Estoppel Page1

---

 

[2001-2 USTC ¶50,719] United States of America, Plaintiff v. Edward G. Novotny, in his individual capacity as Trustee of Midwest Limited and as Trustee of Sunrise Investments, Etta B. Novotny, and State of Colorado, Department of Revenue, Defendants

U.S. District Court, Dist. Colo. , CIV. 99-D-2196, 9/14/2001 , 2001 U.S. Dist. LEXIS 16335.

[Code Sec. 6203 ]

Tax assessments: Summary judgment: Method of assessment: Form 4340: Presumption of correctness: Constitutional provisions: Individuals subject to tax.--The government could not reduce outstanding federal tax assessments against a sole proprietor to judgment because genuine issues of material fact existed concerning business deductions affecting the assessments. The government's Forms 4340, Certificate of Assessments and Payments, constituted presumptive evidence that an assessment was properly made and that notices and demands for payment were sent to the individual, who failed to present any evidence to refute the presumption and claimed he was not subject to tax. However, because he provided enough evidence to create a genuine issue of material fact regarding whether he was entitled to additional business deductions, the government's motion for summary judgment was denied.

[Code Secs. 6323 and 7401 ]

Family trusts: Summary judgment: Validity of trusts: Collateral estoppel.--The government could not foreclose federal tax liens on seven parcels of real property titled to two trusts created by an individual and his wife on the ground that the couple's purported conveyances of the properties to the trusts were ineffective to convey legal title under state ( Colorado ) law. The government was not barred by the doctrine of collateral estoppel from proceeding against the parcels based on an unpublished court opinion validating a series of trusts created with similar trust documents. The issues litigated in the decision were not identical and there was no evidence that the government was in privity with the defendants in that case. However, a genuine issue of material fact remained as to the question of whether the couple or the trusts owned the subject properties when the government's tax liens arose. Thus, the government's summary judgment motion, as well as a motion by the trusts to quiet title to the properties, were denied.

Philip Blondin, August A. Imholtz III, Department of Justice, Washington , D.C. 20530 , for plaintiff. Edward G. Novotny, Etta B. Novotny, Cortez, Colo., pro se. William Allan Cohan, William A. Cohan, P.C., San Diego , Calif. , for Midwest Ltd., Sunrise Investments. Rob ert D. Clark, Attorney General's Office, Denver , Colo. , for Colorado Department of Revenue.

MEMORANDUM OPINION AND ORDER

COAN, Magistrate Judge:

This is an action by the United States to reduce outstanding federal tax assessments against Edward Novotny to judgment and to foreclose federal tax liens on certain real property, under 26 U.S.C. §7401 and 7403. Jurisdiction exists under 26 U.S.C. §7402 and 28 U.S.C. §1340 and §1345. The matters before the court are the United States Motion for Summary Judgment [originally filed on December 22, 2000], ¹ and Defendants Midwest Limited and Sunrise Investments' Motion for Summary Judgment [filed September 28, 2000]. On June 11, 2001 , the parties consented to final disposition of the motions by the undersigned magistrate judge under 28 U.S.C. 636(c). The court heard oral argument from the parties on June 11, 2001 . The motions are ripe for disposition.

I.

The United States ("Government") seeks to reduce outstanding federal tax assessments against Edward Novotny to judgment and to foreclose federal tax liens on seven parcels of real property titled to defendants Midwest Limited and Sunrise Investments. The United States has moved for summary judgment on those claims. Defendants Midwest Limited and Sunrise Investments (collectively referred to as "Trust defendants" or "Trusts") have filed a counterclaim against the United States , and cross claims against the other defendants, to quiet title to the seven parcels of real property at issue. The Trust defendants move for summary judgment on their counterclaim. Defendant Etta Novotny is the wife of Edward Novotny and is named as a defendant because she may have an interest in the property at issue. Etta Novotny has filed a counterclaim against the United States to quiet title to her interest, if any, in the subject properties. Defendant Colorado Department of Revenue has filed cross claims against the defendants seeking to foreclose upon its tax liens against the seven parcels of property to satisfy a judgment entered in Montezuma County District Court, Case No. 99-CV-202, in favor of the State of Colorado and against Edward Novotny for unpaid 1989 and 1990 Colorado income taxes, penalties and interest. The following material facts are undisputed, unless otherwise noted.

A. Federal Tax Liens

Since 1957, defendant Edward Novotny ("Novotny") has operated a sole proprietorship, d/b/a Four Corners Auto Parts & Salvage, consisting of towing and auto mechanic services, and buying and selling used and wrecked vehicles and new and used auto parts in Cortez , Colorado . (Deposition of Edward Novotny ("Novotny Deposition"), pp. 28-29, 42-50; Etta Novotny Declaration, at PP1-2) In 1989, Novotny and his wife, Etta Novotny, decided that Novotny should scale back his business operation; they entered into an agreement with Copperstate Metals, Inc. to sell 2,600 vehicles as scrap metal. (Declaration of Etta Novotny, P 15)

Novotny did not file a federal income tax return or pay any federal income taxes in 1989, 1990 and 1991 and has not filed a tax return since 1980. (Novotny Deposition, pp. 201-202; Government's Exs. 11, 12, 13 and 15) Novotny does not believe he is required to pay federal income taxes. (Edward Novotny's Response to United States Interrogatories, Government's Ex. 17, at p. 5)

The IRS conducted an audit concerning Novotny's failure to pay federal taxes for the years 1989 through 1991 and sent Notices of Deficiency for those tax years to Novotny. (Edward Novotny Response to Requests for Admissions, Government's Ex. 19, PP4, 6) The Government's Certificates of Assessments and Payments for Edward G. Novotny for the 1989, 1990 and 1991 tax years reflect that Novotny owes the Government $100,684 in unpaid federal income taxes, $31,890 in assessed statutory penalties, and interest for those tax years. ² (Government's Exs. 11, 12 and 13) The tax assessments against Novotny for the 1989 and 1990 tax years were made on May 17, 1993 . (Compl., P17; Government's Exs. 11 and 12) The tax assessment against Novotny for the 1991 tax year was made on November 14, 1994 . (Compl., P17; Government's Ex. 13)

On June 23, 1993, acting under the authority of the Commissioner of Revenue, Internal Revenue Service ("IRS") agents recorded Notices of Federal Tax Liens in the Montezuma County, Colorado, Clerk and Recorder's Office, listing tax assessments made against Novotny for the 1989 and 1990 tax years, and naming several entities, including the defendants Sunrise Investments and Midwest Limited, as nominees, alter egos or transferees of Novotny with respect to the assessments against Novotny. (Compl., PP21-22 and Exs. 1 and 2; admitted, Trusts' Answer, PP21-22) On March 1, 1995 , the IRS recorded a Notice of Federal Tax Lien in the Clerk and Recorder's Office of Montezuma County, Colorado, listing assessments made against Novotny for the 1991 tax year, and naming several entities, including the Trusts, as nominees, alter egos or transferees of Novotny with respect to the assessments against Novotny. (Compl., PP23-24 and Exs. 3 and 4; admitted, Trusts' Answer, PP23-24)

B. Transfers of Real Property to the Trusts

The Novotnys purchased a package of domestic trusts from Wyoming promoter Lowell Anderson and created the Trusts on June 1, 1979 . (Novotny Deposition, pp. 197-200, 469; Declaration of Etta Novotny, PP4-5) The Novotnys formed the Trusts for estate planning purposes to preserve assets for their children. (Novotny Deposition, pp. 197-200, 469; Deposition of Etta Novotny, p. 16; Declaration of Etta Novotny, P4) Each Trust was organized under the laws of Wyoming and contains the following provisions: the trustees have discretion to distribute any Trust income or proceeds; the trustees have discretion to pay all officers, agents and employees of the Trust; the Trust exists for twenty-five years unless the trustees unanimously change the date; when the Trust terminates, the Trust assets are liquidated and distributed to the existing certificate holders; the Trust property is held in fee simple by the trustees for the benefit of the certificate holders; and, the trustees, officers, agents or employees possess only such authority as awarded them in the Trust documents. (Contract and Declaration of Trust for Midwest Limited and for Sunrise Investments, attached to the defendant Trusts' Answer as Exhibits 2 and 3, at PP4, 5, 17, 24, 27, 29)

At the time the Trusts were created, each Trust issued 100 Trust Certificate Units ("TCUs"). (Etta Novotny Declaration, P6) On June 1, 1979 , the Novotnys transferred title to the seven parcels of real property to the defendant Trusts in exchange for $10.00 consideration for each parcel and fifty TCUs each. (Etta Novotny Declaration, PP6-7; Novotny Deposition, pp. 411-412) Parcels 1, 2, 4, 5, and 6 were conveyed to defendant Midwest Limited. (Compl. at PP26, 28, 32, 34 and 36 and Exs. 6, 8, 12, 14, and 16; admitted, Trusts' Answer, PP26, 28, 32, 34 and 36) Parcels 3 and 7 were conveyed to defendant Sunrise Investments. (Compl. at PP30, 38 and Exs. 10, 12, and 18; admitted, Trusts' Answer, PP30, 38) The deeds transferring the properties to the Trusts were recorded in the Montezuma County Clerk and Recorder's Office on August 3, 1979 . (Compl., Exs. 6, 8, 10, 12, 14, 16 and 18)

Parcel 1, legally described in paragraph ten of the Complaint, consists of two vacant lots on the corner of Empire and Broadway in Cortez , Colorado . (Novotny Deposition, pp. 263-266). Title to Parcel 1 was conveyed to the Novotnys on February 3, 1977 for the stated consideration of $10. (Compl., P25 and Ex. 5; admitted, Trusts' Answer, P25) The documentary fee stamp applied when the deed was recorded indicates that the purchase price was $17,000. ( Id. )

Parcel 2, legally described in paragraph eleven of the Complaint, consists of two commercial buildings located at 483 and 485 N. Broadway in Cortez , Colorado . (Novotny Deposition, p. 274) Title to Parcel 2 was conveyed to the Novotnys on November 18, 1977 for the stated consideration of $10. (Compl. P27 and Ex. 7; admitted, Trusts' Answer, P27) The documentary fee stamp applied when the deed was recorded indicates that the purchase price was $58,000. ( Id. )

Parcel 3, legally described in paragraph twelve of the Complaint, consists of sixty-two acres of land located at 13106 U.S. Highway 666, Cortez , Colorado and contains the Novotnys' residence. (Novotny Deposition, p. 323) Title to Parcel 3 was conveyed to the Novotnys on September 15, 1956 for the stated consideration of $10. (Compl., P29 and Ex. 9; admitted, Trusts' Answer, P29)

