorney.

41. The Contract to Marry was never recorded.

42. The Contract to Marry is not referred to in the deed conveying the property to Mr. and Mrs. Purcell which was recorded in the Montgomery County land records.

43. Mr. and Mrs. Purcell were the only witnesses who testified that the Contract to Marry existed prior to Mr. Purcell's receipt of the statutory notice of deficiency for the 1980 and 1981 years. There was no evidence independent of the testimony of defendants Purcell that the Contract to Marry was executed on the date alleged, February 20, 1984.

44. Mr. Purcell and Mrs. Purcell each testified that Mr. Purcell pursued dangerous hobbies, such as flying, scuba diving and parachuting, for which he was not able to obtain life insurance. Each testified that Mrs. Purcell was motivated to request the Contract to Marry in part by Mr. Purcell's hobbies.

45. At their depositions, neither of the Purcells mentioned Mr. Purcell's hobbies as a motive for Mrs. Purcell's request for the Contract to Marry.

46. As Mr. and Mrs. Purcell dated for four and one-half years prior to marriage, the Court does not credit Mrs. Purcell's testimony that the Purcells did not ask an attorney to draft the Contract to Marry because there was not sufficient time before the marriage was to take place.

47. The Court finds that Mrs. Purcell would not have relied on Mr. Purcell to draft a document of such importance and does not credit her testimony that she did. Mrs. Purcell demonstrated her lack of faith in Mr. Purcell's legal skill by her continued filing of tax returns and payment of taxes after Mr. Purcell's explanation to her of why the United States Constitution does not require payment of taxes.

48. For the reasons above, the Court finds that the Contract to Marry was not executed prior to the receipt of the Notice of Deficiency for the 1980 and 1981 tax years.

49. For the reasons above, the Court finds that the Contract to Marry was not executed prior to the marriage.

50. The Court finds the conveyance left Mr. Purcell insolvent in that the present salable value of his assets was less than the amount required to pay existing debts as they matured.

51. The Court finds that Mrs. Purcell did not pay fair consideration for the conveyance.

52. The Court finds that, whether or not with intent to defraud, the conveyance was fraudulent against the United States as a creditor of Mr. Purcell.

53. The Court finds that the Contract to Marry was entered into with the actual intent to hinder, delay or defraud the United States as a creditor of Mr. Purcell.

54. The Court finds the following facts support an inference of intentional fraud in this case: (1) Mrs. Purcell was generally familiar with Mr. Purcell's tax problem; (2) the 1984 conveyance lacked fair consideration; (3) the transferor and the transferee are closely related; (4) tax litigation against Mr. Purcell for the 1980 and 1981 tax years was pending at the time of the transfer; (5) Mr. Purcell reserved a benefit in the Cricket Avenue Property; (6) Mr. Purcell retained possession of the Cricket Avenue property.

55. The Court finds that, in conveying the property from Mr. Purcell to Mr. and Mrs. Purcell, the Purcells had actual intent to defraud Mr. Purcell's creditors.

56. By indenture dated November 1, 1979 and recorded on November 7, 1979, John M. Kenney, Administrator of the Estate of John J. Kenney, conveyed the real property located at 328 Locust Avenue , Ardmore , Pennsylvania to Mr. Purcell, David M. Stevenson and John R. Gingras, trading as G.S.P. Associates, a fictitious name.

57. A mortgage dated November 1, 1979 and recorded on November 7, 1979 was granted on the Locust Avenue property in favor of Main Line Federal Savings and Loan Association in the amount of $40,000.

58. In early 1982 or 1983, Richard Boandl, a revenue agent of the Internal Revenue Service investigating the partnership's affairs, spoke with Gingras. Gingras testified that the agent was particularly interested in Mr. Purcell. Gingras testified that he provided agent Boandl with partnership returns for the two preceding years and with a current and preceding tax return of his own.

59. By indenture dated July 1, 1983, Mr. Purcell and Stevenson conveyed the Locust Avenue property to Gingras. This indenture was part of an Agreement of Sale dated July 1, 1983 and entered into by Mr. Purcell, Stevenson and Gingras by which Gingras was to buy out "all right, title and interest" of his partners in G.S.P. Associates and "all real property" owned by the partnership. The Agreement of Sale names the Locust Avenue property specifically as property held and managed by the partnership which is to be conveyed to Gringas alone. The indenture was executed and delivered in October 1983, when Gingras paid Purcell and Stevenson. Gingras paid Purcell $8498.00 by check.

60. Gingras did not attempt to record the indenture on the Locust Avenue property until August 1, 1989, almost five years after the indenture was delivered. He did not record the deed until May 7, 1990.

61. On October 15, 1983, Gingras filed the final partnership return for G.S.P. Associates. The return, marked as final, reported that the partnership was terminated by June 30, 1983 and identified 328 Locust Avenue as a property owned by the partnership.

62. On April 13, 1984, Stevenson filed an individual federal income tax return on behalf of his wife and himself in which he reported the sale of his partnership interest as a long-term capital gain. Stevenson's 1983 return was audited by the IRS which issued a "Statement of Change" to his account on January 6, 1986 approving the return as filed.

63. On April 16, 1984, Gingras filed an individual federal income tax return on behalf of his wife and himself in which he claimed the entire depreciation on the Locust Avenue property from July 1, 1983, the date from which Gingras was sole owner of the property.

64. From 1983 on, Gingras filed personal income tax returns reflecting his sole ownership of the Locust Avenue property.

65. In early 1985, prior to the filing of the first tax lien against Purcell in August 1986, IRS agent Kevin Whiting told Gingras over the telephone that he was investigating the transfer of the partnership interest by Purcell. In a follow-up letter, Agent Whiting requested documentation of the sale.

66. Gingras testified that he believed but was not certain that he had sent a copy of the deed to the Locust Avenue property to agent Whiting because he did not keep a list of documents he provided. Agent Whiting testified that he did not ask for or receive a copy of the indenture from Gingras.

67. At least as of March 19, 1985, IRS agent Whiting possessed a copy of the Agreement of Sale, dated July 1, 1983, by which Gingras agreed to purchase the interests of Purcell and Stevenson in the Locust Avenue property.

68. Before the first tax lien arose or was filed against Mr. Purcell, Agent Whiting possessed copies of the Agreement of Sale for the Locust Avenue property, correspondence, accountant's worksheets and cancelled checks showing the purchase price paid by Gingras and the 1983 income tax returns for both Gingras and the partnership reflecting the termination of the partnership and Gingras' acquisition of the Locust Avenue property.

69. Agent Whiting had actual knowledge in 1985, before the first federal tax lien arose or was filed against Mr. Purcell, that Gingras had purchased Stevenson's and Purcell's interests in the Locust Avenue property.

70. As a result of his 1985 investigation, Agent Whiting prepared and filed on July 15, 1985 an "Income Tax Examination Changes" form in which he calculated Mr. Purcell's gain on the sale of his interest in the partnership and the Locust Avenue property and the additional tax to be assessed against Purcell. Agent Whiting testified that the IRS knew that Purcell had sold his interest in the Locust Avenue property and that he owed a tax on it.

71. In March 1989, IRS Agent Antonio Cruz met with Gingras to determine the correct owner of the Locust Avenue property. He requested and received from Gingras a copy of the indenture on the Locust Avenue property and informed Gingras of the IRS lien on the property.

72. The IRS attached a copy of the unrecorded deed to the Complaint in this action, which was filed May 12, 1989.

III Conclusions of Law

This Court has jurisdiction over both the subject-matter of and the parties to this action.

The government contends that taxpayer Thomas Purcell owes it assessed and unpaid taxes over the tax years 1980-86. Defendants Mr. and Mrs. Purcell contend that the government may not foreclose existing federal tax liens on the property known as 221 Cricket Avenue because, pursuant to a Contract to Marry and a recorded deed, Mrs. Purcell owns the property with Mr. Purcell as tenants in the entireties. Defendant Gringas contends that the government may not foreclose existing federal tax liens on real property located at 328 Locust Avenue because the government liens are not valid against Gingras, who purchased Purcell's interest in the property. I will address the contentions of defendants Mr. and Mrs. Purcell first.

A. Defendants Thomas W. Purcell and Constance M. Purcell

Tax assessments by the government are presumptively correct. Sullivan v. United States [80-1 USTC ¶9344 ], 618 F.2d 1001, 1008 (3d Cir. 1980); United States v. Vespe [89-1 USTC ¶9193 ], 868 F.2d 1328, 1331 (3d Cir. 1989). In this case, the government established its prima facie case by offering into evidence the Form 4340 Certificate of Assessments and Payments for the tax years 1980-1986. Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159 (3d Cir. 1971); United States v. Nuttall [89-2 USTC ¶9460 ], 713 F.Supp. 132, 135 (D.Del. 1989), aff'd, mem. [89-2 USTC ¶9460 ], 893 F.2d 1332 (3d Cir. 1989). The taxpayer bears the burden of proving by a preponderance of the evidence that a particular assessment is erroneous. Sullivan [80-1 USTC ¶9344 ], 618 F.2d at 1008.

The government introduced evidence that the assessments for 1984, 1985 and 1986 were based wholly on the amount of tax reported due on Mr. Purcell's returns and that most of the assessments for 1982 and 1983 were based on the taxpayer's returns. Mr. Purcell did not dispute the accuracy of any of the figures on his 1982-1986 returns and did not present evidence questioning the accuracy of the additional assessments for 1982 and 1983. In addition, the Decision and Order entered into Thomas W. Purcell v. Commissioner, Dkt. No. 17466-84 (April 18, 1985) is res judicata as to the deficiencies for the years covered in the decision, the 1980 and 1981 tax years. United States v. Int'l. Bldg. Co. [53-1 USTC ¶9366 ], 345 U.S. 502, 506 (1953); Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 598 (1948).

I conclude that the assessments made against taxpayer Thomas W. Purcell for the tax years 1980-1986 are valid. Taxpayer Thomas W. Purcell is indebted to the United States of America in the amount of $141,698.59, plus statutory additions accruing between November 5, 1990 and today, for the 1980-1986 tax years.

Defendants Mr. and Mrs. Purcell contend that the Crickett Avenue property is not subject to the government lien because by indenture dated April 19, 1984 and recorded April 25, 1984, and entered into pursuant to a Contract to Marry, the Crickett Avenue property was transferred from Mr. Purcell alone to both Mr. and Mrs. Purcell as tenants in the entireties. Whether or not the indenture was made with intent to defraud, the conveyance is set aside as fraudulent.

1. Fraud Without Regard to Intent

The parties do not dispute that rights in property are determined by Pennsylvania law. 39 Pa. Stat. Ann. §354 provides:

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

39 Pa. Stat. Ann. §354 . The Statute defines the term insolvent:

A person is insolvent when the present, fair, salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured.

When the conveyor is in debt at the time of the conveyance, "the burden rests upon the grantee to establish by clear and convincing evidence that either the conveyor was solvent and was by such conveyance not rendered insolvent; or that a fair consideration had been paid for the conveyance." United States v. St. Mary [72-1 USTC ¶9319 ], 334 F.Supp. 799, 804 (E.D. Pa. 1971). The burden is heavier on the wife of the debtor when she is the grantee: "the burden is on the wife to show by clear and satisfactory evidence, beyond that required of other creditors, that at the time of the transfer he [the conveyor] was solvent or that she paid full consideration." Winter v. Welker, 174 F.Supp. 836, 843 (E.D. Pa. 1959) (emphasis added); see also In re Elliott, 83 F.Supp. 771, 773 (E.D. Pa. 1948), aff'd, 173 F.2d 895 (3d Cir. 1949). The Purcells failed to carry this burden.

The United States is deemed a creditor "from the date when the obligation to pay income taxes accrues," United States v. St. Mary [72-1 USTC ¶9319 ], 334 F.Supp. at 803, that is, April 15 of the year following the tax year. See also United States v. Klayman, 736 F.Supp. 647, 649 (E.D. Pa. 1990). Therefore, on the date of the indenture conveying the Crickett Avenue property, April 19, 1984, the taxpayer owed the government at least $40,000 for the tax years 1980-1983. ¹ Since the taxpayer was indebted at the time of the conveyance, the burden was on the Purcells, as the grantees, to show by clear and convincing evidence either (1) that at the time of the conveyance taxpayer was solvent or (2) that Mrs. Purcell paid fair consideration. They did neither.

The Purcell defendants did not show that Mr. Purcell was solvent at the time of the conveyance. There was testimony at trial that the taxpayer had two assets at that time, land in Virginia and a painting company in Pennsylvania . The land in Virginia was worth between $17,000 and $20,000. ² Mr. Purcell testified that at the time of his marriage his painting company had $5,000 to $6,000 in accounts receivable and $1,000 in accounts payable. The Purcells did not introduce any evidence as to the taxpayer's liabilities but the evidence showed that his debt to the IRS alone was in excess of $40,000. The Purcells therefore did not carry their burden of showing that the value of Mr. Purcell's assets was more than the amount required to pay his then existing debts. See 39 Pa. Stat. Ann. §352(1).

Nor did Mrs. Purcell show by "clear and satisfactory evidence" that she paid fair consideration for the property. Winter v. Welker, 174 F.Supp. at 843. The Pennsylvania statute defines fair consideration:

Fair consideration is given for property or obligation:

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

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

39 Pa. Stat. Ann. §353.

Testimony at trial established that, at the time of the conveyance in 1984, the Cricket Avenue property was worth between $32,000 and $134,900. ³ On the face of the indenture, the consideration offered by Mrs. Purcell for the property was "one dollar and other valuable and lawful consideration."

The Pennsylvania Supreme Court has construed the statute to mean that, under certain circumstances, a conveyance for nominal consideration is presumptively fraudulent. "[W]here a husband conveys realty to his wife or to his wife and himself as tenants by the entireties for a nominal or inadequate consideration, at a time when the husband is insolvent or thereby rendered insolvent, the conveyance is presumptively fraudulent as to the husband's creditors." First National Bank v. Hoffines, 429 Pa. 109, 115 (1968) (and citations therein). As the indenture is dated after the date of the Purcells' marriage, the consideration on the face of the indenture is nominal and Mr. Purcell was insolvent at the time, the conveyance is deemed presumptively fraudulent as to the government as a creditor.

The Purcells contended at trial that the consideration received by the taxpayer for the land was Mrs. Purcell's promise to marry him. This promise is not referred to on the face of the indenture which was executed and recorded after the marriage, but in a Contract to Marry purportedly entered into several days prior to the marriage, which took place February 25, 1984.

