Fraudulent Conveyances Part2 page5

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United States of America , Appellee v. Laverne Scherping, Loren Scherping, Jane Scherping, Epsilon Company, C.J.S. Ranch, Appellants

(CA-8), U.S. Court of Appeals, 8th Circuit, 98-2009, 8/11/99, 187 F3d 796, Affirming an unreported District Court decision

187 F3d 796.

[Code Sec. 6321 ]

Liens and levies: Fraudulent conveyances: State ( Minnesota ) law: Circumstantial evidence of fraud.--Despite the solvency of sibling taxpayers at the time of their transfers of real property to a sham trust, the district court's determination that the transfers were fraudulent was proper. Under state ( Minnesota ) law, solvency was merely one factor to be considered in determining fraudulent intent at the time of transfer, and sufficient circumstantial evidence of fraud existed. Inadequate consideration was paid for the transfers, the trust did not maintain separate financial records or bank accounts, the taxpayers continued to live on the property after the transfers, the transfers occurred close to the taxpayers' acquisition of substantial tax debts and, after the transfers, the taxpayers were insolvent.

[Code Sec. 6502 ]

Liens and levies: Statute of limitations: Alter ego: Collection not barred: Reverse piercing of corporate veil.--The government was entitled to foreclose its tax liens on the property of delinquent siblings since its collection action was not barred by the six-year statute of limitations. Although the government timely filed the collection action against the taxpayers, it added the taxpayers' alter-ego trust as a party to the collection action more than six years after the original assessment. The foreclosure against the trust's property was intended to collect the collateral tax liability of the siblings, rather than the primary tax liability of the trust. Moreover, the government had not sought to reduce to judgment any tax liability of the trust; rather, it imposed liens against the trust in an effort to collect the tax debts of the siblings. Additionally, the government was entitled to use "reverse" piercing of the corporate veil to hold the trust liable for the taxpayers' individual tax liabilities since, under state (Minnesota) law, the trust was a sham entity that the taxpayers used to fraudulently evade payment of taxes.

Before: MCMILLIAN, LAY and MURPHY, Circuit Judges.

MCMILLIAN, Circuit Judge:

Appellants are two brothers, Laverne Scherping and Loren Scherping, Loren's wife, Jane Scherping, and two business trusts, Epsilon Co. and C.J.S. Ranch. Appellants appeal from a summary judgment entered in the United States District Court ¹ for the District of Minnesota in favor of the United States (government), holding that the government was entitled to foreclose its tax liens upon appellants' property to satisfy their tax liabilities. United States v. Scherping, Civil File No. 97-2282 (PAM/JGL) (D. Minn. Mar. 9, 1998) (memorandum and order). For reversal, appellants argue that the district court erred in: (1) finding the collection action was not barred by the 6-year statute of limitations, (2) ordering a "reverse pierce" and imposing liability upon C.J.S. Ranch for tax obligations of the Scherpings, and (3) finding that the transfer of their property to Epsilon Co. was fraudulent because the transfer did not render them insolvent. For the reasons discussed below, we affirm the judgment of the district court.

JURISDICTION

The district court has subject matter jurisdiction pursuant to 28 U.S.C. §§1340 (original jurisdiction of civil action arising under any Act of Congress provision for the Internal Revenue), 1345 (original jurisdiction of all civil actions, suits, or proceedings commenced by the United States ), and 26 U.S.C. §7402 (action to reduce to judgment tax assessments and foreclose tax liens against property). This court has appellate jurisdiction pursuant to 28 U.S.C. §1291. Appellants timely filed a notice of appeal. Fed. R. App. P. 4(a)(1).

FACTUAL BACKGROUND

This case has a long, checkered history, involving numerous tax court proceedings. Laverne Scherping and Loren Scherping (taxpayers), who are brothers, unsuccessfully appealed the two tax court cases from which this collection action arises to this court. See Scherping v. Commissioner [84-2 USTC ¶9909], 747 F.2d 478, 480 (8th Cir. 1984) (per curiam) (Laverne Scherping); Scherping v. Commissioner, 725 F.2d 689 (8th Cir. 1983) (table) (Loren Scherping). This collection action was filed in September 1989; the case was stayed pending a criminal tax investigation of taxpayers and James Noske and Joan Noske, involving some of the entities in issue here. Taxpayers were convicted on one count of conspiracy to evade income taxes with respect to some of the transactions in issue here, which convictions taxpayers unsuccessfully appealed. United States v. Noske [97-2 USTC ¶50,538], 117 F.3d 1053, 1056 (8th Cir.), cert. denied, 118 S. Ct. 315, 389 (1997).

After the completion of the criminal tax proceedings, the government sought to reduce to judgment taxpayers' tax assessments for tax years 1979 and 1980, and to foreclose its federal tax liens on property owned by the taxpayers and purportedly conveyed by them to the two business trusts, Epsilon and C.J.S. Ranch.

By deeds dated December 21, 1972, January 2, 1973, and January 4, 1974, Lawrence and Laura Scherping, taxpayers' parents, conveyed approximately 200 acres of farm land property to taxpayers which had a fair market value in excess of $200,000. On August 7, 1979, taxpayers transferred the same farm property to Epsilon for consideration of ten dollars ($10.00) and other good and valuable consideration. Taxpayers received shares in Epsilon. The trustees of Epsilon were taxpayers and their mother, Laura Scherping. Evidence showed that after the transfer, Loren and Jane Scherping not only continued to live on the farm property, but also farmed the property and paid insurance and all of the utility bills. Moreover, the same farm property was Epsilon's only asset and Epsilon maintained no bank account, financial records, or balance sheets and filed neither federal or state tax returns.

In October 1982 the government sent notices to taxpayers of deficiencies for tax years 1979 and 1980, asserting taxes and penalties in the amount of $94,223 against Laverne Scherping, against Loren and Jane Scherping for tax year 1979 for $33,683, and against Loren Scherping for tax year 1980 for $51,418. Taxpayers contested in tax court each of the notices and their petitions were dismissed for failure to state a claim. The tax court noted that taxpayers were part of an unending parade of taxpayers bent on flooding the tax court's docket with frivolous claims. Thereafter, the tax court determined the liabilities and additions to the taxes as set forth in the notice of deficiencies. This court dismissed or affirmed taxpayers' appeals. Scherping v. Commissioner [84-2 USTC ¶9909], 747 F.2d at 480; Scherping v. Commissioner, 725 F.2d 689. These are the same assessments which the government seeks in this suit to reduce to judgment and to collect.

Subsequent to the transfer by taxpayers and their mother of the farm property to Epsilon on January 13, 1983, taxpayers and Laura Scherping, as trustees of Epsilon, recorded two deeds dated June 15, 1982, purporting to convey the same farm property to Epsilon. Finally, by deed, reciting for consideration of $1,000 or less, Epsilon, by taxpayers and Laura Scherping, purported to convey the same farm property to C.J.S. Ranch. Epsilon received no consideration for the transfer. C.J.S. Ranch had no other assets and did not maintain a bank account. Once again, as after the Epsilon conveyance, Loren and Jane Scherping continued to live on the property, farmed it, and paid no rent.

After the completion of the criminal tax cases, the government moved to reopen this case and for summary judgment, asking the district court to order a sale of the farm property transferred by taxpayers to C.J.S. Ranch because Epsilon and C.J.S. Ranch were alter egos of taxpayers and because the transfers of the same farm property to Epsilon and C.J.S. Ranch were fraudulent under Minn. Stat. §§513.25 and 513.26. Taxpayers filed an opposition to the government's motion and their own affidavits. Taxpayers argued that the collection action was untimely, that Minnesota law does not allow "reverse" piercing of the corporate veil, and that the transfers to the business trusts were not sham transactions or fraudulent conveyances.

The district court granted summary judgment in favor of the government and ordered the property to be sold (not including the 240 acres owned by C.J.S. Ranch that had been formerly owned by Laura Scherping) and the proceeds of the sale to be paid over to the government (and any excess proceeds to be paid to taxpayers after expenses and costs of sale). The district court rejected the statute of limitations argument, holding that the liens filed against C.J.S. Ranch were not assessments of tax against C.J.S. Ranch but against taxpayers and Jane Scherping. See slip op. at 6-7 (noting that the government timely filed a suit against taxpayers and that, once suit is timely filed, proceeding to judgment was not curtailed by statute of limitations). The district court also held that, under Minnesota law, the trusts were alter egos of taxpayers because there was a close identity between taxpayers and the trusts, taxpayers were not innocent individuals, and application of the alter ego theory would prevent the very sort of fraud and injustice that the alter ego doctrine seeks to avoid, and rejected taxpayers' argument that Minnesota courts would refuse to apply the "reverse" piercing-the-corporate-veil doctrine under these circumstances. See id. at 7-12. The district court also held, in the alternative, that the transfers by taxpayers to Epsilon and C.J.S. Ranch in 1979 and 1982, respectively, were fraudulent conveyances under Minnesota law. See id. at 12-15. This appeal followed.

STANDARD OF REVIEW

This court reviews a grant of summary judgment de novo. See, e.g., Dillon v. Yankton Sioux Tribe Housing Authority, 144 F.3d 581, 583 (8th Cir. 1998). Fed. R. Civ. P. 56(c) provides that summary judgment shall be granted where the record reveals that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. See Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 246 (1986); Postscript Enterprises v. City of Bridgeton , 905 F.2d 223, 225 (8th Cir. 1990).

STATUTE OF LIMITATIONS

First, taxpayers argue that the district court erred in holding that this action was not barred by the 6-year statute of limitations. Title 26 U.S.C. §6502, as in effect at the relevant time, provided in pertinent part:

(a) Length of period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--

(1) within 6 years after the assessment of the tax, or

. . . .

If a timely proceeding in court for the collection of a tax is commenced, the period during which such tax may be collected by levy shall be extended and shall not expire until the liability for the tax (or a judgment against the taxpayer arising from such liability) is satisfied or becomes unenforceable.

Here, it is undisputed that this collection action was timely filed within the 6-year statutory period. The government filed the notices of federal tax liens in 1984; this collection action was filed in 1989, within the 6-year statutory period, although the government failed to make effective service on C.J.S. Ranch at that time. Eight years later, in 1992, the government amended its complaint to add C.J.S. Ranch as a party. Taxpayers argue that C.J.S. Ranch was improperly added as a party because the collection was not begun against it until 1992, more than 6 years after the assessment of tax in 1984. Taxpayers argue that because C.J.S. Ranch is allegedly their alter ego, C.J.S. Ranch stands in their shoes and the government had to file the collection action against it within 6 years. For that reason, taxpayers argue that the collection action is one against C.J.S. Ranch for primary liability and not, as the district court found, for collateral liability to collect a judgment against taxpayers. We disagree.

Taxpayers' reliance on Hall v. United States [68-2 USTC ¶9665], 403 F.2d 344 (5th Cir. 1968), cert. denied, 394 U.S. 958 (1969), and United States v. Updike [2 USTC ¶533], 281 U.S. 489 (1930), is misplaced. We note that Hall expressly holds that §6502 is inapplicable to bar a suit against third persons in aid of collecting a judgment against a taxpayer. See [68-2 USTC ¶9665], 403 F.2d at 346. Here, there is no doubt that C.J.S. Ranch is a third person. Updike held an action against transferees to be barred by the predecessor statute to §6502 where no proceeding to collect the tax had been commenced within the statutory period, relying on statutory language regarding collection of assessments against transferees of the taxpayers (in contrast, the assessments here were against the taxpayers, not the transferees). See [68-2 USTC ¶9665], 403 U.S. at 492-96. As noted above, in the present case there is no dispute that the suit against taxpayers was timely filed, so Updike is inapplicable here. Moreover, neither Hall nor Updike involved an alleged third party which was found to be an alter ego of the taxpayer against whom a timely suit had been filed. Contrary to taxpayers' argument, the government did not seek to reduce to judgment any tax assessment made against C.J.S. Ranch, nor does the record anywhere include such a judgment. The district court's order reducing the assessment to judgment states that the assessments in issue are against Laverne, Loren, and Jane Scherping, and are based upon the tax court's decisions against those individuals and not against C.J.S. Ranch.

ALTER EGO

On the merits, taxpayers argue that the district court erred in "reverse" piercing the corporate veil to hold C.J.S. Ranch liable for their individual tax liabilities. Taxpayers argue that Minnesota courts would not extend the alter ego doctrine as a creditor's remedy beyond its traditional context, that is, to hold the individual liable for corporate debts. Taxpayers argue that the two Minnesota cases applying the reverse piercing doctrine were remedial and limited to the specific facts, citing Roepke v. Western National Mutual Insurance Co., 302 N.W.2d 350 (Minn. 1981) (Roepke) (no fault insurance), and Cargill, Inc. v. Hedge, 375 N.W.2d 477 (Minn. 1985) (Cargill) (homestead exemption). Taxpayers also argue that, even assuming Minnesota courts would extend the reverse piercing doctrine to the collection of tax, the test for application of the doctrine was not met here because there are no strong policy reasons to do so, the degree of identity between taxpayers and the trusts is less than 50%, and application of the doctrine would harm an innocent individual, taxpayers' mother, Laura Scherping. We disagree.

The government may collect the tax debts of a taxpayer from assets of the taxpayer's nominee, instrumentality, or "alter ego." See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 429 U.S. 338, 350-51 (1977); Horton Dairy, Inc. v. United States [93-1 USTC ¶50,195], 986 F.2d 286, 291 (8th Cir. 1993); F.P.P. Enterprises v. United States [87-2 USTC ¶9536], 830 F.2d 114, 117-18 (8th Cir. 1987). In determining the economic reality of a transaction, courts must analyze the substance of a transaction and are not restricted by its form. See, e.g., Gregory v. Helvering [35-1 USTC ¶9043], 293 U.S. 465, 469-70 (1935); Estate of Sachs v. Commissioner [88-2 USTC ¶13,781], 856 F.2d 11585, 1164 (8th Cir. 1988). While taxpayers are permitted to reduce their tax burden by any lawful means available, they are not permitted "to construct paper entities to avoid taxation when those entities are without economic substance." Chase v. Commissioner [CCH Dec. 46,495(M)], 59 T.C.M. (CCH) 261, 264 (1990) (citations omitted), aff'd [91-1 USTC ¶50,090], 926 F.2d 737 (8th Cir. 1991).

When an entity is without economic substance, it may be deemed to be the "alter ego" of the taxpayer. "Alter ego means 'other self'--where one person or entity acts like, or, for another to the extent that they may be considered identical." Loving Saviour Church v. United States [83-1 USTC ¶9215], 556 F. Supp. 688, 691 (D.S.D. 1983), aff'd [84-1 USTC ¶9261], 728 F.2d 1085 (8th Cir. 1983) (per curiam). "Property held in the name of an entity which is the alter ego of a taxpayer may be levied on to satisfy the tax liabilities of the taxpayer." F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 118 (upholding finding that trusts created by taxpayers were the alter egos of taxpayers, and therefore not separate persons apart from taxpayers).

Generally, federal courts will look to state law to determine whether an entity is an alter ego of a taxpayer. See Loving Saviour Church [84-1 USTC ¶9261], 728 F.2d at 1086 (citing Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-13 (1960)). In Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509, 513 ( Minn. 1979) (Victoria Elevator), the court held that where a shareholder "did not treat the corporation as a separate legal entity, he should not be entitled to its protection against personal liability." In determining whether an entity is the alter ego of an individual, Minnesota courts, since Victoria Elevator, have employed a two-step analysis. In the first step, the court considers the relationship between the individual and the entity (typically a corporation), focusing on such factors as the "failure to observe corporate formalities, nonpayment of dividends, . . . siphoning of funds [by the individual], . . . absence of . . . records [for the entity], and the existence of [the entity] as merely a facade for [the individual]." White v. Jorgenson, 322 N.W.2d 607, 608 ( Minn. 1982). "Disregard of the corporate entity requires not only that a number of these factors be present, but also that there be an element of injustice or fundamental unfairness." Victoria Elevator, 283 N.W.2d at 512. Thus, in the second step, the court considers the relationship between the entity and the party that seeks to disregard it; only if the entity has operated in a fraudulent or unjust manner toward that party will the entity be disregarded. See BBCA, Inc. v. United States, 630 F. Supp. 349, 351 (D. Minn. 1986) (BBCA) (noting that proof of strict common law fraud is not required) (citing White v. Jorgenson, 322 N.W.2d at 608). "[W]here the formalities of corporate [or, as in the present case, trust] existence are disregarded by one seeking to use it, . . . [the] existence [of the corporation or trust] cannot be allowed to shield the individual from liability for damages incurred by those dealing with the corporation [or for taxes owed by the individual]." Victoria Elevator, 283 N.W.2d at 512.

We hold that the district court properly concluded, based on the undisputed facts, that Epsilon and C.J.S. Ranch were sham entities created on behalf of and used by taxpayers to evade payment of their federal income tax liabilities. Indeed, taxpayers even admitted in their depositions that they, together with their mother, Laura Scherping, were trustees of Epsilon; that they received no compensation for the transfers other than shares in the trust; that Epsilon received no compensation whatsoever for the transfer to C.J.S. Ranch; that Loren and Jane Scherping continued to live on the property and taxpayers continued to farm the property, after both transfers; and that neither Epsilon nor C.J.S. Ranch had any other assets or maintained separate checking accounts.

Although taxpayers were not trustees of C.J.S. Ranch, they, together with their mother, Laura Scherping, held 100% of the beneficial interest in that trust. The trustees of C.J.S. were two South Dakota non-profit corporations, Parnell, Inc., and Armageddon, Inc., that have been repeatedly recognized as vehicles for the promotion of abusive tax shelters. See Paulson v. Commissioner [93-1 USTC ¶50,271], 992 F.2d 789, 790-91 (8th Cir. 1993) (per curiam) (Armageddon and Parnell were trustees of entity determined to be a sham where at trial the presidents of Armageddon and Parnell testified they had never heard of either entity and had not performed any act for these entities); Xemas, Inc. v. United States [88-1 USTC ¶9282], 689 F. Supp. 917, 921 (D. Minn. 1988) (Xemas) (Armageddon and Parnell recognized as vehicles for the promotion of abusive tax shelters), aff'd, 889 F.2d 1081 (8th Cir. 1989) (table), cert. denied, 494 U.S. 1027 (1990). We note that taxpayers' criminal convictions, which related to their efforts and to the efforts of their related entities to operate in a fraudulent manner by conspiring to evade the payment of federal income taxes, combined with the tax court's holding that taxpayers' other vehicle for tax avoidance, Imperial Investment, Inc., was a sham trust, and the facts outlined above which are based on taxpayers' own statements in depositions, overwhelmingly demonstrated that Epsilon and C.J.S. Ranch were sham entities operated in a fraudulent manner vis-a-vis the government and should therefore be disregarded. See Scherping v. Commissioner [CCH Dec. 46,232(M)], 58 T.C.M. (CCH) 1046, 1047 (1989) (finding Imperial was a sham entity and taxpayers' alleged transfers of asserts to Imperial was a sham).

Taxpayers next argue that the reverse piercing of the corporate veil unfairly penalized the trusts for acts over which the trusts had no control. This argument, however, ignores the fact that the district court found that the trusts were the alter egos of taxpayers, and thus not separate entities. As the Fifth Circuit explained in Zahra Spiritual Trust v. United States [90-2 USTC ¶50,473], 910 F.2d 240, 243-44 (1990), "[t]he ultimate goal in a reverse piercing case is unique; rather than merely disregarding the corporate fiction and holding the shareholders accountable, the court treats the individual and the corporation as 'one and the same.' " See also F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 118 (upholding finding that trusts created by taxpayers were the alter egos of taxpayers, and therefore not separate persons apart from taxpayers). Taxpayers acknowledge that the present case involves reverse piercing, but they argue that the Minnesota courts would not extend the alter ego doctrine as a creditor's remedy beyond its traditional context, that is, to hold the individual liable for corporate debts. Taxpayers cite numerous cases in which Minnesota courts have rejected attempts to apply the reverse piercing doctrine as a creditor's remedy.

The government argues correctly that reverse piercing is a well-established theory in the federal tax realm. See, e.g., Zahra Spiritual Trust v. United States [90-2 USTC ¶50,473], 910 F.2d at 243 (applying Texas law); Shades Ridge Holding Co. v. United States, 888 F.2d 725, 728 (11th Cir. 1989), cert. denied, 494 U.S. 1027 (1990); Loving Saviour Church [84-1 USTC ¶9261], 728 F.2d at 1086 (holding that the IRS could levy on church property to satisfy the tax liabilities of its members in appropriate circumstances); Cargill, 375 N.W. 2d 477 (applying Minnesota law to reverse pierce in case involving homestead exemption); Roepke, 302 N.W.2d 350 (applying Minnesota law to reverse pierce to provide an equitable result in case involving no fault insurance). In Cargill, the issue was whether the owner-occupants of a farm, by placing their land in a family farm corporation, were entitled to use a reverse pierce of the corporate entity to assert a homestead exemption from judgment creditors. While declining to adopt an equitable interest theory, the court allowed a reverse pierce to protect the owner-occupants' homestead exemption, holding that "the approach of a reverse pierce of the corporate veil may be used." 375 N.W.2d at 478, citing Roepke, 302 N.W.2d 350. The court emphasized the strong policy reason for a reverse pierce, namely, "the importance, notwithstanding the just demands of creditors, for a debtor's home to be a 'sanctuary.' " Id. at 479. In Roepke the court disregarded the corporate entity to further the purposes of no fault insurance. "Although title to six motor vehicles was in a corporation, . . . [the court] treated the vehicles as if they had been owned by the deceased, sole shareholder of the corporation, so that the decedent could be deemed an 'insured' under the no-fault policy for the purpose of survivors' benefits." Id. (discussing Roepke).

We believe that the present case meets the standards established in Cargill and Roepke. Contrary to taxpayers' argument, there are strong policy reasons for reverse piercing the corporate veil in the present case, that is, avoiding fraud and collecting delinquent federal taxes. In addition, contrary to taxpayers' argument, there is a strong degree of identity between the "guilty" individuals and the entities to be disregarded. The trusts in issue here did nothing other than hold title to real property. The district court properly looked only to the real property transferred to the trusts by taxpayers, who were hardly innocent individuals needing protection. The interests of taxpayers' mother are not harmed because, in addition to the language in the district court's order, there is an agreement in effect in which the government has agreed not to seek to collect taxpayers' liability from the property transferred by her. Thus, contrary to taxpayers' contention, the reverse pierce here does not harm any innocent individual.