Parcel 4, legally described in paragraph thirteen of the Complaint, is located at 23400 Road N, Cortez , Colorado and consists of seventeen acres of land. (Novotny Deposition, p. 337) Title to Parcel 4 was conveyed to the Novotnys on August 7, 1978 for the stated consideration of $10.00. (Compl., P31 and Ex. 11; admitted, Trusts' Answer, P31) The documentary fee stamp indicates that the purchase price was $16,000. ( Id. )

Parcel 5, legally described in paragraph fourteen of the complaint, is located at 112 North Street E. , Cortez , Colorado and consists of a 900-square foot house. (Novotny Deposition, pp. 342-43). Title to Parcel 5 was conveyed to the Novotnys on March 2, 1978 for the stated consideration of $10. (Compl., P33 and Ex. 13; admitted, Trusts' Answer, P33) The documentary fee stamp applied indicated that the purchase price was $19,000. ( Id. )

Parcel 6, legally described in paragraph fifteen of the Complaint, is located at 26058 Highway 145, Cortez , Colorado and consists of forty acres of vacant land. (Novotny Deposition, pp. 348-49). Title to Parcel 6 was conveyed to the Novotnys on August 25, 1975 for the stated consideration of $10. (Compl., P35 and Ex. 15; admitted, Trusts' Answer, P35) The documentary fee stamp applied when the deed was recorded indicates that the purchase price was $56,000. ( Id. )

Parcel 7, legally described in paragraph sixteen of the Complaint, is located at 29456 County Road U, Montezuma County , Colorado , and includes a small cabin. (Novotny Deposition, pp. 353-54). Title to Parcel 7 was conveyed to the Novotnys in a treasurer's deed on May 17, 1967 . (Compl., P37 and Ex. 17; admitted, Trusts' Answer, P37)

The Novotnys served as trustees for Midwest Limited for a brief period in 1979 and then from October 1985 to the present. (Deposition of Etta Novotny as Representative of Midwest Limited, p. 8; Deposition of Edward Novotny as Representative for Midwest Limited, p. 5; Trusts' Answer, Exs. 2 and 3) The Novotnys were trustees for Sunrise Investments for a brief period in 1979, and have served as the only trustees from October 1985 to the present. (Ed Novotny Deposition, pp. 226, 370; Trusts' Answer, Exs. 2 and 3) The Novotnys, as trustees, make all decisions concerning the use of the seven parcels of property, with the exception of Parcel 5 which is managed by Trustee Costello. (Deposition of Etta Novotny as Representative of Midwest Limited, pp. 45-47, 51-52) Other trustees have been appointed throughout the years, but none have been involved in the management of the Trusts. (Trusts' Answer, Exs. 2, 3; Declaration of Etta Novotny, P5; Etta Novotny Deposition, pp. 55-57) The Novotnys have acted as trustees of the Trusts, even when their names have not appeared on the Trust documents as trustees. (Etta Novotny Deposition, pp. 56-57; Deposition of Barbara Costello, p. 31)

Novotny has been the "manager" of Midwest Limited since 1979 and maintains and repairs the Trust properties. (Novotny Deposition, p. 242) Novotny has never received compensation from Midwest Limited for performing the services. ( Id. at 242-243) Barbara Costello, who has been a trustee of Midwest Limited since 1993, manages Parcel 5 without receiving compensation. (Costello Deposition, pp. 9-13)

Prior to June 1, 1979 , Edward and Etta Novotny resided on Parcel 3 and used approximately fifty acres of the land for Novotny's auto parts and salvage business. (Novotny Deposition, pp. 27-30, 77; Etta Novotny Declaration, P1) The Novotnys continued to live at their residence on Parcel 3 after the property was transferred to Sunrise Investments, with the exception of a two to three year period when the property was leased to a Mr. Zack. (Novotny Deposition, pp. 11-17) The Novotnys have not paid rent to Sunrise Investments for the use of the property, or made improvements to the property, other than regular maintenance and repairs. (Id. at pp. 331-332) In June 1979, Sunrise Investments entered into an agreement to lease Parcel 3 to Midwest Limited for $10 per year, but Midwest Limited has not paid any rent to Sunrise Investments for that parcel. (Id. at pp. 329, 334, and attached lease agreement) Novotny's auto salvage business has not paid rent to either Trust for the use of Parcel 3. (Novotny Deposition, pp. 127-130) Midwest Limited has never placed any limitations on the Novotnys' use of Parcel 3. (Etta Novotny Deposition, at pp. 46-48; Novotny Deposition, at pp. 335-337)

Parcel 2, consisting of two commercial buildings at 483 and 485 Broadway in Cortez , Colorado , is the main source of income for Midwest Limited. (Novotny Deposition, pp. 271-276) The buildings have been rented out over the years to various commercial enterprises. (Id. at pp. 275-76) The tenants are responsible for paying utilities in conjunction with their use of the buildings. (Id. at p. 284) Novotny managed the buildings on Parcel 2 before and after the property was transferred to Midwest Limited. (Id. at pp. 297-299) The monies generated from the building rentals are used to pay the property taxes and bills for the seven parcels of property. (Id. at pp. 340, 348, 352) Midwest Limited has never placed any limitations on the Novotnys' management of Parcel 2. (Etta Novotny Deposition, at pp. 46-48)

The Novotnys maintained Parcel 5 before Barbara Costello began managing the property in 1993. (Novotny deposition, p. 347) There is no evidence as to what use, if any, was made of Parcel 5 prior to 1993. Midwest Limited never placed any limitations on the Novotnys' management of Parcel 5. (Etta Novotny Deposition, at pp. 46-48) Costello uses Parcel 5 commercially as a place to train road crew flaggers. (Costello Deposition, p. 12) Costello does not pay rent to Midwest Limited for her use of Parcel 5, but has invested $6,000 to $7,000 of her own money to improve the building on the property. (Id. at pp. 13-14).

Novotny leases Parcel 6 to a cattleman for cattle grazing purposes. (Novotny deposition, pp. 349-350) The monies generated by Parcel 6 are used to pay the bills and taxes on the seven parcels of property. ( Id. at p.352) Midwest Limited has not placed any limits on the Novotnys' use of Parcel 6. (Id. at pp. 352-353)

Parcels 1 and 4 are undeveloped land. (Novotny Deposition, pp. 266-270, 337-339) Parcel 7 has a cabin on it and the Novotnys have picked plums from the trees on the property. (Id. at pp. 353-59) There is no evidence that the Novotnys have ever made any use of Parcels 1 and 4.

When Midwest Limited had a bank account, Novotny was one of three signatories on that account and authorized payment of Midwest Limited's bills. (Novotny Deposition, p. 434; Etta Novotny Declaration, P11) Kathy Novotny, the Novotnys' daughter, also had signatory authority on Midwest Limited's bank account. (Etta Novotny Declaration, P11) In recent years, Novotny stores the monies received from the rental of Parcels 2 and 6 in a box to pay the Trusts' property taxes and bills. (Novotny Deposition, pp. 111-112, and 333-334) The Trusts have not filed income tax returns, maintained financial statements, or made any distributions of principal or income to the designated beneficiaries. ( Id. at 196-197; Sunrise Investment's Response to Requests for Admission, Government's Ex. 9, P2; Midwest Limited's Response to Requests for Admission, Government's Ex. 7, P2) Sunrise Investments has no income. (Novotny Deposition, p. 360; Deposition of Etta Novotny, p. 22) When Midwest Limited has not had enough money to pay its bills and property taxes, the Novotnys have advanced the funds to the Trust to pay them. (Deposition of Novotny as Representative of Midwest Limited, p. 61; Novotny Deposition, pp. 340, 388-89) The Novotnys did not charge interest to Midwest Limited when they advanced funds to the Trust. (Deposition of Novotny as Representative of Midwest Limited, pp. 110-11) All of the monies which the Novotnys have advanced to the Trusts have been repaid by the Trusts, with the exception of an outstanding $17,500 loan to Midwest Limited. (Deposition of Novotny as Representative of Midwest Limited, p. 109) The rental income generated from Parcels 2 and 6 has never been appropriated by the Novotnys for personal use. (Deposition of Novotny as Representative of Midwest Limited, pp. 110-111; Deposition of Etta Novotny as Representative of Midwest Limited, p. 53)

On August 5, 1983 , the Novotnys transferred their Trust TCUs to Thelma Novotny, Novotny's mother. (Etta Novotny Declaration, P10; Trusts' Answer, Exs. 2 and 3) Thelma Novotny thereafter transferred the TCUs to the Novotnys' adult children in equal amounts on January 11, 1997 . (Etta Novotny Declaration, P12; Trusts' Answer, Exs. 2 and 3) Thelma Novotny did not use the seven parcels of property after her name was placed on the TCUs. (Novotny Deposition, at pp. 368-369) Thelma Novotny did not receive any distributions of principal or income from the defendant Trusts. (Id. at pp. 196, 369) The Novotnys' four adult children -Frank, Doug, Julie and Kathy--have been listed as the holders of the TCUs for Midwest Limited and Sunrise Investments since 1997. (Novotny Deposition, 405-431) The Novotnys' children have not been involved in the management or financial affairs of the Trusts. (Id. at pp. 420-21; Deposition of Frank Novotny, p. 16; Deposition of Douglas Novotny, pp. 8, 10; Deposition of Julie Fertsch, pp. 30, 51; Deposition of Kathy Lawrence, p. 32) None of the children have received any distributions from the Trusts and do not have any expectations that they will receive distributions. (Frank Novotny Deposition, pp. 10, 16; Douglas Novotny Deposition, pp. 8, 11; Fertsch Deposition, pp. 28-29; Lawrence Deposition, p. 32) Frank and Douglas Novotny are not aware that the Trusts own any property. (Frank Novotny Deposition, p. 9; Douglas Novotny Deposition, pp. 8, 10) Prior to their depositions for this case, Douglas Novotny, Julie Fertsch and Frank Novotny had not seen the trust certificates containing their names. (Douglas Novotny Deposition, pp. 9, 12; Frank Novotny Deposition, pp. 11-12, 15; Fertsch Deposition, pp. 26-27)

The United States had not assessed tax deficiencies against Novotny at the time the parcels of real property were transferred to the Trusts in 1979, nor had the State of Colorado assessed any tax deficiencies against Novotny at that time. (Etta Novotny Declaration, P9) Novotny was not rendered insolvent as a result of the property transfers. ( Id. )

II.