While marriage may be good consideration, see Magniac v. Thompson, 32 U.S. 348 (1833), marriage may only be consideration for the land exchange if the Contract to Marry was entered into prior to the Purcell's marriage. The only evidence that the Contract was entered into on February 21, 1984 was the Purcells' testimony. The Purcells did not introduce any other evidence to support their contention that the Contract was entered into before they were married. The contract was never recorded and is not referred to in the deed which was recorded in April 1984. The Contract was drafted by Mr. Purcell and was not witnessed by any non-parties. The Purcells' contention that they entered into the Contract to Marry prior to marriage is not credible. Marriage, therefore, did not supply consideration for the conveyance.

The Purcells did not establish "by clear and convincing evidence that the conveyor was solvent or was not rendered insolvent by the conveyance or that fair consideration had been paid for the conveyance." St. Mary [72-1 USTC ¶9319 ], 334 F.Supp. at 804. Without regard to their actual intent, therefore, the conveyance of the Cricket Avenue property to the Purcells together will be set aside as fraudulent as to the government as creditor. 39 Pa. Stat. Ann. §354 .

2. Intent to Defraud

Alternatively, I conclude that the Purcells intended to defraud Mr. Purcell's creditors by conveying the Cricket Avenue property to Mr. and Mrs. Purcell.

39 Pa. Stat. Ann. Section 357 provides:

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

The Pennsylvania Supreme Court has construed the statute to mean "a conveyance from husband to wife for nominal consideration is presumed fraudulent on its face as to creditors, and no further evidence of actual fraud is required." United States v. Klayman, 736 F.Supp. 647, 649 (E.D.Pa. 1990) (citations omitted). "[W]hen a transfer from husband to wife for apparently nominal consideration has been alleged, the burden is on the wife to show by clear and satisfactory evidence that the conveyance was fair." Id.

As noted above, the consideration provided by Mrs. Purcell on the face of the indenture was apparently nominal: "one dollar and other good and valuable consideration." I have concluded that the Purcells have not met their burden of demonstrating by clear and satisfactory evidence that fair consideration was paid for the conveyance.

The Purcells contended at trial that this was not a conveyance between husband and wife but a transaction between two people intending to be married and that the consideration received by the taxpayer for the property was the future Mrs. Purcell's promise to marry him. This promise does not appear on the fact of the indenture, which was executed and recorded after the marriage, but in the Contract to Marry, purportedly entered into several days prior to the marriage.

Actual intent to defraud creditors can be inferred from all the circumstances surrounding the transaction, including conduct subsequent to the conveyance. Klayman, 736 F.Supp. at 649; Iscovitz v. Filderman, 334 Pa. 585, 590 (1939). The following facts support the inference of fraud in this case: the date of the indenture; his wife knew that he did not pay taxes and was generally familiar with his tax problem; and as she has continued to pay taxes herself she remains unpersuaded by the taxpayer's legal position on the payment of taxes. See Klayman, 736 F.Supp. at 649-50. Other factors relied on by this Court in Klayman in finding the conveyance fraudulent also are present here: a close relationship between the transferor and the transferee; pendency of tax litigation against the taxpayer; the transferor's reservation of a benefit in the property; and the transferor's retention of possession. Id.

The existence of the Contract to Marry does not alter this analysis. As I found above, the document lacks credibility. The sole evidence that this Contract was executed on the date alleged, February 20, 1984, four days prior to the marriage, was the testimony of Mr. and Mrs. Purcell. The contract was neither recorded nor referred to in the indenture, which was recorded after Mr. Purcell received the notice of deficiency, nor did any non-party witness the document.

In addition, the Purcells' testimony concerning the Contract to Marry was inconsistent. At trial, both testified that Mrs. Purcell's motive for entering the Contract was in part her anxiety about her husband's dangerous hobbies for which he could not obtain life insurance. Yet neither mentioned Mr. Purcell's hobbies when asked at their depositions about Mrs. Purcell's reasons for entering the Contract. In addition, I do not credit Mrs. Purcell's testimony that, having disregarded her husband's legal views on the taxation system, she then relied on Mr. Purcell rather than an attorney of her own to draft a document to protect her in the event of divorce from Mr. Purcell.

The conveyance of the Cricket Avenue property will be set aside as fraudulent against the United States as creditor pursuant to both 39 Pa. Stat. Ann. §354 and 39 Pa. Stat. Ann. §357 , as the Purcells intended to defraud Mr. Purcell's creditors by conveying the property from the taxpayer to the taxpayer and his wife as tenants in the entireties. The United States is permitted to foreclose its tax liens against taxpayer against the Crickett Avenue property. The government has stipulated that the Commonwealth of Pennsylvania State Employee Retirement Fund has a previously recorded and superior lien against the Crickett Avenue property.

B. Defendant John R. Gingras

Taxpayer Mr. Purcell and defendant David Stevenson conveyed their interests in the Locust Avenue property to Gingras by indenture dated July 1, 1983 and delivered in October 1983, nearly two years before the first assessment by the government in August 1985. Gingras did not attempt to record the indenture until August 1, 1989, and did not record the deed until May 7, 1990. ⁴

Once a tax assessment is made, a lien arises in favor of the United States "upon all property and rights to property whether real or personal, belonging to such person." 26 U.S.C. §6321 ; 26 U.S.C. §6322 . The federal tax lien arises when an assessment of the tax is made. 26 U.S.C. §6321 ; United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719; (1985) Philadelphia & Reading Corp'n v. United States [91-2 USTC ¶50,448 ], No. 90-3520 (3d Cir. Sept. 4, 1991), slip op. at 1 n.1. A court must look to state law to determine whether a taxpayer has a property interest and to federal law to determine the priority of competing interests. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509 (1960) ("once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have repeatedly held determines the priority of competing liens asserted against the taxpayer's 'property' or 'right to property.' ").

Defendant Gingras does not contest that the government lien attached to the Locust Avenue property. This is not clear, however. The first lien arose against the property of taxpayer Mr. Purcell in 1985, but Mr. Purcell had conveyed his interest in the Locust Avenue property to Gingras in 1983, nearly two years earlier. In decisions cited by the government, the tax liens arose either before the taxpayer acquired the property to which the liens attached or while the taxpayer held the property. See U.S. v. Carson , 741 F.Supp. 92, 94 (E.D.Pa. 1990) (tax liens arose in 1984 and 1985; taxpayer acquired the property in 1986); Burbano v. United States [89-2 USTC ¶9644 ], 723 F.Supp. 193, 194 (S.D.N.Y. 1989) (tax liens arose on Feb. 7, 1987; taxpayer conveyed the property on March 25, 1987).

In a decision of this Court cited by the government, however, the Court found that the tax lien attached although it arose one year after the taxpayer had conveyed the property to a third party because the Court held the conveyance void under Pennsylvania law for failure to record. See Raimo v. United States of America [88-1 USTC ¶9170 ], 61 A.F.T.R. 2d 398, 1987 U.S.Dist. LEXIS 11705 (E.D.Pa. Dec. 21, 1987 ). The government relies also on Prewitt v. United States [86-2 USTC ¶9513 ], 792 F.2d 1353, 1355 (5th Cir. 1986), in which the Court of Appeals for the Fifth Circuit held that Texas law permitted the IRS lien to attach to property that the taxpayer's former wife had been awarded two months earlier pursuant to a divorce decree which was not recorded until after the IRS levy. Prewitt, 792 F.2d at 1355. The Prewitt holding has been criticized. See Prewitt [86-2 USTC ¶9513 ], 792 F.2d at 1359 (transfer by unrecorded divorce decree meant "taxpayer had no interest or right whatsoever, legal or equitable, in this property") (special concurrence); United States v. V&E Engineering & Constr. Co. [87-1 USTC ¶9355 ], 819 F.2d 331, 334 (1st Cir. 1987); Travis v. United States, 1989 U.S. Dist. LEXIS 12047 (E.D.Tenn. Sept. 27, 1989). Nevertheless, I will consider the effect of Gingras' failure to record the conveyance on the government's interest in the property.

The government and Gingras do not agree on which of Pennsylvania 's recording statutes applies here. The government contends that Gingras' interest is void against the government as a creditor of Mr. Purcell's pursuant to 21 Pa. Stat. Ann. §444 . Section 444 provides:

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

21 Pa. Stat. Ann. §444 (1775, March 18, 1893, May 19, P.L. 108, §1 ).

Gingras claims that the applicable statute is 21 Pa. Stat. Ann. §351 . Section 351 provides, in relevant part:

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

21 Pa. Stat. Ann. §351 (1925, May 12, P.L. 613, §1 ; 1931, June 12, P.L. 558, No. 191, §1 .)

Gingras claims that the government incorrectly relies on Section 444 , which on its face protects creditors of the grantor, and that the applicable recording statute, Section 351 , does not protect creditors. ⁵ The government concedes that, as a creditor Mr. Purcell's, it would not be protected by Section 351 . Post-Trial Memorandum of Plaintiff United States of America at 19 n. 6 ("The United States was a creditor of the conveyor--covered by Section 444 --not a subsequent purchaser, mortgagee, or judgment creditor--covered by Section 351 .")

Gingras contends that each recording act contains a notice exception. The government concedes that Section 351 expressly provides a notice of exception, Government's Post-Trial Memorandum at 19, but argues that Section 444 protects creditors regardless of notice. Id. at 18-19. Contrary to the government's assertion, the Pennsylvania Supreme Court has found the notice exception to be implicit in Section 444 . Smith v. Miller, 296 Pa. 340, 344 (1929) (claimant under unrecorded deed bears burden of showing subsequent purchaser had actual or legal notice of the prior right); see Overly v. Hixson, 169 Pa. Super. 187, 190 (1951) ("it was also the law under this statute, as it has been under all our recording Acts, the subsequent purchasers who had actual or constructive notice of unrecorded deeds were not protected.").

Gingrass argues that whether Section 351 or Section 444 applies, the government had notice of Gingras' interest in the Locust Avenue property and therefore cannot claim the protection of either statute. I agree. I need not resolve the issue of which statute should apply because, as Gingras argues, the government had notice of the transfer of Mr. Purcell's interest in the Locust Avenue property to Gingras before the Internal Revenue Service assessed Mr. Purcell and filed its tax liens. The government therefore is disqualified from the protection of either Pennsylvania recording act. ⁶

Under Pennsylvania law, either actual or constructive notice of a prior deed may defeat a subsequent claimant's interest. In Long John Silver's, Inc. v. Fiore, 386 A.2d 569 (1978), the Pennsylvania Superior Court stated that at the time of signing an unconditional agreement for the sale of land the buyer acquires an equitable interest in the land, see Byrne v. Kanig, 231 Pa. Super 531, 332 A.2d 472 (1974), which can be defeated by a subsequent purchaser without notice of a prior transaction pursuant to the recording act:

However, in order to qualify as a bona fide purchaser, the subsequent buyer must be without notice of the prior equitable estate. Overly v. Hixon, 169 Pa Super. 187, 82 A.2d 573 (1951). If the subsequent purchaser had notice of the first agreement of sale or deed, he has no protection as a bona fide purchaser and his title is subject to the interest vested in the first purchaser. Either actual or constructive notice is sufficient to prevent the subsequent purchaser from acquiring the status of a bona fide purchaser and his title is subject to the interest vested in the first purchaser.

Because constructive notice is not limited to instruments of record, a subsequent purchaser may be bound by constructive notice of a prior unrecorded agreement. Overly v. Hixson, supra; Smith v. Miller, 296 Pa. 340, 145 A. 901 (1929). This is true because the subsequent purchaser could have learned of facts that may affect his title by inquiry of persons in possession or others who the purchaser reasonably believes know such facts. Lund v. Heinrich, [410 Pa. 341 (1963)]; Sidle v. Kaufman, 345 Pa. 549, 29 A.2d 77 (1942).

Long John Silver's, 386 A.2d at 572-73. In that case, the Court held that the equitable interest conveyed by an agreement of sale which was not recorded was superior to the interests of two subsequent purchasers who had actual notice of the prior interest. Id. at 572. The Court held that the subsequent purchasers' actual knowledge of a prior interest in the property meant they "were on notice to inquire into the situation by contacting the [prior interest holder]" and therefore they were not protected by the recording act. Id. at 575. In addition, the Pennsylvania Supreme Court has held that "a fundamental rule in construing recording laws generally [is] that actual notice of an unrecorded instrument, if received by a subsequent lienor before his interest attaches, is equivalent to the constructive notice which recording provides." In re 250 Bell Road , 388 A.2d 297, 299-300 n. 1 (1978).

Government cites Reiter v. Kille [56-2 USTC ¶9860 ], 143 F.Supp. 590 (E.D.Pa. 1956) and Prewitt [86-2 USTC ¶9513 ], 792 F.2d 1353 (5th Cir. 1986) in support of its argument that it was entitled to rely on the recorded deeds and therefore had no notice of Gingras' interest. In Prewitt, the Court of Appeals for the Fifth Circuit, applying Texas law, held that oral notification of an IRS agent by the taxpayer's wife that she was "getting a divorce" was insufficient notice to the IRS of the transfer of interests where the divorce decree by which the wife took the property had not yet been filed. Prewitt [86-2 USTC ¶9513 ], 792 F.2d at 1358-59. In Reiter, the Court held that a purchaser was not required to search tax sales records for a federal tax lien and therefore did not have constructive notice of the lien which arose against an intervening purchaser who did not record his deed. Reiter [56-2 USTC ¶9860 ], 143 F.Supp. at 591-93.

Unlike the situations in Prewitt and Reiter, the lienholder, the IRS, is alleged itself to have received actual written notice in addition to oral notice to its agents of the transfer of the delinquent taxpayer's interest to Gingras before any tax assessments were made or tax liens filed against Mr. Purcell. In early 1982 or 1983 and again in early 1985, different IRS agents contacted Gingras pursuant to investigations of his interest in the property. The IRS admits that its agent had a copy of the Agreement of Sale from Mr. Purcell and Stevenson in March 1985 before it made any assessments or recorded any tax liens against Purcell's property. In addition, the partnership, Gingras and Stevenson each filed timely 1983 tax returns documenting the transfer of Purcell's and Stevenson's interests in the property to Gingras. As a result of the 1985 investigation, Agent Whiting calculated an additional capital gain tax to be assessed against Purcell on the sale of his interest in the partnership, including the Locust Avenue property. IRS agent Whiting testified at trial that he and therefore the IRS had actual notice that Gingras' agreement with Purcell had been consummated. The above supports the view that the IRS had notice before the first IRS lien arose or was filed that after July 1, 1983, Gingras was the sole owner of the property.

The government argues that actual notice to one of its agents should not be imputed to the Internal Revenue Service as a whole. The government states: "information derived by the audit side of the Service, either by the filing of a tax return or communication with a single revenue agent, cannot be imputed automatically to the Collection Division of the IRS . . . the IRS is simply too large a governmental agency for such imputations of knowledge . . ." Government's Post-Trial Memorandum at 21.