FRAUDULENT CONVEYANCE

Finally, we consider taxpayers' argument that the district court erred in holding that the transfers of the property to Epsilon and C.J.S. Ranch were fraudulent under Minnesota law. Taxpayers argue that the transfers could not have been fraudulent because they were not insolvent at the time of the transfers. Whether a conveyance may be set aside as fraudulent must be determined in accordance with state law. See Loving Saviour Church [83-1 USTC ¶9215], 556 F. Supp. at 691. The Minnesota Uniform Fraudulent Conveyance Act in effect at the time of the alleged transfers to Epsilon in 1979 and to C.J.S. Ranch in 1982 was contained in Minn. Stat. §§513.20-.32.11 (These sections were repealed in 1986 and replaced in part with Minn. Stat. §513.44.)

Minnesota Uniform Fraudulent Conveyance Act provided several alternative theories under which a creditor may set aside a fraudulent conveyance. The government argues that it did not seek to prove that the transfers were fraudulent conveyances under the section that required proof of insolvency, Minn. Stat. §513.23; rather, the government (and the district court) relied on two sections, §513.25 (conveyance by a person about to incur debt), ² and §513.26 (conveyance made with intent to defraud), ³ in which insolvency was just one factor to be considered in determining whether a transfer was made with actual intent to defraud.

As the district court properly noted, actual intent for the purpose of §513.26 may not be presumed. See slip op. at 13. One may establish actual intent through the examination of circumstantial evidence or "badges of fraud." Citizens State Bank v. Leth, 450 N.W.2d 923, 927 (Minn. Ct. App. 1990) (Leth) (applying Minn. Stat. §513.44). Under Minnesota law, although the creditor bears the initial burden of proving fraud, if a creditor demonstrates sufficient badges of fraud, the burden of production shifts to the party contending that a fraudulent conveyance has not occurred. See Argonaut Insurance Co. v. Cooper, 395 N.W.2d 119, 121-22 (Minn. Ct. App. 1986) (Argonaut) (applying Minn. Stat. §513.26); accord Xemas [88-1 USTC ¶9282], 689 F. Supp. at 922 (applying Minn. Stat. §§513.23, 26). The badges of fraud which courts are to consider when determining actual intent include, but are not limited to: "adequacy of consideration, confidential relationship between grantor and grantee, . . . retention of possession of the property by the debtor, failure to testify or produce available explanatory or rebutting evidence when circumstances attending to transfer are suspicious," Argonaut, 395 N.W.2d at 122, failure to record the transfer or conveyance documents, prospective debts or threats of suit, and the insolvency of the debtor either before or as a result of the transaction. See Leth, 450 N.W.2d at 927. Minn. Stat. §513.44(b) lists as factors to be considered whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit (id. §513.44(b)(4)); whether the transfer was of substantially all of the debtor's assets (id. §513.44(b)(5)); and whether the transfer occurred shortly before or shortly after a substantial debt was incurred (id. §513.44(b)(10)).

Here, we agree with the district court that there was sufficient circumstantial evidence that the transfers were fraudulent. It is undisputed that both transfers were made for inadequate consideration. Furthermore, taxpayers admitted that they continued to farm the property after each transfer and that Loren and Jane Scherping continued to live on the property after each transfer. As discussed above, the district court correctly found that both Epsilon and C.J.S. Ranch were taxpayers' alter egos. Thus, it is clear that taxpayers retained control over the property. See slip op. at 14. The trusts did not maintain separate financial records or bank accounts. In addition, as noted above, taxpayers made deliberate efforts to evade tax and they were found guilty of conspiracy for tax evasion. See id.

Likewise, we note that the undisputed facts show that both transfers occurred shortly before or shortly after taxpayers acquired substantial debts. It is well established that, regardless of when federal taxes are actually assessed, the United States is a creditor on the date a return is due to be filed and the taxes are required to be paid for each period. See, e.g., Hartman v. Lauchli [57-1 USTC ¶9571], 238 F.2d 881, 887 (8th Cir. 1956), cert. denied, 353 U.S. 965 (1957). The tax liabilities in issue here were those for tax years 1979 and 1980. Thus, taxpayers incurred the indebtedness in issue as of April 15, 1980, and April 15, 1981, that is, shortly after the initial transfer of the property to Epsilon and shortly before the second transfer to C.J.S. Ranch. Moreover, we note that taxpayers admit that they did not file the trust agreement for Epsilon, which is the trust they contend owned the property after 1979, with the Minnesota Secretary of State until June 1982, shortly after incurring those debts. The assessments were made on September 27, 1983, shortly after the date of the alleged transfer to C.J.S. Ranch, and shortly before the recording of the deed. Moreover, the sham transfer of taxpayers' remaining assets to Imperial took place on May 24, 1983, shortly after the Tax Court dismissed taxpayers' petition for the tax years in issue here. See Scherping v. Commissioner [CCH Dec. 46,232(M)], 58 T.C.M. (CCH) at 1047. Thus, on the undisputed facts, taxpayers engaged in an extensive pattern of transferring all of their assets shortly before or shortly after various events occurred relating to their accumulation of substantial tax debts.

Finally, the assets that taxpayers point to to show that they were not insolvent after the transfers were their cattle and farm equipment, which they transferred to a third sham entity, Imperial, at approximately the same time of the second transfer to C.J.S. Ranch. Consequently, taxpayers were insolvent at the conclusion of all the transfers, and they were rendered insolvent by the transfer to C.J.S. Ranch. See Minn. Stat. §513.42(d) (for purposes of determining the solvency or insolvency of a debtor, assets that have been fraudulently transferred are not included in the calculation of assets); FDIC v. United States [87-1 USTC ¶9332], 654 F. Supp. 794, 810 (N.D. Ga. 1986) (assets hidden from creditors not available to creditors and may not be considered in support of solvency claim). Thus, taxpayers had no remaining assets after the transfers to the two trusts.

In sum, we hold that the present collection action was not barred by the 6-year statute of limitations, the trusts were the alter egos of taxpayers and were liable for taxpayers' tax liabilities under the reverse pierce doctrine, and the transfers to the trusts were fraudulent conveyances under Minnesota law.

Accordingly, we affirm the judgment of the district court.

¹ The Honorable Paul A. Magnuson, Chief Judge , United States District Court for the District of Minnesota.

² Minn. Stat. §513.25 provided: "Every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he [or she] will incur debts beyond his [or her] ability to pay as they mature, is fraudulent as to both present and future creditors."

³ Minn. Stat. §513.26 provided: "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."

 

 

United States of America v. Uwe Freudenberg, Bobbie Freudenberg, Timothy Fox and Lisa Fox

U.S. District Court, East. Dist. Tenn. , at Greeneville, 2:97-CV-192, 6/9/99

[Code Sec. 6321 ]

Insolvent taxpayer: Fraudulent conveyance: Badges of fraud: Burden of proof, failure of taxpayer to meet.--The conveyance of real property by delinquent married taxpayers to the wife's daughter and son-in-law was set aside as fraudulent because it was intended to defeat the rights of the IRS as a creditor. The lack of consideration for the transfer and the fact that the grantees were close relatives of the grantors rendered the transfer suspect. The taxpayers failed to rebut these inferences of fraud because testimony they offered to show that the property was conveyed in exchange for the daughter's agreement to postpone having children was not credible.

[Code Secs. 6321 and 7403 ]

Tax liens, foreclosure of: Insolvent taxpayer: Fraudulent conveyance.--The conveyance of real property by delinquent married taxpayers to the wife's daughter and son-in-law was set aside as fraudulent because it was intended to defeat the rights of the IRS as a creditor. Although the assessments were made shortly after the conveyance, the taxpayers knew they were in severe financial difficulty at the time they transferred the property. Since the IRS was deemed to be a creditor from the date the obligation to pay taxes accrued, rather than from the date the assessment was made, the tax liens filed against the taxpayers and against their daughter and son-in-law as nominees for the taxpayers were valid and could be foreclosed.

MEMORANDUM

HULL , District Judge:

This is an action filed by the United States of America to set aside what it alleges was a fraudulent conveyance of real property in Hamblen County, Tennessee. Specifically, the United States alleges that a transfer of a house and lot on Lakemont Circle in Morristown , Tennessee , by Uwe and Bobbie Freudenberg to Lisa and Timothy Fox was made with the intent to impede, delay, and defeat the rights of the United States as a creditor of the Freudenbergs.

On November 20, 1992, Uwe and Bobbie Freudenberg purchased the subject property, generally described as 2660 Lakemont Circle , Morristown , Tennessee (hereafter "the property") for $67,500.00. On August 30, 1993, the Freudenbergs transferred this property to Lisa and Tim Fox for $20,000.00. Lisa Fox is Bobbie Freudenberg's daughter and Uwe Freudenberg's stepdaughter. On that same date (August 30, 1993), Lisa and Tim Fox borrowed $22,000.00 from Franklin Federal Savings Bank of Morristown ¹, $16,500.00 of which was paid by the Foxes to Bobbie Freudenberg, and $2,500.00 of which was used to defray miscellaneous closing costs; there was no explanation offered for the disposition of the remaining loan proceeds. The day after receiving the $16,500.00 payment from Lisa, Bobbie Freudenberg gave Lisa a check for $20,000.00.

On October 7, 1993, assessments were levied against Uwe Freudenberg for the tax years 1990 and 1991 for unpaid income taxes, interest, and penalties in the amount of $323,174.00 and $376,860.00, respectively. On July 3, 1995, additional assessments were made against Uwe Freudenberg in the amount of $45,038.00 (for tax year 1990) and $6,410.00 (for tax year 1991), plus additional penalties and interest.

On October 8, 1993, the United States recorded its notice of federal tax lien against the Freudenbergs in the Register of Deeds Office for Hamblen County , Tennessee , in the amount of $298,943.00, representing federal income taxes due by the Freudenbergs for the taxable year 1992.

On October 7, 1994, the United States recorded a notice of federal tax lien in the amount of $298,943.00 against Timothy and Lisa Fox as nominees of the Freudenbergs.

The United States insists that the transfer of the property by the Freudenbergs to the Foxes was intended to impede, delay and defeat the rights of the United States as a creditor of the Freudenbergs and therefore should be set aside as fraudulent. The defendants contend that the transfer was the consummation of an oral agreement between Bobbie Freudenberg and Lisa Fox in 1990 (one week prior to Lisa's marriage to Tim), that the Freudenbergs would buy a house for Lisa and Tim if they waited some period of time before having another child. ² The avowed reason underlying this offer by the Freudenbergs was the additional strain another child would place on Lisa and Tim Fox's already shaky financial situation.

Where a taxpayer has allegedly fraudulently transferred his property prior to the filing of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the state in which the property is located. See, Commissioner v. Stern [58-2 USTC ¶9594], 357 U.S. 39, 45 (1958); and United States v. Westley [98-2 USTC ¶50,545], 1998 W.L. 427375 (W.D. Tenn.). Thus, Tennessee 's law applies to this case. That law is as follows:

66-3-305. Conveyances by insolvent without fair consideration declared fraudulent.--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 such person's actual intent, if the conveyance is made or the obligation is incurred without a fair consideration.

. . . .

66-3-308. Conveyances with intent to defraud.--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.

Tenn. Code Ann.

The plaintiff must prove fraud (actual or constructive) by a preponderance of the evidence. James v. Joseph, et al, 1 S.W.2d 1017, 1019 ( Tenn. 1928); Middle Tenn. Electric Membership Corp. v. Neely, 1988 W.L. 86342 (Tenn. App. 1988); United States v. Kerr [78-2 USTC ¶9827], 470 F.Supp. 278, 281 (E.D. Tenn. 1978). However, if there are "badges of fraud" which cast suspicion on the transaction, the burden of proof shifts to the defendant to explain the transaction and show that it was not fraudulent. Stevenson v. Hicks, 176 B.R. 466 (W.D. Tenn. 1995), listed a number of "badges of fraud" identified over the years by the Tennessee appellate courts: The transferor is in a precarious financial condition; he knew there was or soon would be a large money judgment rendered against him; inadequate consideration was given for the transfer; secrecy or haste existed in carrying out the transfer; a family or friendship relationship existed between the transferor and the transferee; the transfer included all or substantially all of the transferor's nonexempt property; the transferor retained a life estate or other interest in the property transferred; the transferor failed to produce available evidence explaining or rebutting a suspicious transaction; and there was a lack of innocent purpose or use for the transfer. See, 176 B.R. at 470.

There are at least two "badges of fraud" present in this case: There was no consideration for the transfer, and the grantees were close family relatives of the grantors. Also, it strains credulity to believe that the Freudenbergs did not know that they were significantly indebted at that time to the United States for unpaid taxes. Therefore, the burden of proof shifted to the defendants to demonstrate that the transfer was not fraudulent, i.e., was not intended to impede, delay and defeat the rights of the United States as a creditor of the Freudenbergs. The Court finds that the defendants failed to carry their burden of proof. To state it succinctly, neither Lisa Fox nor Bobbie Freudenberg were credible witnesses and the Court did not believe this proffered explanation for this conveyance.

For example, in her pro se answer filed to the government's complaint, Bobbie Freudenberg did not mention any parol agreement to buy the Foxes a house in return for their delay in having a baby. Nor did she mention any such oral agreement in her answer to interrogatories served upon her by the United States . Rather, her answer to the interrogatory suggests that Lisa and Tim Fox would buy the house from the Freudenbergs when they were financially able to do so. Further, in her deposition upon oral examination, Bobbie Freudenberg again failed to mention anything about an oral agreement conditioned upon the Foxes waiting to have a child.

Similarly, Lisa Fox's answers to the government's interrogatories say nothing about the alleged oral agreement.

Although the IRS assessments were made shortly after the transfer of the property, the Court concludes that the Freudenbergs knew that they were in severe financial difficulty. First, the United States is deemed to be a creditor from the date the obligation to pay income taxes accrues. See, United States v. Jones [95-1 USTC ¶50,190], 877 F.Supp. 907, 914 (D. N.J.), and cases cited therein. Thus, the IRS was a creditor of the Freudenbergs from 1990 and thereafter. Second, at the time of the transfer, the Freudenbergs owned a house in Florida with an equitable value of $300,000.00, the subject property worth $67,500.00, three vehicles worth $55,000.00, $300,000.00 in cash, and an investment business of some sort. This business in fact was worth nothing; the Freudenbergs ultimately "walked away from it." Shortly before or after the subject conveyance, the IRS called the Freudenbergs and asked that they come in for a discussion. Although Bobbie Freudenberg testified that she and her husband had no idea that they owed significant money to the IRS, they fled the country in September or October 1993 after their home in Daytona , Florida , was seized by the IRS. This is hardly the action of anyone who had no idea of a delinquent tax liability. It was at this same time that they abandoned their business. The Freudenberg literally dumped all their records into the ocean in December 1993. Although each drew a $100,000.00 salary from the business in 1993, and some amount of salary in 1992, it is noteworthy that Uwe Freudenberg's conduct of this business resulted in allegations of criminal fraud and conspiracy in Germany .

The defendants have failed to rebut the inference of fraud raised by the badges of fraud present in this case. The Court is convinced that at the time of the transfer to the Foxes, the Freudenbergs knew that they imminently faced the prospect of a significant delinquent tax liability to the United States and that their business in Florida not only was worthless, but likely was going to result in charges of criminal wrongdoing.

Thus, at the time of the transfer to the Foxes, the Freudenbergs were essentially insolvent and the transfer was intended to defeat the rights of the United States as a creditor.

The conveyance of the subject property from the Freudenbergs to the Foxes is declared fraudulent as to the United States . It therefore is void as to the United States and should be set aside. Title to the subject property, therefore, is deemed vested in Uwe and Bobbie Freudenberg. The federal tax liens filed against the Freudenbergs, and against the Foxes as nominees for the Freudenbergs, are valid and should be foreclosed. The United States Marshal should take possession of the property and sell same according to its procedures and protocol. After selling the property, the United States Marshal should report to this court the proceeds of the sale and the expenses thereof. The distribution of the net proceeds of the sale should be distributed with the following priority: payment of the remaining balance on Union Planters' note; satisfaction of the outstanding liens of the United States ; the fees of the attorneys representing the United States ; the costs incurred by the United States in prosecuting this action.

A judgment shall be prepared in accordance with the foregoing.

JUDGMENT

In accordance with the Memorandum Opinion this day entered, the conveyance from Bobbie and Uwe Freudenberg to Lisa and Timothy Fox, as same appears in Warranty Book 401 at page 521 in the Register of Deeds Office for Hamblen County, Tennessee, is hereby declared to be NULL AND VOID and same is therefore SET ASIDE. Title to the property described in the foregoing warranty deed is deemed to reside in Uwe and Bobbie Freudenberg.

The United States Marshal Service is directed to take possession and control of said property and, pursuant to its procedures and protocol, sell same and thereafter report to this Court the proceeds of the sale and expenses of sale. Distribution of the sale proceeds will be made in the following priority: payment of the remaining balance on Union Planters' note; satisfaction of the outstanding liens of the United States ; the fees of the attorneys representing the United States ; and the costs incurred by the United States in prosecuting this action.

After the United States Marshal has made his report regarding the sale, Union Planters Bank and the United States government will file affidavits specifying the precise amounts owing on their respective liens, as well as attorneys fees and costs incurred by the United States government, after which an order will be entered to make appropriate distribution.

SO ORDERED.

¹ Franklin Federal Savings Bank (now Union Planters Bank) is the holder of a deed of trust on the subject property. It was stipulated by all parties that should this Court set aside the transfer of the subject property from the Freudenbergs to the Foxes and order same sold, Union Planters Bank would be entitled to priority over the claims of the United States to the proceeds of such sale to the extent of the amounts remaining owing on the note secured by the deed of trust. See, Doc. 9.

² Lisa already had one child at the time of her marriage to Tim Fox.

 

 

 

United States of America , Plaintiff v. Eleanor L. Labine, et al., Defendants

U.S. District Court, No. Dist. Ohio , West. Div., 3:98 CV 7102, 3/25/99, 73 FSupp 2 d 853

[Code Sec. 6321 ]

Property subject to tax liens: Fraudulent conveyances: State law: Intent to defraud creditors.--A delinquent taxpayer's conveyance of her home to a family trust during the pendency of litigation challenging her assessments was fraudulent under state (Ohio) law. Even if she made the transfer with no intent to defraud her creditors, it constituted a fraudulent conveyance because the trust did not pay her fair consideration and the transfer left her insolvent with respect to her creditors at the time, including the government. Moreover, it appeared that the taxpayer intended to defraud her creditors; the home represented most of her estate, she originally had the power to withdraw the home from the trust, she and her children were the trust beneficiaries, and she continued to live in the home after the transfer.

[Code Sec. 6502 ]

Statute of limitations: State law: Fraudulent conveyances.--The state ( Ohio ) statute of limitations did not bar the government's suit against a delinquent taxpayer who fraudulently conveyed her home to a family trust during the pendency of litigation challenging her assessments.

MEMORANDUM OPINION

KATZ, District Judge:

This matter is before the Court on cross motions for summary judgment. For the following reasons, the United States ' motion for summary judgment is granted. Accordingly, the Defendants' motion for summary judgment is denied. Also before the Court is a motion by the Government to strike the affidavit of Robert LaBine, or in the alternative, to reopen discovery as to the issue of the alleged bank account seizure. The United States ' motion to strike the affidavit of Robert LaBine is denied, but the Government's motion to reopen discovery solely on the bank account issue is granted. Furthermore, Defendants have filed a motion to reopen discovery with respect to the transcripts for the tax years at issue. Defendants' motion is denied for lack of timeliness. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§1340 and 1345.

BACKGROUND

On October 22, 1987, Defendants Nelson E. LaBine (deceased) and Eleanor L. LaBine established the LaBine Family Trust Agreement. Mr. and Mrs. LaBine were both in their eighties when the trust was established. Substantially all of the LaBine's assets, including their residence of 2233 Timberland, Toledo , Ohio , were placed into the trust. Mrs. LaBine received "200 units of beneficial interest", of nominal value, for the transfer of the residence. Originally, the trust was revocable by the donors during their lifetimes, but on September 16, 1988, the LaBines made the trust irrevocable.

Following the transfer of assets into the trust, Eleanor LaBine's remaining assets consisted of $10.00 in cash, an automobile worth $750.00, and a cemetery lot worth $600.00. No information is provided in the record with respect to the remaining assets of Mr. LaBine after the transfer of the assets. Mr. and Mrs. LaBine continued to live in their home after the transfer of the residence to the trust. During the donors' lifetimes, the trust assets were to be used primarily for their benefit. Upon their death, the trust assets were to be divided amongst the donors' children and their issue.

On or about May 14, 1984, the LaBines filed a petition in the United States Tax Court for redetermination of the remaining deficiencies assessed against them by the IRS for the 1976, 1977, 1978, and 1979 tax years. It was during the pendency of this proceeding in October, 1987, that the trust was created. On March 2, 1988, the Tax Court issued a stipulated decision in which Mr. and Mrs. LaBine, through counsel, agreed that there were "deficiencies in income tax due from [them] for the taxable years 1976, 1977, 1978, and 1979 in the amounts of $3,686.00, $5,054.00, $112.00 and $4,236.90, respectively." Nelson LaBine died on August 4, 1988. On November 17, 1988, the IRS allegedly attached Mrs. LaBine's bank account and seized $211.28. The records of the IRS documents do not indicate that Mrs. LaBine has been credited for this amount, and the IRS denied seizing the funds. The IRS claims that the documentation of the seizure is suspect.

Beginning in January, 1990 through the present day, Eleanor LaBine has made payments of $50.00 per month to the IRS. As of February, 1998, the unpaid balance of the assessments for 1976-1979 tax years totals $31,827.36. On May 22, 1994, the IRS issued a Federal tax lien for the amount of $33,528.70. The United States filed this action on March 16, 1998, alleging that the trust was established for the purpose of hindering, delaying or defrauding the United States Government in the collection of taxes. Defendants maintain that the trust was established as a result of probate problems experienced by LaBine family members; Mr. LaBine had experienced the death of ten (10) family members and Mrs. LaBine had lost eight (8) family members. Those deaths often resulted in extended and expensive probate proceedings, and thus the LaBines created the trust to avoid a large delay in the probate of their estates. The Defendants assert that the relative closeness between the date that the trust was established and the pending outcome of the Tax Court is merely coincidental.

DISCUSSION

A. Summary Judgment Standard

As an initial matter, the Court sets forth the relative burdens of the parties once a motion for summary judgment is made. Summary judgment must be entered "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 191 L. Ed. 2d 265 (1986). Of course, the moving party always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact. Id. at 323, 106 S. Ct. at 2553. The burden then shifts to the nonmoving party who "must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 2541, 91 L. Ed. 2d 202 (1986) (quoting Fed. R. Civ. P. 56(e)).