The purpose of summary judgment is to determine whether trial is necessary. White v. York Int'l. Corp., 45 F.3d 357, 360 (10th Cir. 1995). Summary judgment is appropriate under Fed.R.Civ.P. 56(c) when 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." The movant bears the initial burden to "point to those portions of the record that demonstrate an absence of a genuine issue of material fact given the relevant substantive law." Thomas v. Wichita Coca-Cola Bottling Co. , 968 F.2d 1022, 1024 (10th Cir. 1992). If this burden is met, the nonmovant must "come forward with specific facts showing that there is a genuine issue for trial as to elements essential to [the nonmovant's claim]." Martin v. Nannie and the Newborns, Inc., 3 F.3d 1410, 1414 (10th Cir. 1993) (internal citations omitted). The nonmovant has the burden to show that there are genuine issues of material fact to be determined. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L.Ed.2d 265, 106 S.Ct. 2548 (1986). The court views the evidence of record and draws all reasonable inferences in the light most favorable to the nonmovant. Thomas v. International Business Machines, 48 F.3d 478, 484 (10th Cir. 1995). To defeat a properly supported motion for summary judgment, "there must be evidence upon which the jury could reasonably find for the plaintiff." Panis v. Mission Hills Bank, N.A., 60 F.3d 1486, 1490 (10th Cir. 1995) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986)). Conclusory allegations will not create a genuine issue of material fact necessitating trial. White, 45 F.3d at 363.

III.

A. Claim to Reduce Tax Deficiency to Judgment

The Government argues that it is entitled to summary judgment on its first claim for relief against Novotny, to reduce to judgment unpaid federal income taxes for the 1989, 1990 and 1991 tax years in the total amount of $100,684, statutory penalties assessed against Novotny for those tax years in the total amount of $31,890, and interest as allowed by law, because the certified Certificates of Assessments and Payments satisfy the Government's burden to establish the amount of federal taxes owed.

The Government has sued Novotny to collect taxes resulting from unreported income. A presumption of correctness attaches to the Commissioner of Revenue's assessment if there is some evidence in the record to show that the taxpayer received unreported income. United States v. McMullin [92-1 USTC ¶50,056], 948 F.2d 1188, 1192 (10th Cir. 1991). The record shows that the IRS used the bank deposits method to calculate Novotny's income for the 1989 and 1990 tax years, and used the Consumer Price Index method to calculate Novotny's income for the 1991 tax year because Novotny chose not to file federal income tax returns for those years. (Government's Ex. 18, Attachments 1 and 2) Taxpayers are required to retain sufficient books and records from which their actual income can be determined. 26 U.S.C. §6001; Treas. Reg. 1.6001-1(a). If a taxpayer's records are incomplete or inaccurate, the IRS is authorized to reconstruct his income in accordance with any reasonable method that accurately reflects actual income. 26 U.S.C. §446; Jones v. Comm'r of Revenue [90-1 USTC ¶50,280], 903 F.2d 1301, 1303 (10th Cir. 1990); Palmer v. United States [97-2 USTC ¶50,550], 116 F.3d 1309, 1312 (9th Cir. 1997); see, also, Dodge v. Comm'r of Revenue [93-1 USTC ¶50,021], 981 F.2d 350, 353 (8th Cir. 1992) (holding that IRS acted reasonably in reconstructing taxpayer's income from bank deposits); Moore v. Comm'r of Revenue [84-1 USTC ¶9129], 722 F.2d 193, 196 (5th Cir. 1984) (holding that IRS acted reasonably in projecting taxpayer's income based on increases reflected in the Consumer Price Index).

The Notices of Deficiency for the 1989 and 1990 tax years reflect that Novotny received unreported income for interest, dividends, bank deposits, and capitol gains. (Government's Ex. 18, Attachment 1) The Notice of Deficiency for 1989 also shows that Novotny received income from the sale of inventory in the amount of $201,400. ( Id. ) The Notice of Deficiency for the 1991 tax year shows that Novotny received income from interest, dividends, capitol gains and self-employment income. ( Id. , Attachment 2) Novotny admits that he received substantially all of the monies identified as "income" in the Government's Notices of Deficiency for the 1989, 1990 and 1991 tax years, but denies that any of the monies received were from capital gains, interest payments, or the "sale" of inventory. (Novotny's Answer to United States ' Requests for Admissions, Government's Ex. 19). Further, it is undisputed that Novotny sold all or most of his auto salvage business to Copperstate Metals in 1989.

I find that the United States has met its burden to produce some evidence to support the tax deficiency assessments against Novotny for the 1989, 1990 and 1991 tax years. Accordingly, a presumption of correctness attaches to the Government's certified Certificates of Assessments and Payments against Novotny for those tax years. ³

Because the Government has demonstrated that it is entitled to the presumption that valid tax assessments were made, the burden shifts to Novotny to overcome the presumption by presenting admissible evidence which refutes the fact or amount of the assessments. Long [92-2 USTC ¶50,431], 972 F.2d at 1181; United States v. Gosnell [92-2 USTC ¶50,368], 961 F.2d 1518, 1519 (10th Cir. 1992) (quoting Jones v. Comm'r of Revenue [90-1 USTC ¶50,280], 903 F.2d 1301, 1303 (10th Cir. 1990)).

Novotny is proceeding pro se. He first argues, to no avail, that he is not subject to the federal income tax. The arguments which Novotny advances in support of his position have been soundly rejected by the courts. See Lonsdale v. United States [90-2 USTC ¶50,581], 919 F.2d 1440, 1448 (10th Cir. 1990); Charczuk v. Comm'r of Revenue [85-2 USTC ¶9656], 771 F.2d 471, 472-474 (10th Cir. 1977) (citing Ficalora v. Comm'r of Internal Revenue [85-1 USTC ¶9103], 751 F.2d 85 (2d Cir. 1984)).

Novotny next asserts that he is not liable for any income tax for the years 1989, 1990 and 1991 because his profit and loss statements show that he suffered a loss for each of those tax years. (See Exs. 47-49 to Novotny's Response to United States ' Motion for Summary Judgment ("MSJ"); Ex. A to Declaration of Etta Novotny, attached to defendant Trusts' Opposition to United States' MSJ) Specifically, Novotny maintains that: (1) the Government did not allow him the correct amount in business expense deductions for the tax years 1989, 1990, and 1991; (2) the Government did not deduct his costs when it established his basis in the cars sold to Copperstate Metals when calculating Novotny's income for the 1989 tax year; and (3) the Government taxed him up to eight times on the same income.

Novotny bears the burden to demonstrate that he is entitled to the claimed business expense deductions. See INDOPCO, Inc. v. Comm'r of Revenue [92-1 USTC ¶50,113], 503 U.S. 79 (1992); Hradesky v. Comm'r of Revenue [CCH Dec. 33,461], 65 T.C. 87, 90 (1975), aff'd per curiam [76-2 USTC ¶9703], 540 F.2d 821 (5th Cir. 1976); Ashley v. Comm'r of Revenue [CCH Dec. 54,151(M)], 80 TCM 841 (2000). Similarly, Novotny must prove his cost basis in property; otherwise, the basis of property is deemed to be zero. G.M. Leasing Corp. v. United States [75-1 USTC ¶9435], 514 F.2d 935, 941 (10th Cir. 1975), aff'd in part and rev'd in part on other grounds [77-1 USTC ¶9140], 429 U.S. 338 (1977) (citing Factor v. Comm'r of Revenue [60-2 USTC ¶9551], 281 F.2d 100 (9th Cir. 1960)); Irwin H. Bard [CCH Dec. 46,800(M)], 90 [60] TCM 431, pp. 2088-90.

The United States argues that Novotny's profit and loss statements are inadmissible hearsay because the documents do not satisfy the business records exception under Fed.R.Evid. 803(6). ⁴

Novotny must proffer admissible evidence to refute the presumption that the United States ' tax assessments against him are valid. Long [92-2 USTC ¶50,431], 972 F.2d at 1181; Fed.R.Civ.P. 56(e). Because the profit and loss statements submitted by Novotny are hearsay under Fed.R.Evid. 801, they are inadmissible unless an exception to the hearsay rule applies. Fed.R.Evid. 802. The record shows that Novotny's profit and loss statements for the tax years 1989, 1990 and 1991 were not maintained in the course of a regularly conducted business activity, but were instead prepared by Etta Novotny sometime after July 2000 in response to a specific request from Government counsel. (Declaration of Etta Novotny, P17) The business records exception set forth in Fed.R.Evid. 803(6) does not apply. The profit and loss statements will be excluded because Novotny has not demonstrated that they are admissible under any exception to the hearsay rule.

Even if the profit and loss statements are admissible, Novotny did not provide the Government with any corroborating records to substantiate his claims regarding his cost basis in the cars sold to Copperstate Metals in 1989. Novotny's uncorroborated and self-serving profit and loss statements are insufficient to overcome the presumption of correctness afforded the determinations of the Commissioner. See Mays v. United States [85-2 USTC ¶9490], 763 F.2d 1295, 1297 (8th Cir. 1985). Novotny contends that he sold 2,600 vehicles as scrap metal in 1989 which were purchased at an average price of $125 per vehicle (totaling $325,000 for the cost of goods sold); however, he has not produced any supporting records to verify that he sold 2,600 vehicles to Copperstate Metals, other than his own recollection (Novotny Deposition, p. 83), or any records to substantiate his calculated figure of $125 to purchase each vehicle. Novotny has also failed to proffer substantiating records to establish how the costs of goods were allocated, or whether such allocation was proper in order to refute the Government's determination that he received $201,400 from the sale of scrap metal. Novotny's profit and loss statements reflect that he deducted the entire cost of each vehicle from the price he received when the cars were sold to Copperstate Metals as scrap metal. The scrap metal sold to Copperstate was acquired from cars which had been accumulating in Novotny's salvage yard since 1957. (Novotny Deposition, p. 124) Parts from most of the cars had been sold by Four Corners over the years prior to the 1989 sale. (Novotny as Representative of Midwest Limited deposition, pp. 71-72, 86) Novotny may not deduct the entire cost of each vehicle from the amount he received from the sale of the cars to Copperstate Metals in 1989 without taking into account the fact that he sold parts from many of the vehicles over the years. I find that Novotny has failed to provide corroborating documentation to establish his claimed basis in the cars sold to Copperstate Metals in 1989; thus, Novotny has failed to raise a genuine issue of material fact about the correctness of the Government's certified Certificates of Assessments and Payments for 1989 which assign Novotny $201, 400 in income for the sale of inventory and a presumed zero basis in that inventory.