There is precedent for imputing the knowledge of a revenue agent to the Internal Revenue Service. For example, in a decision of this Court, Chief Judge Luongo held in an admittedly different situation that the actual knowledge of a taxpayer's new address of one of its agents should be imputed to the Internal Revenue Service as a whole even if the taxpayer communicated with the agent verbally. Wagner v. United States [79-2 USTC ¶9525 ], 473 F.Supp. 276, 279 (E.D. Pa. 1979) ("Of course, the Commissioner is bound by an address of which his agents acquire actual knowledge . . . as plaintiffs correctly argue, verbal communication of a change of address will suffice to charge the Commissioner with knowledge of that address."); see Gibson v. United States [91-1 USTC ¶50,206 ], 761 F.Supp. 685 (C.D. Cal. 1991) ("knowledge of the IRS Service Center should be imputed to the Audit Division for the purpose of determining the taxpayer's last known address"); Trails End Motels, Inc. v. C.I.R. [82-1 USTC ¶9264 ], 532 F.Supp. 85, 88 (D. Kan. 1982) ("there is ample authority to the effect that the IRS is bound by oral notification of an address change given to one of its agents") (citing Alta Sierra Vista, Inc. v. Commissioner [CCH Dec. 32,649 ], 62 T.C. 367, 375 (1974), aff'd. mem. 538 F.2d 334 (9th Cir. 1976)); United States v. Eisenhardt [77-2 USTC ¶9565 ], 437 F.Supp. 247, 249-50 (D. Md. 1977) (agent's knowledge of change of address imputable to the tax commissioner); Cohen v. United States [62-1 USTC ¶9202 ], 297 F.2d 760, 773 (9th Cir.), cert. denied, 369 U.S. 865 (1962)).

Other courts have held that "the IRS must be charged with the knowledge of its agents" in situations involving violations of bankruptcy stays. In re Price [89-2 USTC ¶9502 ], 103 Bankr. 989, 65 A.F.T.R.2d 90-359 (N.D.Ill. 1989), aff'd. 1991 U.S. Dist. LEXIS (N.D. Ill. 1991) ("The size and complexity of the IRS does not excuse its disregard for the automatic stay."); see In re Shafer [86-2 USTC ¶9523 ], 63 Bankr. 194, 198 (D. Kan. 1986) (IRS charged with knowledge of agents in Wichita and was responsible therefore for actions of agents in Utah ); In re Santa Rosa Truck Stop, 74 Bankr. 641, 643 (N.D.Fla. 1987) ("IRS, at least through its agent, Mr. Jones, had knowledge of the [bankruptcy] filing").

There is precedent also for holding the IRS accountable for information submitted to it in tax returns. In support of its argument that the Service did not receive "notice of Gingras' ownership claim on the Locust Avenue property simply by Gingras filing an individual or partnership tax return or communicating information to an individual revenue agent concerned solely with determining taxpayer's tax liability, not which property he owns," ⁷ Government's Post-Trial Memorandum at 20-21, the government cities United States v. Zolla [84-1 USTC ¶9175 ], 724 F.2d 808 (9th Cir. 1984), cert. den., 469 U.S. 830 (1984). The government's reliance on Zolla is misplaced. The Court of Appeals for the Ninth Circuit explained in a subsequent decision that the Zolla holding is consistent with prior Ninth Circuit holdings that the IRS is to be held accountable for information reported in tax returns:

Zolla holds that knowledge acquired in unrelated investigations is not necessarily imputed from one division to another. Tax return, however, are a different matter; since Welch v. Schweitzer [39-2 USTC ¶9725 ] [106 F.2d 885 (9th Cir. 1939)] we have consistently held that address information on subsequent returns is imputed to the IRS as a whole. Zolla confirms this . . .

King v. C.I.R. [88-2 USTC ¶9521 ], 857 F.2d 676, 680 (9th Cir. 1988).

Zolla supports defendant Gingras' contention that the IRS should be charged with knowledge of the information submitted by Gingras, the partnership and Stevenson on their respective 1983 returns. See Cool Fuel Inc. v. Connell [82-2 USTC ¶9559 ], 685 F.2d 309, 312 (9th Cir.1982); King [88-2 USTC ¶9521 ], 857 F.2d at 679; Cyclone Drilling, Inc. v. Kelley [85-2 USTC ¶9595 ], 769 F.2d 662, 664 (10th Cir. 1985) ("taxpayer's subsequent return bearing a new address provides the IRS with . . . notice").

In this case, the IRS had notice of Gingras' unrecorded interest in the Locust Avenue property before the first lien arose or was filed against Mr. Purcell's property and the government therefore may not claim the protection of either Pennsylvania recording statute. Smith, 296 Pa. at 344; Long John Silver's, 386 A.2d at 575. Gingras' interest in the property therefore is superior to the government lien.

Except as provided in 26 U.S.C. §6323 , the federal rule of priority is first in time, first in right. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81 (1954). Congress excepted only four categories of interests from the standard rule.

The lien imposed by section 6321 shall not be valid as against any purchaser, holders of security interests, mechanic's lienors or judgment lien creditor until notice thereof, . . . has been filed by the Secretary.

26 U.S.C. §6323 . If a claimant fits one of these four categories, its interest may prevail over that of the government, even though it is later in time than the government's lien unless the government has filed notice of its lien before the claimant's interest arose.

The government argues that whether the IRS had notice of Gingras' interest in the property is irrelevant because the federal statute governs the priority of competing claims and Gingras does not qualify for any of the statutory exceptions to the first in time rule. Government's Post-Trial Memorandum at 21-23. Defendant Gingras' claims that he qualifies as a "purchaser" under the federal statute. Post-Trial Memorandum of Defendant John R. Gingras at 16-17.

There is no need to reach the issue of whether Gingras qualifies for an exception to the first in time rule because Gingras' interest preceded the government lien and I have found as a matter of state law that his interest is valid against the government's interest. Gingras' interest was first in time because the tax lien arose after the taxpayer, Mr. Purcell, had deeded his share in the property to Gingras by a conveyance valid under Pennsylvania law. The cases relied on by the government therefore are inapposite. See U.S. v. Carson , 741 F.Supp. at 94; Burbano [89-2 USTC ¶9644 ], 723 F.Supp. at 194; Raimo [88-1 USTC ¶9170 ], 61 A.F.T.R. 2d 398, 1987 U.S.Dist. LEXIS 11705.

IV. Conclusion

For the foregoing reasons, I will enter judgment in favor of the United States of America on its claims against defendants Thomas W. Purcell and Constance M. Purcell. I will enter judgment in favor of defendants John R. Gingras, David M. Stevenson and Commonwealth of Pennsylvania State Employees Retirement System and against the United States . Defendant Main Line Federal Savings and Loan Association will be dismissed from this action.

ORDER

AND NOW, this 30th day of September, 1991, for the reasons set forth in the accompanying Memorandum, it is hereby ORDERED that:

1. Judgment is ENTERED in favor of the United States of America and against defendant Thomas W. Purcell in the amount of $141,698.59 plus any interest that has accrued;

2. The conveyance of 211 Cricket Avenue , Ardmore , Pennsylvania from defendant Thomas W. Purcell to himself and defendant Constance Purcell is set aside as fraudulent, null and void pursuant to 39 Pa.Stat.Ann. §§354 and 357 ;

4. The tax liens of United States of America described in paragraphs 18-20 of plaintiff's Complaint are valid;

5. The Commonwealth of Pennsylvania State Employee Retirement Fund has a lien against Crickett Avenue property which was previously recorded and is superior to that of the United States ;

6. The tax liens on the real property known as 211 Crickett Avenue shall be foreclosed; the subject property shall be turned over to the marshall and sold and the proceeds from the sale shall be distributed in an amount sufficient to satisfy the lien of the Commonwealth of Pennsylvania State Employees Retirement System ;

7. Judgment is ENTERED in favor of defendant Commonwealth of Pennsylvania State Employees Retirement System. In accordance with the stipulation between the United States of America and the Commonwealth of Pennsylvania State Employees Retirement System, the United States of America shall provide written notice of such sale to SERS at least twenty (20) days prior to such sale;

8. Judgment is ENTERED in favor of the United States of America and against defendant Constance M. Purcell;

9. Judgment is ENTERED in favor of defendant John R. Gingras and against the United States of America ;

10. Judgment is ENTERED in favor of defendant David Stevenson and against the United States of America ;

11. In accordance with the stipulation between the United States of America and defendant Main Line Federal Savings and Loan Association and the Order of this Court dated November 6, 1990, defendant Main Line's lien on 328 Locust Avenue is prior to and superior to any lien of the United States of America. Judgment is ENTERED [in] favor of defendant Main Line Federal Savings and Loan Association and against the United States of America .

12. The Clerk shall Mark this case Closed for statistical purposes.

¹ At a minimum, as of April 19, 1984, the taxpayer was indebted to the United States for the $32,808 listed on the Notice of Deficiency for the 1980 and 1981 tax years, not including the penalty that was to be calculated under 26 U.S.C. §6653(a)(2), and for $7655 for the 1982 and 1983 tax years, not including penalties and interest.

² At trial, Mr. Purcell estimated the value of his land in Virginia at $17,000. After trial, the Purcells submitted a letter from the County of Accomack Department of Assessment in which the County estimated that the land value was $20,000 at the time of the transfer of the Crickett Avenue property.

³ Mr. Purcell testified that he bought out his first wife's half interest in the property in 1979 for $16,000 and that the Purcells received an offer for the property in 1989 of $134,900, after listing it on the market for $149,000.

⁴ Gingras admits that he did not record the indenture on the Locust Avenue property in part because he wanted to avoid the due-on-sale clause of the Main Line mortgage which Main Line could have invoked if it had known of the sale. Gingras' motivation for not recording the deed is not relevant to this case.

⁵ Gingras argues that Section 444 does not protect the government because it was repealed by the passage of the 1925 recording act, condified as Section 351 , to the extent that it was inconsistent with the later recording act. Post-Trial Memorandum of Defendant John R. Gingras at 3-6; see infra n. 6.

⁶ Defendant Gingras claims that Section 444 , enacted in 1775 and amended in 1893, was repealed by the subsequent passage of the recording act of 1925, as amended in 1931 and 1937 and codified as Section 351 . The note following Section 444 confirms that it was repealed in part by a 1955 act regulating recording of instruments within the city of Philadelphia . However, the note to Section 444 explained that it was repealed only to the extent that it was inconsistent with the new provisions concerning Philadelphia . The note to Section 444 does not mention Section 351 as having repealed Section 444 . The note following Section 351 , however, explains that "the act of 1925 repealed all inconsistent acts or parts of acts." While the note following Section 351 does not mention Section 444 specifically, defendant Gingras relies on this language as support for his contention that the 1925 act repealed Section 444 's protection of creditors.

The commentary of Title 21 of Purdon's Statutes, published in 1955, does not resolve the ambiguity as it refers to both recording acts, Sections 444 and 351 , in explaining Pennsylvania law. Citing to both Sections, the commentary includes creditors as a protected class: "recording is obligatory, on peril of having an unrecorded deed adjudged fraudulent and void as against subsequent purchasers, mortgagees and creditors of the grantor." 21 Pa. Stat. Ann. Commentary at 37 (emphasis added). The Commentary explains that the later recording statute modified the existing recording statute to convert Pennsylvania to a "race-notice" system where the validity of deeds depends upon notice and the chronological priority of recording. Id. at 38.

In recent cases addressing the validity of recent unrecorded deeds, however, some courts have referred to a single Pennsylvania recording act, Section 351 . See Haggerty v. Erie County Tax Claim Bureau, 528 A.2d 681 (Pa.Cmmwlth. 1987), app. den., 518 ( Pa. Super. 1978); McCannon v. Marston, 679 F.2d 13, 15-16 (3d Cir. 1982). Other courts dealing with recent deeds have referred to Section 444 in the past tense. See Wheatcroft v. Albert, 407 Pa. 97, 104, 180 A.2d 216 (1962) (in 1954, both recording statutes "were in effect"); Overly v. Hixson, 169 Pa. Super. 187, 190 (1951) (in deciding validity of a 1925 deed, referred to Section 444 as "applicable recording act" in past tense); Commonwealth of Pa. v. Ulrich, 565 A.2d 859 (Pa. Cmwlth. 1989) (applying §444 to chain of title originating with unrecorded conveyance in 1888).

At least one Pennsylvania court and two federal courts applying Pennsylvania law have held recently pursuant to Section 444 that creditors are protected from unrecorded conveyances. See Busin v. Whiting, 369 Pa. Super. 563, 535 A.2d 1078, 1081 (1987), rev'd. on other grounds, 524 Pa. 240, 570 A.2d 508 (1989) (pursuant to Section 444 , "[a]n unrecorded deed is void against a subsequent purchaser for value or against a creditor."); Raimo v. United States [88-1 USTC ¶9170 ], 61 A.F.T.R. 2d 398, 1987 U.S. Dist. LEXIS (E.D.Pa. December 21, 1987) (pursuant to Sections 351 and 444 , conveyance in 1983 held void against government as tax creditor for failure to record within ninety days) (relying solely on the statutory language); United States v. Carson, 741 F.Supp. 92, 95 (E.D.Pa. 1990) (alternate holding that pursuant to Sections 351 and 444 , conveyance in 1986 void against government as tax creditor for failure to record within 90 days) (relying solely on Raimo). With respect, it is not clear to this Court that the Courts in these cases should have applied Section 444 to recent conveyances or that Section 351 should have been interpreted to protect creditors and to require recording within 90 days.

⁷ Contrary to the government assertion, the IRS was concerned with what property Mr. Purcell owned as his tax liability depended in part on the sale of the partnership assets.

 

 

 

Richard and Maureen Reid, Plaintiffs v. Internal Revenue Service; Sandra Bobb, I.R.S. Agent, Beverly Lattin, I.R.S. Agent, Defendants

U.S. District Court, Dist. Colo., Civ. 93-F-1972, 11/8/93

[Code Secs. 6321 , 6326 , 6331 , and 6343 ]

Levy and distraint: Authority to create liens: Release of liens.--The imposition of liens and wage garnishment on a married couple could not be challenged on the basis of the failure of the IRS to promulgate regulations. The Internal Revenue Code constitutes enforceable law even without specific regulations. Moreover, regulations exist governing the authority of the IRS to impose levies. These regulations detail the means of enforcement to be used to create and release liens. Therefore, the taxpayers' arguments were without merit, and the liens and wage garnishments were not released.

[Code Sec. 7421 ]

District court: Jurisdiction: Injunctions: Irreparable harm.--A district court lacked jurisdiction to issue a temporary restraining order to prevent the imposition of tax liens and wage garnishment against a married couple. The Anti-Injunction Act barred such action, and the taxpayers had not met the statutory or judicially created exceptions. The taxpayers failed to show that under no circumstances could the IRS prove that it was entitled to the unpaid taxes, and they also failed to present evidence concerning whether they owed the unpaid taxes. In addition, the taxpayers did not establish that they would suffer irreparable harm from the imposition of the liens.