Once the burden of production has so shifted, the party opposing summary judgment cannot rest on its pleadings or merely reassert its previous allegations. It is not sufficient "simply [to] show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986). Rather, Rule 56(e) "requires the nonmoving party to go beyond the [unverified] pleadings" and present some type of evidentiary material in support of its position. Celotex, 477 U.S. at 324, 106 S. Ct. at 2553. Summary judgment shall be rendered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c).

B. The Prospective Application of the Ohio Uniform Transfer Act

Defendants maintain that Ohio 's Uniform Fraudulent Transfer Act of 1990 and not its predecessor, the Uniform Fraudulent Conveyance Act, applies to the instant case. Ohio Rev. Code §1336, et seq. In deciding whether to apply the Ohio Uniform Fraudulent Transfer Act, which superseded the Ohio Uniform Fraudulent Conveyances Act, the Court is controlled by Ohio law on the retroactive application of statutes. Retroactive application of a statute in Ohio is governed by Ohio Revised Code §1.48 which provides: "A statute is presumed to be prospective in its operation unless expressly made retrospective." The Ohio Uniform Fraudulent Transfer Act does not contain a provision which would expressly give the statute retrospective application. See generally Ohio Rev. Code Chapter 1336. Thus, under Ohio Revised Code §1.48, the Ohio Uniform Fraudulent Transfer Act should not be applied to transfers which predated its enactment. Whittaker v. Carmean, 153 B.R. 985, 989 (S.D. Ohio 1993).

The transfer at issue in this matter took place on October 22, 1987. The Ohio Uniform Fraudulent Transfer Act became effective on September 28, 1990. Therefore, the Act's predecessor, the Ohio Uniform Fraudulent Conveyances Act, must control. ¹

C. The Statute of Limitations

The ancient rule quod nullum tempus occurit regi--"that the sovereign is exempt from the consequences of its laches, and from the operation of statutes of limitations"--has enjoyed continuing vitality for centuries. Guaranty Trust Co. of New York v. United States , 304 U.S. 126, 132, 58 S.Ct. 785, 788, 82 L.Ed. 1224 (1938). "Citing Blackstone, Mr. Justice Story noted nearly 175 years ago that the reason for the rule was sometimes asserted to be that 'the king is always busied for the public good, and, therefore, has not leisure to assert his right within the time limited to subjects." United States v. Peoples Household Furnishings, Inc., 75 F.3d 252, 254 (6th Cir. 1996) quoting United States v. Hoar, 26 F.Cas. 329, 330 (Cir. Crt.D.Mass. 1821). Justice Story was not persuaded by this rationale: "The true reason," he said, ". . . .is to be found in the great public policy of preserving the public rights, revenues, and property from injury and loss, by the negligence of public officers." Id. Accord , United States v. Weintraub [80-1 USTC ¶9172], 613 F.2d 612, 618 (6th Cir. 1979), cert. denied, 447 U.S. 905, 100 S.Ct. 2987, 64 L.Ed.2d 854 (1980). See also United States v. Kirkpatrick, 22 U.S. (9 Wheat.) 720, 735, 6 L.Ed. 199 (1824) (Story, J.) ("The government can transact its business only through its agents; and its fiscal operations are so various, and its agencies so numerous and scattered, that the utmost vigilance would not save the public from the most serious losses, if the doctrine of laches can be applied to its transactions").

However, a debate has arisen with respect to whether a distinction exists between cases involving the government's common law right to collect on a debt and cases involving a carefully delineated state statutory right. United States v. Vellalos [92-1 USTC ¶50,227], 780 F. Supp. 705, 708 (D. Hawaii 1992) (finding that the United States had no cause of action under Hawaii's Uniform Fraudulent Transfer Act because of the specific extinguishment provision within the statute which functioned in a similar manner to a statute of limitations but was an element of the statute). In other words, the issue is whether the government's exemption from a state's statute of limitations extends to a situation where a state has enacted a fraudulent conveyance statute, which differs from a mere common law right to collect a debt.

The Sixth Circuit, in an unpublished decision, has held that this is a distinction without a difference. "We . . . do not accept Taxpayers' argument that the suit should have been dismissed because it was not brought within the limitations period in Kentucky 's fraudulent conveyance statute. The United States, as sovereign, is not bound by state statutes of limitations, United States v. Summerlin [40-2 USTC ¶9633], 310 U.S. 414, 416, 60 S.Ct. 1019, 1020, 84 L.Ed 1283 (1940), except where it has expressly bound itself to them." United States of America v. Isaac, 968 F.2d 1216, 1992 WL 159795 (6th Cir. ( Ky. 1992). The Court continued by stating that:

The United States does not bind itself to a state statute of limitations simply because it looks to the state's fraudulent conveyance law when applying I.R.C. §7403 (1988), [the statute which gives the Government the authority to file a civil action to enforce a tax lien]. Whenever courts apply federal revenue law, state law is controlling as to the nature and extent of the individual's property rights, but federal law determines the consequences of those rights. United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722-23 (1985). Thus, state law determines what constitutes a fraudulent conveyance, but federal law determines the timeliness of the action. United States v. Fernon [81-1 USTC ¶9287], 640 F.2d 609, 611- 12 (5th Cir. 1981). Contra United States v. Vellalos [92-1 USTC ¶50,227], 780 F.Supp. 705, 707 (D.Haw. 1992). Accordingly, the United States is not bound by the [state] statute of limitations.

United States of America v. Isaac, 968 F.2d 1216, 1992 WL 159795 (6th Cir. ( Ky. 1992). See also Goldstein v. United States of America [93-2 USTC ¶50,478], 1993 WL 388702 (N.D.Ohio 1993) (finding that the United States' claim that the creation of a trust constituted a fraudulent conveyance is not time-barred because the United States is not bound by state statute of limitations under United States v. Summerlin, except where it has expressly bound itself to them).

D. The Law Regarding Federal Tax Liens

Upon assessment, a federal tax lien attaches to all property and rights to that property belonging to a taxpayer. See 26 U.S.C. §§6321 and 6322. Generally, a tax lien does not attach to property that a taxpayer previously transferred and which ostensibly no longer belongs to the taxpayer. Id. However, if a taxpayer fraudulently disposes of property prior to the existence of federal tax liens, the Government may seek relief under the applicable fraudulent conveyance laws of the state in which the property is located. Commissioner v. Stern [58-2 USTC ¶9594], 357 U.S. 39, 45, 78 S.Ct. 1047, 1051, 2 Led.2d 1126, 1131 (1958); United States v. Fernon [81-1 USTC ¶9287], 640 F.2d 609, 611 (5th Cir. 1981). Federal law governs the right of the Government to enforce a tax lien; however, the determination of the taxpayers rights over the property are a question of state law. United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722-723, 105 S.Ct. 2919, 2925, 86 L.Ed.2d 565 (1985); Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513, 80 S.Ct. 1277, 1280, 4 L.Ed.2d 1365 (1960); United States v. Isaac, 968 F.2d 1216, 1992 WL 159795 (6th Cir. 1992); United States v. Ambrose, 782 F.2d 1044, 1985 WL 14094 (6th Cir. 1985).

In this case, the property the Government seeks to attach through its tax lien is the LaBine's residence in Ohio . Allegedly, the residence was fraudulently transferred to a trust. As noted above, the applicable law is Ohio 's Uniform Fraudulent Conveyance Act, Ohio Revised Code §1336 et seq. Under the Act, fraudulent conveyances may be set aside by creditors. The relevant portions of the Act are as follows:

(A) Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such purchaser:

(1) Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim; or

(2) Disregard the conveyance and attach or levy execution upon the property conveyed.

(B) A purchaser, who without actual fraudulent intent has given less than a fair consideration for the conveyance or obligation, may retain the property or obligation as security for repayment.

Ohio Rev. Code §1336.09. Therefore, if the Government can demonstrate that the conveyance of the residence to the trust was fraudulent, the Government can disregard the conveyance and attach the lien to the property if the there was not a purchaser of the property who paid fair consideration and who did not have actual fraudulent intent.

E. Actual Fraud

The Government alleges that Defendants had an intent to defraud under Ohio Rev. Code §1336.07 which provides:

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

Therefore, the three elements for a fraudulent conveyance under the Act are (1) a conveyance; (2) with actual intent to defraud, hinder, or delay; (3) either present or future creditors. See Bancoho National Bank v. Nursing Center Services, 61 Ohio App.3d 711, 714-715, 573 N.E.2d 1122, 1124 (1988). The burden of proof under Ohio Rev. Code §1336.07 rests on the party seeking to set aside the fraudulent conveyance. Stein v. Brown, 18 Ohio St.3d 305, 308, 480 N.E.2d 1121, 1124 (1985).

i. The Conveyance

Element one is clearly fulfilled because the transfer of the residence to the trust constitutes a conveyance. Ohio Rev. Code §1336.01 defines conveyance as the "payment of money, assignment, release, transfer, lease, mortgage, or pledge of tangible or intangible property, and also the creation of any lien or encumbrance." Therefore, the transfer of the residence to the trust satisfies the requirement of a conveyance.

ii. Actual Intent to Defraud

The second essential element requires the Government to show actual intent to hinder, delay or defraud. However, proving "actual intent" by direct proof may be difficult. Therefore, the Ohio Supreme Court stated:

Due to the difficulty in finding direct proof of fraud, courts of this state began long ago to look to inferences from the circumstances surrounding the transaction and the relationship of the parties involved.

Stein v. Brown, 18 Ohio St.3d 305, 308, 480 N.E.2d 1121, 1124 (1985) citing Gleason v. Bell, 91 Ohio St. 268, 110 N.E. 513 (1915). Consequently, certain traditionally designated indicia of fraud, or "badges" have generally been held to be sufficient to show fraud and invalidate the transfer of property. McKinley Fed. S. & L. v. Pizzuro Enterprises, Inc., 65 Ohio App.3d 791, 796, 585 N.E.2d 496, 500 (1990); In re Poole , 15 B.R. 422, 431-432 (Bankr. N.D. Ohio 1981). If the Government is able to demonstrate a sufficient number of badges, which illustrates a fraudulent conveyance by clear and convincing evidence, Household Finance Corp. v. Allenberg, 5 Ohio St.2d 190, 214 N.E.2d 667 (1966), then the burden of proof shifts to Defendants to prove that the transferee paid fair consideration for the property and that the transferee took the property without knowledge of the transferor's fraudulent intent. Cardiovascular and Thoracic Surgery of Canton, Inc. v. Dimazzio, 37 Ohio App. 3d 162, 164, 524 N.E.2d 915, 917 (1987). If the transferee fails to rebut the presumption that the conveyance was fraudulent, then the Government is entitled to judgment. Id. Some examples of "badges" of fraud include:

(1) inadequate consideration;

(2) transfer of the debtor's entire estate;

(3) the debtor's insolvency as a result of the transfer;

(4) transactions between members of the same family;

(5) the reservation of an interest in the transferred property;

(6) the existence or cumulative effect or a pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors;

(7) whether the debtor retained possession or control of the property transferred after the transfer;

(8) whether the transfer or obligation was disclosed or concealed;

(9) whether the debtor absconded;

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

(11) whether the transfer or obligation was disclosed or concealed;

(12) dealings in cash;

(13) use of dummies or fictitious parties; and

(14) the general chronology of the events and transactions under inquiry.

See Cardiovascular & Thoracic Surgery of Canton, Inc. v. Dimazzio, 37 Ohio App.3d 162, 166, 524 N.E.2d 915, 918 (1987); Conti v. Commissioner [94-2 USTC ¶50,582], 39 F.3d 658 (6th Cir. 1994), cert. denied, 115 S.Ct. 1793 (1995); United States v. Leggett, 292 F.2d 423, 426-427 (6th Cir. 1961) cert. denied, 368 U.S. 914 (1961); United States v. Mantarro [94-1 USTC ¶50,229], 72 A.F.T.R.2d 93-6428, 1992 WL 551483 (N.D. Ohio 1992); In re Poole, 15 B.R. 422, 431-432 (Bankr. N.D. Ohio 1981); Wagner v. Galip, 97 Ohio App.3d 302, 309, 646 N.E.2d 844, 849 (1994); Ransier v. McFarland, 170 B.R. 613, 626 (Bankr. S.D.Ohio 1994) citing Progeta v. Lombardo, 75 Ohio App.3d 621, 625, 600 N.E.2d 360, 363 (1991). See also Ohio Rev. Code §1336.04 of the Ohio Uniform Fraudulent Transfer Act for a non exhaustive list of the badges of fraud.

The Government alleges that the following badges exist in this matter:

(1) The residence was transferred to the trust during the pendency of the Tax Court case.

(2) The residence was transferred to the trust for inadequate consideration.

(3) The residence was transferred to the trust of which Eleanor LaBine was a beneficiary and her children the trustees.

(4) At one point in time, the LaBines had the power to withdraw the residence from the trust.

(5) Eleanor LaBine continued to live in the residence after it was transferred to the trust.

(6) The transferred residence constituted most of Eleanor LaBine's estate.

(7) Eleanor LaBine was insolvent or rendered insolvent by the transfer of the residence to the trust.

The record indicates that the above badges of fraud exist in this matter. Thus, if the third element is also satisfied, the Government has provided proof by clear and convincing evidence of fraud which shall have the effect of shifting the burden to the Defendants to demonstrate that the trust paid fair consideration for the property and took the property without knowledge of Defendants' fraudulent intent.

iii. Present or Future Creditors

The final element requires that the intent to defraud either present or future creditors. The United States qualifies as a present creditor. Ohio Rev. Code §1336.01 defines "creditor" as "a person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent." In an action to show a fraudulent conveyance, "the United States is deemed a creditor with standing to institute such an action from the date the taxes become due and owing." United States v. Manatarro [94-1 USTC ¶50,229], 72 A.F.T.R. 2d 93-6428 (N.D. Ohio 1992) citing Simpson v. United States [89-1 USTC ¶9285], 89 U.S. Tax Cas. 9285 (M.D. Fla 1989). See United States v. Hickox [66-1 USTC ¶15,679], 356 F.2d 969, 972 (5th Cir. 1966).

The Government was a present creditor as to the 1976, 1977, 1978, and 1979 income taxes at the date the residence was transferred into the trust. The United States is deemed a creditor for income taxes on the last day of the taxable period, which is no later than the date the return is originally due. United States v. Adams Bldg. Inc. [76-1 USTC ¶9221], 531 F.2d 342, 343 n.2 (6th Cir. 1976). Therefore, on October 22, 1987, the date of the transfer of the residence into the trust, the United States was a present creditor. Accordingly, the third and final prong of Ohio Rev. Code §1336.07 is fulfilled. The Government has fulfilled its burden of showing that the transfer was fraudulent under Ohio 's Uniform Fraudulent Conveyances Act.

iv. Shifting the Burden

The Government has satisfied the following elements: (1) a conveyance, (2) significant badges of fraud, and (3) that the United States is a present creditor. Therefore, the burden is shifted to the Defendants to demonstrate that the trust paid fair consideration of the residence and that it took the property in good faith.

The consideration for the transfer of the residence was equal to 200 units of beneficial interest. The value of the units appears to be symbolic rather than having any significant monetary value. The document evidencing that units of beneficial interest exist states that the units are non-transferable. Additionally, the units become null and void upon the death of the holder. ² Therefore, as the value of the units appear to be nominal, as they cannot be sold and they become extinguished upon Mrs. LaBine's death, and the Trust beneficiaries become the sole beneficial owners of the Trust assets, the transfer of the residence to the trust was not for adequate consideration. Although there is no direct evidence that the property was taken by the trust in bad faith, it is sufficient that the trust obtained the property without providing adequate consideration to prohibit Defendants from fulfilling their burden. The Government has established that the transfer of the residence to the trust was fraudulent, and the Defendants have not sufficiently satisfied their burden of demonstrating otherwise.

F. Fraud Without A Showing of Actual Intent

Even if the Government had failed to demonstrate a fraudulent conveyance under Ohio Rev. Code §1336.07, the Government may alternatively prove that the transfer was fraudulent without making a showing of discriminatory intent. Ohio Rev. Code §1336.04 provides that:

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

Fair consideration is given for property if "in exchange for such property, or obligation, as a fair equivalent therefore, and in good faith, property is conveyed or an antecedent debt is satisfied." Ohio Rev. Code §1336.03. Furthermore, a person is considered to be "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." Ohio Rev. Code §1336.02.

The consideration for the transfer of the residence was equal to 200 units of beneficial interest. As noted above, the value of the units appears to be symbolic rather than having any significant monetary value. Furthermore, the transfer rendered Mrs. LaBine insolvent because her assets subsequent to the transferred consisted of $10.00 in cash, an automobile worth $750.00, and a cemetery lot worth $600.00. Mr. LaBine's assets were not disclosed in the record, but the Court has been given no reason to believe that Mr. LaBine's assets were any greater than those of Mrs. LaBine. Therefore, the transfer of the residence rendered the LaBines insolvent.

The evidence has established that the transfer of Mr. and Mrs. LaBine's residence was made without sufficient consideration since no value can be ascertained for the units of beneficial interest, and the transfer rendered the LaBine's insolvent. Under Ohio Rev. Code §1336.04, these two elements are sufficient to demonstrate that the conveyance was fraudulent without a determination of actual intent. Therefore, the Government has shown that the LaBine's residence was fraudulently transferred to the LaBine Family Trust and the Government is thus entitled to summary judgment as a matter of law. The Government may attach the LaBine's residence through its tax lien because the property's transfer into the trust was fraudulent.

G. Motion to Strike and to Reopen Discovery

In addition to cross motions for summary judgment, the parties in this matter have made extraneous motions to strike and to reopen discovery. Specifically, the Government has moved to strike the affidavit of Robert LaBine, son of Mr. and Mrs. LaBine. Robert LaBine's affidavit states that "[o]n approximately November 17, 1988, the Internal Revenue Service attached my mother's bank account, no. 30-97063, at Trustcorp. Bank. The IRS seized $211.28. The official transcripts provided by the IRS do not show any credit of this amount." An exhibit is in the record regarding the $211.28 seizure which bears the following words:

Internal Revenue Service

Funds Attached by Court

Carrie Boze Court Clerk

Defendants are seeking credit for the seized amount. The Government challenges the authenticity of the stamp on the exhibit, and requests that it be stricken from the record. In the alternative, the Government requests that the Court reopen discovery solely on the issue of the alleged $211.28 seizure. (A request which, in view of the amount involved, seems curious at best!)

Additionally, Defendants seek additional discovery with respect to the issue of whether the IRS properly assessed the LaBine's taxes within the three-year time period established under 26 U.S.C. §6501. Specifically, Defendants seek review of the transcripts of the four years in question in order to make this determination.

This Court finds that the matters of the $211.28 seizure and the transcripts are issues that should have been addressed prior to the discovery cutoff date of September 21, 1998. However, whether the IRS seized Mrs. LaBine's bank account is relevant in determining the total amount of outstanding tax liability currently owed by the LaBines. Therefore, the Government's motion to strike the affidavit of Robert LaBine is hereby denied, and reluctantly, the Court directs that discovery shall be reopened as to that sole issue. Defendants motion to review the transcripts in order to determine whether the IRS properly assessed the LaBine's taxes within the required time period is denied as untimely.

CONCLUSION

For the foregoing reasons, the United States ' motion for summary judgment as to the issue of whether Mr. and Mrs. LaBine's residence at 2244 Timberlawn, Toledo , Ohio was fraudulently transferred into the LaBine Family Trust is granted. (Doc. No. 15). Accordingly, Defendants' cross motion for summary judgment is denied. (Doc. No. 20). The Government's motion to reopen discovery as to the issue of the bank account seizure is granted, but the Government's motion to strike the affidavit of Robert LaBine is denied. (Doc. No. 21). Furthermore, the Defendants' motion to reopen discovery as to the transcript for the tax years at issue is denied. (Doc. No. 23).

IT IS SO ORDERED.

¹ Unless otherwise specified in the text of this Memorandum Opinion, references to Ohio Rev. Code §1336 et seq. are references to Ohio 's Uniform Fraudulent Conveyences Act. which was in effect until September 28, 1990, when it was superceded by the Uniform Fraudulent Transfer Act.

² The certificate which serves as evidence of the units of the beneficial interest references an Exhibit A, which purports to be a table which bears the value of the units once they have been transferred or reassigned by the Trustor. Exhibit A has not been supplied to the Court; however, given the totality of the circumstances, the Court does not feel that the exhibit would demonstrate that the units have substantial value.

 

 

 

Lee Ronald Dahmer and Judith Ann Dahmer, Plaintiffs v. The United States of America , et al., Defendants

U.S. District Court, West. Dist. Mo. , S. West. Div., 02-5007-CV-SW-SWH-ECF, 10/1/2002, 2002 U.S. Dist. LEXIS 22755. Related cases at 99-1 USTC ¶50,482 and 2000-2 USTC ¶50,680 .

[Code Secs. 7402 , 7421 and 7433 ]

District court: Claim for damages: Summary judgment: Res judicata.--A couple's claim for damages in connection with the alleged wrongful collection of taxes was barred by the doctrine of res judicata because the issues had been resolved in previous litigation. The taxpayers' contentions that the government issued an untimely deficiency notice and fraudulently backdated an assessment against them were rejected in the earlier suit. Thus, the government's motion for summary judgment was granted. The taxpayers were not permitted to amend or supplement their complaint, and they were not entitled to injunctive relief from the government's collection efforts.

Lee Ronald Dahmer, Judith Ann Dahmer, Nevada, Mo., pro se. Robert D. Metcalfe, Department of Justice, Washington, D.C. 20530, for U.S., Carl Tierney.

ORDER

HAYS, Magistrate Judge:

On January 11, 2002, Lee Ronald Dahmer and Judith Ann Dahmer filed a Complaint for the Recovery of Unlawful Assessments and Collections and Claim for Damages for Lawless Conduct. In their Complaint, plaintiffs set forth the "Nature of the Action" as follows:

1. This is an action instituted pursuant to and jurisdiction arises under the provisions of Title 28 USC 1346(a)(1), which provides for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal revenue laws.

2. This action also seeks damages under 26 USC 7433 incurred as a result of the reckless and/or intentional violation of provisions of the IRS Code and Regulations.

3. This action also seeks damages under 42 USC 1983 for injuries incurred in violation of federally protected rights by individuals acting under the color of federal law depriving Plaintiffs of their constitutional rights.

(Plaintiffs' Complaint at 1-2) (emphasis in original).