Novotny next argues that the Government did not allow him the correct amount in business expense deductions for the tax years 1989, 1990, and 1991. Novotny maintains that eighty-six percent of the monies he received in those years should have been deducted as business expenses. (See Novotny's Answer to United States' Interrogatories, Government's Ex. 17, attachment, p. 186) Novotny did not provide the Government with any documentation to substantiate his assertion until on or about April 11, 2001 . Novotny then produced to the United States bank statements, cancelled checks and ledger pages for the Four Corners Auto Parts & Salvage business for the tax years 1989, 1990 and 1991, in response to a court order granting the United States ' Motion to Compel [filed February 22, 2001 ]. See "Respondent['s] . . . Response to Courts Order to Compel Certain Answers and Copies of Checks to Support Private Profit and Loss Statement." I find that the records produced by Novotny in April 2001 provide some evidence of Novotny's expenses for the tax years 1989 through 1991 sufficient to create a genuine issue of material fact on the issue of whether Novotny is entitled to additional business expense deductions for those tax years which would require a reduction in the taxable income attributed to Novotny in the Government's certified Certificates of Assessments for those tax years.

Finally, Novotny argues that he was taxed up to eight times on the same income, but he has not provided any documentation or expert testimony to support his assertions. Novotny's unsubstantiated claim is insufficient to create a genuine issue of material fact about the correctness of the Government's certified Certificates of Assessments and Payments for 1989, 1990 and 1991.

Novotny was also assessed statutory additions for the 1989, 1990 and 1991 tax years under 26 U.S.C. §6651(a)(1) for failure to file tax returns on time without reasonable cause, and under 26 U.S.C. §6654 for underpayment of estimated taxes. (Government's Ex. 18, Attachments 1 and 2) Novotny does not dispute that he did not pay his taxes in a timely manner or that he failed to make estimated tax payments for the years in question. Further, Novotny has not demonstrated reasonable cause for his failure to file timely tax returns for the 1989, 1990 and 1991 tax years. Novotny is thus liable for statutory additions under 26 U.S.C. §6651(a)(1) and §6654. The penalty assessments reflected in the Government's certified Certificates of Assessments and Payments were determined from Novotny's calculated income tax liability and are based on a percentage of that tax liability. 26 U.S.C. §6651(a)(1) and §6654. Because I have determined that a genuine issue of material fact exists as to the correctness of the Government's income tax deficiency assessments against Novotny, based on possible business expense deductions to which Novotny may be entitled, I also find that a genuine issue of material fact exists as to the correctness of the assessed statutory penalties for the 1989, 1990 and 1991 tax years.

In sum, I find that Novotny has failed to meet his burden to demonstrate that genuine issues of material fact exist as to the correctness of the tax deficiency assessments reflected in the Government's certified Certificates of Assessments and payments for the 1989, 1990 and 1991 tax years, excepting the issue of whether Novotny is entitled to additional business expense deductions for those tax years. Because of the existence of that single issue of disputed material fact, I deny the United States ' Motion for Summary Judgment on Claim One.

B. Can the United States foreclose its federal tax liens against the seven parcels of real property to satisfy Novotny's federal tax liabilities?

In Claim Two, the United States seeks to foreclose its federal tax liens against the seven parcels of real property to which the Trusts hold paper title on the ground that the Novotny's purported conveyances of the properties to the Trusts were ineffective to convey legal title to the Trusts under Colorado law. In Claims Three through Six, which are pleaded in the alternative to Claim Two, the United States seeks to foreclose its tax liens under the theories that the Trusts hold legal title to the properties as the nominees of Edward Novotny, that the Trusts are the alter egos of Novotny, or that the Trusts are sham trusts, and, therefore, Novotny retains a beneficial interest in the Trust properties.

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . 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. The federal tax lien arises automatically when (1) assessment has been made in accordance with 26 U.S.C. §6203; (2) the taxpayer has been given notice that states the amount of the assessment and demands payment under 26 U.S.C. §6303(a); and (3) the taxpayer has failed to pay the amount assessed. See Egbert v. United States [91-1 USTC ¶50,048], 752 F.Supp. 1010, 1015 (D.Wyo. 1990), aff'd, United States v. Egbert, 940 F.2d 1539, 1991 WL 150859 (10th Cir. 1991); Guthrie v. Sawyer [92-2 USTC ¶50,391], 970 F.2d 733, 735 (10th Cir. 1992). The lien attaches at the time the assessments are made and continues until the liability is extinguished. 26 U.S.C. §6322; United States v. Cache Valley Bank [89-1 USTC ¶9157], 866 F.2d 1242, 1244 (10th Cir. 1989) (internal citation omitted). Here, the tax liens against Novotny's property and rights to property arose when the IRS made tax deficiency assessments against Novotny for the 1989 and 1990 tax years in May 1993, and for the 1991 tax year in November 1994.

It is well settled that "state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the [federal revenue act]." Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513, 4 L.Ed.2d 1365, 80 S.Ct. 1277 (1960) (quoting Morgan v. Commissioner [40-1 USTC ¶9210], 309 U.S. 78, 82, 84 L.Ed. 585, 60 S.Ct. 424 (1940)); see, also, United States v. Mitchell [71-1 USTC ¶9451], 403 U.S. 190, 197, 29 L.Ed.2d 406, 91 S.Ct. 1763 (1971) (citations omitted); Gardner v. United States [94-2 USTC ¶50,482], 34 F.3d 985, 987 (10th Cir. 1994). "The statutory language 'all property and rights to property,' appearing in §6321 [and in §6331(a) and §6332(a)], is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20, 86 L.Ed.2d 565, 105 S.Ct. 2919 (1985) (internal citation omitted). Federal law controls "the ultimate issue of whether a taxpayer has a beneficial interest in any property subject to [lien] for unpaid federal taxes." Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 57, 145 L.Ed.2d 466, 120 S.Ct. 474 (1999) (citing Morgan [40-1 USTC ¶9210], 309 U.S. at 80) ("State law creates legal interests and rights. The federal revenue acts designate what interest or rights, so created, shall be taxed.") Once the taxpayer's legal interest in the property is determined, the federal tax consequences that attach to that interest are a matter of federal law. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, 2 L.Ed.2d 1135, 78 S.Ct. 1054 (1958); United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 683, 76 L.Ed.2d 236, 103 S.Ct. 2132 (1982); Gardner [94-2 USTC ¶50,482], 34 F.3d at 987.

1. Are the United States ' claims barred by collateral estoppel?

The Trusts argue that the United States is collaterally estopped from proceeding against the seven parcels of real property to satisfy the tax liabilities of Novotny by the Colorado Court of Appeals' decision in Par Husan Ventures, et al. v. Thurl Boyd, et al. ("Par Husan"), No. 97CA0948 (February 25, 1999) (not selected for publication) (attached as Ex. 1 to Trust Defs.' MSJ).

Colorado law determines the preclusive effect of a Colorado state court judgment. United States v. Winchell, 790 F.Supp. 245, 248 (D.Colo. 1992) (citing 28 U.S.C. §1738). In Colorado , collateral estoppel precludes relitigation of an issue that was actually litigated and necessarily adjudicated in a prior proceeding against a party to that proceeding, or someone who was in privity with a party, and the party against whom the doctrine is asserted had a full and fair opportunity to litigate. Denver v. Consolidated Ditches Co., 807 P.2d 23, 32 ( Colo. 1991).

In Par Husan, the plaintiff trusts and individual family members affiliated with the trusts sought to quiet title to two tracts of real property conveyed to the trusts by the family members upon the creation of the trusts, and which had been sold by IRS auction to the defendants to satisfy the tax deficiencies of some of the family members. The state trial court ruled that the trusts were invalid under Wyoming law for lack of identifiable beneficiaries and that the conveyances of property to the trusts were consequently of no effect. (Par Husan decision, p. 2). The trial court thus concluded that the taxpayer's interests in the properties were effectively conveyed to the defendants in the tax sale. (Id. at pp. 2-3) The Colorado Court of Appeals reversed the trial court's ruling that the Trusts were invalid for lack of identifiable beneficiaries and held that the trust documents were sufficient to form valid trusts under Wyoming law. (Id. at pp. 5-11) The Court of Appeals then remanded the case to the trial court for further proceedings to determine ownership interests in the properties. (Id. at pp. 13-16)

The Trust defendants argue that because the trust documents which formed Midwest Limited and Sunrise Investments are virtually identical to the trust documents which the Court of Appeals upheld as valid in Par Husan, the United States is collaterally estopped from challenging the Trusts' ownership interests in the seven parcels of real property at issue.

I find that the Trusts' attempt to invoke the doctrine of collateral estoppel against the United States fails. First, the issues litigated and decided in Par Husan are not the same issues involved in the instant action. The Court of Appeals did not address or decide the issue of whether the trusts were the nominees or alter egos of the taxpayer, or were sham trusts. Even if the Colorado Court of Appeals had decided those questions as they pertained to the trusts involved in that case, the issues of whether Midwest Limited and Sunrise Investments are sham trusts, are the alter egos of Edward Novotny, or hold title to the seven parcels of real property as the nominees Novotny, were not litigated and decided in the Par Husan case, nor could they have been. Similarly, the issue of whether Sunrise Investments and Midwest Limited complied with Colorado statutory requirements for acquiring legal title to real property was not litigated or decided in Par Husan.

Second, the United States was not a party to the Par Husan case and there is no evidence that the United States was in privity with the Par Husan defendants. "Privity exists when there is a substantial identity of interests between a party and a non-party such that the non-party is 'virtually represented' in the litigation." Public Service Co. v. Osmose Wood Preserving, Inc., 813 P.2d 785, 787 (Colo.App. 1991). The identity of interests must be demonstrated by a "functional or working relationship" in which the non-party's interests are presented and protected by the party in litigation. Id. The Trusts argue that the Par Husan defendants represented the United States ' interests in that case because the defendants purchased the trust property at an IRS tax sale. This argument ignores the fact that the United States had sold its interest in the property when the Par Husan litigation commenced; thus, the United States did not have any interests to "represent" in that action. (Government Ex. 10, Affidavit of Rob ert A. Varra, PP3, 13) Even if the United States had any interests in the subject property, those interests were not presented or protected by the Par Husan defendants. The undisputed evidence shows that the IRS did not provide trial strategies or otherwise actively participate in the defense of Par Husan. (Varra Affidavit, PP3-12) The only participation by the IRS in the Par Husan suit was the subpoenaed lay witness testimony of IRS employees about the seizure and sale actions taken by the IRS against the taxpayers. ( Id. at PP5-12)

I find that collateral estoppel does not preclude the United States from seeking to foreclose its tax liens against the seven parcels of real property titled to the Trusts.