Richard and Maureen Reid, 8031 Wadsworth Blvd., Arvada, Colo. 80003, Richard and Maureen Reid, 2901 "E" W. 81st Ave., Westminster, Colo. 80030, pro se. James R. Allison, Interim United States Attorney, William G. Pharo, Assistant United States Attorney, Denver, Colo. 80294, Joel J. Roessner, Department of Justice, Washington, D.C. 20530, for defendants.

ORDER

 

FINESILVER, Chief Judge:

This matter comes before the Court on Plaintiffs' short Complaint along with their Request For Temporary Restraining Order, the Government's Response To Request For Restraining Order, and Plaintiffs' Response To United States Argument To Have The Court Deny Plaintiff's [sic] Request For Temporary Restraining Order. Jurisdiction is pursuant to 28 U.S.C. §1331.

BACKGROUND

Plaintiffs seek to enjoin the Internal Revenue Service ("IRS") from collecting back taxes allegedly owed by them. According to the exhibits attached to Plaintiffs' Complaint, the IRS is proceeding against them via liens and wage garnishment actions. They state that "immediate action is needed to relieve the severe emotional and financial stress imposed by the actions of the Internal Revenue Service." Complaint at ¶3. Plaintiffs assert that the IRS's wage garnishment and lien upon Richard Reid, and notice of intent to lien Maureen Reid, are unlawful and unenforceable, mainly as a result of perceived procedural flaws. Plaintiffs assert that the IRS has failed to promulgate regulations for sections 6331 and 6321 of Title 26 of the United States Code. Plaintiffs allege that the Internal Revenue Code is not law in and of itself--that is, it is unenforceable without specific regulations for each section being put forward by the Secretary of the Treasury. As a result of the IRS's alleged failure to issue accompanying regulations for the sections relating to liens and levies, any liens placed against Plaintiffs constitute gross error. They argue that because the IRS's liens against them are unenforceable, release is available pursuant to 26 U.S.C. §§6326(b) and 6343 .

ANALYSIS

I. Procedural Flaws. It is clear that Plaintiffs' arguments lack merit. First, the Internal Revenue Code, as enacted by Congress, does itself constitute enforceable law, even without specific enforcement or other mechanisms issued by the Treasury Secretary for the many individual sections of the Code. See United States v. Dawes [89-2 USTC ¶9437 ], 874 F.2d 746, 750 (10th Cir. 1989); Ryan v. Bilby [85-2 USTC ¶9524 ], 764 F.2d 1325, 1328 (9th Cir. 1985) ("Like it or not, the Internal Revenue Code is the law"); 1 U.S.C. §204(a) (Matters set forth in the Code "establish prima facie the laws of the United States . . . "). "Congress's failure to enact a title [of the United States Code] into positive law has only evidentiary significance and does not render the underlying enactment invalid or unenforceable." Bilby [85-2 USTC ¶9524 ], 764 F.2d at 1328.

Second, even if Plaintiffs' argument was to be accepted--that each Code section needs to have a corresponding regulation pursuant to 26 U.S.C. §7805 --as pointed out in the Government's Response, the Treasury Secretary has issued regulations for both §6331 and §6321 . Treas. Reg.§301.6331-1 , entitled "Levy and Distraint," and Treas. Reg. §301.6331-1(a) , entitled "Authority to Levy," are regulations issued relating to 26 U.S.C. §6331 . Additionally, Treas. Reg. §301.6331-2 , "Levy and Restraint on Salary and Wages," and subsection (a), entitled "Notice of Intent to Levy," are further regulations relating to the IRS's authority to impose levies and garnish taxpayers' wages. Contrary to Plaintiffs' contention that Treas. Reg. §301.6331 is part of a "general index file," the requirements laid out in the above Treasury regulations detail the means of enforcement to be used pursuant to 26 U.S.C. §6331 . ¹ While Plaintiffs assert that 26 U.S.C. §7805 requires specific regulations for each Internal Revenue Code section, the fact is that §7805 only authorizes that such regulations as may be necessary for the Code's enforcement or interpretation are to be issued by the Treasury Department.

Plaintiffs appear to believe that it is regulations passed pursuant to the Treasury Secretary's authority as laid out in Title 26 of the United States Code that are "the law," whereas Title 26 itself is not the law. But in reality, any regulations would emanate from, and be under the authority of, the Internal Revenue Code provisions themselves.

II. Anti-Injunction Act. The biggest obstacle to granting Plaintiffs the relief they seek, however, is that Plaintiffs have not met their burden of overcoming the clear provisions of theAnti-Injunction Act, 26 U.S.C. §7421 . The Act prevents district courts from taking jurisdiction over suits to enjoin the collection of federally owed taxes. The statutory exceptions to the Act do not include challenges based on the IRS's failure to prescribe regulations for each and every section of the Code. Thus, in order to overcome the Act's provisions, Plaintiffs are required to meet a judicially-created exception, and show that (1) under no circumstances could the government establish its entitlement to the taxes, and (2) they will suffer irreparable harm if injunctive relief is not granted. Bob Jones University v. Simon [74-1 USTC ¶9438 ], 416 U.S. 725, 737 (1974); Enochs v. Williams Packing & Navigation Co. [62-2 USTC ¶9545 ], 370 U.S. 1, 6-8 (1962); Lonsdale v. United States [90-2 USTC ¶50,581 ], 919 F.2d 1440, 1442 (10th Cir. 1990). As indicated above, Plaintiffs' arguments against the IRS's authority to collect the overdue wages is without merit. Thus, they have not met the first prong of the judicially-created exception. They have not shown that under no circumstances can the Government prove it is entitled to the unpaid taxes. In fact, Plaintiffs nowhere address the merits of whether they owe any unpaid taxes, and if so, how much.

In addition, Plaintiffs, while alleging that they are suffering emotional distress because of the IRS's actions in pursuing the collection of their overdue taxes by way of liens and wage garnishment, have not established that they will suffer irreparable harm as required under the law. See Souther v. Mihlbachler [83-1 USTC ¶9269], 701 F.2d 131 (10th Cir. 1983). Plaintiffs have adequate remedies for refunds under the law, 28 U.S.C. §1346(a)(1); 26 U.S.C. §7422 . See Lonsdale [90-2 USTC ¶50,581 ], 919 F.2d at 1443 (noting, with respect to taxpayers' actions, the "time honored 'pay first, litigate later' rule").

Thus, under the explicit terms of the Anti-Injunction Act, 26 U.S.C. §7421(a) , the Court does not have jurisdiction to issue a temporary restraining order to prevent the imposition of the liens and garnishment undertaken by the IRS against the Reids, and their request for such an order must be denied.

Accordingly, it is ORDERED that

(1) Plaintiffs' Request For Temporary Restraining Order is DENIED, and

(2) Plaintiffs' Complaint is DISMISSED.

¹ The same may be said for 26 U.S.C. §6321 , relating to liens, which has an accompanying regulation in Treas. Reg. §301.6321-1 .

 

 

 

United States of America , Plaintiff v. Rickey A. Ward, Doris A. Ward and Chittenden Bank, Defendants

U.S. District Court, Dist. Vt. , 2:91-CV-371, 5/12/93

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Fraudulent conveyances.--The testimony in a taxpayer's deposition was insufficient to reopen a case in which it was decided that the IRS failed to establish that the taxpayer fraudulently conveyed property. Although the taxpayer testified that he was aware of his failure to file taxes for the years at issue, he was unaware at the time he transferred the property of his tax liability. Accordingly, the taxpayer did not have the intent to avoid a tax liability. Additionally, the taxpayer's testimony did not establish that the transfer of the property rendered the taxpayer insolvent.

Keith Morgan, Department of Justice, Washington , D.C. 20530 , for plaintiff. Robert Francis O'Neill, Gravel & Shea, Burlington, Vt. 05402-0369, Richard Ashton Brownell, Chittenden Bank, 2 Burlington Sq., Burlington, Vt. 05401, for defendants.

OPINION AND ORDER

PARKER, Chief Judge:

On April 15, 1993, a bench trial commenced in this Court in which the Government sought to reduce to judgment the unpaid tax liability of the defendant Rickey Ward, to set aside an allegedly fraudulent conveyance of defendant's real property located at 48 Horizon View Drive, Colchester, Vermont and to foreclose the federal tax liens against the fraudulently conveyed real property.

The Government case consisted of the testimony of three witnesses from the Internal Revenue Service ("IRS") and various exhibits entered into evidence including a Certificate of Assessments and Payments for the 1983 tax year and a Property Transfer Return. The Government then rested and moved for directed verdict. ¹

This Court denied the motion, finding that the Government had "failed to sustain its burden of proof to show that any fraud occurred." Trial Transcript, April 15, 1993 ("Transcript") at 74.

Defendant then moved for directed verdict as to the fraudulent conveyance. This Court granted the motion, stating:

[T]he government has not convinced me that the conveyance was done with any sort of fraudulent intent because the government has failed to prove to me that Mr. Ward was aware of any specific tax liability, and certainly has failed to prove to me that the conveyance made Mr. Ward insolvent, given the fact that he was then operating a successful business, which later was able to generate sufficient cash to make substantial payments on tax liabilities.

Transcript at 74. Immediately following the decision to grant the defendant's motion for directed verdict, the Government orally moved for reconsideration and to reopen the matter. This Court orally denied that request as well as the three subsequent requests Government's counsel made. Transcript at 74-79. Presently before this Court is the Government's Motion to Reopen. (Paper 20)

Motion to Reopen

The Government's Motion to Reopen seeks to introduce the testimony of defendant Ward through his deposition (Deposition of Rickey Ward, Paper 21, attachment) or by calling him as an adverse witness to support its claim that Ward fraudulently conveyed his property. ²

A motion to reopen a case to take additional testimony is addressed to the trial court's discretion. Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 331 (1971); Air Et Chaleur, S.A. v. janeway, 757 F.2d 489, 495 (2d Cir. 1993); 6A J. Moore's Federal Practice ¶59.04[13], 59-31 (1993). In disposing of a motion to reopen, "the time when the motion is made, the character of the additional testimony, and the effect of granting the motion are pertinent factors for consideration." Id. at 59-33; Shoenholtz v. Doniger, 112 F.R.D. 110, 112 (S.D.N.Y. 1986).

After reviewing the deposition of the defendant I am of the same opinion now as I was when I denied the Government's motion for directed verdict and granted the defendant's motion for directed verdict. The defendant's deposition testimony does not establish that the defendant acted fraudulently in conveying the property. Although the defendant did testify that he was aware of his failure to file taxes for the years 1979 through 1982 prior to transferring the property he also testified that he was not aware that he owed the Government money until almost one year later. Deposition of Rickey Ward at 24, 26-27, 36. If he was unaware of his tax liability at the time of the property's conveyance, then the defendant could not have conveyed the property acting fraudulently, that is, with the intent to avoid a tax liability.

Nor does the deposition establish that the transfer of the property rendered the defendant insolvent. Defendant did testify that he had no other significant assets at the time of the transfer and that he was "barely" able to pay his bills and expenses. But transfer of the property did not render him insolvent--the defendant owned a viable business although the premises and furnishings of the business were leased, his annual income at the time of the transfer was between $20,000--$30,000 and a year after he transferred the property he was making payments of $1,000 a week to the IRS, payments he made on a regular basis for five years. Nothing in the defendant's deposition suggests the transfer of the property rendered him insolvent. And as stated above, the defendant testified that he was unaware of any tax liability until almost a year after the transfer.

Conclusion

The additional testimony the Government seeks to enter does not cause this Court to alter its finding that the Government failed to prove that the defendant fraudulently conveyed his interest in the real property located at 48 Horizon View Drive , Colchester , Vermont . Therefore, the Motion to Reopen (Paper 20) is DENIED.

¹ The phrase "directed verdict" has been relegated to the dusty shelves of a bygone era. The wordsmiths behind the new Federal Rules of Civil Procedure deemed the terminology "directed verdict" "misleading as a description of the relationship between judge and jury" and "freighted with anachronisms." Fed.R.Civ.P. 50(a), Notes of Advisory Committee on Rules, 1991 Amendment. In its place has risen the "judgment as a matter of law" under Fed.R.Civ.P. 50(a) and 52(c). Recognizing the Herculean task of inducing change in a profession which places a premium on precedent and tradition, the Advisory Committee made provision for those in the legal profession whose training and experience has imbued in them a deep affection for the ways of the past by stating that when a "motion is denominated a motion for directed verdict . . the party's error is merely formal. Such a motion should be treated as a motion for judgment as a matter of law in accordance with this rule." Therefore, the motions for directed verdict made by the Government and the defendant were considered to be motions for judgment as a matter of law.

² In its oral motions to reopen made in court on April 15, the Government sought to call the defendant and his mother, to whom the real property at issue was transferred, as witnesses. However, contrary to the Government's position in its memorandum (Paper 21, p.3) there was no mention of reopening the matter to submit the defendant's own sworn deposition testimony.

 

 

 

United States of America v. George S. Sitka, et al

U.S. District Court, Dist. Conn. , Civ. 2:90CV00268(AHN), 5/19/94

[Code Sec. 6203 ]

Assessment: Validity: Procedure.--The IRS's assessment of unpaid taxes against an individual was valid and enforceable because it had offered Forms 4340 to validate the assessment. In addition, each Form 4340 contained a "23C date," which indicated that a signed summary record had been prepared in making the assessment. The individual's unsupported affidavit did not rebut the presumed validity of the assessment.

[Code Sec. 6663 ]

Civil penalties: Fraud: Validity of assessment.--An individual was liable for the fraud penalty because the IRS was able to show by clear and convincing evidence that he acted with intent to evade paying taxes. He had not filed tax returns for six straight years, despite the fact he had substantial income during the period. He was unable to show that he had a good faith belief that he did not owe taxes, and he demonstrated that he knew he had a legal obligation to pay income taxes.

[Code Sec. 6321 ]

Tax liens: Fraudulent conveyances: Summary judgment.--The IRS was denied summary judgment on its motion to set aside certain transfers of property as fraudulent conveyances. The IRS had not established that, as a matter of law, actual fraud or constructive fraud had taken place, because the taxpayer had introduced issues of fact that could only have been resolved at trial.

RULING ON OBJECTION TO MAGISTRATE JUDGE'S RECOMMENDED RULING

NEVAS, District Judge:

The plaintiff, United States of America , brings this action against the defendant, George Sitka, to collect unpaid taxes, penalties and interest. ¹ The plaintiff also claims that the defendant fraudulently transferred real property in violation of Conn. Gen. Stat. §52 -552. Ultimately, the plaintiff seeks a court order setting aside the alleged fraudulent transfers so that the plaintiff may then foreclose federal tax liens to satisfy the unpaid taxes, penalties and interest assessed against the defendant.