On March 8, 2002, the United States of America and Carl Tierney, the "federal defendants," filed a Motion to Dismiss or, in the Alternative, for Summary Judgment. Defendants make four arguments: (1) res judicata bars the relitigation of the plaintiffs' claims concerning their 1987 federal income tax liabilities; (2) plaintiffs have failed to exhaust their administrative remedies or to fully pay their 1987 income taxes and their suit must be dismissed for lack of jurisdiction; (3) this action is barred by the tax anti-injunction act and must be dismissed; and (4) the individual federal defendant is entitled to absolute immunity in this civil action.

On March 25, 2002, plaintiffs filed a Motion for Preliminary Injunction to prevent any seizure of property or levy upon plaintiffs' salaries, wages, other income or property pending the outcome of this case. Plaintiffs argue that they are entitled to a preliminary injunction because the government is trying to collect on assessments that are time-barred and fraudulent.

On April 30, 2002, plaintiffs filed a document entitled "Plaintiffs' Reply to Federal Defendants' Reply Suggestions in the Alternative Request Permission to Amend or Supplement Complaint." Plaintiffs state that they believe that defendants' motion to dismiss is based upon procedural defects that plaintiffs may have made in preparing their complaint and not upon the factual evidence which plaintiffs have provided to the Court. Therefore, plaintiffs request permission to amend their complaint in order to correct any procedural defects.

I. DEFENDANTS' MOTION TO DISMISS OR MOTION FOR SUMMARY JUDGMENT

A. Standards For Evaluating A Motion For Summary Judgment

Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Summary judgment should be granted only where the evidence is such that no reasonable jury could return a verdict for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986). Thus, the moving party must demonstrate that no genuine issues of material fact remain to be resolved. See Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L.Ed.2d 265, 106 S.Ct. 2548 (1986).

In determining whether the moving party is entitled to summary judgment, the Court must resolve all controversies in favor of the non-moving party, take the nonmovant's evidence as true and draw all justifiable inferences in favor of that party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L.Ed.2d 538, 106 S.Ct. 1348 (1986). See also Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 147 L.Ed.2d 105, 120 S.Ct. 2097 (2000) ("the court must draw all reasonable inferences in favor of the nonmoving party, and it may not make credibility determinations or weigh the evidence"); Kopp v. Samaritan Health Sys., Inc., 13 F.3d 264, 269 (8th Cir. 1993) ("At the summary judgment stage, we resolve all disputed facts and draw all inferences in favor of the plaintiff.") In opposing a motion for summary judgment, the nonmovant "may not rest on mere allegations or denials of his pleading, but must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986).

B. Uncontroverted Material Facts

Although plaintiffs have filed objections to defendants' motion, plaintiffs have failed to dispute defendants' Statement of Material Facts as required by the Local Rules for the United States District Court for the Western District of Missouri. ¹ Accordingly, the following facts are deemed admitted for purposes of this motion:

1. In a notice of deficiency dated April 30, 1992, the Commissioner of Internal Revenue notified the plaintiffs, Lee Ronald Dahmer and Judith Ann Dahmer ("plaintiffs" or "taxpayers"), of the deficiencies determined by the Internal Revenue Service in plaintiffs' federal income taxes for the 1986 and 1987 tax years.

2. The amounts of the deficiencies set forth in the statutory notice described above were $48,395 (1986) and $54,303 (1987).

3. One year later, on April 30, 1993, the taxpayers stipulated to the entry of a Decision by the United States Tax Court in the case entitled Lee Ronald Dahmer and Judith Ann Dahmer v. Commissioner of Internal Revenue, Docket No. 17017-92.

4. The Decision entered by the Tax Court on May 19, 1993, provided, in pertinent part, that "there is a deficiency in income tax due from the petitioners for the taxable year 1987 in the amount of $54,303.00."

5. As reflected on the IRS certificate of assessments and payments for the taxpayers for the 1987 tax year, additional federal income taxes in the amount of $54,303.00 were assessed against them on June 25, 1993.

6. A notice of federal tax lien was filed against the taxpayers with the Recorder of Deeds for Vernon County , Missouri , with respect to the tax assessment described in the preceding paragraph on November 21, 1994.

7. On December 12, 1997, the United States of America commenced a civil action against the taxpayers in the United States District Court for the Western District of Missouri to collect their unpaid 1987 federal income tax liabilities.

8. The civil action commenced on December 12, 1997, was captioned United States of America v. Lee Ronald Dahmer, Judith Ann Dahmer, Bluebird Trust, Cardinal Trust, and Citizens National Bank, Case No. 97-5122-CV-SW-8 (W.D. Missouri) ("the prior civil action"). The complaint was signed by Carl J. Tierney, a trial attorney in the Tax Division of the U.S. Department of Justice.

9. The prior civil action (United States v. Dahmer) sought to reduce the tax assessment made against the taxpayers for additional federal income taxes for the 1987 tax year to judgment, to set aside certain fraudulent transfers of real property made by the taxpayers to the Bluebird Trust and the Cardinal Trust, and to foreclose the tax liens of the United States against the taxpayers' real property located in Vernon County, Missouri.

10. Judge Fenner granted the Government's motions for partial summary judgment and summary judgment in an order entered in the prior civil action (United States v. Dahmer) on March 31, 1999. The Court entered judgment against the taxpayers for the unpaid balance of the assessments made against them for the 1987 tax year, set aside the fraudulent conveyances of the taxpayers' real property to the Bluebird and Cardinal Trusts, and ordered the tax liens of the United States foreclosed as against the taxpayers' real property in Vernon County , Missouri . United States v. Dahmer [99-1 USTC ¶50,482 ], 1999 U.S. Dist. LEXIS 6863, 1999 WL 357926 (W.D. Mo. Mar. 31, 1999), aff'd [2000-2 USTC ¶50,680 ], 230 F.3d 1364 (8th Cir. 2000).

11. The Order entered by this Court in the prior civil action (United States v. Dahmer) on March 31, 1999, provided, in pertinent part, as follows:

III.

Dahmers' Motion for Dismissal

The Dahmers move for dismissal pursuant to Rule 12(b), Federal Rules of Civil Procedure arguing that the Secretary [of the Treasury] failed to make the requisite tax assessment of their federal income taxes for the year ending December 31, 1987 prior to the running of the three-year statute of limitations as required under 26 U.S.C. §6501(a). As discussed in Section II, the Dahmers are barred from raising a statute of limitations defense because they failed to raise it in their earlier Tax Court proceedings. Shades Ridge Holding Co., Inc. v. United States [89-2 USTC ¶947289-2USTCP9472], 880 F.2d 342, 344 (11th Cir. 1989) (affirmative defenses, such as statute of limitations, must be raised initially in tax court). Accordingly, the Dahmers' motion to dismiss will be denied.

United States v. Dahmer [99-1 USTC ¶50,482 ], 1999 U.S. Dist. LEXIS 6863, 1999 WL 357926 at *4.

12. The Order entered in the prior civil action (United States v. Dahmer) also provided, in pertinent part, that:

IV.

Dahmers' Motion for Reconsideration

The Dahmers move the Court to reconsider its September 28, 1998 Order in which the Court denied the Dahmers' motion to dismiss for lack of jurisdiction. The Dahmers state that the Court misconstrued the " 'lack of jurisdiction' contention in [their] motion to dismiss" and that the "jurisdictional challenge was directed to the United States for violations of procedure by the IRS." Any procedural violations by the IRS could have and should have been raised by the Dahmers in their Tax Court proceedings and is barred by res judicata from relitigation in this Court.

United States v. Dahmer [99-1 USTC ¶50,482 ], 1999 U.S. Dist. LEXIS 6863, 1999 WL 357926 at *4.

13. After the judgment entered by this Court in the prior civil action (United States v. Dahmer) was affirmed on appeal ([2000-2 USTC ¶50,680 ], 230 F.3d 1364), the taxpayers filed their "Defendants' Request for a Bill of Review" on October 3, 2000.

14. On page 2 of the "Defendants' Request for a Bill of Review" in the prior civil action (United States v. Dahmer), the taxpayers alleged that they had "newly discovered evidence that substantiates allegations that the government committed both fraud upon the court and fraud upon the defendants when representing to the court that a timely and proper assessment had been made against the Dahmers."

15. On page 4 of the "Defendants' Request for a Bill of Review," the taxpayers allege that they contacted Victoria Osborn, a "Forensic Accountant," and asked her to "examine the transactions in their case."

16. On page 8 of the "Defendants' Request for a Bill of Review," the taxpayers alleged that "the government . . . did not have a legal and enforceable assessment" against them for the 1987 tax year.

17. On page 9 of the "Defendants' Request for a Bill of Review," the taxpayers asserted that the federal income tax assessment made against them for the 1987 tax year was made during the first week of November, 1993. The taxpayers also claimed that the assessment date set forth in the complaint in the prior civil action (United States v. Dahmer) and the IRS certified certificates of assessments and payments had been "backdated."

18. On October 20, 2000, the Government filed its response to the "Defendants' Request for a Bill of Review." The United States' Response to Defendants' Request to Reopen Case pointed out (on page 3) that the taxpayers had failed to contest any of the material facts set forth in the Government's motion for summary judgment, including the date on which additional taxes were assessed against the taxpayers for the 1987 tax year (June 25, 1993).

19. On November 27, 2000, this Court entered an "Order Denying Defendants' Request for a Bill of Review."

20. On January 11, 2002, the taxpayers commenced the present civil action against the United States , trial attorney Carl J. Tierney, and certain "John Does."

21. The "Complaint for the Recovery of Unlawful Assessments and Collections and Claim for Damages for Lawless Conduct" in the present civil action alleges, in Count I, that "the Defendants made assessments of tax, in the amount of $53,553.00 plus statutory additions, against Plaintiffs, for tax period [ending] December 31, 1987, which assessments were time-barred and fraudulent because the assessments were made beyond the statute of limitations and the Defendants intentionally backdated the assessment date, in the master file record, to read June 25, 1993, instead of the actual date of October 18, 1993."

22. Taxpayers further allege that "the Defendants' actions of failing to abate the tax in question, and of undertaking enforced collection action, have caused immediate and irreparable harm to the Plaintiff [sic], and is in violation of the deficiency procedures set out in the Internal Revenue Code."

23. In Count II of the complaint, titled "Unlawful Acts of Collection Officers," the taxpayers allege that "the assessment and collection of the tax at issue is in disregard of the tax laws, as the assessment is time-barred because it was made beyond the statute of limitations and fraudulent because Defendants intentionally backdated the assessment date in the master file record, to read June 25, 1993, when the assessments were not made until October 18, 1993. The [sic] was intentionally done to conceal Defendants [sic] reckless and intentional conduct."

24. In Count III of the complaint, the taxpayers claim that notices of federal tax lien were improperly filed against them with respect to the additional federal income taxes assessed against them for the 1987 tax year because those assessments were untimely made.

25. In Count IV of the complaint, the taxpayers allege that

"Defendants, through its agency the Internal Revenue Service, and John Doe and Jane Doe, employed by the IRS, have recklessly and intentionally violated the Plaintiffs [sic] Constitutional rights to due process, under the claim of federal authority."

(Suggestions in Support of the Federal Defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment at 3-10.)

C. Discussion

As set forth by Judge Fenner in United States v. Dahmer [99-1 USTC ¶50,482 ], 1999 U.S. Dist. LEXIS 6863, 1999 WL 357926 (W.D. Mo. Mar. 31, 1999), aff'd [2000-2 USTC ¶50,680 ], 230 F.3d 1364, 2000 WL 1146323 (8th Cir. Aug. 15, 2000):

Under the doctrine of res judicata, an issue litigated in front of a competent judicial forum cannot be relitigated in a separate proceeding. The parties and their privies are bound not only as to every matter presented to the court, but also as to every matter that might have been brought before the court. The doctrine of res judicata applies to all final orders issued by a court of competent jurisdiction including, of course, the United States Tax Court.

[99-1 USTC ¶50,482 ], 1999 U.S. Dist. LEXIS 6863, 1999 WL 357926 at *3 (citations omitted). See also Montana v. United States, 440 U.S. 147, 153, 59 L.Ed.2d 210, 99 S.Ct. 970 (1979) (a "right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction . . . cannot be disputed in a subsequent suit between the same parties or their privies. . . .") (quoting Southern Pacific R. Co. v. United States, 168 U.S. 1, 48-49, 42 L.Ed. 355, 18 S.Ct. 18 (1897)).

Plaintiffs' Complaint sets forth the following facts upon which plaintiffs base all of their claims in this lawsuit:

13. On January 27, 1991, the Plaintiffs and Defendants entered into a legal extension of the assessment statute expiration date, to equal December 31, 1991. . . .

14. On April 30, 1992, Defendants willfully and intentionally issued a time-barred "Statutory Notice of Deficiency" for tax period 1986 and 1987. The notice of deficiency was time-barred because it was not issued before December 31, 1991, which is in violation of 26 USC 6501(c)(4). . . .

15. Plaintiffs timely filed a petition for redetermination with the Tax Court in accordance with 26 USC 6213. On May 19, 1993, Tax Court Decision upheld the time-barred "Statutory Notice of Deficiency."

16. The Plaintiffs waived the restrictions provided by 26 USC 6213(a)(1) and 6503(a)(1) of the Code. As a result of the waiver, the new assessment statute expiration date is July 18, 1993. The Defendants were required to make the assessment by July 18, 1993. . . .

17. On October 18, 1993, which was 90 days beyond the legal assessment date, the Defendants made a time-barred and fraudulent assessment. The Defendants backdated the assessment date to June 25, 1993, in the Plaintiffs' master file records, to conceal the fraudulent assessment. The Defendant illegally extended the assessment statute expiration date, from the legal date of July 18, 1993 to October 16, 1993, which allowed the computer to make the fraudulent assessment.

(Plaintiffs' Complaint at 4.)

Plaintiffs' claims in this lawsuit boil down to two allegations of wrongdoing by defendants, i.e. that defendants issued a time-barred "Statutory Notice of Deficiency" and that defendants fraudulently backdated the assessment. Both allegations of wrongdoing raised by plaintiffs were before Judge Fenner in the previous litigation. With respect to plaintiffs' allegation that defendants issued a time-barred "Statutory Notice of Deficiency," the Dahmers moved for dismissal before Judge Fenner because the statute for assessment expired on December 31, 1991. See Claimants' Motion for Dismissal at 2, United States v. Dahmer, No. 97-5122-CV-SW-8 (Oct. 15, 1998). Judge Fenner ruled that the Dahmers were barred from raising a statute of limitations defense because they failed to raise it in their earlier Tax Court proceedings. See United States v. Dahmer [99-1 USTC ¶50,482 ], 1999 U.S. Dist. LEXIS 6863, 1999 WL 357926, *4 (W.D. Mo. Mar. 31, 1999), aff'd [2000-2 USTC ¶50,680 ],230 F.3d 1364, 2000 WL 1146323 (8th Cir. Aug. 15, 2000).

Plaintiffs presented their claim that defendants fraudulently backdated the assessment to Judge Fenner in a Request for a Bill of Review. Defendants' Request for a Bill of Review provides, "The Dahmers have newly discovered evidence that substantiates allegations that the Government committed both fraud upon the court and fraud upon the defendants when representing to the court that a timely and proper assessment had been made against the Dahmers." See Defendants' Request for a Bill of Review at 2, United States v. Dahmer, No. 97-5122-CV-SW-4 (Oct. 3, 2000). The "newly discovered evidence" was based upon Victoria Osborn's review of the Dahmers' master file. Id. at 4. In its Response to Defendants' Request to Reopen Case, the Government argued that the Dahmers' evidence that the June 25, 1993 assessment was entered into the IRS administrative computer records in October 1993 provided no evidence of fraud because an assessment occurs on the date an authorized official signs a summary record of assessment containing the taxpayer's assessment rather than the date the assessment is posted to the IRS computerized record system. See United States' Response to Defendants' Request to Reopen Case at 1-3, United States v. Dahmer, No. 97-5122-CV-SW-4 (Oct. 20, 2000). Judge Fenner ruled this issue by stating, "the Court . . . having fully considered Defendants' Request for a Bill of Review . . . in which [the Dahmers] request the reopening of this case on alleged newly discovered evidence of fraud, DENIES said request to reopen for all of the reasons stated in the United States' Response to Defendants' Request to Reopen Case." Order Denying Defendants' Request for a Bill of Review, United States v. Dahmer, No. 97-5122-CV-SW-4 (Nov. 27, 2000).

The issues litigated before Judge Fenner cannot be relitigated in this proceeding. Defendants are, therefore, entitled to summary judgment on the basis of res judicata. Given the Court's finding that defendants are entitled to summary judgment based on the doctrine of res judicata, it is not necessary to examine defendants' other arguments for dismissal of this case.

II. PLAINTIFFS' REQUEST FOR PERMISSION TO AMEND COMPLAINT

In their Reply to Federal Defendants' Reply Suggestions [or] in the Alternative Request [for] Permission to Amend or Supplement Complaint, plaintiffs state that they believe that defendants' motion to dismiss is based upon procedural defects that plaintiffs may have made in preparing their complaint and not upon the factual evidence which plaintiffs have provided to the Court. Therefore, plaintiffs request permission to amend their complaint in order to correct any procedural defects. Given the Court's finding that defendants are entitled to summary judgment because the issues presented in plaintiffs' complaint have previously been litigated and not because of any defect in the way the issues were presented by plaintiffs in their complaint, plaintiffs' request for permission to amend or supplement their complaint is denied.

III. PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION

In their Motion for Preliminary Injunction, plaintiffs argue that they are entitled to a preliminary injunction pending the outcome of this case because the government is trying to collect on assessments that are time-barred and fraudulent. Given the Court's finding that defendants are entitled to summary judgment, plaintiffs' motion for preliminary injunction is denied.

III. CONCLUSION

For the reasons set forth above, it is

ORDERED that the Federal Defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment (doc. # 7) is granted. It is further

ORDERED that plaintiffs' Motion for Preliminary Injunction (doc. # 14) is denied. It is further

ORDERED that plaintiffs' Request [for] Permission to Amend or Supplement Complaint (doc. # 22) is denied.

¹ See Local Rule 56.1(a) ("All facts set forth in the statement of the movant shall be deemed admitted for the purpose of summary judgment unless specifically controverted by the opposing party.")

 

 

 

United States of America, Plaintiff v. James A. Kudasik, Elinor A. Evenech, John Evenech, Danette A. Cook, Johnstown Bank and Trust Company, Pauline L. Zovnar, First Philson Bank, N.A., Lola J. Wohlfarth, Somerset County, Somerset Borough, and Borough of Central City, Defendants, and Somerset Area School District, Central City Borough, Shade-Central City School District, Jefferson Township, Milford Township, Rockwood Area School District, and Shade Township, Intervenors

U.S. District Court, West. Dist. Pa., Civ. 96-209J, 6/8/98, 21 FSupp 2 d 501, 21 FSupp2d 501

[Code Secs. 6321 and 6323 ]

Tax liens, attachment of: Transfers prior to assessment: Fraudulent conveyances: Transfers for nominal consideration: Constructively fraudulent: Nominee: Foreclosure.--Federal tax liens attached to real property that was transferred by an attorney for nominal consideration to his sister and her husband prior to the assessment of taxes against him. Under the state ( Pennsylvania ) Uniform Fraudulent Conveyance Act, fraud was presumed, and the taxpayer failed to rebut that presumption. However, the taxpayer's transfer of his undivided one-half interest in another parcel was undertaken for fair consideration where his sister and brother-in-law, who were the other joint tenants, assumed the mortgage on the property and paid the real estate taxes from the date on which they acquired their interest in the property. Moreover, the taxpayer's niece, who subsequently received the property from her parents, did not qualify as the taxpayer's nominee for purposes of the tax lien since the taxpayer did not exercise active or substantial control over the property after its transfer.

[Code Sec. 7403 ]

Tax liens: Municipal taxes: Priority of liens: State law: Foreclosure.--The municipalities in which a taxpayer's fraudulently conveyed real properties were located had a first lien under state ( Pennsylvania ) law for any delinquent unpaid taxes on those parcels. Thus, those liens had priority over federal tax liens.

MEMORANDUM and ORDER

I. Introduction

SMITH, District Judge:

The United States filed a complaint against delinquent taxpayer, James A. Kudasik, seeking to reduce personal income tax assessments to judgment, set aside fraudulent conveyances of real estate and foreclose on federal tax liens. Before the court are the unopposed motions of the government for summary judgment and default judgment. Dkt. no. 32.

II. Facts

In 1976, James A. Kudasik, an attorney, purchased for $50,000 a two story building located at 158 E. Union Street in the Borough of Somerset. Located in the county seat of Somerset County , Pennsylvania , the structure was intended to serve as both his residence and law office. Dkt. no. 1, exh. A; dkt. no. 35, exh. A at 32, exh. D ¶21. In October 1979, Kudasik and his sister, Elinor Evenech, purchased for $16,000, as joint tenants with the right of survivorship, a 4.54 acre parcel of land, including mineral rights, in Milford Township , Somerset County . Dkt. no. 1, exh. J. Almost a year later, Kudasik purchased for $13,500, two parcels of ground situated in the Borough of Central City, Somerset County . Dkt. no. 1, exh. D. Less than a month later, Kudasik and a business partner conveyed in exchange for $7,000 two parcels of real estate, together with all the mineral rights, situated in Jefferson Township , Somerset County , to Kudasik, his sister Elinor and her husband, John Evenech, as joint tenants with the right of survivorship. Dkt. no. 1, exh. G.

On March, 25, 1983, Kudasik granted a mortgage on the Central City lots to Citizens National Bank in Windber in the amount of $16,500. Dkt. no. 35, exh. 6. On June 2, 1987. Kudasik conveyed the Central City parcels of land ¹ to his sister, Elinor, for a one dollar consideration. Dkt. no. 1, exh. E. The deed from Kudasik to Elinor was not recorded at that time, and Kudasik did not notify the mortgagee that the title had been transferred. Dkt. no. 35, exh. A at 61. On July 3, 1990, the deed conveying the Central City parcels to Elinor was recorded. On July 12, 1990, the Evenechs conveyed their interest in the real estate to their daughter, Danette Cook, and a deed was recorded on August 17, 1990. Dkt. no. 1, exh. E and F.