2. Were the conveyances of property to the Trusts in 1979 ineffective to convey legal title under Colorado law?

The Government asserts, in Claim Two, that it is entitled to foreclose its tax liens against the seven parcels of property because the Novotnys' purported conveyances of those properties to the Trusts in 1979 were ineffective to convey legal title to the Trusts under COLO.REV.STAT. ("C.R.S.") §38-30-166.

Colorado law applies to issues relating to the conveyance and ownership of real property located within Colorado . See Restatement (Second) of Conflicts of Laws §223 and comment g (1971).

C.R.S. §38-30-166(1) states that a trust may acquire real property in the name of the trust upon compliance with subsection (2) which provides for the trustee to record an affidavit setting forth the name of the trust and the names and addresses of all the trustees with the county clerk and recorder of the county in which the property interest is located.

Parcels 3 and 7 were conveyed to Sunrise Investments on June 1, 1979 . It is undisputed that none of the trustees of Sunrise Investments recorded an affidavit setting forth the name of the trust and the names and addresses of all the trustees on or before June 1, 1979 , or at any time thereafter. (Compl., P39, admitted, Defendant Trusts' Answer, PP39-40) The United States argues that because the trustees of Sunrise Investments did not record the requisite affidavit, the conveyances to that Trust are null and void and the property is still owned by the Novotnys.

The Government contends that the conveyances of real property to Midwest Limited were also legally ineffective because Midwest Limited did not file an affidavit in compliance with C.R.S. §38-30-166(1) and (2) until five years after the purported transfers and that affidavit is defective because it does not list the names of all trustees. (See Trusts' Answer, Ex. 12) The Government further argues that Midwest Limited has failed to comply with the statutory requirement that a new affidavit be filed each time the identity of the trustees changes. C.R.S. §38-30-166(6). ⁵

The record shows that on January 29, 1985 , the trustees of Midwest Limited recorded an affidavit with the Montezuma County Clerk and Recorder which listed Lowell Anderson and Pioneer Trust as trustees. (Trusts' Answer, Ex. 12) When the affidavit was recorded, Pioneer Trust was no longer a trustee of Midwest Limited, having resigned as trustee on June 7, 1984 . (Id., Ex. 2, Minutes of Midwest Limited dated June 7, 1984) A new trustee, Common Estates Company, was appointed on June 5, 1984 . (Id., Minutes of Midwest Limited dated June 5, 1984) Common Estates Company was not listed in the January 29, 1985 affidavit as a trustee. The Novotnys were appointed as trustees of Midwest Limited in October 1985 after Lowell Anderson and Common Estates Company resigned as trustees. (see generally, Defendant Trusts' Answer, Ex. 2) Midwest Limited did not file a new affidavit in October 1985 to reflect the appointment of the Novotnys as trustees.

The Trusts, relying on the Colorado Court of Appeals' unpublished decision in Par Husan, argue that C.R.S. §38-30-166 is a notice statute and that conveyances of property to a trust are not void for failure to comply strictly with the statutory terms. The Trusts emphasize that the affidavit filed by Midwest Limited on January 29, 1985 substantially complies with the statutory requirements because the affidavit was signed and notarized on May 18, 1984 , before Pioneer Trust resigned as trustee.

In Par Husan, the Colorado Court of Appeals held that C.R.S. §38-30-166 is a notice statute and a failure to comply with its affidavit requirement which is subsequently corrected does not invalidate a prior conveyance to a trust. Par Husan, at p. 21. The Colorado Court of Appeals found that although the trustee had not filed the requisite affidavits prior to, or contemporaneous with, the conveyances of real property to the trusts, the proper affidavits were filed well before the tax sale where the defendants purchased the property, so that defendants had adequate record notice that the property was owned by the trusts. ( Id. )

The court has located only one published decision by a Colorado appellate court addressing the requirements of C.R.S. §38-10-166. In Oken v. Hammer, 791 P.2d 9, 13 (Colo.App. 1990), the Colorado Court of Appeals explained that the statute "provides for the ownership of property by a trust," and "provides a method of giving notice to parties that the property is part of a trust estate and establishes, as a public record, those individuals empowered to deal with the trust property." In Oken, the court held that the trustee's recording of the Certificate of Trust Existence and Authority, signed under oath by the trustee, which granted the trustee all powers which may be exercised by individuals owning property in their own right, satisfied the filing requirements of C.R.S. §38-30-166(2) and established the trustee's authority to convey and encumber the subject property. Id. at p. 12.

United States v. Winchell, 790 F.Supp. 245, 247 (D.Colo. 1992) (Babcock, J.) involved a dispute over property which Winchell had conveyed to a trust organization in 1979. One of the parties to the dispute attacked the conveyance to the trust under C.R.S. C.R.S. §38-30-166. The court held that the statute must be strictly construed because it is in derogation of common law. See Pigford v. People, 197 Colo. 358, 593 P.2d 354 ( Colo. 1979). The court found that the trust in question had filed a facially defective affidavit because the affidavit was signed by a person who was not named as a trustee in the affidavit. 790 F.Supp. at 247. The court then held as a matter of law that the trust failed to acquire the real property conveyed to it in 1979 and voided the conveyances. Id. at 248. The court cited the Colorado Court of Appeals' statement in Oken v. Hammer, at p. 12, that a statute which is clear must be applied as written. Winchell, 790 F.Supp. at 248.

The Colorado Supreme Court has not addressed the issue of whether a facially defective affidavit can satisfy the requirements of C.R.S. §38-30-166(2). In the absence of a statutory interpretation by the state's highest court, interpretational decisions of state intermediate appellate courts provide evidence of how the state's highest court would rule on the issue. See Stauth v. National Union Fire Ins. Co. of Pittsburgh , 236 F.3d 1260, 1267 (10th Cir. 2001).

The Oken v. Hammer and Par Husan decisions did not specifically address whether a facially defective affidavit is sufficient to comply with C.R.S. §38-30-166(2). Par Husan decided only that the filing of a late affidavit satisfied the notice requirements of the statute and thus did not operate to void a conveyance of property to the trusts several years earlier. There is no indication in the Par Husan decision that the late affidavit was facially defective. The only case to address the specific issue of a facially defective affidavit is the Winchell decision. Because the Colorado appellate courts have not addressed the specific issue before me, I will follow Winchell.

I construe the filing requirements of C.R.S. §38-30-166 strictly and find that both Trusts have failed to comply with the statute. There is no evidence that Sunrise Investments has ever attempted to comply with the requirements of C.R.S. §38-30-166. With regard to Midwest Limited, the evidence shows that the trust did record an affidavit approximately six years after title to Parcels 1, 2, 4, 5, and 6 were conveyed to it by the Novotnys, but the affidavit failed to name the correct trustees. Because there had been a change of trustee prior to the date Midwest Limited recorded its affidavit, the trust should have amended the affidavit to reflect the name of the new trustee, Common Estates Company, who was appointed after Pioneer Trust Company resigned. Further, Midwest Limited should have amended the affidavit again in October 1985 to reflect the appointment of the Novotnys as trustees. I find and conclude as a matter of law that the defendant Trusts do not hold legal title to the seven parcels of real property because they have failed to comply with Colorado's statutory requirements for trusts to hold legal title to real property.

Because title to Parcels 1, 2, 3, 4, 5, 6 and 7 was not legally conveyed to Sunrise Investments and Midwest Limited in 1979, the Novotnys remained the fee simple owners of those properties, unless the Trusts successfully establish, in their quiet title counterclaims, that notwithstanding their failure to acquire legal title in 1979, the Trusts subsequently became the owners of the properties pursuant to Colorado statutes which allow persons to establish ownership by possession. See Discussion, Section III.B.3, infra. In Section III.B.3, infra, I find that genuine issues of material fact exist on the Trusts' counterclaims to quiet title to the seven parcels in the Trusts; thus, the question of whether the Novotnys or one of the Trusts owned the subject properties when the Government's tax liens arose in 1993 and 1994 cannot be resolved on summary judgment. I must therefore deny the United States ' motion for Summary Judgment on Claim Two.

3. The Trusts' Counterclaims to Quiet Title

The Trusts contend that they are entitled to summary judgment on their counterclaims to quiet title to the seven parcels of property. The Trusts seek to establish their ownership of the property under C.R.S. §38-41-108 or §38-41-111(1).

C.R.S. §38-41-108 provides that a party who is in actual possession of property for seven years under color of title and who pays the legally assessed taxes shall be deemed the legal owner of the real property to the extent of his title. Section 38-41-111(1) states:

No action shall be commenced or maintained against a person in possession of real property to question or attack the validity of or to set aside upon any ground or for any reason whatsoever any instrument of conveyance [or] deed . . . if such document has been recorded and has remained of record in the office of the county clerk and recorder of the county where said real property is situated for a period of seven years. All defects . . . or other grounds of invalidity . . . must be raised in a suit commenced within said seven year period.

Sections 38-41-108 and 38-41-111(1) can be asserted as a means to establish title to or the right of possession of real property. C.R.S. §38-41-113; see Childers v. Quartz Creek Land Co., 946 P.2d 534 (Colo.App. 1997), cert. dismissed, 964 P.2d 509 ( Colo. 1998). An action to enforce or establish a right to real property must be commenced within eighteen years after the right to bring such action accrued. C.R.S. §38-40-101(1). The Trusts' claims are timely under C.R.S. §38-40-101(1) because the earliest their claims accrued was in June or August 1986, seven years after the Novotnys attempted to transfer title to the properties to the Trusts and the deeds were recorded.

To establish ownership of the seven parcels under §38-41-108, the Trusts must prove that at the time the IRS tax liens arose, the Trusts had been in actual and exclusive possession of the properties for a period of seven continuous years and paid the taxes on the properties during that time period. See Peters v. Smuggler-Durant Mining Co., 930 P.2d 575, 579-580 (Colo. 1997); Ginsberg v. Stanley Aviation Corp., 193 Colo. 454, 568 P.2d 35 (1977). To establish ownership of the properties under C.R.S. §38-41-111(1), the Trusts must prove actual possession and that the deeds conveying the properties were properly recorded for a seven-year period. See Ginsberg, 568 P.2d at 38; Calvat v. Juhan, 119 Colo. 561, 206 P.2d 600 (1949). "Actual possession" means "physical occupancy or control over property." BLACK'S LAW DICTIONARY (7th ed. 1999).

