Conveyances Part2 page1
United States of America
v. Thomas W. Purcell, Constance M. Purcell, John R. Gingras, David
Stevenson, Main Line Federal Savings and Loan Association,
State Employees Retirement System
District Court, East.
, CIV. 89-3642, 9/30/91, 798 FSupp 1102.
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 (
) 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
O'NEILL, JR., District
This is a non-jury action
brought by the
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
211 Cricket Avenue
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
property. The government also seeks to foreclose federal tax liens on
real property located at
328 Locust Avenue
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
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
and against defendants Thomas and Constance Purcell. I conclude that if
the federal tax lien attached to the
property the IRS does not qualify for the protection of the
recording statutes because it had notice of the transfer of Mr.
Purcell's interest in the
property to defendant Gingras. I therefore will enter judgment in favor
of defendant Gingras and against the
. I also will enter judgment in favor of the remaining defendants.
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
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.
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
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
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
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
property to the
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
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
property from himself and defendant Mrs. Constance Purcell.
24. At the time of the 1984
conveyance of the
property, Mr. Purcell was indebted to the
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
property, Mr. Purcell owed two lots worth between $17,000 and $20,000 in
26. At the time of the 1984
conveyance of the
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
28. In 1979, Mr. Purcell
bought out Ellen C. Purcell's one half interest in the
property for $16,000.
29. In 1989, Mr. and Mrs.
Purcell listed the
property for sale for $149,000 and received an offer of $134,900.
30. At the time of the 1984
conveyance, therefore, the
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
property and the additional tax to be assessed against Purcell. Agent
Whiting testified that the IRS knew that Purcell had sold his interest
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
property. He requested and received from Gingras a copy of the indenture
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.
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
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.
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,
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
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
Fraud Without Regard to Intent
The parties do not dispute
that rights in property are determined by
Stat. Ann. §354
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
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.
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.
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
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
and a painting company in
. The land in
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
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
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.
Stat. Ann. §353.
Testimony at trial
established that, at the time of the conveyance in 1984, the
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
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,
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
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
Stat. Ann. §354
Intent to Defraud
Alternatively, I conclude
that the Purcells intended to defraud Mr. Purcell's creditors by
property to Mr. and Mrs. Purcell.
Stat. Ann. Section
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."
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
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
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.
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
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
is permitted to foreclose its tax liens against taxpayer against the
property. The government has stipulated that the
Pennsylvania State Employee Retirement Fund
has a previously recorded and superior lien against the
Defendant John R. Gingras
Taxpayer Mr. Purcell and
defendant David Stevenson conveyed their interests in the
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,
Once a tax assessment is
made, a lien arises in favor of the
"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
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
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
, 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,
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
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
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
'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
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 . . .
Stat. Ann. §444
(1775, March 18, 1893, May 19, P.L. 108, §1
Gingras claims that the
applicable statute is 21
Stat. Ann. §351
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.
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
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.
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
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
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
Gingrass argues that
351 or Section
444 applies, the government had notice of Gingras' interest
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
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
recording act. 6
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
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
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.
v. Heinrich, [410
341 (1963)]; Sidle v. Kaufman, 345
549, 29 A.2d 77 (1942).
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.
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
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
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
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
and was responsible therefore for actions of agents in
); In re
Truck Stop, 74 Bankr. 641, 643 (N.D.Fla. 1987) ("IRS, at least
through its agent, Mr. Jones, had knowledge of the [bankruptcy]
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
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 . . .
v. C.I.R. [88-2 USTC ¶9521 ], 857 F.2d 676, 680 (9th Cir. 1988).
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
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
property before the first lien arose or was filed against Mr. Purcell's
property and the government therefore may not claim the protection of
recording statute. Smith, 296
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
, 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.
. 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
law. The cases relied on by the government therefore are inapposite. See
, 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
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
Pennsylvania State Employees Retirement System
and against the
. Defendant Main Line Federal Savings and Loan Association will be
dismissed from this action.