The Central City parcels were rental property and the local realty taxes were sometimes paid by the lessees and at other times by Kudasik. Dkt. no. 35, exh. A at 48. Despite the unrecorded conveyance to his sister on June 2, 1987, Kudasik used the Central City parcels as part of the collateral for a second mortgage granted to Somerset Trust Company on June 24, 1987. Dkt. no. 35, exh. 4. Kudasik satisfied the earlier mortgage to Citizens' National Bank in June 1990. Dkt. no. 35, exh. 7. In February 1991, despite the conveyances from Kudasik to Elinor and then the Evenechs to Cook, Kudasik granted yet another mortgage in the amount of $10,563.48 to Cenwest National Bank which he satisfied in April 1993. Dkt. no. 35, exh. 8, 9; dkt. no. 35, exh. A at 65. The mortgage to Somerset Trust Company was marked satisfied on March 19, 1993. Dkt. no. 35, exh. 4. Although he has not been the record owner of the Central City parcels, Kudasik has "always considered [him]self to be the owner of the property." Dkt. no. 35, exh. A at 68.

On June 2, 1987, by a separate deed, Kudasik also conveyed to Elinor his undivided one-half interest in the Jefferson Township parcels and his undivided one-half interest in the Milford Township land. Dkt. no. 1, exh. H. The deed for those parcels was not recorded until June 26, 1990. Id. The Evenechs also conveyed the Jefferson and Milford Township pieces of land to their daughter, Danette Cook, on July 12, 1990. Dkt. no. 1, exh. I. This deed was recorded on August 17, 1990.

When the Jefferson Township parcels were conveyed in 1980 to Kudasik and his sister. Elinor, they were encumbered by a $20,000 mortgage granted by Kudasik and his partners in March 1978 to Somerset Trust Company. Dkt. no. 35, exh. 3. A concrete block motel had been erected on one of the Jefferson Township parcels and the Evenechs established their residence in a mobile home located on the premises. Dkt. no. 1, exh. G; dkt. no. 35, exh. D ¶23. Despite Kudasik's one-half interest in the property and Kudasik's partnership's liability on the mortgage, the Evenechs have paid the local taxes and utilities for the Jefferson Township parcels, as well as the mortgage payments, since 1980. Dkt. no. 35, exh. A at 76; dkt. no. 35, exh. D ¶23. The 1978 mortgage was satisfied in March 1994. Dkt. no. 1, exh. G. The Milford Township parcel is unimproved and the Evenechs have paid the assessed local taxes since they acquired their interest in the real estate in 1979. Dkt. no. 35, exh. D ¶24.

Finally, Kudasik transferred his interest in the Union Street building to his sister in March 1990. Dkt. no. 1, exh. B. Although Somerset Trust Company held a June 1987 mortgage that was secured by the Union Street property, Kudasik did not notify the mortgagee of the transfer. Dkt. no. 35, exh. 4; dkt. no. 35, exh. A at 40. Kudasik continued to make all the mortgage payments until it was satisfied in March 1993. Dkt. no. 35, exh. A at 40. Kudasik characterized the mortgage as a "business loan," and admitted that he deducted the interest in preparing his income tax return. Dkt. no. 35, exh. A at 41. Then, on August 17, 1990, the Evenechs deeded their interest in the real estate to their daughter, Danette Cook. Dkt. no. 1, exh. C. Kudasik continued to live in and work from the Union Street building. From Kudasik's perspective, he believed that he was the owner of the Union Street property and "always treated it that way." Dkt. no. 35, exh. A at 42. Over the years, regardless of who held legal title to the property, Kudasik paid the local real estate taxes, the utilities, insurance and mortgage payments. Id. at 40, 47.

Kudasik, however, did not pay his personal income tax for calendar years 1983, 1985-1986, 1988-1991, and 1993, although it appears that he filed 1040 income tax returns for those years. See dkt. no. 33, at 6 n. 5; dkt. nos. 1 and 2 ¶¶30, 40, 50, 58. As a result of Kudasik's delinquency, the IRS issued assessments for the tax due, plus statutory interest and penalties. The first assessment was issued on November 15, 1993 for calendar years 1983 and 1985. Assessments followed in 1994 and 1995 for the remaining calendar years of 1986, 1988-1991 and 1993. See dkt. no. 34 ¶4. Notice of the federal tax liens for calender years 1983 and 1985-1986 was filed on June 28, 1994 in the Somerset County Prothonotary's Office showing an unpaid balance of $38,631.39. Dkt. no. 35, exh. B. Notice of the federal tax liens for tax years 1988-1990 was filed later that year showing an unpaid balance of $42,791.55. Id. at 2. A year later, on October 24, 1995, notice of the federal tax liens for 1991 and 1993 was filed indicating a balance due of $57,961.15.

Notice of a federal tax lien against Danette Cook, Kudasik's niece, was filed on March 27, 1996. The notice indicated Kudasik's indebtedness of $149,384.09 for federal taxes, interest and penalties for calendar years 1983, 1985-1986, 1988-1991 and 1993. Cook was designated "as nominee for James A. Kudasik . . . to the extent of his interest in" the real estate on Union Street , and in Central City and Jefferson and Milford Townships . Dkt. no. 35, exh. B.

Subsequently, on August 5, 1996, the government filed this civil action "for the purpose of reducing income tax assessments to judgment, setting aside numerous fraudulent conveyances of four separate real properties, and foreclosing federal tax liens against the four real properties. . . ." Dkt. no. 1 ¶1. The government sued Kudasik, Mr. and Mrs. Evenech, and Danette Cook. The complaint also named as defendants Johnstown Bank and Trust, First Philson Bank, N.A., Lola J. Wohlfarth, and Pauline L. Zovnar, due to their alleged creditor status. Some of the municipal entities within which the parcels of land were situated were named as defendants, and others were granted leave to intervene pursuant to Federal Rule of Civil Procedure 24(a). See dkt. no. 18.

The first of the government's five count complaint seeks to reduce to judgment the assessments totaling $138,206.26. The remaining four counts seek to set aside as fraudulent the conveyances from Kudasik to Elinor and from the Evenechs to Cook. If the conveyances are set aside. Kudasik would be deemed the legal owner at the time the IRS assessments were issued and foreclosure would lie.

Kudasik, who is an attorney, has filed an answer to the complaint. In it, he admits that he failed to pay income taxes due for 1983, 1985-1986, 1988-1991, and 1993, but he disputes the statutory assessments for interest and penalties. Dkt. nos. 1 and 2 ¶¶20-21. Kudasik denies that the conveyances to his sister, Elinor, and to his niece, Danette Cook were fraudulent and void, and that he conveyed the land with the intent to hinder, delay or defraud the government. Dkt. no. 2 ¶¶32, 42, 52, 60. Kudasik avers that the conveyances were made for the purpose of "affixing equity for a legitimate business purpose which business venture failed." Dkt. no. 2 ¶35; see also ¶¶42-44, 52, 60. He admits that his niece, Danette Cook, was his nominee for each of the four properties. Dkt. nos. 1 & 2, ¶9.

During Kudasik's deposition, he denied that the transfers were fraudulent or for "the purposes of avoiding a government obligation. . . ." Dkt. no. 35, exh. A at 93. He conceded that after the transfers he had no "recorded" assets and asserted that "if it was not for the foreclosures, these properties would have been transferred back to [him] by Danette Everett, with the exception of my sister Elinor. I would have made sure that she continued to have the motel and the properties that belong to her." Id.

All defendants have been served, except for John Evenech, who died on January 15, 1994. Dkt. no. 2 ¶8. Default was entered against Elinor Evenech, Danette Cook and Johnstown Bank and Trust Company. Dkt. nos. 19, 22, 23. First Philson Bank, Pauline Zovnar and Lola Wohlfarth were dismissed as defendants. Dkt. nos. 25, 26, 38.

After the close of discovery, the government moved for summary judgment against Kudasik and for default judgments against Elinor Evenech, Danette Cook and Johnstown Bank and Trust. Neither Kudasik nor Evenech, Cook nor Johnstown Bank and Trust have filed any opposition to the government's motions.

III. Summary Judgment Standard

Summary judgment shall be "rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). When a motion for summary judgment is properly supported by affidavits or the like, the non-moving party cannot defeat the motion by resting on the bare allegations contained in his or her pleadings. That is, once the moving party has satisfied its burden of identifying evidence which demonstrates the absence of a genuine issue of material fact, see Childers v. Joseph, 842 F.2d 689, 694 (3d Cir. 1988), the non-moving party is required by Federal Rule of Civil Procedure 56(e) to go beyond the pleadings by way of affidavits, depositions, answers to interrogatories, and admissions on file in order to demonstrate specific material facts which give rise to a genuine issue. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). That is, the nonmoving party "may not rest upon mere allegation or denials of his pleadings, but must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby Inc., 477 U.S. 242, 256 (1986) (citing Fed.R.Civ.P. 56(e)).

IV. Judgment as to the Assessed Income Tax, Interest and Penalties

Section 6321 of the Internal Revenue Code provides that:

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

26 U.S.C. §6321. Section 6322 explains that the "lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied. . . ." 26 U.S.C. §6322. An assessment by the IRS is presumed to be correct. Freck v. I.R.S. [94-2 USTC ¶50,518], 37 F.3d 986, 991 n. 8 (3d Cir. 1994) ("Assessments are generally presumed valid and establish a prima facie case of liability against a taxpayer . . ."); United States v. Vespe [89-1 USTC ¶9193], 868 F.2d 1328, 1331 (3d Cir. 1989); Psaty v. United States [71-1 USTC ¶9346], 442 F.2d 1154, 1160 (3d Cir. 1971).

Here, the assessments issued to Kudasik establish that he is liable for $138,206.26. Dkt. nos 1 and 2 ¶¶20-21; see also dkt. no. 34, exh. 1 (certified Form 4330). Kudasik admits that he is indebted to the government in this amount and that he has no basis to challenge the statutory additions reflected on the assessments. Dkt. no. 35, exh. A at 14-16. The government asserts that the amount owing as of October 31, 1997 increased to $186,041.86. Dkt. no. 34 ¶4. Nor has Kudasik come forward to dispute this amount. Consistent with Rule 56(c), judgment will be entered in favor of the government and against Kudasik in the amount of $186,041.86 which represents Kudasik's tax liability for calendar years 1983, 1985-1986, 1988-1991 and 1993 as of October 31, 1997.

V. Attachment of the Federal Tax Liens

The statutory language of §6321 " 'all property and rights to property' is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. Nat'l Bank of Com merce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985) (quoting 26 U.S.C. §6321). "A lien arising under Section 6321 cannot, however, extend beyond the property interest held by the taxpayer. Consequently, a federal tax lien attaches only to the property interests of the delinquent taxpayer at the time of assessment." Gardner v. United States [94-2 USTC ¶50,482], 34 F.3d 985, 987 (10th Cir. 1994) (citations omitted).

Accordingly, the assessments issued to Kudasik operated as a lien when made in 1993, 1994, and 1995. Those assessments were not made, however, until after Kudasik had conveyed his interests in the four real estate holdings to his sister, and she and her husband, in turn, conveyed them to their daughter. The question remains, therefore, whether Kudasik had any interest in these four real estate holdings in 1993, 1994 and 1995.

The government contends that Kudasik was the sole owner of these four properties because the conveyances were fraudulent when made. It argues that the fraudulent nature of the conveyances may be demonstrated under any of three different theories. In the event any conveyance should not be found fraudulent, the government asserts that it may proceed against that property because of Cook's nominee status.

VI. Fraudulent Conveyances

The government contends that Kudasik's conveyances may be declared fraudulent under sections 351 and 444 of Title 21 of the Pennsylvania Statutes which specify the recording requirements for deeds and conveyances. 21 P.S. §§351, 444. Alternatively, it argues that Pennsylvania 's Uniform Fraudulent Conveyance Act permits nullifying the deeds based upon findings of either actual or constructive fraud. See 39 P.S. §§354, 357. ²

A. Applicability of Pennsylvania 's Recording Statutes

The government's first argument relies upon its status as a creditor for past due taxes and section 444 which provides:

All deeds and conveyances . . . shall be recorded in the office for the recording of deeds . . . within ninety days after the execution of such deeds or conveyances and every such deed and conveyance . . . which shall not be proved and recorded as aforesaid, shall be adjudged fraudulent and void against any subsequent purchaser or mortgagee for a valid consideration, or any creditor of the grantor or bargainor. . . .

21 P.S. §444 (emphasis added). In 1894, however, the Pennsylvania Supreme Court held that this provision is inoperative against creditors. Davey v. Ruffell, 29 A. 894 ( Pa. 1894). It declared that "[t]he act is to be read as though the word 'creditors' was not in it, and in this respect the act of 1775 is unchanged." Id. at 896; see also Smith v. Young, 103 A. 63 ( Pa. 1918); In re Lukens, 138 F. 188 (E.D. Pa. 1905); English v. Ross, 140 F. 63, 634-350 (M.D. Pa. 1905). Accordingly, Kudasik's conveyances to his sister cannot be set aside as fraudulent simply because the government was a creditor and the deeds were not recorded within ninety days. ³

B. Uniform Fraudulent Conveyance Act

Applying the Uniform Fraudulent Conveyance Act, I conclude that several of the conveyances at issue here are fraudulent. Conveyances may be set aside as fraudulent under the Act based on either actual or constructive fraud. 39 P.S. §§354, 357. I will address the government's theory of actual fraud first.

Section 357 provides that:

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.

39 P.S. §357. In Iscovitz v. Filderman, 6 A.2d 270, 272 ( Pa. 1939), the Pennsylvania Supreme Court recognized that the determination of whether there was an actual intent to hinder, delay or defraud under the Act must "be proved by facts and circumstances which taken together show the existence of fraud. Although the intent must exist at the time the transfer was made, it may be shown by conduct subsequent to the execution of the conveyance of such a nature as to show fraud in its inception." Id. (citations omitted). The court affirmed the decree that several conveyances from husband to wife, and then from parents to children, were made with the intention of defrauding the creditor plaintiff. The court reasoned

[w]here the transaction is between husband and wife actual intent does appear where it is shown that there was a deed given for a nominal consideration. This is but a presumption of fact and places on the wife the burden of showing the fairness of the transaction. Since family collusion by a debtor is so easy to execute and so difficult to prove, the evidence to sustain the claim of such cases must be clear and satisfactory.

Id. (emphasis added) (citations omitted); see also County of Butler v. Brocker, 314 A.2d 265, 268 ( Pa. 1974).

Section 351 of the Act defines creditor as a "person having any claim, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent." 39 P.S. §351. Here, the government was a creditor by virtue of its claim for unpaid taxes. These taxes were due on April 15 of the years following the close of the tax years 1983, 1985-1986, a time before the conveyances were made. See United States v. St. Mary [72-1 USTC ¶9319], 334 F.Supp. 799, 802-03 (E.D. Pa. 1971) (citing 26 U.S.C. §§6151, 6211, 6513(b), 6601, 6653(a)).

Relying on its creditor status here, the government contends that the transfers of the Union Street and Central City properties were fraudulent. It points out that, except for the difference in familial relationship, the transfers are like those in Iscovitz which were for the nominal consideration of one dollar. I agree. Because the Court in Iscovitz was concerned about "family collusion," a presumption applies here that Kudasik intended to defraud the government when he transferred the Union Street and Central City parcels. Iscovitz, 6 A.2d at 272. That presumption places upon Elinor the burden of showing the fairness of the transaction. Because she has not appeared, and there is no evidence of record to support a finding of "fairness," the "clear and satisfactory" burden is not met. The Union Street and Central City conveyances must be set aside pursuant to 39 P.S. §359(1)(a). The subsequent conveyance to Danette Cook does not affect the government's right to have the conveyance set aside inasmuch as she was not a "purchaser for a fair consideration. . . ." Id. ; Iscovitz, 6 A.2d at 272.

According to the government, the conveyances of the Jefferson and Milford Township parcels should also be set aside because those conveyances were constructively fraudulent under §354 of the Uniform Fraudulent Conveyance Act. That section provides:

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

39 P.S. §354. Section 353 states that "fair consideration" for the property is given "[w]hen, 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. . . ." 39 P.S. §353.

The record reveals that Kudasik and the Evenechs became joint tenants with the right of survivorship of the Jefferson Township parcel in September 1980 in a conveyance from Kudasik and his partner. Dkt. no. 1, exh. G. The purchase price was $7,000, but the land was encumbered by a $20,000 mortgage granted by the Kudasik partnership in March 1978. Dkt. no. 35, exh. 3. The Evenechs effectively assumed the mortgage after the 1980 conveyance by making all of the payments due until the mortgage was satisfied in March 1994. Id. ; exh. A at 76; exh. D ¶23. In addition, the Evenechs paid all the local realty taxes for the land from the date that they acquired their interest and established their residence on the premises. Then, in 1987, Kudasik conveyed his undivided one-half interest in the land to his sister. In light of this evidence, I conclude that there was fair consideration for the Jefferson Township parcel, and the transfer will not be set aside as fraudulent under §354.

The Milford Township parcel, however, does not appear to have been transferred for a fair consideration. Because Kudasik was indebted to the government at the time of the transfer, the burden is upon the defendants to demonstrate that the transfer did not render Kudasik insolvent. People's Savings & Dime Bank & Trust Co. v. Scott, 154 A. 489, 490 ( Pa. 1931). This, the defendants have failed to do. Accordingly, Kudasik's conveyance of his one-half interest in the Milford Township land in 1987 to his sister was fraudulent under §354 of the Act and must be set aside pursuant to §359(1)(a). The subsequent conveyance by Elinor to her daughter will likewise be set aside as there was only a nominal consideration for that conveyance. Id. ; Iscovitz, 6 A.2d at 272.

VII. Nominee Status

My determination that the Jefferson Township conveyance was valid under the Uniform Fraudulent Conveyance Act does not end my inquiry as to that parcel. I must still address the government's argument that this parcel should be foreclosed upon because of the nominee lien. "Property of the nominee or alter ego of a taxpayer is subject to the collection of the taxpayer's tax liability." Shades Ridge Holding Co. v. United States , 888 F.2d 725, 728 (3d Cir. 1989). The critical factor in determining whether one is a nominee is whether the taxpayer "has 'active' or 'substantial' control." Id. Factors which inform that determination include the amount of consideration paid by the nominee, whether the property was placed in the nominee's name in anticipation of a suit, the relationship between the transferor and the nominee, the failure to record the conveyance, the retention of possession by the transferor, and the continued enjoyment by the transferor of the benefits associated with the property. United States v. Klimek [97-1 USTC ¶50,281], 952 F.Supp. 1100, 1113 (E.D. Pa. 1997).

Here, it is clear that Kudasik did not exercise active or substantial control over his one half interest in the Jefferson Township property. It is true that there was a substantial delay in the recording of the Jefferson Township deed and that there are close relationships between Kudasik, Elinor and Cook. Yet, as I noted above, Elinor provided a fair consideration for the property and there are no indicia of Kudasik's continued enjoyment of the property after he conveyed his undivided one-half interest. For those reasons, and despite Kudasik's admission that Cook is his nominee. I conclude that Cook is not Kudasik's nominee for the Jefferson Township parcel. Summary judgment will be denied.

VIII. Municipal Liens

The government also seeks summary judgment against the municipalities for these four real estate holdings. It contends that these municipalities are required to establish their claims and the amounts thereof.

"[I]n the application of a federal revenue act, state law controls in determining the nature of the legal interest[s]. . . ." Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960). Under Pennsylvania law,

all taxes . . . levied by any taxing district on any property . . . shall be and are hereby declared to be a first lien on said property. Such liens shall have priority to and be fully paid and satisfied out of the proceeds of any sale of said property held under the provisions of this act.

72 P.S. §5860.301. Accordingly, the municipalities have a first lien for any delinquent unpaid taxes on the Union Street , Central City and Milford Township parcels. See In the matter of Vigne, 18 B.R. 949 (W.D. Pa. 1982) (finding claim by municipality for local realty taxes had priority over other liens).

IX. Foreclosure

Because Section 403 of the Internal Revenue Code permits foreclosure of the federal tax liens against any property in which Kudasik has an interest, 26 U.S.C. §7403(c), and because I have concluded that Kudasik is the owner of the Union Street and Central City properties and has a one-half interest in the Milford Township parcel, these properties may be sold to satisfy the tax liens. United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 694 (1983). The proceeds from the sale must be used to satisfy any claims for delinquent municipal taxes which have first priority pursuant to 72 P.S. §5860.301. The remaining proceeds for the Union Street and Central City properties shall be used to satisfy the judgment against Kudasik. The remaining proceeds from the sale of the Milford Township parcel must be distributed between the government and Ms. Cook, the holder of the other undivided one-half interest. Id.

X. Default Judgment

The motion for default judgment against Elinor Evenech, Danette Cook and Johnstown Bank and Trust pursuant to Federal Rule of Civil Procedure 55 will be granted.

An appropriate order will follow.

ORDER

AND NOW, this 8th day of June, 1998, consistent with the foregoing memorandum, it is hereby

ORDERED AND DIRECTED that:

1. The government's Motion for Default Judgment, dkt. no. 32, against Elinor Evenech, Danette Cook and Johnstown Bank and Trust Company is GRANTED.

2. The government's Motion for Summary Judgment. dkt no. 32, is GRANTED IN PART and DENIED IN PART as follows:

A. Judgment is granted in favor of the United States and against James A. Kudasik in the amount of $186,041.86 (the tax liabilities for tax years 1983, 1985-1986, 1988-1991, and 1993) plus interest from October 31, 1997, to the date that the judgment is satisfied.

B. The conveyances of the Union Street and Central City parcels and the one-half interest in the Milford Township parcels from James A. Kudasik to Elinor Evenech, as more particularly described in dkt. no. 1, exh. B, E, H, are set aside as fraudulent under Pennsylvania 's Uniform Fraudulent Conveyance Act. 39 P.S. §§357, 359(1)(a) and declared null and void. The conveyances of the Union Street and Central City parcels and the one-half interest in the Milford Township parcel from Elinor and John Evenech to Danette A. Cook, as more particularly described in dkt. no. 1, exh. C, F, I, are set aside as fraudulent under Pennsylvania 's Uniform Fraudulent Conveyance Act, 39 P.S. §359(1)(a) and declared null and void.

C. The federal tax liens, arising from the assessments issued by the Internal Revenue Service to James A. Kudasik on November 15, 1993, July 25, 1994, April 4, 1994, May 9, 1994, June 27, 1994, September 12, 1994 and October 9, 1995, attached to James A. Kudasik's fee simple interest in the Union Street and Central City properties and his undivided one-half interest in the Milford Township property on the date that such assessments were issued.