At the outset, the court must address the tortured procedural history that resulted from the plaintiff's premature filing of a motion for summary judgment. In December, 1991, the plaintiff filed its motion for summary judgment, despite the fact the parties had not completed pertinent discovery. The court referred the motion to Magistrate Judge Smith. The parties engaged in additional discovery, periodically supplementing the record for purposes of the summary judgment motion. In February, 1993, the Magistrate Judge recommended denial of the summary judgment motion citing procedural defects in the supporting documentation. The Magistrate Judge determined that the plaintiff failed to comply with Rule 56(f), Fed. R. Civ. P, and with Rule 9(c)(2), R. Civ. P. (D. Conn.).

The plaintiff cured these procedural defects and moved for reconsideration. On July 24, 1993, the Magistrate Judge recommended the denial of the plaintiff's motion for reconsideration. He noted that summary judgment might be warranted, but declined to conduct a substantive review of the motion because of the purportedly deficient record. On July 26, 1993, the plaintiff filed an objection, challenging the Magistrate Judge's recommended denial of the motion for reconsideration.

The court finds that the plaintiff has in fact cured its initial failure to provide adequate supporting documentation. It is true that the plaintiff's repeated amendments to the record have precipitated a tediously disorganized record. Nevertheless, all of the necessary components are now in place. The plaintiff's objection [doc. #111] is therefore sustained, the motion for reconsideration [doc. #109] is granted and the magistrate judge's recommended ruling on the plaintiff's motion for summary judgment [doc. #32] is set aside. After a review of the merits, the plaintiff's motion for summary judgment is GRANTED in part and DENIED in part.

STANDARD OF REVIEW

The court reviews a magistrate judge's recommended ruling de novo. Rule 72(b), Fed. R. Civ. P., dictates that the court "shall make a de novo determination . . . of any portion of the magistrate's disposition to which specific written objection has been made." See also United States v. American Soc'y of Composers, Authors, and Publishers, 739 F. Supp. 177, 179 (S.D.N.Y. 1990); Rule 2(b), R Civ. P. (D. Conn.). After conducting its review, "the court may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate." 28 U.S.C. §636(b)(1) .

In a motion for summary judgment, the burden is on the moving party to establish that there are no genuine issues of material fact in dispute and that it is entitled to judgment as a matter of law. Rule 56(c), Fed. R. Civ. P.; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). A court must grant summary judgment " '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 . . . .' " Miner v. Glen Falls, 999 F.2d 655, 661 (2d Cir. 1993) (citation omitted). A dispute regarding a material fact is genuine " 'if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.' " Aldrich v. Randolph Cent. Sch. Dist., 963 F.2d 520, 523 (2d Cir.) (quoting Anderson, 477 U.S. at 248), cert. denied, -- U.S. --, 113 S. Ct. 440 (1992). After discovery, if the nonmoving party "has failed to make a sufficient showing on an essential element of [its] case with respect to which [it] has the burden of proof," then summary judgment is appropriate. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The court resolves "all ambiguities and draw[s] all inferences in favor of the nonmoving party in order to determine how a reasonable jury would decide." Aldrich, 963 F.2d at 523. Thus, "[o]nly when reasonable minds could not differ as to the import of the evidence is summary judgment proper." Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir.), cert. denied, -- U.S. --, 112 S. Ct. 152 (1991). See also Suburban Propane v. Proctor Gas, Inc., 953 F.2d 780, 788 (2d Cir. 1992).

FACTS

The record establishes the following undisputed facts. From 1977 through 1982, the defendant failed to file tax returns with the Internal Revenue Service ("IRS"). Although the IRS filed tax returns for the defendant, he still failed to pay any income or estimated taxes. (Pl. Ex. J.)

In 1987, a federal grand jury indicted the defendant on thirteen counts of attempted tax evasion. The defendant subsequently pleaded guilty to attempted tax evasion, but noted that his unpaid taxes reflected his honest belief that the Sixteenth Amendment to the Constitution is invalid. The defendant noted on the record that he was insolvent. The court sentenced the defendant and ordered him to pay the amount owing in taxes. (Pl. Ex. N.)

In 1988, the IRS made assessments against the defendant for unpaid taxes during the period of 1977 through 1982. The IRS summarized the assessments in a "Form 23C." Subsequently, the IRS prepared certificates-of assessments and payments on "4340 forms" which were signed by Dorothy DeJesus and certified by Malcolm Bennett. The forms assessed a total tax liability of $549,791.86, including a fraud penalty of $108,281.11. ² (Pl. Ex. B.) On March 27, 1990, the plaintiff, on behalf of the IRS, brought the present action to collect taxes, penalties and interest assessed against the defendant.

DISCUSSION

I. Validity of the Assessments

In Count I of the Amended Complaint, the plaintiff seeks to establish that its assessments of unpaid taxes are valid and enforceable against the defendant. In response, the defendant challenges the procedural and substantive adequacy of the assessments.

A. Procedural Compliance

A tax assessment must comply with 26 U.S.C. §6203 which provides the following: "The assessment shall be made by recording the liability of the taxpayer in the office of the Secretary . . . ." Within the aegis of §6203 , the IRS makes an assessment by preparing a signed summary record, known as a "Form 23C." Huff v. United States [93-2 USTC ¶50,633 ], 10 F.3d 1440, 1446 n.5 (9th Cir. 1993); Geiselman v. United States [92-1 USTC ¶50,200 ], 961 F.2d 1, 5 (1st Cir.), cert. denied, -- U.S. --, 113 S. Ct. 261 (1992). In addition, the IRS will often prepare a certificate of assessments and payments, referred to as a "Form 4340."

The IRS regularly uses the Form 4340 to prove that it has made a tax assessment. Rocovich v. United States [91-1 USTC ¶60,072 ], 933 F.2d 991, 994 (D.C. Cir. 1991). Indeed, it well established that the Form 4340 is " 'presumptive proof of a valid assessment.' " Geiselman [92-1 USTC ¶50,200 ], 961 F.2d at 6 (quoting United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1018 (11th Cir.), cert. denied, 493 U.S. 975 (1989)). See also Stallard v. United States [94-1 USTC ¶50,056 ], 12 F.3d 489, 493 (5th Cir. 1994); Huff [93-2 USTC ¶50,633 ], 10 F.3d at 1445; Rand v. United States, 818 F. Supp. 566, 571 (W.D.N.Y. 1993). Cf. Brewer v. United States [91-2 USTC ¶50,379 ], 764 F. Supp. 309, 315-16 (S.D.N.Y. 1991) (absent 23C date on Form 4340, issue of fact remained). A prerequisite to the presumption, however, is that the Form 4340 contain a "23C date," i.e., a date indicating when the Form 23C was signed. Geiselman [92-1 USTC ¶50,200 ], 961 F.2d at 5-6; Brewer [91-2 USTC ¶50,379 ], 764 F. Supp. at 315-16.

In the present case, the plaintiff has offered 4340 forms to validate its tax assessments against the defendant. On each form, appears a 23C date. Thus, the assessments are presumptively valid; the plaintiff has established a prima facie case that the defendant owes $192,106.13 in unpaid income taxes.

The defendant claims that there are several procedural deficiencies in the plaintiff's evidence. First, the defendant highlights the fact that the IRS prepared the 4340 forms after it prepared the summary record via the Form 23C. Accordingly, the defendant argues that the 4340 forms are litigation-driven and not entitled to the ordinary presumption of validity. The defendant's argument is misplaced. According to the court in Stallard [94-1 USTC ¶50,056 ], 12 F.3d at 493, if the IRS prepares and signs a summary record (Form 23C) before the statute of limitations expires, then it may later prepare the supporting record (Form 4340). The logical import of this decision is that it is entirely appropriate for the Form 23C to precede the 4340 forms.

In addition, the court notes that the IRS's use of the Form 4340 is often for purposes of litigation. Geiselman [92-1 USTC ¶50,200 ], 961 F.2d at 6 (IRS routinely uses Form 4340 to prove that assessment has been made); Rocovich [91-1 USTC ¶60,072 ], 933 F.2d at 994 (same). Notwithstanding this purpose, courts consistently have applied a presumption of validity to the Form 4340. See e.g., Geiselman [92-1 USTC ¶50,200 ], 961 F.2d at 6. In short, there is no merit to the defendant's contention that the 4340 forms are unworthy of credence. ³

The defendant next argues that the IRS must submit the Form 23C as evidence in order to establish the validity of the assessments. This argument contradicts established precedent. As noted, the Form 4340 is sufficient to establish the presumption of a valid assessment. While the 23C date must appear on the Form 4340, the Form 23C in its entirety is not an evidentiary prerequisite. Geiselman [92-1 USTC ¶50,200 ], 961 F.2d at 6 (the argument that the Form 4340, itself, cannot prove that a valid assessment was executed is "beneath the weight of authority"); Rand, 818 F. Supp. at 571 (Form 4340 sufficient documentation that IRS made proper statutory assessment).

The defendant also claims that Bennett had no authority to sign the 4340 forms. The basic flaw in this argument is that Bennett did not sign the forms; he merely certified the forms as true and complete accounts of the defendant's unpaid taxes. The forms themselves were signed by DeJesus, whose authority is not in dispute. (Pl. Ex. B.) Moreover, as a disclosure officer, Bennett was authorized to certify the accuracy of the 4340 forms. (See Delegation Order No. 198 (1986).) In no way has Bennett acted beyond his delegated authority.

In short, the plaintiff's 4340 forms are not procedurally deficient. Relying on these forms, the plaintiff has established a prima facie case that the assessments of unpaid income taxes are valid.

B. Substantive Considerations

1. Calculation of Income

The defendant declares by affidavit that a discrepancy exists between his actual income and the statement of income prepared by the IRS. In this regard, the defendant's challenge to the plaintiff's evidence is reminiscent of a similar contention rejected by the Second Circuit in United States v. Prince [65-2 USTC ¶9552 ], 348 F.2d 746, 748 (2d Cir. 1965). There, the plaintiff moved for summary judgment against the taxpayer. The plaintiff offered tax assessments which were presumptively correct. In response, the taxpayer relied on an affidavit in which he denied that he owed any taxes and noted that he never agreed to the IRS's figures. The court in Prince held that the taxpayer's conclusory denials of unpaid taxes failed to rebut the presumption that the plaintiff's assessments were valid. Id.

The present case is no different. In his affidavit, the defendant lists what he claims was his income in 1977 through 1982. He then offers a "proposed assessment" for each year. However, the defendant has not offered a shred of documentation to support his conclusory contradiction of the plaintiff's evidence. He failed to file tax returns from 1977 through 1982 through which he could have presented a statement of his income. (Pl. Ex. J.) Furthermore, the defendant's reference to his assessment figures as "proposed" suggests uncertainty as to their substance. "Mere formal denials and allegations should be pierced upon Rule 56 motions and cannot forestall summary relief." Prince [65-2 USTC ¶9552 ], 348 F.2d at 748. The court concludes that the bald assertions in the defendant's affidavit do not rebut the presumed validity of the IRS's assessments. Id.; See also United States v. Property Located at 15 Black Ledge Drive, 897 F.2d 97, 102 (2d Cir. 1990) (evidence so one-sided that government entitled to summary judgment as a matter of law); United States v. Property located at 101 Kimberly Ave., 765 F. Supp. 39, 42 (D. Conn. 1991) (affidavit containing only conclusory denials of material facts does not create a factual issue).

2. Fraud Penalties

The defendant also contends that he is not liable for the fraud penalties set forth in the plaintiff's assessments. The court disagrees.

A fraud penalty is warranted if the IRS proves by clear and convincing evidence that a taxpayer acted with an intent to evade paying taxes. Schiff v. United States [90-2 USTC ¶50,591 ], 919 F.2d 830, 833 (2d Cir. 1990), cert. denied, -- U.S. --, 111 S. Ct. 2871 (1991). The presentation of circumstantial evidence is often the means by which to establish tax fraud. For example, "consistent and substantial understatement of income" is circumstantial evidence of tax fraud. Dougue v. Commissioner [90-1 USTC ¶50,186 ], 899 F.2d 164, 168 (2d Cir. 1990).

In the present case, the plaintiff has offered evidence that the defendant failed to file tax returns for six straight years. (Pl. Ex. J.) His failure to file returns is tantamount to an assertion that no taxes were due. Schiff [90-2 USTC ¶50,591 ], 919 F.2d at 832. Such an assertion directly contradicts undisputed evidence that the defendant received substantial income throughout the six-year period. (See Pl. Ex. B; Aff. of Def.) The defendant's consistent failure to file a tax return, despite his receipt of substantial income, is circumstantial evidence that he intended to evade paying taxes. Schiff [90-2 USTC ¶50,591 ], 919 F.2d at 833-34.

In addition, the defendant has not indicated a good faith belief that he did not owe taxes. Indeed, such a position is untenable given his constitutional challenge to the applicable tax provisions. The defendant's claims that certain provisions of the tax code are unconstitutional "do not arise from innocent mistakes caused by the complexity of the Internal Revenue Code. Rather, they reveal full knowledge of the provisions at issue and a studied conclusion, however wrong, that those provisions are invalid and unenforceable." Cheek v. United States [91-1 USTC ¶50,232 ], 498 U.S. 192, 205-206 (1991).

The defendant knew that certain provisions of the tax code required the payment of income taxes; he knew that he received income for each of the years in question. Yet he failed to pay the IRS. This presents, by clear and convincing evidence, a classic case of tax evasion warranting the assessment of a fraud penalty.

The plaintiff has established the procedural and substantive validity of its assessments against the defendant, including unpaid taxes, fraud penalties and interest. ⁴ The court concludes that the plaintiff is entitled to summary judgment on Count I of its complaint and that the defendant owes $549,791.86 in unpaid taxes, penalties and interest.

II. Fraudulent Conveyance

In Counts II-VII of the Amended Complaint, the plaintiff alleges that the defendant fraudulently conveyed six parcels of real property to a trust fund in an effort to avoid paying his debts. The plaintiff seeks to set aside the transfers so that it may then foreclose tax liens on the properties. The plaintiff now moves for summary judgment on Counts II through VII. At this stage in the litigation, however, judgment as a matter of law is not warranted.