I find that the evidence does not establish, as a matter of law, that the Trusts physically occupied or controlled Parcels 1, 2, 3, 4, 5, 6 and 7. The pertinent evidence of record shows the following: Novotny has controlled the management of all properties both during his tenures as trustee, and during the period from 1979 through 1985 when he was not an appointed trustee. Novotny has managed Parcels 2 and 6 for the benefit of the Trusts. The evidence regarding Novotny's personal use of Parcels 1, 4, 5 and 7 was meager and inconclusive. There is no evidence that any use has been made of Parcels 1, 4 or 7. Parcel 5 has been managed by trustee Costello since 1993 and has been used for her personal business ventures, but there is no evidence about the use of Parcel 5 prior to 1993 when it was managed by Novotny.

With regard to Parcel 3, the evidence shows that after Parcel 3 was transferred to Sunrise Investments, Novotny continued to exercise control over the property which he uses solely for his and his wife's benefit, as their residence and for his auto salvage business. Novotny has never paid rent to either Trust for his use of Parcel 3 as a residence and for his business. The Novotnys have not made any significant improvements to Parcel 3 in lieu of rent. Further, the Trusts have not placed any restrictions on the Novotnys' use of Parcel 3 and no other persons have exercised control over Parcel 3 since the property was conveyed to the Trusts. It is unclear from the record whether the Novotnys or the Trusts paid the property taxes on Parcel 3 and the utility bills for the Novotnys residence and business.

Genuine issues of material fact exist about whether the Trusts' have satisfied the "possession" element of C.R.S. §38-41-108 or §38-41-111(1) with respect to each parcel of real property. Issues of material issue of fact also exist as to whether the Trusts have paid the property taxes on Parcels 1, 2, 4, 5, 6 and 7 for the period required by C.R.S. §38-41-108. I therefore deny the Trusts' motion for summary judgment on their counterclaims to quiet title to Parcels 1, 2, 3, 4, 5, 6 and 7. ⁶

4. The United States ' Motion for Summary Judgment on Claims Three through Six to foreclose its federal tax liens

The United States also moves for summary judgment on Claims Three through Six, to foreclose its tax liens on the seven parcels of property because Novotny retains a beneficial interest in the properties under the theories of nominee, alter ego or sham trust. I do not address the Government's arguments in support of their motion for summary judgment on Claims Three through Six because my ruling on Claim Two, that the Novotnys failed to convey legal title to the Trusts in 1979, obviates the need for a ruling as to those claims. The theories of nominee, alter ego and sham trust are not applicable because the Novotnys' purported conveyances of the properties to the Trusts in 1979 did not convey legal title to the Trusts.

IV.

Accordingly, it is

ORDERED that the United States ' Motion for Summary Judgment [originally filed on December 22, 2001 ] is DENIED. It is

FURTHER ORDERED that Defendants Midwest Limited and Sunrise Investments' Motion for Summary Judgment [filed September 28, 2000 ] is DENIED.

¹ The United States originally filed the Motion for Summary Judgment on December 22, 2000 . On January 3, 2001 the district judge ordered that the motion be stricken and granted leave to refile. The United States ' Motion for Summary Judgment, as originally filed, was reinstated on January 19, 2001 .

² The IRS has determined that, as of December 18, 2000 , Novotny owed a total amount of $347,436.62 in unpaid federal taxes and interest. (Declaration of Jane Trujillo, Revenue Officer, Government's Ex. 14)

³ The certified Certificates of Assessments and Payments ("Form 4340") (Government's Exs. 11, 12 and 13) are presumptive proof that the assessments were made in the manner prescribed by 26 U.S.C. §6203 and Treas.Reg. 301.6203-1. Long v. United States [92-2 USTC ¶50,431], 972 F.2d 1174, 1181 (10th Cir. 1992).

Additionally, the government's Form 4340 is presumptive proof that the government has satisfied the notice and demand requirements of 26 U.S.C. §6303. See Geiselman v. United States [92-1 USTC ¶50,200], 961 F.2d 1, 6 (1st Cir. 1992) (holding that certified Form 4340 which listed "first notice" dates for each tax assessment constitutes presumptive proof that the IRS provided notice and made demand for payment to the taxpayer); see also, United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1019 (11th Cir. 1989).

⁴ Fed.R.Evid. 803(6) provides an exception to the hearsay rule for records kept in the course of a regularly conducted business activity, made contemporaneous to the time of the events, as shown by the testimony of a qualified witness.

⁵ C.R.S. §38-30-166(6) provides that in order for a trust to have acquired property before July 1, 1993, it must have complied with the statute as it existed prior to May 14, 1992. Before 1992, the statute required the trustees to record a new affidavit each time the identity of the trustees changed. See C.R.S. §38-30-166 Historical and Statutory Notes.

⁶ The Trusts also assert, as an affirmative defense, that the United States' Claims Two through Six, to foreclose its tax liens which allegedly attached to the seven parcels of real property, are time-barred under the statutes of limitation provided for in C.R.S. §38-8-110 §38-41-108, and §38-41-111(1).

The federal government argues that it is not subject to state statutes of limitations in enforcing sovereign rights absent clear Congressional intent to the contrary. United States v. Summerlin [40-2 USTC ¶9633], 310 U.S. 414, 417, 84 L.Ed. 1283, 60 S.Ct. 1019 (1940) ("When the United States becomes entitled to a claim, acting it its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement.") (internal citation omitted); Marshall v. Intermountain Electric Co., Inc., 614 F.2d 260, 262-63 (10th Cir. 1980); United States v. Christenson [90-2 USTC ¶50,543], 751 F.Supp. 1532, 1536 (D.Utah 1990) (holding that the United States was not bound by the Utah statute of limitations for fraudulent conveyance actions in action to enforce federal tax lien), appeal dismissed, 961 F.2d 221 (10th Cir. 1992).

The United States has brought this action to enforce its sovereign right to collect taxes. The only statutory time limitation applicable to the United States' foreclosure claims is the ten-year limitations period prescribed by 26 U.S.C. §6502(a)(1) (stating that judicial actions to collect assessed tax liabilities must be commenced within ten years after the assessment is made). C.R.S. §38-8-110, which establishes a limitations period on actions to set aside a fraudulent conveyance, is not even arguably applicable because the United States has not asserted a fraudulent conveyance claim.

C.R.S. §38-41-108 and §38-41-111(1) bar the United States' foreclosure claims against the subject properties only if the Trusts prove at trial that they were the owners of the properties at the time the Government's tax liens arose in 1993 and 1994 because they had established ownership of the properties in accordance with the statutory requirements. If the Trusts legally owned the properties at the time the tax liens arose, the IRS cannot reach the properties to satisfy Novotny's tax debts because Novotny did not have a beneficial interest in the properties under state law.

 

 

[2000-2 USTC ¶50,625] Watson Clinic LLP, Plaintiff v. United States of America , Richard Hill, and Patricia Hill, Defendants

U.S. District Court, Mid. Dist. Fla., Tampa Div., 8:99-CV-2260-T-17E, 7/6/2000

[Code Sec. 6323 ]

Tax liens: Interpleader action: Validity and priority of liens: Third parties: Judgment lien creditor.--In an interpleader action, two federal tax liens were entitled to priority over a creditor's judgment lien with respect to a delinquent taxpayer's interest in partnership property. The creditor's judgment lien was not perfected until the state ( Florida ) court actually entered a charging order against the debtors. Therefore, the government's liens, which had been filed prior to the issuance of the charging order, were accorded priority.

[Code Sec. 6323 ]

Tax liens: Interpleader action: Validity and priority of liens: Third parties: Judgment lien creditor: Res judicata: Collateral estoppel.--In an interpleader action, two federal tax liens were entitled to priority over a creditor's judgment lien with respect to a delinquent taxpayer's interest in partnership property. The principles of res judicata or equitable estoppel did not prevent the government from asserting its tax liens even though the IRS failed to raise a claim or an objection at the time a charging order was issued. The government was neither a party nor in privity with the parties in the earlier court proceedings and, therefore, was not barred from litigating this issue. Further, a creditor cannot use equitable estoppel against the government to recover public funds in the 11th Circuit.

[Code Sec. 6323 ]

Tax liens: Interpleader action: Attorneys' fees.--A partnership may be entitled to attorneys' fees it incurred in bringing an interpleader action when the government attempted to enforce its federal tax liens against a delinquent partner. However, the partnership was not entitled to have its attorneys' fees paid from the interpleaded funds until the tax liens had been satisfied.

ORDER GRANTING MOTION BY UNITED STATES OF AMERICA FOR SUMMARY JUDGMENT

KOVACHEVICH, District Judge:

This cause is before the Court on the following:

Doc. 14 Defendant , United States ', Motion for Summary Judgment

Doc. 19 Defendant, Watson Clinic LLP's, response

Doc. 23 Defendants, Richard Hill and Patricia Hill's, Motion for Summary Judgment

Doc. 24 Defendants, Richard Hill and Patricia Hill's, Memorandum of Law in Support of Motion for Summary Judgment

Doc. 27 Defendants, Richard Hill and Patricia Hill's, Appendix to Motion for Summary Judgment

The parties have previously received notice that all motions for summary judgment under Federal Rule of Civil Procedure 56 will be considered based upon the standards of review set forth by the United States Supreme Court in Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); and Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

Summary judgment is appropriate if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c).

The plain language of Rule 56(c) mandates the entry of summary judgment after adequate time for discovery and upon motion, 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. In such a situation, there can be no 'genuine issue of material fact' since a complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial. The moving party is 'entitled to judgment as a matter of law' because the non-moving party has failed to make a sufficient showing on an essential element of the case with respect to which that party has the burden of proof.

Celotex Corp. v. Catrett, 477 U.S. at 317-318 (1986).

Issues of fact are genuine only if a reasonable jury considering the evidence presented could find for the non-moving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Where the moving party bears the burden of persuasion at trial, the party must support the summary judgment motion with credible evidence, of the like indicated in Rule 56(c), which would entitle that party to a directed verdict if not controverted.

FACTS

The facts as enumerated in the Motion for Summary Judgment filed by the United States of America are undisputed. Further, there is no dispute that the issues raised should be resolved via summary judgment.

Dr. Henry J. Redd is indebted to the United States of America for 1991, 1995, and 1996, income tax liabilities. (Doc. 27 at App. Ex. 9, 10). Richard Hill and Patricia Hill (hereinafter referred to as "the Hills") obtained a Judgment against Dr. Redd and his wife on June 7, 1995 , in the amount of $75,000.00. Hill v. Redd, No. GC-G-94-1868 (Fla. Polk County Cir. Ct. June 7, 1995).

On April 8, 1996 , the Watson Clinic LLP was served with a Writ of Garnishment and a Continuing Writ of Garnishment in connection with Dr. Redd and his wife's income tax liabilities. (Doc. 27 at App. Ex. 2 & 3). Watson Clinic LLP filed an Answer to the Writ and Continuing Writ of Garnishment detailing the partnership property which Dr. Redd was entitled to receive. (Doc. 27 at App. Ex. 4).