D. Judgment shall be GRANTED in favor of Somerset County, Somerset Borough, Somerset Area School District, the Borough of Central City, Shade-Central City School District, Milford Township and Rockwood Area School District, and against the United States to the extent that each of these municipal entities has a first lien for any delinquent tax at the time the Union Street, Central City and Milford Township properties are sold and said municipality has furnished a certified claim for delinquent taxes to the United States Marshal Service in advance of the sale.

E. The United States' motion for summary judgment against Shade Township and Jefferson Township is DENIED as moot.

F. The Union Street, Central City properties and Milford Township properties shall be exposed to sale at public auction by the United States Marshal pursuant to 26 U.S.C. §7403(c). The distribution of the proceeds from the sale of each property shall be allocated first to satisfy the certified claim, if any, for delinquent taxes of any of the municipalities cited in paragraph 2.D of this order. Then, the remaining proceeds from the sale of the Union Street and Central City properties shall be used to satisfy the judgment against delinquent taxpayer James A. Kudasik. The remaining proceeds from the sale of the Milford Township property shall be distributed in equal parts to Danette Cook and the government.

G. The United States shall, within thirty (30) days from the date that this Order and Judgment is entered on the docket, submit to the Court a proposed Order directing the sale of the Union Street , Central City and Milford Township properties.

The Clerk shall mark this case CLOSED.

¹ The deed conveying the Central City parcels to Evenech also conveyed two lots of ground situated in the Township of Shade , Somerset County , Pennsylvania . Dkt. no. 1, exh. E. These lots had been conveyed to Kudasik by his sister, Nettie Kudasik, on May 27, 1987 and it does not appear from the record that the government seeks to set aside this conveyance. See dkt. no. 1. For that reason, Shade Township , although previously granted status as an intervenor, has no standing to assert a claim.

² As the government noted in its brief, despite the repeal of this Act in 1993, it is still applicable to conveyances which occurred before February 1, 1994, the effective date of the new Uniform Fraudulent Transfer Act, 12 Pa.C.S.A. §5101 et seq.

³ I recognize that there is more recent authority from the Eastern District of Pennsylvania which finds §444 operative as to the creditors of a grantor. See United States v. Craig, 936 F.Supp. 298, 300 (E.D. Pa. 1966) (citing Raimo v. United States [88-1 USTC ¶9170], 1987 WL 28361 (E.D. Pa.1987)). The application of §444 in those cases, however, fails to cite any authority and relies on the statutory language alone without regard to the construction given it in decisions of Pennsylvania's highest appellate court.

 

 

 

United States of America , Appellee v. Howard I. Green, Mary Green, Roylan Finance, Ernestine Woodmansee, Howard I. Green, Mary Green, Appellants

(CA-3), U.S. Court of Appeals, 3rd Circuit, 98-1482, 1/11/2000, 201 F3d 251. Affirming a District Court decision, 98-1 USTC ¶50,348

[Code Sec. 6321 ]

Lien for taxes, property subject to: Fraudulent conveyance: Interspousal transfer: Nominal consideration: Presumption of actual fraud: Rebuttal of presumption: Solvency: Evidence.--A federal tax lien attached to property that a delinquent husband fraudulently transferred to his wife for nominal consideration. Under state ( Pennsylvania ) law, the transfer was presumed to constitute actual, rather than constructive fraud because it was made between spouses for inadequate consideration. The husband's contention that he was entitled to rebut the presumption by introducing evidence of his solvency was rejected. Solvency was irrelevant to the question of actual fraud, the husband's subsequent actions indicated his fraudulent intent, and it appeared that he was insolvent at the time of the transfer.

Louis C. Ricciardi, Trujillo , Rodriguez & Richards, Philadelphia , PA 19103 , for appellants. Loretta C. Argrett, William S. Estabrook, Sara Ann Ketchum, Department of Justice, Washington , D.C. 20044 . Michael R. Stiles, United States Attorney, Philadelphia , PA 19106 , for appellee.

BEFORE: BECKER, Chief Judge, and GREENBERG and CUDAHY, ^* Circuit Judges.

OPINION OF THE COURT

CUDAHY , Circuit Judge:

This case stems from Howard Green's efforts to stay one step ahead of his creditors, including the United States government. During several years of financial struggle, bankruptcy filings, flight from federal prosecution and ultimately jail time, Green underestimated his federal tax liabilities on his income tax returns in 1979, 1980 and 1981. The IRS eventually caught up with Green and in 1992 attempted to foreclose against all of his property, including property in Huntingdon Valley , Pennsylvania . Green responded that he had conveyed the Huntingdon Valley property to his wife in 1981, thus insulating it from foreclosure. The trial court deemed the conveyance fraudulent and set it aside. Green now appeals, and we affirm.

I. Background

In the late 1970s and early 1980s, Green was president and chairman of the board of Fidelity America Financial Corporation and its three subsidiaries. In 1981, he filed for corporate bankruptcy protection for the companies. According to a bankruptcy trustee's complaint against him, Green and other Fidelity officers had been conducting a fraudulent financial scheme with the companies. See Kranzdorf v. Green, 582 F. Supp. 335, 337-38 (E.D. Pa. 1983). Green allegedly persuaded a company employee to prepare financial statements "for use in inducing investments by limited partners and loans by commercial lenders." Id. at 337. Apparently, the loans were used to start new limited partnership syndications, which were not financially viable, in part because of Green's corporate waste. See id. at 337-38.

During the years that Green's business scheme was "collapsing," (Lower Ct. Op. at 4) he was experiencing upheaval in his private life as well. In September 1979, Howard entered into an agreement for separation and property settlement with his first wife, Ina. Two months later, he met Mary Woodmansee, whom he married in April 1980. Throughout this period, in tax years 1979, 1980 and 1981, Howard substantially underreported his federal income tax liabilities.

In 1981, Green transferred an interest in his residence to Mary. The validity of that transfer is the heart of this appeal. For context, however, we outline Howard's subsequent maneuvers. In 1981, Green liquidated a trust worth approximately $1.4 million. In 1983, the federal government indicted Green on charges of conspiracy, securities fraud, mail fraud and the filing of a false income tax return for the 1979 tax year. In June 1983, two months after his federal indictment, Green transferred a portion of his interest in his home to his children. In September 1983, Howard and Mary opened Maryland bank accounts (Mary disguising her appearance by wearing a black wig and glasses) to which they transferred money. Then they fled to Maryland . A year later, officials apprehended Green in Baltimore , where he was redeeming coupons from his bearer bonds. He was carrying two sets of false identification at the time. Later in 1984, Green pleaded guilty to many counts of the indictment. He paid about $1 million restitution and served 30 months in jail. ¹

In 1991, the IRS made assessments totaling $140,297 against Green for the income he failed to report on his 1979, 1980 and 1981 tax returns. Green has not challenged the accuracy of these assessments. A federal tax lien exists against all of a taxpayer's property on the date of the assessment if that assessment is not paid. 26 U.S.C. S 6321, 6322 (1989); see United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 352 n.1 (1964). Assessments are presumed to be valid, and establish a prima facie case of liability against a taxpayer. United States v. Vespe [89-1 USTC ¶9195], 868 F.2d 1328, 1331 (3d Cir. 1989). Thus, by dint of its 1991 assessments against Green, the federal government had obtained a lien against all of his property, including the Huntingdon Valley property. Green, however, refused to pay the assessments, and in 1992 the IRS recorded a notice of lien against him. Green claims the government has no lien against the Huntingdon Valley property because he conveyed it to Mary and himself as tenants by the entirety in 1981. Courts look to state law to determine what rights a taxpayer has in the property the government seeks to reach. See Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 120 S. Ct. 474, 478 (1999). Under Pennsylvania law, property owned by tenants by the entirety is not subject to the debts of either spouse. See Stauffer v. Stauffer, 465 Pa. 558, 576 (1976).

The government responds, and the district court agreed, that the conveyance was fraudulent and should be set aside under the actual fraud provisions of the Pennsylvania Uniform Fraudulent Conveyances Act (PUFCA). See 39 Pa. Stat. Ann. S 357 (1993) (repealed 1994). ² The trial court stated that actual fraud is presumed where a husband transfers property to a wife for inadequate consideration, and that the presumption may be rebutted by a showing that the conveyance was fair. Lower Ct. Op. at 9. The trial judge stated that any evidence of Green's solvency was "irrelevant" to the presumption of actual fraud. Id. at 9 n.7. Green disagrees, arguing that solvency is relevant as "evidence that the transfer was proper and not fraudulent." Appellant's Br. at 5. Specifically, Green contends that under Pennsylvania law, evidence of solvency conclusively rebuts the presumption of actual fraud. Appellant's Br. at 4.

II. Analysis

We review the district court's findings of fact under the clearly erroneous standard. See Moody v. Sec. Pacific Bus. Credit Inc., 971 F.2d 1056, 1063 (3d Cir. 1992). We exercise plenary review of the trial court's legal interpretation and construction of PUFCA. See id. In doing so, we are bound by Pennsylvania law. See id. Thus, our task is to determine whether, by deeming evidence of solvency "irrelevant," the trial court substantially misstated Pennsylvania law on the weight to be given solvency in the actual fraud analysis of interspousal transfers. Among Pennsylvania jurists there have been confusing cross-currents on this question, as we shall see. But the most recent statement of Pennsylvania law grounds the presumption in the inadequacy of consideration, and minimizes any consideration of solvency. The trial judge therefore correctly interpreted and applied that law to this case.

PUFCA, like most fraudulent conveyance statutes, recognizes two distinct types of fraud: actual fraud and constructive fraud. Historically, fraudulent transfer law "addressed transactions in which the debtor, by engaging in a transaction, had a specific intent to prevent or interfere improperly with collection efforts in order to retain some benefit for the debtor." Barry L. Zaretsky, Fraudulent Transfer Law as the Arbiter of Unreasonable Risk, 46 S.C. L. Rev. 1165, 1165 (1995) (emphasis added). However, because courts recognized "the difficulty of proving a transferor's specific intent, [they] developed principles of constructive fraud under which a transaction might be avoidable as fraudulent even in the absence of a showing of actual intent to hinder, delay, or defraud." Id. (emphasis added). Thus, the two bodies of fraudulent transfer law taken together provide that the debtor "may not dispose of his property with the intent (actual fraud) or the effect (constructive fraud) of placing it beyond the reach of creditors." COUNTRYMAN, CASES AND MATERIALS ON DEBTOR AND CREDITOR 127 (2d ed. 1971) (parenthetical phrases added).

PUFCA defines and proscribes actual fraud as follows:

"[e]very 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." 39 Pa. Stat. Ann. S 357 (1993).

A. Interspousal Presumption of Actual Fraud

In most actual fraud cases, insolvency is one of several relevant factors or "badges of fraud" the court may consider as evidence of fraudulent intent. See Sheffit v. Koff, 175 Pa. Super. 37, 42 (1953). As early as 1939, however, thePennsylvania Supreme Court recognized a situation in which solvency was not relevant to the actual fraud inquiry: property transfers between husbands and wives for nominal consideration. See Iscovitz v. Filderman, 334 Pa. 585, 589 ( Pa. 1939). In that situation, the court stated, the transfer itself was sufficient to create a presumption of fraud, and only a showing of fair consideration could successfully rebut the presumption. See id. "Where the transaction is between husband and wife actual intent does appear where it is shown that there was a deed given for a nominal consideration. This is but a presumption of fact and places on the wife the burden of showing the fairness of the transaction." Iscovitz, 334 Pa. at 589. Moreover, because "family collusion by a debtor is so easy to execute and so difficult to prove, the evidence to sustain the claim of the wife in such cases must be clear and satisfactory." Id. at 589-90. Thus, in cases of interspousal transfer, whether there is a factual presumption of actual intent to defraud depends on whether there is adequate consideration for the transfer. The principle has been restated and applied numerous times in the past sixty years. See, e.g., County of Butler v. Brocker, 455 Pa. 343, 347-48 (1974); United States v. Klayman, 736 F. Supp. 647, 648 (E.D. Pa. 1990); United States v. Kudasik [98-2 USTC ¶50,535], 21 F. Supp.2d 501, 507 (W.D. Pa. 1998). This Court recently discussed the continuation of the principle under Pennsylvania 's new fraudulent transfer statute. See In re Blatstein, 192 F.3d 88, 97-98 (3d Cir. 1999). Blatstein also highlights the more significant role solvency plays in constructive fraud, stating that under PUFCA's successor statute, when constructive fraud is at issue, the spouse may defeat the fraud claim by proving either fair consideration or solvency. See id. at 99.

The trial court here specifically stated that it was reviewing this transaction for actual fraud, not constructive fraud. Lower Ct. Op. at 9. The trial judge found as a matter of fact that the conveyance was between husband and wife, and found as a matter of fact that consideration for the conveyance was not fair. The Greens do not challenge either of these findings, and the evidence suggests they are quite correct. Thus, the judge correctly construed PUFCA and correctly determined that the facts gave rise to a presumption of actual fraud regardless of whether Howard was solvent.

B. Relevance of Solvency in Rebutting Presumption of Actual Fraud

Green contends that even if the trial court correctly applied the presumption, under Pennsylvania law he can wholly rebut it by presenting evidence of solvency. But in its most recent pronouncement on interspousal transfers and the application of the fraud presumption in actual fraud cases, the Pennsylvania Supreme Court grounded its analysis on the question of fair consideration. See County of Butler , 455 Pa. at 348. County of Butler minimized any significance of solvency in the analysis of interspousal transfers for inadequate consideration. See id. at 347-48. The trial court reviewing the Greens' predicament correctly followed suit, as have other federal courts. See, e.g., Klayman, 736 F. Supp. at 648; Kudasik [98-2 USTC ¶50,535], 21 F. Supp. 2d at 507.

Resisting the implications of County of Butler, Green cites dictum from a 1957 case stating that a wife may rebut the presumption of actual fraud arising from an interspousal transfer alternatively by showing fair consideration or by showing "that the husband's liabilities did not exceed his then remaining assets." Smith v. Arrell, 388 Pa. 117, 118 (1957). Green's argument here is not frivolous, because Smith does illustrate that Pennsylvania courts have occasionally equivocated on the relationship between solvency and actual fraud in interspousal transfers. For instance, the court in Smith cited three cases to support its statement that solvency is a defense to the interspousal presumption of actual fraud. First, the court cited to Iscovitz, which mandated review of "the entire course of conduct of the grantor," including insolvency. Iscovitz, 334 Pa. at 589. But Iscovitz then directed that, if this review revealed a conveyance between husband and wife for nominal consideration, the court should presume actual intent to defraud, and dismiss the presumption only on a showing that the transaction was fair. Id. Second, the Smith court cited to People's Savings & Dime Bank & Trust Co. v. Scott to support the notion of a "solvency defense" to the interspousal presumption of actual fraud. 303 Pa. 294, 297 (1931). But People's Savings dealt with constructive fraud, and not actual fraud, so its application here is doubtful. Id. at 296. Finally, the Smith court cited to dicta in Queen Favorite Building & Loan Ass'n v. Burstein, suggesting that a presumption of actual fraud arising from an interfamily transfer may be offset by evidence, conjointly, of fair consideration and solvency. See 310 Pa. 219, 223 (1933). But the outcome of Queen-Favorite did not turn on a showing of solvency, thus diminishing the authority of the language used in the opinion. Moreover, the Queen-Favorite court cited in support of its "solvency" language People's Savings and Shaver v. Mowry, 262 Pa. 381, 386 (Pa. 1918), both of which dealt with constructive fraud, a distinct legal concept in which solvency is relevant as a defense.

In short, Smith captures the vacillation of the Pennsylvania courts in seeking to evaluate the significance of solvency to the presumption of interspousal fraud. Green's citation of Smith shrewdly highlights strands of Pennsylvania law that have suggested that solvency may be a defense to the presumption of interspousal fraud. But his effort fails here for two reasons. First, County of Butler overruled sub silentio the Smith dicta that Green cites. County of Butler stated that for purposes of actual fraud, a debtor "does not have to render himself insolvent. . . in order to establish a fraudulent intent. . . . [The creditor] need only show an intent to hinder, delay or defraud on the part of the [debtor] to make the conveyance fraudulent. Our cases have established the principle that as between husband and wife fraud is presumptively present when the conveyance is for a nominal consideration and is challenged by creditors . . . ." County of Butler, 455 Pa. at 347 (internal quotation and citations omitted). Put another way, a debtor may remain solvent and still face a presumption of actual fraud by making an interspousal transfer for nominal consideration. Further, Smith's congruence with the present case is questionable. In Smith, a wife who received a $25,000 judgment note from her husband after loaning him $10,000 protested application of the interspousal transfer presumption on the ground that she was still single at the time of the transaction. The Smith court mentioned in passing that solvency was a possible defense, but the debtor did not rely on it there and the court did not apply it. Thus, despite the existence of Smith, the trial judge did not err in following the teachings of County of Butler , the more recent and more analogous case. In light of County of Butler , the judge was certainly not incorrect to deem solvency substantially "irrelevant" in evaluating the presumption that Howard's transfer to Mary was fraudulent. The present facts are that the transfer was to a spouse for a wholly inadequate consideration. No matter how healthy Howard Green's balance sheet might have been, the factual presumption of actual fraud would survive. We therefore regard the trial court's assessment of Pennsylvania law as applied here to be substantially accurate. On the present facts, particularly where there is clear and convincing evidence of inadequate consideration, solvency is an inconsequential factor.

Under PUFCA, "[f]air consideration is given for property or obligation: (a) [w]hen, 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) [w]hen such property or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property or obligation obtained." 39 Pa. Stat. Ann. S 353 (1993). The trial court found as a matter of fact that Mary did not give fair consideration, and the Greens do not challenge this finding of fact. Thus, Mary did not successfully rebut the presumption of actual intent.

C. The Presumption is in Accord with Subsequent Events

Moreover, the judge did not wear blinders in presuming that Howard acted with actual fraudulent intent. The court took account of the totality of the circumstances, an approach clearly endorsed by Godina v. Oswald, which states that "[s]ince fraud is usually denied, it must be inferred from all facts and circumstances surrounding the conveyance, including subsequent conduct." 206 Pa. Super. 51 (1965) (quoting Sheffit, 175 Pa. Super. at 41.). Howard's subsequent conduct included creating the Roylan Finance Company and installing Mary's mother as its owner solely for the purpose of granting a mortgage on the property, just days after contesting the IRS's claim for taxes owed. Subsequent conduct also involved granting Roylan a security interest in all of his personal property shortly before the $17 million judgment was entered against him in the bankruptcy trustee's lawsuit. These facts reinforce the trial court's ultimate conclusion that, all things considered, Howard's proffered evidence of solvency was "irrelevant" to the question of his intent to defraud creditors.

D. Howard's Solvency

Finally, we note that despite his doggedness on this issue, Howard likely cannot prove that he was solvent as of April 13, 1981, the date he transferred the property to Mary. A person is insolvent under the Uniform Fraudulent Conveyance Act 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." 39 Pa. Stat. Ann. S 352(1) (1993). "Debts" are defined as "any legal liability whether matured or unmatured, liquidated or unliquidated, absolute,fixed, or contingent." 39 Pa. Stat. Ann. S 351 (1993). The United States is considered a creditor "from the date when the obligation to pay income taxes accrues," essentially on April 15 of the year following the tax year in question. United States v. St. Mary [72-1 USTC ¶9319], 334 F. Supp. 799, 803 (E.D. Pa. 1971). Further, the Pennsylvania Supreme Court has found that awareness of a probable legal action against a debtor amounts to a debt for purposes of determining solvency. See Baker v. Geist, 457 Pa. 73, 76-77 (1974).

As of April 15, 1980, Howard was in debt to the United States for the underreported amount of his 1979 federal income taxes, $51,845. And Howard transferred the property to Mary just two months after Fidelity filed for bankruptcy protection. It was this filing, and the appointment of a bankruptcy trustee, that led to the 1983 complaint against Howard and the eventual $17 million judgment against him. Thus, at the time Howard conveyed the property, he was on notice of a possible suit by the bankruptcy trustee. Howard could reasonably estimate that the tax debt and bankruptcy debt together would reach several million dollars. These looming debts, when compared with his "collapsing" portfolio, suggest that Howard was insolvent at the time of the transfer to Mary. So even if solvency were relevant to the question of actual fraud in this case--we repeat that it is not--Howard's arguments are still unavailing.

III. Conclusion

Evidence of solvency was not a barrier to applying the presumption of actual fraud arising from Howard's transfer of property to Mary for nominal consideration. Evidence of solvency would not have been enough to rebut that presumption once applied. Moreover, the evidence suggests that Howard was not solvent at the time of the transfer. Therefore, we AFFIRM the district court's interpretation of PUFCA, the presumption that the conveyance was fraudulent and the finding that the Greens did not rebut the presumption.

^* Honorable Richard D. Cudahy, United States Circuit Judge for the Seventh Circuit, sitting by designation.

¹ Howard was released from prison in 1987, but his machinations continued. The next year, he received an examination report letter from the Internal Revenue Service (IRS) proposing adjustments for the 1979, 1980 and 1981 tax years. He wrote a letter to the IRS contesting the adjustments. The next day, he granted a $300,000 mortgage on his residence to Roylan Finance Company. Howard had created Roylan, and installed Mary's mother, Ernestine Woodmansee, as its sole owner. Ernestine did not pay $300,000 for the mortgage, which was allegedly given in exchange for Ernestine's parental support to Mary over the years. In 1989, Howard and Mary executed a UCC-1 financing statement that gave Roylan a security interest in all of their personal property. Lower Ct. Op. at 6. The statement was filed just two months before a judgment was entered against Howard in the Kranzdorf lawsuit. The trial court found as a matter of fact that the financing statement was filed in anticipation of this debt arising.

² Pennsylvania replaced the Uniform Fraudulent Conveyances Act with the Uniform Fraudulent Transfers Act in 1994. However, PUFCA is still applicable to transfers that occurred before the February 1, 1994 effective date of the new act, 12 Pa. C.S.A. S 5101 et seq. See United States v. Kudasik [98-2 USTC ¶50,535], 21 F. Supp. 2d 501, 506 n.2 (W.D. Pa. 1998).

 

 

United States of America , Plaintiff v. Sheldon G. Hansel, Christy Hansel, Grant Hansel, Shelley Hansel and Eunice Hansel, Defendants

U.S. District Court, No. Dist. N.Y., 96-CV-0775, 3/25/99, 42 FSupp 2 d 201

[Code Secs. 6321 and 7403 ]

Transferee liability: Tax liens: Fraudulent conveyances: Good-faith purchaser: Antecedent debt: Gift.--A delinquent taxpayer's transfer of stock to his mother and her subsequent transfer of one share to the taxpayer's wife for no consideration, were set aside as a fraudulent conveyances under state (New York) law. The taxpayer's transfer of the stock was determined to be fraudulent in a prior case. His mother's transfer of stock to his wife was also fraudulent because the wife was not a purchaser in good faith and the transfer was not a conveyance for fair value in satisfaction of antecedent debt. Since the transfer was more akin to a gift, it was set aside and the taxpayer was treated as the true owner of the share.