The plaintiff's claim of fraudulent conveyance is governed by the law of Connecticut. Citizens Bank of Clearwater v. Hunt, 927 F.2d 707, 710 (2d Cir. 1991) (governing law is that of the state in which the property is located). Connecticut's fraudulent conveyance law is controlled by statute. In fact, the Connecticut legislature recently enacted the Uniform Fraudulent Transfer Act, Conn. Gen Stat. §52 -552a-1, and repealed its predecessor, Conn. Gen. Stat. §52 -552. At the outset, the court must decide whether the repeal of §52 -552 has any bearing on the plaintiff's fraudulent conveyance claim. In this regard, the court notes that "the applicable substantive law is that in effect at the time that the action accrues." Champagne v. Raybestos-Manhattan, Inc., 212 Conn. 509, 522 (1989). Here, it is undisputed that the plaintiff's fraudulent conveyance claims accrued before the enactment of §52 -552a. This action, therefore, is governed by §52 -552. See Tyler v. Schnabel, 34 Conn. App. 216, 221 (1994) (refusing to give §52 -552a retroactive effect where cause of action accrued prior to repeal of predecessor statute).

Section 52 -552 provides that "[a]ll fraudulent conveyances . . . made or contrived with intent to avoid any debt or duty belonging to others, shall . . . be void as against those persons only . . . to whom such debt or duty belongs." Within this framework a fraudulent conveyance has two primary variations: actual fraud and constructive fraud. Citizens Bank, 927 F.2d at 710; Molitor v. Molitor, 184 Conn. 530, 536 (1981).

A. Actual Fraud

A conveyance is the product of actual fraud if it is made with actual intent to avoid any debt or duty. Id.; Rocklen, Inc. v. Radulesco, 10 Conn. App. 271, 278 (1987). Actual fraud ordinarily is inferred from the circumstances surrounding the transfer. Citizens Bank, 927 F.2d at 711; Zapolsky v. Sacks, 191 Conn. 194, 200 (1983). The intent of the parties is entirely a question of fact the resolution of which is rarely appropriate on a motion for summary judgment. Clements v. County of Nassau, 835 F.2d 1000, 1005 (2d Cir. 1987).

In the present case, the plaintiff's evidence indicates that in 1984, the defendant transferred six parcels of real property to a trust fund by quitclaim deed. (Pl. Exs. D-I.) These transfers occurred shortly after the IRS notified the defendant of his unpaid taxes. (Pl. Ex. J.) In addition, the defendant did not receive any consideration for his properties. (Pl. Ex. J.) Citing these badges of fraud, the plaintiff asks the court to infer that the timing and circumstances of the transfers evince the defendant's intent to avoid his debts. The inference may well be appropriate, but not at this juncture.

The defendant offers evidence, albeit a self-serving affidavit, that he conveyed his property to establish "a legacy to the trust's beneficiaries." The defendant's purported interest in preserving assets for beneficiaries is potentially inconsistent with the plaintiff's evidence that he was attempting to avoid his debts. Whether the defendant's transfer of his property was actual fraud, therefore, is a disputed issue of fact. Citizens Bank, 927 F.2d at 712.

B. Constructive Fraud

The plaintiff has also predicated its claim of fraudulent conveyance on the doctrine of constructive fraud. Constructive fraud occurs when a conveyance is made "without any substantial consideration by a person who is or will be thereby rendered insolvent." Molitor, 184 Conn. at 536 (emphasis added); Tyler, 34 Conn. App. at 221.

The plaintiff has clearly established that the transfers occurred without any substantial consideration. Indeed, the undisputed evidence indicates that the defendant did not receive any consideration in exchange for the properties. (Pl. Ex. J.) The more vexing matter is that involving the issue of insolvency.

As evidence of insolvency, the plaintiff submits statements that the defendant made in 1987, three years after the allegedly fraudulent transfers. Specifically, in 1987, at his sentencing for criminal tax evasion, the defendant explained to the court that he had no money. (Pl. Ex. N.) This evidence, however, does not conclusively indicate that the defendant was insolvent at the time of the transfers or that the transfers rendered him insolvent. Rather, the plaintiff's evidence leaves open the possibility that the defendant's insolvency arose subsequent to and independent of the 1984 transfers. Given the ambiguity of the record, the court cannot conclude that the plaintiff has established constructive fraud as a matter of law. Because the plaintiff has not established that, as a matter of law, the 1984 transfers were the product of actual or constructive fraud, summary judgment on Counts II through VII of the Amended Complaint is not warranted. ⁵

CONCLUSION

For the reasons stated herein, the plaintiff's objection to the magistrate judge's recommended ruling on the motion for reconsideration [doc. #111] is sustained. The motion for reconsideration [doc. #109] is GRANTED, and the magistrate judge's ruling on plaintiff's motion for summary judgment [doc. #32], as well as the court's prior ratification of that ruling, is set aside. The plaintiff's motion for summary judgment [doc. #32] is now GRANTED in part and DENIED in part. The motion is GRANTED as to Count I of the Amended Complaint, and the court finds that the defendant is liable for $549,791.86 in taxes, penalties and interest. The motion is DENIED as to Counts II through VII of the Amended Complaint. The parties shall contact Alice Montz at (203) 579-5727 to schedule a pretrial conference as soon as possible.

SO ORDERED this 19th day of May, 1994 at Bridgeport, Connecticut.

¹ Other defendants in this action are persons involved in Sitka's transfer of real property and are implicated by the plaintiff's fraudulent conveyance claim. For purposes of this ruling, the court will refer to Sitka as the defendant.

² The court notes that the plaintiff's figures in its complaint and brief are not entirely consistent with the numbers appearing on the 4340 forms. Because the 4340 forms are presumptively valid, see infra, the court has used the figures that appear in the forms.

³ In a related argument, the defendant maintains that because the 4340 forms were prepared in anticipation of litigation, they are inadmissible hearsay. This argument is contrary to the weight of authority. Hughes v. United States [92-1 USTC ¶50,086 ], 953 F.2d 531, 539-40 (9th Cir. 1992) (holding that Form 4340 is a "data compilation" admissible under the public record exception to the hearsay rule); United States v. Neff [80-1 USTC ¶9397 ], 615 F.2d 1235, 1241 (9th Cir.), cert. denied, 447 U.S. 925 (1980) (same); United States v. Brewer [91-2 USTC ¶50,379 ], 764 F. Supp. 309, 318 (S.D.N.Y. 1991) (rejecting claim that 4340 forms are inadmissible hearsay).

⁴ The defendant does not challenge the interest and estimated tax penalties set forth in the 4340 forms.

⁵ In his affidavit, the defendant makes two conclusory legal arguments: first, that the imposition of a fraud penalty constitutes double jeopardy, and, second, that the fraudulent conveyance claim is barred by the statute of limitations. The presentation of these arguments is inappropriate. Rule 56(e), Fed. R. Civ. P., provides that a nonmovant's affidavit "must set forth specific facts showing a genuine issue of material fact." (emphasis added.) Implicit in this rule is that the nonmovant cannot use the affidavit to set forth conclusory legal arguments. Accordingly, the court rejects the legal arguments contained in the defendant's affidavit.

 

 

 

 

 

 

United States of America, Plaintiff v. Timothy Lee Nipper, et al., Defendants.

U.S. District Court, No. Dist. Okla.; 98-CV-0526-EA (J), March 25, 2003.

[ Code Sec. 446]

Reconstruction of income: Burden of proof: Third-party records and statistics: Consumer price index: Summary judgment. --

An individual failed to establish that the IRS's reconstruction of his income for four tax years was erroneous. Because there was a reasonable foundation to support its contention that the taxpayer had unreported income, and the taxpayer failed to show that the reconstruction of income was arbitrary or excessive, the IRS's use of the consumer price indexing method was permissible. An IRS investigator testified that he witnessed the taxpayer engaging in a trash collecting business, and such testimony was supported by the deposition of the taxpayer's former wife that the trash collection business was their only source of income. The government failed to present evidence establishing that the taxpayer continued to engage in the trash collection business for two additional tax years. As a result, the government's motion for summary judgment with respect to the two remaining years was denied.

[ Code Sec. 6321]

Collection action: Tax lien: Fraudulent transfer. --

Tax liens arose against an individual on the date the IRS assessed his tax liabilities and issued demand for payment. As a result, the liens properly attached to property that the taxpayer fraudulently transferred to a trust. A default judgment against the trust established that the transfer of the real property to the trust was a fraudulent conveyance, and that the taxpayer was the true owner of the property.

ORDER

EAGAN, District Judge: Now before the Court are Defendant Timothy Lee Nipper's Motion for Summary Judgment (Dkt. #82) and Plaintiff's Second Summary Judgment Motion and Memorandum in Support Against Timothy Lee Nipper and Thomas Eugene Nipper ¹ (Dkt. #105).

I.

The United States brought suit against Timothy Lee Nipper ("Nipper") based on income tax assessments for tax years 1981 through 1986. The United States is seeking to reduce to judgment tax assessments against Nipper, set aside fraudulent transfers of property, and foreclose on certain real property pursuant to pending tax liens on the property.

On July 1, 1999, the United States filed a motion for summary judgment on the grounds that Certificates of Assessments and Payments concerning Nipper were prima facie valid. The United States did not submit any evidence that Nipper had unreported income. Chief Judge Kern granted summary judgment to the United States, and entered judgment terminating the case.

Nipper appealed the grant of summary judgment and the denial of a subsequent Rule 59 motion. The Tenth Circuit reversed the summary judgment and denial of the Rule 59 motion, because the United States failed to prove its tax assessments against Nipper.

II.

"In an action to collect tax, the government bears the burden of proof." United States v. Stonehill [ 83-1 USTC ¶9285], 702 F.2d 1288, 1293 (9th Cir. 1983). The government's initial burden of proof is typically met by the introduction of its assessment of tax duc. Certificates of Assessments and Payments generally suffice as prima facie evidence of the validity of federal tax assessments. Guthrie v. Sawyer [ 92-2 USTC ¶50,391], 970 F.2d 733, 737 (10th Cir. 1992). A presumption of correctness generally attaches to the assessment. Welch v. Helvering [ 3 USTC ¶1164], 290 U.S. 111, 115 (1933).

In an unreported income case, the presumption of correctness does not arise unless it is supported by a minimal evidentiary foundation. Erickson v. Commissioner [ 91-2 USTC ¶50,349], 937 F.2d 1548, 1551 (10th Cir. 1991). The factual foundation for the assessment is laid "once some substantive evidence is introduced demonstrating that the taxpayer received unreported income." Edwards v. Commissioner [ 82-2 USTC ¶9472], 680 F.2d 1268, 1270 (9th Cir. 1982); see Doyal v. Commissioner of Internal Revenue [ 80-1 USTC ¶9280], 616 F.2d 1191, 1192 (10th Cir. 1980). In reconstructing income, the government does not have to prove the "exact amount of unreported income .... To require more or more meticulous proof than this record discloses ... would be tantamount to holding that skilful [sic] concealment is an invincible barrier to proof." United States v. Johnson [ 43-1 USTC ¶9470], 319 U.S. 503, 517-18, 87 L.Ed. 1546, 63 S.Ct. 1233 (1943). The presumption of correctness will permit judgment in the government's favor unless the opposing party produces substantial evidence overcoming it. United States v. McMullin [ 92-1 USTC ¶50,056], 948 F.2d 1188, 1192 (10th Cir. 1991).

III.

The government contends that it is entitled to summary judgment against Nipper for the amount of taxes it contends are due. The government has presented evidence of the assessments, Nipper's failure to pay the assessments, and mailing of the notice of deficiency to Nipper's last-known address. Although the Certificates of Assessments and Payments would generally be prima facie evidence of the validity of federal tax assessments, this case involves unreported income. If the assessment is based on unreported income and the taxpayer disputes having received the income, then the government must present a minimal evidentiary foundation for its assessment. See Erickson [ 91-2 USTC ¶50,349], 937 F.2d at 1551; see also McMullin [ 92-1 USTC ¶50,056], 948 F.2d at 1192.

Nipper contends that the government has failed to carry its burden of presenting substantive evidence demonstrating that he received unreported income. Nipper contends that the government has presented no evidence connecting him to the income-generating activity, and that the government has no legal basis to use the method of extrapolation that was utilized to determine the amount of unreported income represented in the assessments.

The government has presented the declaration of Robert Walter, an Investigative Analyst with the Criminal Investigation Division of the Internal Revenue Service. Walter declared that from 1985 to 1986 he collected information regarding the income-generating activities of Nipper. Walter and others at the IRS used the information to reconstruct the taxable income estimates for Nipper and assessed federal income taxes, penalties and interest against Nipper. Walter stated that he had observed Nipper driving a trash truck and picking up trash, and that he spoke to individuals for whom Nipper had been collecting trash since at least 1981.

Additionally, the government presented the deposition testimony of Dawn Lynn Lang, Nipper's former wife. Lang testified that Nipper had owned and operated a trash collection service from 1981, until at least the termination of their marriage in September 1984. Lang testified that Nipper's trash collection income supported her and their four children, and that it was the only source of income beyond their rental income.

Based upon the evidence presented, it is clear that the government has met the minimal evidentiary burden of the unreported income exception for its assessments regarding tax years 1981-1985. The government has presented substantive evidence that Nipper received unreported income from trash collection services from 1981 until at least 1985. Walter's personal observation of Nipper engaging in an income-generating activity, along with his discussions with Nipper's customers, establishes that Nipper had engaged in an income-generating activity from at least 1981 until 1985. In addition, Lang's testimony confirms that Nipper was engaged in an income-generating activity from 1981 until at least 1984.

Although Nipper contends that the government has failed to connect him with Uptown Trash Service, the government has connected Nipper with the income-generating activity of collecting trash. While Walter and Lang may have used differing names for the entity providing the trash collection services, the testimony is undisputed that Nipper owned and operated a trash collection service from 1981 until at least 1985.

Nipper contends that, even if the government can meet its burden of connecting him with an income-generating activity in 1985 and 1986, the assessments for other years are nonetheless unsupportable, excessive, and arbitrary because they rely on extrapolated income. Nipper contends that there is no legal basis to use the consumer price index ("CPI") to extrapolate his tax liability.

While Nipper is correct in stating that the CPI cannot be used to estimate income for other years where the reference year's income is not based on a reasonable foundation, that is not the case at hand. The government has established a reasonable factual foundation for the tax assessment for the reference year (1985). Based upon that reasonable foundation, the government may permissibly use the CPI method to determine taxable income for other years where the taxpayer fails to present contrary evidence. See Edwards v. Commissioner [ 82-2 USTC ¶9472], 680 F.2d 1268, 1270-71 (9th Cir. 1982). The estimated income for the years from 1981 to 1984 were reasonably calculated using a permissible method and are entitled to a presumption of correctness. Accordingly, the government has met its minimal evidentiary burden to entitle its assessments for the tax years from 1981 to 1985 to a presumption of correctness, and Nipper has failed to establish that those assessments are arbitrary or excessive.