On May 8, 1996 , the Hills filed a Motion for Charging Order Against Partnership Interest seeking to attach Dr. Redd's partnership interest in Watson Clinic LLP. (Doc. 27 at App. Ex. 5). On September 6, 1996 , the trial court entered an Order Denying Without Prejudice the Hill's Motion for Charging Order (Doc. 27 at App. Ex. 6). On or about February 17, 1998 , the Hills filed a new Motion for Charging Order Against Partnership Interest. (Doc. 27 at App. Ex. 8).

On April 6, 1998 , the United States filed a Notice of Federal Tax Lien for the 1991 tax liability, and another Notice of Federal Tax Lien for the 1995 and 1996 liabilities, with the Clerk of the Circuit Court of Polk County, Florida. (Doc. 27 at App. Ex. 9, 10).

On May 12, 1998 , the Polk County Circuit Court entered a Charging Order in favor of the Hills. Hill v. Redd, No. GC-G-94-1868 (Fla. Polk County Cir. Ct. May 12, 1998).

On August 24, 1998 , the Internal Revenue Service served a Notice of Levy on Watson Clinic LLP in an attempt to collect Dr. Redd's tax liability. (Doc. 1 at Ex. E). The Notice of Levy directed Watson Clinic LLP to pay to the United States Dr. Redd's property, or rights to property, that Watson Clinic LLP had or was holding for Dr. Redd. Id. As of September 30, 1999 , Dr. Redd's outstanding income tax liability for tax years 1991, 1995, and 1996, including interest and penalties, was $91,505.84. Id.

Both the United States of America and the Hills have laid claims to Dr. Redd's funds. Watson Clinic LLP was in doubt as to which party was entitled to receive payment and, therefore, brought this interpleader action.

ISSUE 1

The first issue before this Court is whether the Hills' Judgment Lien was perfected before the federal tax liens were filed. Once the United States properly files a Notice of Federal Tax Lien, the lien becomes valid against subsequent judgment lien creditors. See Central Bank v. United States [93-2 USTC ¶50,586], 833 F.Supp. 892, 895 (M.D. Fla. 1993).

The heart of this issue turns upon when the Hills' judgment lien became perfected. No specific statute in Florida exists to dictate when a lien is perfected in the application for a Charging Order Against Interest.

The United States argues that the Hills did not perfect their lien until May 12, 1998 , when the Circuit Court entered the Charging Order and, therefore, failed to meet the definition of judgment lien creditors prior to that date. (Doc. 14 at 5). The United States further argues that since the United States filed two Notices of Federal Tax Lien against Dr. Redd on April 6, 1998 , the United States ' federal tax liens have priority over the Hills'. See id.

The Hills urge this Court to consider and rely on Krauth v. First Continental Dev-Con Inc., 351 So.2d 1106 (Fla. 4th DCA 1977), in which the court determined that between competing unsecured creditors, the first to apply for a charging order has priority for full satisfaction. In Krauth, the court held that ". . . the first to apply to a court of proper jurisdiction for a Section 620.695 charging order has priority for the full satisfaction of his judgment from the debtor's partnership interest." Id. at 1108. However the issue in Krauth did not involve perfection of a lien, but involved the issue of which of two perfected liens has priority. The ruling in Krauth did not establish that a lien is perfected by filing an application with a court.

In In re Jaffe, 235 B.R. 490, 492 (Bankr. S.D. Fla.1999), the court determined that in Florida , "an application for a charging order starts the judicial process for perfecting a lien against a partnership interest. Perfection of the lien, however, does not occur until a court actually enters a charging order." Other courts have also concluded that a lien is not perfected until a charging order has been issued. See In re Bridgeman, 197 B.R. 19 (Bankr. D. Conn. 1996); see also, In re Madden, 174 B.R. 178 (Bankr. E.D.N.Y. 1994).

The Eleventh Circuit has provided some additional guidance on this issue through its exploration of when perfection of garnishment liens occurs. In Continental Nat. Bank of Miami v. Tavormina (In re Masvidal), 10 F.3d 761, 763 (11th Cir. 1993), the court held that, "it is the judgment entered on a writ of garnishment that creates the 'lien' in favor of the garnishor. Mere service of a writ alone creates no such interest."

Under these guiding principles, the Hills did not perfect their lien until the Circuit Court entered the Charging Order on May 12, 1998 . Therefore, the Federal Tax Liens that the United States filed on April 6, 1998 , have priority over the Hills' Judgment Lien.

ISSUE 2

The second issue before this Court is whether the principle of res judicata should preclude the United States from bringing forth any claim against the funds at issue. The Hills argue that the principles of estoppel and res judicata apply because the Internal Revenue Service did not raise a claim or objection at the time of the order requiring Plaintiff, Watson Clinic LLP, to distribute the transfereable interest of Dr. Redd to the Hills. (Doc. 10 at 3).

The Supreme Court has addressed the principle of res judicata. Res judicata applies to "repetitious suits involving the same cause of action." Commissioner of Internal Revenue v. Sunnen [48-1 USTC ¶9230], 333 U.S. 591, 597 (1948). "A final judgment on the merits of an action precludes the parties or their privies from relitigating [sic] issues that were or could have been raised in that action." Federated Department Stores v. Moitie, 452 U.S. 394, 398 (1981).

The United States was neither a party, nor in privity with the parties, in the prior state court proceedings. Therefore, res judicata does not apply in this case.

Equitable estoppel does not apply against the United States in the instant case. In the 11th Circuit, equitable estoppel "cannot apply against the United States to recover public funds." United States v. Walcott, 972 F.2d 323, 327 (11th Cir. 1992).

ISSUE 3

The third and final issue before this Court concerns whether Plaintiff, Watson Clinic LLP, is entitled to attorney's fees. Plaintiff, Watson Clinic LLP, cites two cases from the Middle District of Florida, SouthTrust Bank of Florida N.A. v. Wilson [97-2 USTC ¶50,807], 971 F.Supp. 539 (M.D. Fla. 1997); and Kurland v. United States [96-1 USTC ¶50,242], 919 F.Supp. 419 (M.D. Fla. 1996), which hold that a court may award attorney's fees, at its discretion, to a disinterested stakeholder filing an action in interpleader. (Doc. 20 at 3).

However, under Cable Atlanta , Inc. v. Project, Inc. [85-1 USTC ¶9268], 749 F.2d 626 (11th Cir. 1984), the law in the Eleventh Circuit is clear. "The stakeholder of an interpleaded fund is not entitled to attorney's fees to the extent that they are payable out of a part of the fund impressed with a federal tax lien." Id at 627 (quoting Spinks v. Jones [74-2 USTC ¶9657], 499 F.2d 339, 340 (5th Cir. 1974)).

Therefore, in equity, Plaintiff, Watson Clinic LLP, may be, upon filing of an appropriate motion, entitled to reasonable attorney's fees after the federal tax lien liability has been fully satisfied. As such, summary judgment is not appropriate as to the issue of attorney's fees.

CONCLUSION

Accordingly, it is ORDERED that Defendant, United States of America's, Motion for Summary Judgment, (Doc. 14), be GRANTED in part and DENIED in part as discussed herein; Defendants, Richard Hill and Patricia Hill's, Motion for Summary Judgment, (Doc. 23), be DENIED; and the Clerk of Court be DIRECTED to enter judgment in accordance herewith.

DONE and ORDERED in Chambers, in Tampa , Florida , this 6th day of July, 2000.

 

 

[99-2 USTC ¶50,994] Richard A. Frese, Thomas A. Frese, Paula A. Main, Timothy T. Frese, Plaintiffs v. Noel Smith and Ida B. Smith, Defendants, United States of America, Intervening Defendant

U.S. District Court, Cent. Dist. Ill., Springfield Div., 99-3128, 11/4/99

[Code Sec. 7424 ]

Tax liens: Enforcement of: Intervention by government: Pleadings: Answer: Equitable relief.--The government's status as an intervening plaintiff did not prohibit it from filing an answer to a complaint in which the children of delinquent taxpayers sought to compel the reconveyance of their parents' property after it was sold at a tax sale. The government intervened to assert that the property remained subject to tax liens because the purchaser acted as a straw man for the taxpayers. For purposes of pleading, Code Sec. 7424 provides that the government in intervention is treated as if it had been named as a defendant in the original case. Further, the government's allegations that the plaintiffs were not entitled to equitable relief and that any relief would result in unjust enrichment were reasonably related to the government's asserted interest in the property at issue.

[Code Sec. 6323 ]

Tax liens: Equitable relief: Estoppel by deed: Inapplicable to government.--The doctrine of estoppel by deed did not apply to the government and, thus, did not preclude it from arguing that a purchaser's deed to property that he bought at a tax sale was invalid.

ORDER

SCOTT, District Judge:

This cause is before the Court on the Frese Plaintiffs' Motion to Strike the United States ' Answer (d/e 13). The Court will DENY the Motion to Strike for the reasons stated herein.

On December 1, 1998, the Frese Plaintiffs filed the instant action in the Circuit Court for the Eighth Judicial Circuit Adams County (Case No. 98 CH 80) to compel Noel and Ida Smith to convey legal title to said property into the trust. The instant action was removed to federal court by the United States following the United States ' intervention in that action.

In its Complaint in Intervention, the United States alleges that it has valid liens upon all the property and rights to property of Rob ert and Vickie Frese to secure the payment of a judgment entered against the Freses. The United States alleges that its liens attached to certain property located in Quincy , Illinois . The United States seeks judgment that the lien be foreclosed upon the Quincy property, and said property be sold by the Court.

On June 30, 1999, the United States filed an Answer to the Complaint filed by Plaintiffs Frese.

The Frese Plaintiffs first move to strike the Answer on the grounds that the United States , as an "intervening Plaintiff", may not file an answer. This argument is without merit. The United States intervened pursuant to 26 U.S.C. §7424, which provides:

If the United States is not a party to a civil action or suit, the United States may intervene in such action or suit to assert any lien arising under this title on the property which is the subject of the action or suit. The provisions of section 2410 of title 28 of the United States Code (except subsection (b)) and of section 1444 of the title 28 of the United States Code shall apply in any case in which the United States intervenes as if the United States had originally been named a defendant in such action or suit. (emphasis added)

Thus, the United States for purposes of pleadings is treated as if it had been named a Defendant in the action by the Plaintiffs. Accordingly, the United States is entitled to answer the Complaint as a Defendant.

Next, Plaintiffs Frese move to strike the entire Answer pursuant to Fed.R.Civ.P. Rule 12(f) as "insufficient, immaterial, and impertinent."