Glenn J. Melcher, Esq., U.S. Dept. of Justice, Tax Division, 555 Fourth St., N.W., Room 7824, Washington DC 20001, For Plaintiff

Hope Hansel, Pro Se, RR #2, Box 650, Route 20, West Winfield NY 13491, For Defendant

MEMORANDUM--DECISION & ORDER

MCAVOY, Chief District Judge:

Plaintiff United States of America ("plaintiff") commenced an action against defendants pursuant to 26 U.S.C. §§7401 and 7403 to reduce tax assessments to judgment against Sheldon Hansel and to set aside certain alleged fraudulent conveyances of stock to Defendants Christy, Grant, Shelly, and Hope Hansel. ¹ By Memorandum--Decision & Order dated March 14, 1998, familiarity with which is assumed, see United States v. Hansel [98-1 USTC ¶50,293], 999 F. Supp. 694 (N.D.N.Y. 1998), the Court granted summary judgment against Sheldon, Christy, Grant and Shelley Hansel. ² Plaintiff now moves pursuant to FED. R. CIV. P. 56 seeking summary judgment against Defendant Hope Hansel declaring that the one share of stock transferred to Eunice Hansel and re-transferred to Hope Hansel be set aside as fraudulent.

I. BACKGROUND

The facts surrounding the instant litigation were fully set forth in the Court's prior decision, Hansel [98-1 USTC ¶50,293], 999 F. Supp. 694. In brief, in 1983 the Internal Revenue Service ("IRS") commenced an examination of Sheldon and Hope Hansel's tax liabilities for the years 1980 and 1981. In 1984, Sheldon and Hope transferred their farm land, buildings, and equipment into a farm corporation entitled Hanwinsel Farms, Inc. ("Hanwinsel") in exchange for all 200 shares of outstanding stock in the Corporation (100 shares to Sheldon, 100 to Hope). On June 25, 1985, the IRS sent Sheldon and Hope a Notice of Deficiency in the amounts of $70,691.00 for 1980 and $86,603.00 for 1981, plus interest and penalties. In September 1985, Sheldon and Hope filed a petition with the United States Tax Court for a determination of the tax liabilities set forth in the Notice of Deficiency.

In 1987, Sheldon transferred 45 shares of stock in Hanwinsel equally to each of his children. In 1989, Sheldon transferred his remaining 55 shares as follows: 30 shares equally to each of his children; 25 shares to his mother, Eunice Hansel.

On January 23, 1991, the Tax Court determined Sheldon to have deficiencies of $20,909.00 for 1980 and $53,030.00 for 1981. Shortly before her death in 1995, Eunice transferred her 25 shares as follows: 8 shares to each of her grandchildren (Sheldon and Hope's children); 1 share to Hope.

The plaintiff thereafter commenced the instant litigation seeking to: (1) reduce to judgment the tax assessments against Sheldon Hansel; (2) set aside the fraudulent transfers by Sheldon Hansel to Christy, Grant, Shelley, and Eunice; and (3) obtain judgments against Christy, Grant, Shelley and Eunice in amounts equal to the value of the shares of stock conveyed to them, plus dividends, profits, and increases in the value of the stock. By Memorandum--Decision & Order dated March 14, 1998, Hansel, 999 F. Supp. 694, the Court granted summary judgment to plaintiff and declared the stock conveyances to be fraudulent under New York Debtor and Creditor Law §273. Judgment was subsequently entered in favor of the United States and against Sheldon Hansel in the amount of $222,007.21, plus interest. The judgment provided that "[t]he conveyances of that interest in the stock of Hanwinsel Farms, Inc., for no consideration by Sheldon G. Hansel to Eunice, Christy, Grant and Shelley Hansel were fraudulent under N.Y. Debt. & Cred. L. §273.

Plaintiff now moves pursuant to Fed. R. Civ. P. 56 seeking summary judgment that one of the shares of stock fraudulently transferred to Eunice and re-transferred by her to Hope remains tainted and must be set aside.

II. DISCUSSION

A. Fraudulent Transfer of Stock to Eunice Hansel

The issue of whether Sheldon fraudulently conveyed 25 shares of stock in Hanwinsel to his mother, Eunice, has already been decided by this Court in its prior Memorandum--Decision & Order. See Hansel [98-1 USTC ¶50,293], 999 F. Supp. at 701 ("[T]here is no genuine issue of fact as to any of the elements of §273. The conveyances were therefore fraudulent under New York law, and the Government is entitled to summary judgment against the transferees."). That finding is the law of the case and defendant has offered no reasons why the Court should not adhere to its prior ruling. See Prisco v. A & D Carting Corp., -- F.3d --, 1999 WL 80415, at *12 (2d Cir. Feb. 17, 1999). There are no new facts, intervening changes of law, or other factors demonstrating that the Court made an error of law requiring departure from the prior decision. See id.

Because plaintiff is a creditor, see United States v. Kaplan, 267 F.2d 114, 117 (2d Cir. 1959); United States v. Scharfmann [81-2 USTC ¶9630], 1981 WL 1855, at *5 (S.D.N.Y. Aug. 14,1981), and the Court already found the transfers to be fraudulent pursuant to §273, the Court need not consider whether the transfers were also fraudulent under §276.

B. Whether Hope Hansel is a Purchaser in Good Faith

The Court's inquiry does not end there because Eunice retransferred one share of Hanwinsel stock to Hope. Thus, the conveyance may be set aside only if Hope is not a purchaser in good faith. See N.Y. Debt. & Cred. L. §§278, 279; Atlantic Bank of New York v. Toscanini, 145 A.D.2d 590, 591 (2d Dep't 1988 ).

Hope is the wife of Sheldon and was privy to all the stock transfers and the financial affairs of Sheldon, the farm and Hanwinsel. See generally, Jan. 8, 1998 Aff. of Hope Hansel. Thus, she knew, or reasonably should have known, the value of Sheldon's assets and liabilities, including the tax assessment, and the ramifications of the stock transfers. See Schmitt v. Morgan, 136 A.D.2d 792, 793 (3d Dep't 1988 ).

Furthermore, Hope received her one share of stock from Eunice "in consideration of the 25 years that [Hope] had spent caring for Eunice [] in [her] home and [] because the dedication that [Hope] had shown in maintaining the family farm convinced [Eunice] that [Hope] was in the best position to see that the farm continued to operate in accordance with [Eunice's] desires." Id. at 35. Hope stated at deposition that she did not have any contract with Eunice to provide services to her. See Dep. of Hope Hansel, at 9. Hope also did not include this share of stock as income on her 1995 tax return, which she would have been required to if, indeed, such stock was given to her as payment for services rendered.

These facts demonstrate that the transfer of the one share of stock was more akin to a gift than a conveyance for fair value in satisfaction of an antecedent debt. Aside from Hope's unsubstantiated and conclusory statements in her affidavit, there is no evidence of: (1) an antecedent debt owed to Hope by Eunice "for the labor she had supplied Eunice;" (2) an implied promise by Eunice to pay Hope for "services;" (3) an actual agreement by Eunice to pay Hope for 25 years of caring for her in their home; or (4) the value of any alleged antecedent debt. Even if the Court assumed that Eunice gave the share of stock to Hope in exchange for past services, this would not be a valid contract because it would be based upon past consideration, see Pershall v. Elliott, 249 N.Y. 183, 188 (1928); rather, it would have been a gift.

Accordingly, the facts support a finding that Hope Hansel was not a purchase in good faith because: (1) she knew the nature of the original conveyances, see Anderson v. Blood, 152 N.Y. 285, 293 (1897); Schmitt, 136 A.D.2d at 793; Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 255 (2d Dep't 1984), appeal dismissed, 63 N.Y.2d 741 (1984); and (2) she did not pay fair consideration for the one share of Hanwinsel stock. See N.Y. Cred. & Debt. L. §278(2); Gager v. Pittsford Develop. Corp., 6 Misc.2d 873, 875 (Sup. Ct. 1957).

III. CONCLUSION

For the foregoing reasons, plaintiff's motion for summary judgment is GRANTED. The Court finds that: (1) the 1989 transfer of stock by Sheldon Hansel to Eunice Hansel was fraudulent under N.Y. Cred. & Debt. L. §273; (2) Eunice Hansel was not a purchaser for fair consideration; (3) Hope Hansel was not a purchaser for fair consideration; (4) the stock conveyances must be set aside and Sheldon Hansel is the true owner of the subject one share of Hanwinsel stock; and (5) the United States may foreclose the tax liens on Sheldon Hansel's stock in Hanwinsel through judicial sale and a distribution of the proceeds to satisfy Hansel's liability to the United States. The United States is directed to submit an appropriate order within 30 days of the date of this decision upon which judgment may be entered.

IT IS SO ORDERED

¹ Hope Hansel was not originally named in the Complaint, but was later added by amendment to the Complaint.

² The Court did not address the merits of plaintiff's motion as to Hope Hansel because she had not yet been added as a defendant.

 

 

 

United States of America , Plaintiff v. Sheldon G. Hansel, Christy Hansel, Grant Hansel, Shelley Hansel and Eunice Hansel, Defendants

U.S. District Court, No. Dist. N.Y., 96-CV-775, 3/14/98, 999 FSupp 694, 999 FSupp 694

[Code Secs. 6321 and 7403 ]

Transferee liability: Tax liens: Fraudulent conveyances: Antecedent debt: Transferor's solvency.--The transfer of stock to a taxpayer's family members for no fair consideration in return was set aside as a fraudulent conveyance under state ( New York ) law. The taxpayer had transferred his interest in his farm, including the land, residence, and chattel, to a newly formed corporation. He then transferred all of his shares in the corporation to his three minor children and his mother. The court determined that the transfers to the children were fraudulent because the labor that they purportedly performed in exchange for the stock did not constitute an antecedent debt under state law. Further, the taxpayer's transfer of stock to his mother was fraudulent because he failed to offer any evidence to prove that the transfer represented repayment of an antecedent debt. Moreover, he did not show that he was solvent after the transfers, since his previously determined tax liability exceeded his remaining assets.

[Code Sec. 7402 ]

District court jurisdiction: Tax Court proceedings: Res judicata.--The government was permitted to amend its complaint to join a taxpayer's wife as a defendant because she received stock in a corporation which the taxpayer had transferred to his mother and she later transferred to the wife and the wife was not prejudiced by the amendment. It was also granted summary judgment against the taxpayer for taxes owed, interest, and penalties because his liability for those amounts had been previously determined by the Tax Court and that ruling was res judicata as to the current action. However, the complaint against the taxpayer's mother was dismissed because the IRS failed to substitute her estate as a defendant after her death.

Thomas J. Maroney, United States Attorney, Albany, N.Y. 12207, Glenn J. Melcher, Department of Justice, Washington, D.C. 20530, for plaintiff. Sheldon G. Hansel, Eunice Hansel, West Winfield, N.Y. 13491, pro se, Christy Hansel, P.O. Box 33, Shell, Wyo. 82441, pro se, Grant Hansel, 68 Buell St., Burlington, Vt. 05405, pro se, Shelley Hansel, P.O. Box 1118, Niagara Falls, N.Y. 14109, pro se

MEMORANDUM, DECISION & ORDER

MCAVOY, Chief U.S. District Judge:

Plaintiff United States ("the Government") brought this action, pursuant to 26 U.S.C. §§7401 and 7403, to: 1) reduce to judgment tax assessments made against Sheldon G. Hansel; 2) set aside fraudulent transfers by Sheldon G. Hansel to the other four named defendants; and 3) obtain judgments against Christy Hansel, Grant Hansel, Shelley Hansel and Eunice Hansel in amounts equal to the value of certain shares of stock conveyed to them, plus dividends, profits, and increases in value of the stock.

The Government now moves: (1) to amend the Complaint to add Hope Hansel as a defendant; and (2) for summary judgment.

I. Background

A. Facts

The following facts are set forth in the Government's Local Rule 7.1(f) Statement, which defendants do not dispute. See N.D.N.Y.L.R. 7.1(f) ("All material facts set forth in the statement served by the moving party shall be deemed admitted unless controverted by the statement served by the opposing party."). In 1983, the Internal Revenue Service ("IRS") began an examination of the federal income tax liabilities of Sheldon and Hope Hansel for the tax years 1980 and 1981. In connection with this investigation, Sheldon and Hope signed a form 872, "Consent to Extend the Time to Assess Tax." Govt. Ex. 1. The consent, signed December 17, 1983, provided that the amount of any federal income tax due on any of Sheldon or Hope's returns for the tax year 1980 may be assessed at any time before December 31, 1984.

On June 25, 1985, the IRS sent Sheldon and Hope a Notice of Deficiency for the 1980 and 1981 tax years, alleging deficiencies of $70,691.00 for 1980 and $86,603.00 for 1981. Govt. Ex. 4 at 2. The IRS also assessed interest and penalties on the deficiencies. Id. On September 23, 1985, Sheldon and Hope filed a petition with the United States Tax Court for a redetermination of the tax liabilities set forth in the Notice of Deficiency. Govt. Ex. 5. The Tax Court rendered its decision January 23, 1991, determining deficiencies as to Sheldon Hansel of $20,909.00 for 1980 and $53,030.00 for 1981. Govt. Ex. 6. The Tax Court determined no deficiencies as to Hope Hansel.

In accordance with the Tax Court's decision, the IRS on March 8, 1991 assessed audit deficiencies against Sheldon Hansel of $73,939.00 plus interest and penalties, bringing the total assessment to $222,007.21. Govt. Exs. 7-8.

In April of 1984, Sheldon and Hope incorporated Hanwinsel Farms, Inc. ("Hanwinsel"), naming themselves and Kent Hansel as directors. See Govt. Exs. 9-10. Soon thereafter, Sheldon and Hope transferred their interest in their farm (including their land, residence and chattel) to Hanwinsel, each receiving half of Hanwinsel's stock (100 shares) in return. Sheldon Hansel Dep. at 10-11; Hope Hansel Dep. at 4-5.

Sheldon Hansel later transferred all of his Hanwinsel stock to his children, Christy, Grant and Shelly, and his mother Eunice. Christy was born in 1973, Grant in 1975 and Shelley in 1978. On January 2, 1987, Sheldon transferred 15 shares of Hanwinsel stock each to Christy, Grant and Shelley. Sheldon Hansel Dep. at 65, 69-70; Govt. Ex. 13. On October 5, 1989, Sheldon transferred 25 shares of Hanwinsel stock to Eunice, and 10 shares each to Christy, Grant and Shelley. Id. Sheldon testified at his deposition that the only consideration he received in return from the children was their labor. Sheldon Hansel Dep. at 69. He further testified he gave his mother the stock in repayment of a debt, the amount of which he could recall only as being "under $40,000." Id. 71. At the time of the 1987 and 1989 transfers, Sheldon Hansel's personal assets, in his estimation, totaled no more than $25,000-30,000. Id. at 15-21.

On January 25, 1995, Eunice transferred 8 shares of Hanwinsel stock each to Christy, Grant and Shelley, and one share to Hope. Govt. Ex. 13. Eunice received nothing from her grandchildren or daughter-in-law in consideration for the stock. Christy Hansel Dep. at 26-27; Grant Hansel Dep. at 30-34; Shelley Hansel Dep. at 7.

B. Procedural History

The Government commenced this action in June of 1996 seeking: (1) a judgment against Sheldon Hansel for assessed federal income tax liabilities for the years 1980 and 1981 in the amount $222,007.21 plus interest; (2) a declaration that federal tax liens have attached to all of Sheldon Hansel's property and rights to property, including the Hanwinsel stock; (3) foreclosure of the outstanding tax liens that have attached to the Hanwinsel stock and distribution of the proceeds to the Government to be applied toward satisfaction of Sheldon's tax liabilities; and (4) a judgment against Eunice, Christy, Grant and Shelley Hansel, in an amount equal to the fair market value of the Hanwinsel stock conveyed to them, plus dividends, profits and increases in value of the shares of stock conveyed, minus the amount ultimately recovered by the Government from the foreclosure and sale of the stock.

Defendants moved to dismiss the Complaint in February of 1997. In that motion, defendants averred Eunice Hansel died in 1995. The motion was denied by decision and order entered April 11, 1997, and the Court granted the Government leave to substitute Eunice Hansel's executor within 90 days. It did not do so. Accordingly, this action is dismissed in its entirety against Eunice Hansel.

The Government now moves to amend the Complaint to add Hope Hansel as a defendant, and for summary judgment against the current defendants.

II. Discussion

A. The Government's Motion to Amend

Rule 15(a) generally governs the amendment of complaints, but in the case of proposed amendments where new defendants are to be added, Rule 21 governs. Joseph v. House, 353 F. Supp. 367, 371 (E.D. Va.), aff'd, 482 F.2d 575 (4th Cir. 1973); Pacific Gas & Elec. Co. v. Fireboard Products, Inc., 116 F. Supp. 377, 382-83 (N.D. Cal. 1953). Rule 21 states that a party may be added to an action "at any stage of the action and on such terms as are just." Addition of parties under Rule 21 is guided by the same liberal standard as a motion to amend under Rule 15. Fair Housing Development Fund Corp. v. Burke, 55 F.R.D. 414, 419 (E.D.N.Y. 1972). Rule 21 is "intended to permit the bringing in of a person, who through inadvertence, mistake or for some other reason, had not been made a party and whose presence as a party is later found necessary or desirable." United States v. Commercial Bank of North America, 31 F.R.D. 133, 135 (S.D.N.Y. 1962) (internal quotations omitted). Furthermore, Rule 21 must be read in conjunction with Rules 18, 19 and 20. Id. at 135.

Rule 20 states that "[a]ll persons . . . may be joined in one action as defendants if there is asserted against them jointly, severally, or in the alternative, any right to relief in respect of or arising out of the same transaction or occurrence, or series of transactions or occurrences and if any question of law or fact common to all defendants will arise in the action." Fed.R.Civ.P. 20(a). The Government bases its motion to add Hope Hansel as a defendant on two grounds: (1) that because of Eunice's transfer of one share of stock to Hope, Hope claims an interest in the property against which the Government seeks to enforce its tax lien; and (2) the Government seeks a judgment against Hope as a fraudulent transferee of Hanwinsel stock from Eunice Hansel.

On these bases, the amendment will be allowed. The Government avers, and defendants do not dispute, that it became aware of the one-share transfer from Eunice to Hope only after Hope's deposition on November 19, 1997. Though the Government waited until January 30, 1998 to make the present motion, nothing the in the record indicates bad faith or intentional delay. " 'Mere delay . . . absent a showing of bad faith or undue prejudice, does not provide a basis for a district court to deny the right to amend.' " Block v. First Blood Associates, 988 F.2d 344, 350 (2d Cir. 1993) (quoting State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981)).

Moreover, neither the current defendants nor Hope Hansel herself will be prejudiced by the amendment. She obviously has been well aware of both the existence and the subject matter of this litigation since it outset. The Government already has taken her deposition. Furthermore, once the Government properly serves Hope Hansel, she will have an opportunity to respond to the allegations in the Complaint, and the Court will be receptive to any arguments of merit she may have in favor of any discovery she may need.

Defendants argue that the Government's allegations of fraudulent transfer are flawed. That general contention is discussed in detail infra.

For all of the foregoing reasons, the Government's motion to amend the Complaint to add Hope Hansel as a defendant is GRANTED, and the Government is directed to serve a summons and Complaint on her within 30 days of receipt of this order.

B. The Government's Motion for Summary Judgment

1. Standard for Summary Judgment

The Government next moves for summary judgment against all current defendants. Under Fed. R. Civ. P. 56(c), if there is "no genuine issue as to any material fact . . . the moving party is entitled to a judgment as a matter of law . . . where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp, 475 U.S. 574 (1986). The burden to demonstrate that no genuine issue of material fact exists falls solely on the moving party. Heyman v. Commerce and Indus. Ins. Co, 524 F.2d 1317 (2d Cir. 1975).

Once the moving party has met its burden, the non-moving party must come forward with specific facts showing there is a genuine issue for trial. Matsushita, 475 U.S. at 585-86. A dispute regarding a material fact is genuine "if evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986). Summary judgment is proper when reasonable minds could not differ as to the import of the evidence. Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir.), cert. denied, 502 U.S. 849 (1991). The motion will not be defeated by a non-movant who raises merely a "metaphysical doubt" concerning the facts or who only offers conjecture or surmise. Delaware & H.R. Co. v. Conrail, 902 F.2d 174, 178 (2d Cir. 1990), cert. denied, 500 U.S. 928 (1991)(quoting Matsushita, 475 U.S. at 586).

The Court turns to the Government's motion for summary judgment with this standard in mind.

2. Judgment Against Sheldon Hansel on Unpaid Tax Liabilities

Sheldon Hansel is foreclosed by the January 1991 decision of the U.S. Tax Court from contesting the issue of his 1980 and 1981 tax liability. "[I]f a claim of liability or non-liability relating to a particular year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year." Commissioner of Internal Rev. Ser. v. Sunnen [48-1 USTC ¶9230], 333 U.S. 591, 598-99 (1948). This holds true even where, as appears here, the initial judgment is based on an agreement between the parties in the action before the Tax Court. See United States v. International Bldg. Co. [53-1 USTC ¶9366], 345 U.S. 502, 506 (1953). ¹ Sheldon Hansel's liability as to the 1980 and 1981 deficiencies is thus established as a matter of law, and the Court will not revisit it here. See Toker v. United States , 982 F.Supp. 197, 201 (S.D.N.Y.), aff'd, 133 F.3d 908 (2d Cir. 1997). ²

Accordingly, the Court grants the Government's motion for summary judgment against Sheldon Hansel. Judgment will be entered against him in the amount of $222,007.21, plus interest.