Nipper also contends that the tax assessments for tax years 1986 to 1988 are devoid of any evidentiary basis and are not entitled to a presumption of correctness. The government contends that it has supported the tax assessments for 1986 to 1988 with testimony from Thomas Nipper that Timothy Nipper was "getting along good" from 1981 to 1988. Dkt. #105, Ex. 18 at 40. The government argues that the record is devoid of any evidence suggesting that Nipper stopped collecting trash from 1986 to 1988, and that it has presented evidence that Nipper's standard of living did not change from 1986 to 1988. However, the lack of evidence suggesting that Nipper ceased his income-generating activity, and evidence suggesting a consistent standard of living do not inherently connect Nipper with an income-generating activity for tax years 1986 through 1988. The government must present some substantive evidence connecting Nipper with an income-generating activity for tax years 1986 to 1988 for the tax assessments representing those years to be entitled to a presumption of correctness. The government has failed to present substantial evidence connecting Nipper to an income-generating activity for the tax years 1986 to 1988, and thus is not entitled to summary judgment for the amount of tax allegedly due for those tax years.

The government has shown that Nipper was earning taxable income from his trash collection service from 1981 until 1985, that Nipper earned unreported rental income from 1981 until at least 1984, and that Nipper failed to pay taxes from 1981 through 1988. Nipper has failed to produce evidence refuting the validity of the tax assessments for the tax years from 1981 through 1985 Accordingly, the government has met its initial burden of proof and the tax assessments for the tax years from 1981 to 1985 should be reduced to judgment.

The government contends that the tax assessments attached to certain real property ² and that the real property should be foreclosed and sold to partially satisfy the judgment. The government contends that Nipper fraudulently transferred the real property to the sham "Proprietor Property Trust" ("Trust") with actual intent to hinder, delay, or defraud the IRS, in violation of the Oklahoma Fraudulent Transfer Act. See Okla. Stat. tit. 24, §116(A)(1). Additionally, the government contends that the default judgment against the Trust recognizes that the transfer was fraudulent and that Nipper is the true owner of the real property.

This Court finds that the default judgment against the Trust establishes that the transfer of the real property to the trust was fraudulent and that Nipper is the true owner of the real property at issue. Additionally, this Court finds that pursuant to sections 6321 and 6322 of the Internal Revenue Code, federal tax liens arose on the dates on which the federal tax liabilities were assessed against, and demand for payment was sent to, Nipper. See 26 U.S.C. §§6321, 6322. These tax liens attached to all property or rights to property of Nipper, including the real property at issue.

IV.

IT IS THEREFORE ORDERED that Defendant Timothy Lee Nipper's Motion for Summary Judgment (Dkt. #82) is hereby DENIED; Plaintiff's Second Summary Judgment Motion and Memorandum in Support Against Timothy Lee Nipper and Thomas Eugene Nipper (Dkt. #105) is hereby GRANTED in part and DENIED in part; plaintiff's second summary judgment motion is granted as it relates to the tax assessments against defendant Timothy Lee Nipper for the tax years from 1981 through 1985, and is denied as it relates to the tax assessments against defendant Timothy Lee Nipper for the tax years from 1986 through 1988.

The stay entered by this Court on January 22, 2003, (Dkt. #117) is hereby lifted and the parties are directed to file a joint proposed scheduling order within ten (10) days.

¹ Thomas Eugene Nipper, Timothy Lee Nipper's father, is named as a defendant solely in his capacity as nominee for Timothy Lee Nipper, and the government seeks no separate relief against him in its second summary judgment motion.

² The government contends that certain real property located at Lot 27, Block 7, Shannon Park Sixth, City of Tulsa, Tulsa County, Oklahoma, is real property owned by Timothy Lee Nipper and is subject to federal tax liens.

 

 

 

 

 

United States of America, Plaintiff v. Mary Dieter, f/k/a Mary Ann McNeal, Michael K. McNeal, Cory C. McNeal, Hennepin County Assessor, David Olson and Juli Olson, Defendants, David Olson and Juli Olson, Cross-Claimants v. Corey C. McNeal, Cross-Defendant, David Olson and Juli Olson, Third-Party Plaintiffs v. Tina M. O'Tool, John A. Dieter and Theresa A. Dieter, Third-Party Defendants.

U.S. District Court, Dist. Minn.; 01-1435 (DWF/AJB), April 11, 2003.

[ Code Secs. 61 and 102]

Gross income: Compensation for services: Claim against estate: Homestead property: Gifts or bequests: Compensation for services distinguished. --

An individual was required to include in income the value of homestead property she received as compensation for caring for her elderly mother-in-law. The taxpayer failed to establish that she received the property as a gift or bequest upon the death of her mother-in-law. Evidence indicated that the taxpayer did not receive the property through a will or trust; rather, she received it as a settlement of her claim against the estate for the care services. The taxpayer unsuccessfully argued that she should not be taxed on that portion of the value of the property that exceeded the value of her services and that the assessment of tax concerning the property was untimely.

[ Code Secs. 6321 and 7403]

Tax liens: Property subject to tax liens: Summary judgment: Homestead property: Gifts or bequests: Fraudulent conveyances: Nominee. --

The government was entitled to summary judgment where it established that an individual fraudulently transferred a house to her son, as her nominee, to avoid the collection of taxes. The taxpayer failed to establish that her son asserted substantial control over the property or that he received the house as a gift or bequest from the taxpayer's mother-in-law. Rather, the estate of the taxpayer's mother-in-law transferred the house, at the taxpayer's direction, to the taxpayer's son as a settlement of the taxpayer's claim against the estate for compensation for care services provided to the decedent. The taxpayer's son was not part of the claim against the estate, and paid no consideration for the home. Moreover, the taxpayer and her former husband lived in the home rent-free and controlled all household debts.

[ Code Secs. 6321 and 7403]

Property subject to tax liens: Homestead property: Fraudulent conveyances: Foreclosure: Property transferred to third party: Constructive trust. --

The IRS was entitled to foreclose its tax lien against an individual upon property fraudulently transferred to her son and later sold to an innocent third party. The court was unable to separate the third party's interest from the taxpayer's and, without a forced sale of the property, the government could not foreclose its lien in connection with the taxpayer's outstanding taxes. Moreover, the third party would be compensated for its loss not only by insurance, but by its cross-claim against the taxpayer and her various family members for misrepresentation, breach of warranty of title and unjust enrichment. As a result, a constructive trust was imposed upon the house that the taxpayer purchased through her parents from the sale proceeds of the fraudulently transferred property.

Michael R. Pahl, Department of Justice, for plaintiff. Mark A. Pridgeon, for Mary Dieter and Corey C. McNeal. Robert T. Rudy, Assistant for Hennepin County Attorney, Hennepin County Assessor. Michael L. Brutlag, Ryan J. Trucke, for David Olson and Juli Olson. Kristine K. Nogosek, Loren M. Solfest, for Tina M. O'Tool, John A. Dieter and Theresa Dieter.

MEMORANDUM OPINION AND ORDER

Introduction

FRANK, District Court: The above-entitled matter is before the undersigned United States District Judge pursuant to Plaintiff United States of America's Motion for Summary Judgment against Defendants Mary Dieter, Corey O'Tool, ¹ David Olson, and Juli Olson; Defendants Mary Dieter and Corey O'Tool's Motion for Summary Judgment against the United States of America; David Olson and Juli Olsons' Motion for Summary Judgment against Corey O'Tool, Tina O'Tool, Mary Dieter, John Dieter, and Theresa Dieter; Defendants Corey O'Tool, Tina O'Tool, John Dieter, and Theresa Dieter's Motion for Summary Judgment against David Olson and Juli Olson; and Defendants Corey O'Tool and Mary Dieter's Motion for Summary Judgment against David and Juli Olson.

For the reasons stated below, the United States of America's Motion for Summary Judgment is granted; Mary Dieter and Corey O'Tool's Motion for Summary Judgment against the United States of America is denied; Mary Dieter and Cory O'Tool's Motion for Summary Judgment against David and Juli Olson is denied; David and Juli Olson's Motion for Summary Judgment against Corey O'Tool, Tina O'Tool, Mary Dieter, John Dieter, and Theresa Dieter is granted in part and denied in part; and Tina O'Tool, John Dieter, and Theresa Dieter's Motion for Summary Judgment against David and Juli Olson is denied; and Corey O'Tool and Mary Dieter's Motion for Summary Judgment against David and Juli Olson is denied.

Background

This case arises out of the United States' attempt to satisfy tax assessments against Michael McNeal and Mary Dieter that occurred as a result of a transfer of Michael McNeal's mother's house to Mary Dieter's son, Corey O'Tool. According to the United States, this transfer was made to compensate Mary Dieter and Michael McNeal for services rendered in caring for Michael McNeal's aging mother. The United States asserts that the house was only given to Corey O'Tool to avoid the tax consequences to Mary Dieter and Michael McNeal, and as such, Corey O'Tool held the house as only a nominee for Mary Dieter and Michael McNeal.

The United States requests that the Court reduce these tax assessments to judgment and that the Court order a forced sale of the property to satisfy the judgments. The United States' motion, if granted, could ultimately result in the displacement of David and Juli Olson, the innocent third parties who purchased the home from Corey O'Tool. Consequently, David and Juli Olson bring several claims against Corey O'Tool, Mary Dieter, Tina O'Tool, and John and Theresa Dieter.



I. Alberta McNeal

Alberta McNeal had two children: a son, Michael McNeal, and a daughter, Maureen McNeal. In 1985, Alberta McNeal lived in Minneapolis, Minnesota, in a house located at 5040 Belmont Avenue (the "Belmont Avenue House"). At that time, Alberta McNeal was experiencing health issues, including symptoms associated with Parkinson's disease, that made it difficult for her to continue living alone. (Mary Dieter Dep. at 19-20.) Alberta McNeal's daughter Maureen had previously cared for her, but that care was becoming more than Maureen, a single parent working full-time, could provide. (Maureen McNeal Dep. at 14.) As a result, Alberta McNeal's family discussed moving Alberta McNeal to a senior-living facility, but decided against it because Alberta McNeal wanted to remain at her home. (Mary Dieter Dep. at 21.) At this time, Alberta McNeal's son, Michael McNeal, and his then-wife, Mary Dieter, were living in Des Moines, Iowa, with their son Michael "Mickey" McNeal, and with Mary's son from a previous marriage, Corey O'Tool. The family agreed that Mary Dieter and her two sons would move to Minneapolis to take care of Alberta McNeal.

Once she arrived in Minneapolis, Mary Dieter's tasks in caring for Alberta McNeal included housekeeping, cooking, doing laundry, driving Alberta McNeal to doctor appointments and various social events, handling Alberta McNeal's financial affairs, and bathing her. (Mary Dieter Dep. at 24-29.) Mary Dieter was not paid for these tasks, although she and her two sons lived rent-free in the Belmont Avenue house, where Alberta provided groceries and paid all of the household expenses. (Mary Dieter Dep. at 22.) During this time, Mary Dieter did not work outside of the home. (Mary Dieter Dep. at 24.)



II. Purchase of the 12th Avenue House

Into the late 1980's and early 1990, Alberta McNeal's health steadily declined; she was having issues with her memory and had fallen several times. As a result, family members decided that Alberta McNeal should move into a smaller house where she would not need to climb stairs. (Michael McNeal Dep. at 34-35; Mary Dieter Dep. at 64.) Ultimately, in early 1989, Michael McNeal, in his capacity as Power of Attorney for Alberta, signed the documents necessary to sell the Belmont Avenue House and purchased a new house located at 4904-12th Avenue South in Minneapolis (the "12th Avenue House"). Mary Dieter and Michael McNeal were instrumental in selecting the 12th Avenue House, and it appears that Alberta McNeal played no part in its selection. (Mary Dieter Dep. at 69.) In fact, Mary Dieter stated that it was "totally left up to me" as to which house would be selected. ( Id.) In addition to selecting the home, Michael McNeal and Mary Dieter negotiated the personal property to be conveyed at closing and any changes to be made to the home. (Michael McNeal Dep. at 34; Mary Dieter Dep. at 70-74.) Michael McNeal and Mary Dieter also handled the closing on behalf of Alberta McNeal. ( Id.)

After Mary McNeal and Alberta McNeal moved into the 12th Avenue House, Alberta's health further declined. On December 12, 1991, Alberta McNeal entered a nursing home, and Mary Dieter and Michael McNeal continued to live in the 12th Avenue House. In late 1992, Alberta McNeal suffered three episodes of congestive heart failure. Ultimately, Alberta McNeal died in December 1993.



III. Disputes over the Disposal of Alberta McNeal's Assets

While Mary Dieter cared for Alberta McNeal, it appears that it was discussed that Dieter would receive Alberta McNeal's home as compensation for caring for Alberta. In a letter to Alberta McNeal dated February 14, 1988, her attorney, Wheeler Smith, stated:

Michael and Mary are saying that they are entitled to, or would like to arrange for, more tangible recognition of the services Mary is rendering in taking care of you. They like living in Minneapolis, and they would like to have your homestead property.

( See Wheeler Smith Dep., Ex. 2 at 2.) Mary Dieter stated that at "one time Maureen had said that she wanted to make sure that the house ... would be saved ... for taking care of Grandma" and that no one objected to the idea that the house would go to her for taking care of Alberta McNeal. (Mary Dieter Dep. at 23-24.) Michael McNeal stated that his mother was present at a meeting where "it was decided and agreed upon that we would be given the Belmont house" as financial compensation for taking care of his Alberta McNeal, and that this was "something that Mary [Dieter] wanted." (Michael Dieter Dep. at 46-51.) Further, Michael McNeal stated that this agreement was made with Maureen McNeal prior to his mother's death. ( Id. at 49.) Maureen McNeal stated that while there were not any fixed agreements in place as to how Mary Dieter would be compensated, Maureen McNeal was told by Michael McNeal that "Mary should get the house as compensation for taking care of [Alberta McNeal]." (Maureen McNeal Dep. at 15-16, 32-33.)

Mary Dieter and Corey O'Tool assert, however, that there was no fixed agreement or decision among the family members that Michael McNeal and Mary Dieter would receive Alberta McNeal's house as compensation for caring for Alberta. Furthermore, Mary Dieter and Corey O'Tool contend that Mary Dieter did not expect to be paid for taking care of her mother-in-law, except for the free room and board. ( See id.)

Alberta McNeal had executed two documents directing how her property would be distributed upon her death: a will and a revocable trust. Alberta McNeal's will, dated March 14, 1989, divided Alberta's property equally between Michael and Maureen McNeal upon Alberta's death. (Michael McNeal Dep., Ex. 8.) The will did not provide that Alberta McNeal's house would be conveyed to any person other than Michael McNeal or Maureen McNeal. By a document dated December 1, 1987, Alberta McNeal created a revocable trust that divided Alberta's property equally between Michael McNeal and Maureen McNeal. (Wheeler Smith Dep., Ex. I at 3.) Like Alberta McNeal's will, the trust did not provide that Alberta McNeal's house would be conveyed to any person other than Maureen McNeal or Michael McNeal. The trust further named Michael McNeal as trustee and granted him full Power of Attorney to handle his mother's affairs.