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
from defendant Thomas W. Purcell to himself and defendant Constance
Purcell is set aside as fraudulent, null and void pursuant to 39
4. The tax liens of
United States of America
described in paragraphs 18-20 of plaintiff's Complaint are valid;
5. The Commonwealth of
State Employee Retirement Fund has a lien against
property which was previously recorded and is superior to that of the
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
and sold and the proceeds from the sale shall be distributed in an
amount sufficient to satisfy the lien of the
Pennsylvania State Employees Retirement System
7. Judgment is ENTERED in
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.
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.
At trial, Mr. Purcell estimated the value of his land in
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
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.
Gingras admits that he did not record the indenture on the
property in part because he wanted to avoid the due-on-sale clause of
the Main Line mortgage which
could have invoked if it had known of the sale. Gingras' motivation for
not recording the deed is not relevant to this case.
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.
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
. However, the note to Section
444 explained that it was repealed only to the extent that it
was inconsistent with the new provisions concerning
. 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
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
Stat. Ann. Commentary at 37 (emphasis added). The Commentary explains
that the later recording statute modified the existing recording statute
to a "race-notice" system where the validity of deeds depends
upon notice and the chronological priority of recording.
In recent cases addressing
the validity of recent unrecorded deeds, however, some courts have
referred to a single
recording act, Section
351 . See Haggerty v.
Claim Bureau, 528 A.2d 681 (Pa.Cmmwlth. 1987), app. den., 518
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
97, 104, 180 A.2d 216 (1962) (in 1954, both recording statutes
"were in effect"); Overly v. Hixson, 169
Super. 187, 190 (1951) (in deciding validity of a 1925 deed, referred to
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
At least one
court and two federal courts applying
law have held recently pursuant to Section
444 that creditors are protected from unrecorded conveyances.
See Busin v. Whiting, 369
Super. 563, 535 A.2d 1078, 1081 (1987), rev'd. on other grounds,
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
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.
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.
District Court, Dist. Colo., Civ. 93-F-1972, 11/8/93
6321 , 6326
, 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.
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.
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
Argument To Have The Court Deny Plaintiff's [sic] Request For
Temporary Restraining Order. Jurisdiction is pursuant to 28 U.S.C.
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)
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
. . . "). "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
. 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
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'
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
(1) Plaintiffs' Request
For Temporary Restraining Order is DENIED, and
(2) Plaintiffs' Complaint
The same may be said for 26 U.S.C. §6321
, relating to liens, which has an accompanying regulation in
United States of America
, Plaintiff v. Rickey A. Ward, Doris A. Ward and Chittenden Bank,
, 2:91-CV-371, 5/12/93
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
, 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.
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
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
[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
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)
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
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,
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
at 59-33; Shoenholtz v. Doniger, 112 F.R.D. 110, 112 (S.D.N.Y.
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.
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
. Therefore, the Motion to Reopen (Paper 20) is DENIED.
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.
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
United States of America v. George S. Sitka, et al
, Civ. 2:90CV00268(AHN), 5/19/94
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.
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.
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.
OBJECTION TO MAGISTRATE JUDGE'S RECOMMENDED RULING
NEVAS, District Judge:
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.
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.
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).
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.
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 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
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.
USTC ¶9299 ], 871 F.2d 1015, 1018 (11th Cir.), cert.
denied, 493 U.S. 975 (1989)). See also Stallard v. United States
USTC ¶50,056 ], 12 F.3d 489, 493 (5th Cir. 1994); Huff
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
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
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
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
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.
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).
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
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.
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
The plaintiff has
established the procedural and substantive validity of its assessments
against the defendant, including unpaid taxes, fraud penalties and
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.
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
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
-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).
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 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.
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
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.
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.
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.
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).
The defendant does not challenge the interest and estimated tax
penalties set forth in the 4340 forms.
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.
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.
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.
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.
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
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
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
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.
"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).
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 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
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
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,
These tax liens attached to all property or rights to property of
Nipper, including the real property at issue.
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.
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.
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
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.
Secs. 61 and 102]
Gross income: Compensation for services: Claim against estate:
Homestead property: Gifts or bequests: Compensation for services
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.
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
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.
OPINION AND ORDER
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.
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
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
( 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
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
( 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
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
(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. (
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
(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
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
House. (Dep. of Tina O'Tool at ¶9.)