2. [3.] Fraudulent Conveyances

The liability of a transferee of assets for taxes owed by the transferor under a theory of fraudulent conveyance is governed by state law. ³ See United States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 323 (2d Cir. 1994); Ginsberg v. Commissioner of Internal Revenue [62-2 USTC ¶9625], 305 F.2d 664, 667 (2d Cir. 1962); United States v. Poio [87-1 USTC ¶9357], 1986 WL 31983, at *2 (E.D.N.Y.); United States v. Scharfman [81-2 USTC ¶9630], 1981 WL 1855, at *5 n.12 (S.D.N.Y.); United States v. Altmark [71-2 USTC ¶9567], 331 F.Supp. 1346, 1347 (E.D.N.Y. 1971). Under New York law,

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

N.Y. DEBT. & CRED. L. §273 ( McKinney 1990). Generally speaking, the party challenging the conveyance has the burden of proving both insolvency and the lack of fair consideration. American Investment Bank, N.A. v. Marine Midland Bank, N.A., 595 N.Y.S.2d 537, 538 (2d Dep't 1993 ). In cases of intra-family transfers where facts concerning the nature of the consideration are within the exclusive control of the transferee, however, the defendant has the burden of proving the adequacy of consideration. See McCombs [94-2 USTC ¶50,363], 30 F.3d at 323; Interpool Ltd. v. Patterson, 890 F.Supp. 259, 265 (S.D.N.Y. 1995); ACLI Government Securities, Inc. v. Rhoades, 653 F.Supp. 1388, 1391 (S.D.N.Y. 1987), aff'd, 842 F.2d 1287 (2d Cir.1988); Scharfman [81-2 USTC ¶9630], 1981 WL 1855, at *6. Moreover, if the conveyance is found lacking in consideration, the defendant will have the burden of proving solvency. United States v. Red Stripe, Inc. [92-1 USTC ¶50,277], 792 F.Supp. 1338, 1342 (E.D.N.Y. 1992); ACLI Government Securities, Inc., 653 F.Supp. at 1393.

a. Fair Consideration

The Government points to the absence of any consideration for any of the 1987 or 1989 transfers. As to the transfers to his children, Sheldon Hansel testified (as did the children themselves) he gave them the stock in return for their labor. At the time of the transfers, the children were 14, 12 and 9 (1987) and 16, 14 and 11 (1989). The "labor" in question was the chores the children performed on the farm, during a time when all three also were attending school. Christy Hansel Dep. at 10-11; Grant Hansel Dep. at 18-19; Shelley Hansel Dep. at 4-5, 12.

"Fair consideration" under the Debtor and Creditor Law is given for property or an obligation

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

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

N.Y. DEBT. & CRED. L. §272 ( McKinney 1990). Whether the children's services may be considered an "antecedent debt" within the meaning of §272 depends on whether Sheldon Hansel made an implied or constructive promise to pay them for those services. See Scharfman [81-2 USTC ¶9630], 1981 WL 1855, at *6.

Contrary to defendants' assertions, it has long been established in New York that a parent has a right to the services of his or her children. See Doyle v. Rochester Times-Union, 249 N.Y.S. 30 (4th Dep't 1931 ); Schonberger v. Culbertson, 247 N.Y.S. 180 (1st Dep't 1931 ); Lahann v. Cravotta, 228 N.Y.S.2d 371, 372 (Sup. Ct. Suffolk County 1962) Pokeda v. Nash, 47 N.Y.S.2d 954 (Sup. Ct. Renssalaer County 1944). Thus, the fact that the Hansel children performed services on the farm is no evidence of any implied promise of Sheldon Hansel to pay them for those services.

The general rule can, of course, be altered by an agreement between the parent and child. Cf. Scheller v. Bowery Savings Bank, 630 N.Y.S.2d 62, 63 (1st Dep't 1995 ) (general rule that parent has legal right to possession of child's funds may be varied by private arrangement). Defendants, however, provide no evidence of any such agreement, nor any evidence that the stock was given to the children in satisfaction of any "antecedent debt." See Scharfman [81-2 USTC ¶9630], 1981 WL 1855, at *6. Defendants therefore have failed to carry their burden to show fair consideration was given in exchange for the stock.

As for the 25 shares transferred in 1989 by Sheldon to Eunice Hansel allegedly in repayment of a debt, defendants offer no evidence of any such debt. Moreover, the evidence in the record (a 1985 Farm and Home plan loan application) indicates that the only indebtedness Sheldon had to his mother was for $3,950, which was repaid in 1987. See Pl. Ex. 17. A similar application submitted under Sheldon's name in 1988 lists no indebtedness to Eunice Hansel. See Pl. Ex. 18. Defendants thus have failed to establish this transfer was in payment of any antecedent debt.

Lastly, the children themselves concede they gave their grandmother nothing in return for the 1995 transfers. Christy Hansel Dep. at 26-27; Grant Hansel Dep. at 30-34; Shelley Hansel Dep. at 7.

In sum, defendants have failed to carry their burden to show fair consideration was given for any of the conveyances at issue.

b. Solvency

Defendants also fail to raise a factual issue as to whether Sheldon Hansel was solvent after the transfers. The Debtor and Creditor Law defines insolvency as follows:

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.

N.Y. DEBT. & CRED. L. §271(1) ( McKinney 1990). Sheldon estimated the value of his assets after the creation of the farm corporation at approximately $10,000. Sheldon Hansel Dep. at 16. The only specific asset of value to which he could testify owning thereafter was a 1/3 interest in a house in Vermont that was sold (after the farm corporation was created) for approximately $30,000 to $35,000. Id. at 18-19. At the time of his deposition, he estimated the value of his assets at $15,000. Id. at 20.

Defendants provide no evidence on this motion of any other assets Sheldon Hansel owned or had an interest in during the relevant period.

As to liabilities, "in determining whether the person was insolvent, his federal tax liability, including penalties and interest, even if unknown at the time of the transfer, must be taken into account." United States v. DiGiulio [97-2 USTC ¶50,987], 1997 WL 834820, at *9 n.8 (W.D.N.Y.) (citing United States v. 58th Street Plaza Theatre, Inc. [68-1 USTC ¶9407], 287 F.Supp. 475, 500-01 (S.D.N.Y. 1968)). For purposes of a fraudulent conveyance under §273, the tax liability need only have accrued at the time of the transfer. Id. (citing United States v. Red Stripe, Inc. [92-1 USTC ¶50,277], 792 F.Supp. at 1342). The Tax Court's 1991 decision makes clear Sheldon Hansel was liable for 1980 and 1981 income taxes in the amount of $73,939.00. Thus, by the time Sheldon transferred the remainder of his Hanwinsel stock in 1989, leaving him with no more than $30,000 worth of assets, those assets were far exceeded by his existing tax liabilities.

Sheldon thus was rendered insolvent by the conveyances, and received no fair consideration therefor. Accordingly, there is no genuine issue of fact as to any of the elements of §273. The conveyances were therefore fraudulent under New York law, and the Government is entitled to summary judgment against the transferees.

III. Conclusion

For all of the foregoing reasons, the Government's motion to amend the Complaint to add Hope Hansel as a defendant is GRANTED. The Government's motion for summary judgment against Sheldon, Christy, Grant and Shelley Hansel also is GRANTED. The Government is hereby directed to submit an appropriate order, within twenty days of the date of this decision, upon which judgment may be entered.

IT IS SO ORDERED.

¹ Though the Government provides only the "decision" of the Tax Court entered pursuant to the parties' agreement, such a decision is deemed a final judgment on the merits. See United States v. Wynshaw [82-2 USTC ¶9475], 516 F.Supp. 785, 788 (S.D.N.Y. 1981) (citing International Building Co., 345 U.S. 506; Stetson v. United States [77-2 USTC ¶9663], 1977 WL 1242 (W.D.N.Y.); Sylk v. United States [71-2 USTC ¶9742], 331 F.Supp. 661, 666 (E.D.Pa.1971)).

² This discussion also answers Sheldon's contention that the Government's 1985 assessments were filed beyond the three-year statute of limitations. See 26 U.S.C. §6501(a). Sheldon in fact raised this defense in the Tax Court, and is foreclosed by the Tax Court's determination from raising it now. See United States v. Cohn [88-1 USTC ¶9281], 682 F.Supp. 209, 222-23 (S.D.N.Y. 1989); United States v. Spohrer [76-2 USTC ¶9632], 1976 WL 1107, at *2 (M.D.Fla.).

³ One element of state law that does not apply is the statute of limitations. "The United States is not subject to any statute of limitations in enforcing its rights, unless Congress specifically provides otherwise." United States v. Podell, 572 F.2d 31, 35 n.7 (2d Cir. 1978) (citing United States v. Summerlin [40-2 USTC ¶9633], 310 U.S. 414 (1940)).

 

 

 

United States of America, Plaintiff v. Charles A. Cody, Natalie Jill Cody, a minor child and Judy K. Cody, Defendants

U.S. District Court, So. Dist. Ind., Indianapolis Div., IP 94-1918-C H/G, 1/20/98

[Code Sec. 6321 ]

Tax protestors: Fraudulent conveyance: Lien for taxes: Property subject to levy: Property transferred to third parties.--The IRS could levy upon residential property in satisfaction of an individual's tax liabilities even though he had transferred his interest in the property to his infant child. The father continued to live in the residence, paid all of the property's expenses, made improvements, and never paid rent to the child. He knew of the accrued tax liabilities prior to the transfer, he retained control over the property after the transfer, and no consideration was paid for the conveyance. The father's meritless tax protest arguments that questioned his liability for federal income tax were rejected, as was his claim that the transfer was undertaken to avoid a potential claim against the property by his ex-wife. He had discharged his legal obligations to the ex-wife prior to making the conveyance, and a potential claim by her was highly speculative.

Kevin P. Jenkins, Department of Justice, Washington, D.C. 20530, for plaintiff. Erick P. Knoblock, Brand & Allen, Five Courthouse Plaza, Greenfield, Ind. 46140, William E. Vance, Vance & Phillips, 318 W. Bruce St., Seymour, Ind. 47274, Fred Scott, 55 Monument Circle, Indianapolis, Ind. 46204, for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

HAMILTON, District Judge:

The United States seeks to enforce federal tax obligations owed by defendant Charles Cody. The court has earlier granted summary judgment to reduce Mr. Cody's tax liabilities to judgment and has entered a separate final judgment under Fed. R. Civ. P. 54(b) in the amount of $124,623.55 plus statutory additions. The only remaining issue in the case is the United States' request to foreclose on defendant Charles Cody's residence to enforce a debt for federal taxes. ¹ Cody conveyed the title of his residence to his infant daughter in 1984. The court conducted a bench trial on December 1, 1997, on the issue whether that was a fraudulent conveyance to defeat the United States' interest in collecting taxes owed by Cody. The court now states its findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52. The substance rather than the court's label shall control whether a matter is treated as a finding of fact or a conclusion of law.

Findings of Fact

Mr. Cody's Tax History: By sometime in early 1983, defendant Charles Cody came to the conclusion that he was not subject to federal income tax. On April 14, 1983, he submitted to his employer a new Form W-4 claiming 18 allowances. Ex. 1. That reduced dramatically the withholding of federal income tax from his wages. His last Form W-4 had claimed one allowance, Ex. 2, and although Mr. Cody had remarried in 1982, he had no reasonable or good faith basis for claiming 18 allowances. In April 1984, Mr. Cody did not file a federal income tax return for calendar year 1983. In fact, that was the first of about ten years in a row during which he did not file federal income tax returns. Instead, on April 13, 1984, Mr. Cody submitted to the Internal Revenue Service a Form 843 claiming a refund of all federal income taxes withheld from his wages during 1983. Ex. 13. On December 18, 1984, Mr. Cody submitted to the IRS a 48-page document entitled: "Administrative Law Demand Under the 1st--9th--10th Amendments." Ex. 3. Through a lengthy and distorted review of the legal history of taxation in this country, the document purported to show that the IRS had no authority to tax Mr. Cody's wages. The document concludes with the assertion that "wages, salaries, first time commissions, compensation, tips and gifts are property, not income." Ex. 3 at 47-48. Cf. United States v. Kolihoski [85-1 USTC ¶9251], 732 F.2d 1328, 1329 n. 1 (7th Cir. April 24, 1984) ("the defendant still insists that no case holds that wages are income. Let us now put that to rest: WAGES ARE INCOME. Any reading of tax cases by would-be tax protesters now should preclude a claim of good-faith belief that wages--or salaries--are not taxable."). Mr. Cody submitted similar documents to the IRS dated July 1, 1985, and December 21, 1987, Exs. 4 & 5.

The Property: On June 16, 1966, William and Nora Dailey conveyed to Charles Cody by warranty deed the property commonly known as 6315 South 550 West, Columbus, Indiana. Ex. 23. On June 10, 1968, Charles Cody and his first wife, Betty Cody, borrowed $15,000 secured by a first mortgage on the property. Charles and Betty Cody divorced in about 1975, Charles retained full ownership of the property. He continued making payments on the first mortgage until it was paid off in 1985.

The Conveyance: On March 1, 1984, Charles Cody executed a warranty deed purporting to convey the property to Natalie Jill Cody, his daughter who was born on March 13, 1983. Exs. 25 & 8. The warranty deed provides, however, that Natalie "shall not sell, destroy, mutilate nor create any lein [sic] on the above described parcel of land until the 1st day of April 2005." Ex. 25. The deed was recorded on March 8, 1984, Mr. Cody did not receive any property or other consideration from his infant daughter in return for the property. After the conveyance, Mr. Cody continued paying utility and maintenance bills, property taxes, and payments on mortgages, and he made repairs and improvements on the property, including painting the house and replacing its roof. Mr. Cody lived in the house almost continuously after conveying title to Natalie in 1984 until at least the date of trial in 1997. When Mr. Cody conveyed the property to Natalie, he was married to Sue Ann Cody, who is Natalie's mother. When Mr. Cody and Sue Ann Cody separated permanently, Sue Ann and the children (including Natalie, the nominal titleholder of the property) moved out. Natalie has lived on the property with Mr. Cody during the past couple of summers. Mr. Cody has never paid rent to Natalie.

At the time of the conveyance to Natalie, the property was Mr. Cody's principal asset. In addition to the property, Mr. Cody had at the time about $1600 in credit union accounts, a life insurance policy with a cash value of about $2000, an IRA with a cash value of less than $4000, a 1981 Volkswagen Rabbit, a 1973 Chevrolet pickup truck, a 1984 Yamaha motorcycle, and some tools, books, and guns of modest value (less than $2000 in total). At the time of the conveyance, Mr. Cody was current on all material financial obligations, including child support and mortgages.

The Divorce from Judy Cody: Between his marriages to Betty Cody and Sue Ann Cody, Mr. Cody was married to Judy Cody. The marriage to Judy was dissolved by a court decree filed May 4, 1981. Ex. 10. The dissolution decree awarded Judy $15,000 as a property equalization. The divorce was contested and included an appeal of the dissolution decree to the Indiana Court of Appeals. On or about June 20, 1983, Mr. Cody paid to the clerk of the court the sum of $17,301.15 in satisfaction of the $15,000 judgment in favor of Judy. Ex. 18. Mr. Cody made the payment using his own wages, a second mortgage on the property, and some money from Sue Ann Cody or members of her family.

Mr. Cody's Intentions: The court finds as a fact that Mr. Cody conveyed the property to his daughter Natalie on March 1, 1984, for the primary purpose of putting the property beyond the reach of the United States in efforts to enforce federal tax obligations that existed at the time of the conveyance and that Mr. Cody expected to accrue in his campaign to resist federal taxation of wages. At the time of the conveyance, Mr. Cody knew he owed federal income taxes for 1983, and he was in the early stages of a prolonged effort to avoid federal income taxes. Mr. Cody did not have a good faith belief that he was not subject to federal income taxation. He was not a credible witness on the critical questions going to his intentions. When questioned by the government's attorney, his testimony was repeatedly wrong and self-serving, and his testimony was successfully impeached by the documentary record and inconsistent deposition testimony.

Mr. Cody's assertion that he conveyed the property to Natalie to put it beyond the reach of Judy Cody is only partially credible. At the time of the conveyance, the undisputed facts show that Mr. Cody had discharged his legal obligations to Judy. He was not involved in litigation with Judy at that time. Mr. Cody's testimony at trial about advice from his lawyer about the possibility that Judy could seek the property is not credible: he had not even mentioned such advice or litigation in the discovery process in this case. In sharp contrast to the speculative risk that Judy might assert an unsupported claim against him and the property, when Mr. Cody conveyed the property to Natalie, he knew that he owed money to the IRS, knew that he did not intend to pay the money, and intended not to pay the IRS a lot more money that he expected to accrue in tax liabilities in the coming years as part of his campaign to protest taxes. The court finds that although a desire to protect the property from a possible claim by Judy might have been a minor consideration for Mr. Cody's decision, his denial of any desire to create obstacles for the IRS is not credible. The evidence as a whole shows that that was his primary purpose. ²

On January 8, 1993, a Notice of Federal Tax Lien was filed with the Office of the Recorder, Bartholomew County, Indiana against Natalie Jill Cody as nominee of defendant Charles Cody.

Conclusions of Law

The United States seeks to set aside Mr. Cody's transfer of the property to his daughter Natalie as a fraudulent conveyance of property under Indiana Code §32-2-1-44 (1982). ³ State law determines the interests a taxpayer has in his or her property including disputes over fraudulent conveyances. See United States v. Denlinger [93-1 USTC ¶50,040], 982 F.2d 233, 235-36 (7th Cir. 1992), following Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960). The applicable Indiana law provided that:

All conveyances or assignments, in writing or otherwise of any estate in lands, or goods or things in action, every charge upon lands goods or things in action, and all bonds, contracts, evidences of debt, judgments, decrees, made or suffered with the intent to hinder, delay or defraud creditors or other persons of their lawful damages, forfeitures, debts or demands, shall be void as to the persons sought to be defrauded.

Ind. Code §32-2-1-14 (1982). For purposes of this section, the "question of fraudulent intent . . . shall be deemed a question of fact; nor shall any conveyance or charge be adjudged fraudulent as against creditors or purchasers solely on the ground that it was not founded on a valuable consideration." Ind. Code §32-2-1-18 (1982).

Indiana law does not require direct evidence of fraudulent intent to prove a conveyance was fraudulent. Fraudulent intent may be inferred from "badges of fraud." Lee's Reedy Mix & Trucking, Inc. v. Creech, 660 N.E.2d 1033, 1037 (Ind. App. 1996), which are circumstances that tend to show the transaction was an extraordinary one with a dishonest purposes. No single badge of fraud is sufficient as a matter of law to prove fraudulent intent. See id.; Otte v. Otte, 655 N.E.2d 76, 81 (Ind. App. 1995). A court must examine all the facts to determine "how many badges of fraud exist and if together they amount to a pattern of fraudulent intent." Otte, 655 N.E.2d at 81. Otte summarizes the badges of fraud as the following:

1. the transfer of property by a debtor during pendency of a suit;

2. a transfer of property that tenders the debtor insolvent or greatly reduces his estate;

3. a series of contemporaneous transactions which strip a debtor of all property available for execution;

4. secret or hurried transactions not in the usual mode of doing business;

5. any transaction conducted in a manner differing from customary methods;

6. a transaction whereby the debtor retains benefits over the transferred property;

7. little or no consideration in return for the transfer;

8. a transfer of property between family members.

655 N.E.2d at 81, citing Johnson v. Estate of Rayburn, 587 N.E.2d 182, 186 (Ind. App. 1992). The first item on the list has been extended to situations in which suit is expected. See United States v. Denlinger, 982 F.2d at 236 Jackson v. Farmers State Bank, 481 N.E.2d 395, 406 ( Ind. App. 1985).

The record at trial shows that Mr. Cody's transfer of the property to his daughter satisfies five badges of fraud. First, the transfer of the property greatly reduced Mr. Cody's assets. Second, he made the transfer when he knew he had accrued tax liability and reasonably expected the IRS to pursue him. Third, Mr. Cody continued to retain essentially all the benefits of ownership of the property and exercised control over the property after the transfer. In this case his retention of those benefits and control was about as complete as can be imagined in light of the restrictions on Natalie's ability to sell or pledge the property, topped off by the fact that Mr. Cody retained possession of the property when he and Sue Ann Cody separated and Sue Ann took Natalie with her. Fourth, he made the transfer for little or no consideration. Fifth, he made the transfer to a family member.

This circumstantial evidence amply supports the inference that Mr. Cody transferred the property "with the intent to hinder, delay or defraud" the government of its "lawful damages, forfeitures, debts or demands." See Ind. Code §32-2-1-14 (1982). Mr. Cody's contrary explanation is not at all credible. The conveyance is fraudulent and void as to the United States . ⁴

CONCLUSION

The United States is entitled to foreclose on the property to enforce Mr. Cody's federal tax obligations. No later than February 3, 1998, the United States shall submit, with service to all parties, a suitable form of final judgment as to Count II. The court will order Charles Cody to pay the United States ' costs in this case.

SO ORDERED.

¹ After the grant of partial summary judgment, this case was closed administratively when Mr. Cody filed for bankruptcy protection. After the case was reopened, the court denied Mr. Cody's motion from summary judgment on the fraudulent conveyance claim based on the applicable statute of limitations. United States v. Cody, 961 F. Supp. 220 (S.D. Ind. 1997). On August 18, 1997, the court denied the United States ' motion for summary judgment on the issue of fraudulent conveyance.

² Sue Ann Cody testified at trial that Mr. Cody told her that he was transferring the property to Natalie to prevent Judy from getting the property. The court finds that Mr. Cody told Sue Ann Cody that at the time of the transfer, but that was not his primary motivation in making the transfer. The evidence showed that Mr. Cody told Sue Ann Cody little about his campaign of tax avoidance, and she remembered little of what she might have been told. Her testimony does not persuade the court that Mr. Cody had no intention to defraud the United States through the conveyance.

³ The former Indiana fraudulent conveyance statutes. Ind. Code §§32-2-1-7 to -10 and §§32-2-1-14 to -18, were repealed by P.L.144-1994, Sec. 4, when Indiana adopted its version of the Uniform Fraudulent Conveyance Act. Ind. Code §§32-2-7-1 to -21 (1996). The former statutes apply to transfers like this one made before July 1, 1994. See Ind. Code §32-2-7-1 (1986).

⁴ As the court explained in denying the government's motion for summary judgment, the new Indiana Uniform Fraudulent Transfer Act deems a transfer fraudulent if it is made with the actual intent to hinder, delay, or defraud any creditor of the debtor or if the debtor did not receive reasonable value in exchange for the property and the debtor reasonably should have believed that he or she would incur debts beyond his or her ability to pay them. Ind. Code §32-2-7-14 (1996). The new act eliminated the language in the earlier statute that provided a transfer "shall be void as to the persons sought to be defrauded." Ind. Code §32-2-1-14 (1982). The court concluded earlier that the old law's limitation to "the persons sought to be defrauded" required denial of the government's motion for summary judgment based on Mr. Cody's sworn denial of intent to defraud the United States and assertion of a desire to put the property beyond the reach of his ex-wife.