Ultimately, a dispute arose between Maureen McNeal and Michael McNeal as to Michael McNeal's handling of their mother's affairs. In December 1992, Maureen McNeal wrote a letter to her brother accusing him of misappropriating Alberta's assets and requesting clarification of Alberta's financial affairs. ( See Maureen McNeal Dep. Ex. 2.) In this letter, Maureen McNeal stated that Michael McNeal had "repeatedly spoken of wanting financial compensation for the service [he had] rendered to Mother" and that Michael McNeal had "repeatedly made Mary's need for her own home the only acceptable compensation." ( Id.) The letter detailed the past financial gifts from Alberta McNeal to Michael McNeal and Michael's family and requested an explanation of Alberta McNeal's financial affairs. ( Id.)

Subsequently, Maureen McNeal filed a special conservatorship proceeding in Hennepin County District Court, requesting that Michael McNeal be removed as trustee and also requesting an accounting of Michael McNeal's handling of the estate. (Michael McNeal Dep., Defendants' Exs. 1-3.) As a result, Alberta McNeal's long-time attorney Wheeler Smith was appointed as the Special Conservator for the estate and the parties engaged in discovery. The issues raised in the conservatorship proceeding focused especially upon the status of Alberta McNeal's three main assets: her homestead valued at $135,000; other real estate valued at $150,000 [an Illinois farm]; and other personal property valued at $250,000 [the revocable trust].

Apparently in response to this proceeding and Maureen McNeal's allegations, Michael McNeal attempted to clarify some of Alberta McNeal's financial matters in a letter to Maureen McNeal's attorney dated May 3, 1993. (Maureen McNeal Dep., Ex. 3.) In his letter, Michael McNeal stated, "It was decided and agreed upon that if we stayed and cared for mother that we would be given the Belmont [Avenue] House." ( Id.)

Ultimately, the conservatorship proceeding was resolved by virtue of a Release and Settlement Agreement, signed on July 16 and 17, 1993, that divided Alberta McNeal's estate. (Michael McNeal Dep., Ex. 15.) The portions of the Release and Settlement Agreement relevant to this matter read as follows:

WHEREAS, Michael and Mary have asserted certain claims against Alberta, her assets and her estate, including without limitation, that they are entitled to compensation for care they provided to Alberta during the period from 1985 through 1991; that Alberta transferred or intended to transfer the 12th Avenue house to Michael, Mary, and/or Corey and/or Mickey; and that Alberta transferred or intended to transfer the Illinois Farm to Corey and/or Mickey, which claims are denied by Maureen and Wheeler Smith.

 

...

 

On the Settlement Date, legal title to the 12th Avenue house shall be delivered to Corey by deed previously signed by Alberta individually and Michael as attorney-in-fact. Michael, Mary and Mickey specifically acknowledge that the conveyance to Corey serves as consideration to them as well as to Corey.

 

...

 

In consideration of the foregoing terms, Michael, Mary, Corey, and Mickey, for themselves, and for their successors and assigns, hereby agree to remise, release, acquit, and forever discharge Alberta, her successors, assigns, heirs, trustees, attorneys, and special conservators; Wheeler Smith; Gail Rising; First Bank National Association, as trustee of the Lloyd McNeal Trust; and Maureen and her successors, assigns, and heirs from all debts, demands, actions, suits, accounts, covenants, contracts, agreements, causes of action, damages, claims for services rendered or care provided, claims of gifts, and any and all other claims of every kind, nature, and description whatsoever, known or unknown, suspected or unsuspected, arising or alleging to have arisen, whether in law or in equity, including, without limitation of the foregoing, from any and all claims and/or potential claims for money paid to or on behalf of purchase made for or on behalf of, services rendered to or care provided to Alberta by Michael, Mary, Corey, and/or Mickey, gifts given or allegedly given by Alberta to Michael, Mary, Corey, and/or Mickey or moneys owed or allegedly owed by Alberta to Michael, Mary, Corey, and/or Mickey.

( Id. at 3, 4, 9-10.) The Release and Settlement Agreement was signed by Maureen McNeal, Corey McNeal, Michael McNeal and Mary [Dieter] McNeal (both individually and as guardians of Mickey McNeal), Alberta McNeal, and Wheeler Smith, as Special Conservator. ( Id. at 11-14.)

The Order that approved the terms of the settlement stated as follows:

Mary A. [Dieter] McNeal and Michael K. McNeal had a substantial claim against Alberta L. McNeal for services rendered in taking care of Alberta L. McNeal during the period from 1985 through 1991. This claim is being satisfied by conveying the former Alberta L. McNeal homestead at 4904 12th Avenue South, Minneapolis, Minnesota to Corey C. McNeal, son of Mary A. McNeal and Michael K. McNeal, and their designee to receive title to the property.

(Michael McNeal Dep., Ex. 16.)

The United States asserts that the 12th Avenue House was put in Corey McNeal's name only to avoid payment of back taxes ² that had been assessed by the IRS against Mary Dieter and Michael McNeal --such back taxes that they could not pay. At the time that the Release and Settlement Agreement conveyed Alberta McNeal's house to Corey O'Tool, he was serving in the Air Force and stationed in Colorado. Furthermore, at the time that Corey O'Tool signed the Release and Settlement Agreement, he knew nothing about a lawsuit regarding his grandmother's estate, he was not a party to such a lawsuit, he had no claim against Alberta McNeal's estate, and he had no expectation that he would receive anything from Alberta McNeal's estate. (Corey O'Tool Dep. at 97-100.) Apparently, no other grandchild of Alberta McNeal received anything as part of this Release and Settlement Agreement. ( See, e.g., Mary Dieter Dep. at 93.) Michael McNeal has stated that "it was felt that by putting the property in [Corey O'Tool's] name, it might afford or offer us some protection from the IRS coming in and, and [sic] seizing the property or putting a lien against it or whatever your term would be." (Michael McNeal Depo. at 54.) In addition, Wheeler Smith has stated, "It was done because Michael asked that it be transferred to [Corey O'Tool], and I don't know if he said it, but my understanding was that Michael had tax liens and other obligations that if it went to him, that they could lay claim to the house, and so he didn't want to take title himself." (Wheeler Smith Dep. at 33.) Notably, Wheeler Smith also testified that Alberta never told him that she intended to transfer the house to Corey. ( Id. at 47.)



IV. Control over the 12th Avenue House

In conjunction with the United States' claims that the 12th Avenue House was transferred as compensation for Mary Dieter and Michael McNeal's services in taking care of Alberta, the United States asserts that Corey O'Tool held the 12th Avenue House as a nominee for Mary Dieter and Michael McNeal. The United States contends that Corey O'Tool owned the 12th Avenue House in name only, and that he failed to exercise any dominion or control over the property once the house was conveyed to him. Michael McNeal stated in his deposition testimony that the house was Corey O'Tool's in "name only." (Michael McNeal Dep. at 22.) Any decisions regarding the house were made by "whoever was living there at the time," Mary Dieter and Michael McNeal did not pay rent, and Mary Dieter and Michael McNeal were the named insureds on the house and paid for the homeowner's insurance, utilities, and were responsible for paying the property taxes. ( See Corey O'Tool Dep. at 104; Michael McNeal Dep. at 57.) Michael McNeal and Mary Dieter continued paying all of the bills, even once the house was transferred to Corey O'Tool, in complete absence of any formal agreement. There were no real discussions about Mary Dieter and Michael McNeal paying rent to Corey O'Tool after the house was transferred to him; "[t]hey just continued living there." (Corey O'Tool Dep. at 104.) Finally, several court pleadings submitted as part of Mary Dieter's 1995 petition for divorce from Michael McNeal listed the 12th Avenue House as a marital asset. ( See Mary Dieter Dep. at 110-112; see also Mary Dieter Dep. Exs. 21, 22, 23.)

Mary Dieter and Corey O'Tool contend that the household expenses paid by Mary Dieter and/or Michael McNeal constituted the "rent" paid to Corey O'Tool as part of an informal, verbal rent agreement. ( See Mary Dieter Dep. at 95.) They assert that Corey O'Tool demonstrated his dominion and control over the property by borrowing a home equity loan in 2000 by deciding to replace the house's carpeting with wood floors and by renting a bedroom to a college friend. Finally, Mary Dieter and Corey O'Tool assert that Mary Dieter's listing of the 12th Avenue House as a marital asset in her divorce pleading was merely "aggressive pleading" on the part of Mary Dieter's divorce attorney. ( See Defendants Mary Dieter and Corey O'Tool's Memorandum of Law in Support of Their Motion for Summary Judgment and in Opposition to Plaintiff United States' Motion for Summary Judgment at 11.)

In 1997, when Corey O'Tool returned to Minneapolis upon completion of his military service, he lived in the 12th Avenue House and contributed to payment of the household expenses. ( See Corey O'Tool Dep. at 115-21; Mary Dieter Dep. at 99.) At this same time, Mary Dieter had her paychecks deposited in Corey O'Tool's account and also had full authority to write and sign checks in Corey O'Tool's name. ( See Corey O'Tool Dep. at 117-18.) Corey O'Tool believed that his mother did this because the IRS had "attached to one of her accounts, and she was afraid that, you know, every time she got money, they would just snag it, you know, every time, and then she wouldn't be able to make her car payment or anything like that." ( Id. at 117.) In 2000, Hennepin County threatened to foreclose on the property due to nonpayment of Hennepin County property taxes. Although Corey O'Tool did not believe that these property taxes were his own debts, he took out a home equity loan to pay them, a loan which he later attempted, unsuccessfully, to assign to Mary Dieter. ( Id. at 109-111; 126-27.) In addition, Corey O'Tool completed some home improvement projects with the money. ( Id. at 122-24.) Unfortunately, Corey O'Tool did not enjoy these improvements, as he returned to San Antonio in February 2001. Once he left, Mary Dieter made payments on the home equity loan and continued to live in the house. ( Id. at 124.)



V. Sale of the 12th Avenue House

In approximately September 2001, Corey O'Tool decided to sell the 12th Avenue House. (Corey O'Tool Dep. at 18-20.) The sale of the house was handled almost entirely by Mary Dieter, who had Power of Attorney to handle everything related to the sale. ( See Corey O'Tool Dep. at 131; Gary Oslund Dep. at 17-18; Aff. of David Olson, Exs. I, K.) Neither Corey O'Tool nor Mary Dieter informed the real estate agent that the United States had brought suit to foreclose upon the 12th Avenue House in September 2001. (Gary Oslund Dep. at 20-21.) Moreover, although Corey O'Tool knew that there was a possibility that a tax lien had attached to the 12th Avenue House, neither he nor Mary Dieter notified the real estate agent of this possibility. ³ ( See Corey O'Tool Dep. at 19; Gary Oslund Dep. at 29-32.) For whatever reason, the title search performed on the 12th Avenue House on October 16, 2001, did not reveal the tax lien. ⁴

In reliance upon the assertions of Corey O'Tool and this seemingly clear title search, David and Juli Olson ("the Olsons") purchased the 12th Avenue House in December 2001 for $280,000. ⁵ The actual closing of the house was supposed to take place prior to November 14, 2001; however, the closing was delayed because Mary Dieter had not vacated the 12th Avenue House. (Corey O'Tool Dep. at 148.)

On November 24, 2001, Corey O'Tool married Tina O'Tool. As a result of their marriage, although Tina O'Tool had never lived at the 12th Avenue House nor owned it, Corey insisted that Tina O'Tool sign some of the closing documents in order to allow the sale to proceed. (Tina O'Tool Aff. at ¶17.) Tina O'Tool executed these documents without reading the majority of them. ( Id.) Tina O'Tool contends that although she knew about Mary Dieter's problems with the IRS, she believed, based upon the two title searches of the 12th Avenue House that revealed nothing in regard to tax liens, that Mary Dieter's tax problems did not affect the 12th Avenue House. ( Id. at ¶8.)

Corey O'Tool and Tina O'Tool executed a Seller's Affidavit dated December 12, 2001, which stated:

Corey Christopher O'Tool and Tina M. O'Tool, husband and wife being first duly sworn, on oath say(s) that:

 

...

 

(3) There have been no:

 

...

 

(5) Any judgments, or tax liens of record against parties with the same or similar names are not against the above named person(s).

 

...

 

Affiant(s) know(s) the matters herein stated are true and make(s) this Affidavit for the purpose of inducing the acceptance of title to the Premises.

(David Olson Aff. at Ex. D.) At closing, Corey and Tina O'Tool also delivered a Warranty Deed to the Olsons. ( Id. at Ex. C.)

Corey O'Tool did not attend the closing on the house, but authorized the proceeds of the sale to be distributed by Mary Dieter. The $199,975.99 in proceeds were initially issued by a check made payable to Corey O'Tool, but such check was voided and reissued to Mary Dieter as attorney-in-fact for Corey O'Tool. (Affidavit of Denise Crosley at Ex. E.) Of these proceeds, it appears that approximately $62,000 was given as a gift from Corey O'Tool to John and Theresa Dieter, Mary Dieter's parents. Although he appears to have played no part in the decision as to the amount, Corey O'Tool stated that it was his own idea to use the sale proceeds as a gift because he knew that his mother could not own a home in her own name. (Corey O'Tool Dep. at 53-58.)

Consequently, the sale proceeds passed through Mary Dieter to John and Theresa Dieter for their down payment on the purchase of the house that Mary Dieter currently lives in at 6114 Elliot Avenue South in Minneapolis (the "Elliot Avenue House"). Mary Dieter asked John and Theresa to purchase the Elliot Avenue House for her. (Mary Dieter Dep. at 129.) Admittedly, Mary Dieter did not purchase the Elliot Avenue House herself because of the tax liens involving her name. ( See Mary Dieter Dep. at 128.) ⁶ Mary Dieter had Power of Attorney from her parents to make the purchase of the Elliot Avenue House and she, not John and Theresa Dieter, attended the settlement for purchase of the Elliot Avenue House. ( See id. at 128-29.) Mary Dieter currently makes all of the payments for mortgage, utilities, homeowner's insurance, and property tax payments on the Elliot Avenue House. (Theresa Dieter Dep. at 31-33.)

Approximately $138,000 of the remaining proceeds from the sale of the 12th Avenue House went to Corey O'Tool. ( See Mary Dieter Dep. at 127.) Tina O'Tool asserts that she has had no access to any of the funds that Corey O'Tool received as proceeds from the sale of the 12th Avenue House. (Dep. of Tina O'Tool at ¶9.)