In its Answer, the United States raises a defense that Plaintiffs Frese are not entitled to equitable relief (First Defense) and that any relief afforded would result in unjust enrichment to Plaintiffs Frese to the detriment of the United States (Second Defense). The Third Defense details the title history of the property in question, that Plaintiffs and entities controlled by Plaintiff purchased the property, and that Plaintiffs have acted as the alter egos of the delinquent taxpayers over whose assets the United States seeks to exercise its lien.

The relief sought by Plaintiffs Frese in this action is the conveyance of the deed to the property. The United States has intervened in the action to protect its lien interest in the property. The allegations in the Answer are reasonably related to the United States ' interest. The United States has asserted that its tax lien attaches to the subject property of the lawsuit, and that Plaintiffs, in "purchasing" the property as an alter ego, have perpetuated a fraud to prevent the United States from collecting a judgment against delinquent taxpayers. The allegations here are relevant and material to an action involving the property.

Finally, the Frese Plaintiffs argue that the United States ' response to paragraph 4 of the Complaint should be stricken under the doctrine of estoppel by deed. In its Answer the United States did not admit to the conclusion of law that Defendants Smith acquired legal title to the property. The Frese Plaintiffs argue that the United States is precluded from denying the validity or effect of its own deed. The Court has reviewed the case submitted by the United States , and agrees that the United States is not subject to the doctrine of estoppel by deed. DSI Corp. v. United States, 655 F.2d 1072, 1076-78 (Ct.Cl. 1981) (Estoppel by deed not available as to prevent the correction of fraud perpetrated upon the Government).

Therefore, the Court DENIES the Frese Plaintiffs' Motion to Strike the Answer of the United States (d/e 13).

 

 

[99-2 USTC ¶50,958] Ian Herzog, an individual, Plaintiff-Appellant v. United States of America, Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 98-55629, 10/26/99, Affirming in part, reversing in part and remanding an unreported District Court decision

[Code Sec. 6321 ]

Federal tax liens: Property subject to: Community property: California: Divorce settlement: Date of assessment: Use of separate property: Right to reimbursement.--A federal tax lien attached to a delinquent taxpayer's interest in real property that she had owned with her former husband, even though the couple's marital settlement agreement awarded the entire property to the husband. Under state ( California ) law, the formal division of assets was the crucial event in determining the status of property, and the taxpayer's deficiency was assessed before she entered into the settlement agreement. Further, in the absence of the husband's formal claim for reimbursement prior to the assessment, his use of his separate property to make mortgage payments did not give him an automatic right to reimbursement that divested the taxpayer of her interest in the property before the lien attached.

[Code Sec. 66 ]

Federal tax liens: Innocent spouse relief: Personal liability.--A federal tax lien attached to a delinquent taxpayer's interest in real property that she had owned with her former husband, even though the couple's marital settlement agreement awarded the entire property to the husband. Since the government was not attempting to hold the husband personally liable for the taxpayer's deficiency, he was not entitled to innocent spouse relief under Code Sec. 66 .

[Code Sec. 6323 ]

Federal tax liens: Priority: Community property: Divorce settlement: Purchaser for value: Estoppel: Affirmative misconduct: Delay in filing lien.--A federal tax lien attached to a delinquent taxpayer's interest in real property that she had owned with her former husband, even though the couple's marital settlement agreement awarded the entire property to the husband. Under state ( California ) law, the husband did not acquire possession of the property until after the taxpayer's deficiencies were assessed. Further, even if he qualified as a purchaser of the property for gift tax purposes, the relinquishment of marital rights did not constitute consideration that would qualify him as a purchaser for purposes of priority over the federal tax lien. In addition, the government's failure to file notice of the lien until after the husband received the property did not constitute affirmative misconduct that would estop enforcement of the lien.

[Code Sec. 7426 ]

Attorneys' fees: Costs: Award of: Wrongful levy.--Costs and attorneys' fees were awarded without comment to the former husband of a delinquent taxpayer in his wrongful levy suit; the suit determined that tax liens against the taxpayer attached to half of the community property that he was awarded in the divorce settlement.

Before: SCHROEDER and BEEZER, Circuit Judges, and SCHWARZER, ^* District Judge.

è Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.ç

MEMORANDUM ^**

Ian Herzog appeals the district court's grant of summary judgment and award to the government of the entire amount of disputed funds held in escrow. The government now concedes that it is not entitled to the entire amount, but claims entitlement to half of the funds in escrow. Because the district court's holding that the lien properly attached to the funds in escrow was correct with respect to the disputed half of the funds, we affirm in part, vacate in part and remand.

I

"We review de novo both the district court's grant of summary judgment and its interpretation of state law." Ellis v. City of La Mesa, 990 F.2d 1518, 1523-24 (9th Cir. 1993) (internal citations omitted). "Questions of statutory interpretation are also reviewed de novo." Fort Belknap Indian Community v. Mazurek, 43 F.3d 428, 432 (9th Cir. 1994).

II

"A federal tax lien attaches to a taxpayer's property when unpaid taxes are assessed. . . ." United States v. Donahue Indus., Inc. [90-2 USTC ¶50,343], 905 F.2d 1325, 1330 (9th Cir. 1990); see also 26 U.S.C. §6322. Herzog asserts that the lien was improper because he had exclusive interest in the Kinnard property when the assessments were made against his ex-wife in September 1992.

Under California law, the formal division of assets is the crucial event in determining the status of property. See Cal. Fam. Code §916; In re Mantle, 153 F.3d 1082, 1085 (9th Cir. 1998), cert. denied, 119 S. Ct. 1461 (1999). Herzog and his ex-wife entered into the marital settlement agreement in December 1992. It was this agreement, made after the tax assessments, that extinguished his ex-wife's attachable interest in the Kinnard property.

Herzog argues that his right to reimbursement divested his ex-wife of any interest she had in the Kinnard property before the lien attached. Since March 1986, all the mortgage payments on the Kinnard property came from Herzog's separate property. These payments far exceed the funds now in escrow. In California , the use of "postseparation separate property earnings to pay preexisting community obligations . . . are ordinarily reimbursable upon dissolution." In re Marriage of Hebbring, 255 Cal. Rptr. 488, 492 (Cal. App. 1989); see also Cal. Fam. Code §2626.

Reimbursement for the use of postseparation property to preserve a community asset is not automatic; rather, the paying spouse must specifically request reimbursement. See In re Marriage of Feldner, 47 Cal. Rptr. 2d 312, 316-17 ( Cal. App. 1995). Herzog made no claim for reimbursement prior to the 1992 assessments; thus, his ex-wife's interest in the Kinnard property was fully attachable.

III

Herzog contends that the tax lien is ineffective against him because he was a "purchaser" of the Kinnard property. See 26 U.S.C. §6323(a) (mandating that a lien "shall not be valid as against any purchaser . . . until notice thereof . . . has been filed."). At issue is whether the compromise of Herzog's and his ex-wife's claims, embodied in the marital settlement agreement, qualifies him as a purchaser.

A purchaser is one who, "for adequate and full consideration in money or money's worth, acquires an interest . . . in property." 26 U.S.C. §6323(h)(6). The regulation interpreting section 6323(h)(6) states that, for purposes of tax liens, "[a] relinquishing or promised relinquishment of . . . marital rights is not a consideration in money or money's worth." 26 C.F.R. §301.6323(h)-1(a)(3) (1992).

Herzog counters by citing to federal gift tax law, which treats a transfer of marital property pursuant to a written agreement as one "made for a full and adequate consideration in money or money's worth." 26 U.S.C. §2516. Section 6323, however, enjoys a "dominant position" relative to other federal statutes. In re Berg [97-2 USTC ¶50,665], 121 F.3d 535, 537 (9th Cir. 1997). An individual who qualifies as a purchaser for purposes of another federal statute does not necessarily meet the definition of purchaser under section 6323. See id. Although Herzog might qualify as a purchaser in the gift tax context, he was not a purchaser with priority over the federal tax lien.

IV

Herzog argues that the newly-amended 26 U.S.C. §66(c) affords him protection as an innocent spouse. See 26 U.S.C.A. §66(c) (West Supp. 1999) ("[I]f . . . it is inequitable to hold the individual liable for any unpaid tax . . . the Secretary may relieve such individual of such liability."). The current dispute is over the extent of Herzog's ex-wife's interest in the Kinnard property, not Herzog's personal liability. The government is not attempting to hold Herzog liable. Section 66(c) does not apply.

V

Herzog contends that the government is estopped from enforcing the lien because it waited to file notice until he had received the Kinnard property. A party seeking to invoke equitable estoppel against the government must show, in addition to the traditional elements of estoppel, that the government "engaged in 'affirmative conduct going beyond mere negligence' and that 'the public's interest will not suffer undue damage' as a result of the application of [estoppel]." United States v. Hemmen [95-1 USTC ¶50,210], 51 F.3d 883, 892 (9th Cir. 1995) (quoting Watkins v. United States Army, 875 F.2d 699, 707 (9th Cir. 1989) (en banc)). Herzog does not argue that the delay exhibited affirmative misconduct, which requires "an affirmative misrepresentation or affirmative concealment of a material fact by the government." Watkins, 875 F.2d at 707. Equitable estoppel is inappropriate here.

VI

We vacate in part and remand the case with instructions to award Herzog half the funds in escrow, and affirm in part the district court's grant of summary judgment to the government with respect to the disputed half of the funds.

We award Herzog $3,000 for costs and attorney fees.

AFFIRMED IN PART, VACATED IN PART AND REMANDED.

^* The Honorable William W Schwarzer, Senior District Judge for the Northern District of California, sitting by designation.

^** This disposition is not appropriate for publication and may not be cited to or used by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.

 

 

[98-2 USTC ¶50,610] United States of America , Plaintiff v. James C. Dunkel, Mary Grace McIntyre Dunkel, Virginia Dunkel, Illinois Department of Revenue and Alpine Bank of Illinois , Defendants

U.S. District Court, No. Dist. Ill. , West. Div., 97 C 50228, 7/20/98

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Fraudulent conveyance: Summary judgment: Questions of fact: Transferor's solvency.--In an action brought by the IRS to foreclose tax liens on real property owned by a delinquent taxpayer, the issue of whether the taxpayer was insolvent when he conveyed the property to his former wife was a question of material fact that precluded summary judgment that the conveyance was fraudulent. The taxpayer testified that, at the time he made the conveyance, the value of his assets exceeded his tax obligations; under state ( Illinois ) law, a property owner is competent to render an opinion as to the value of his property.

[Code Sec. 6321 ]

Lien for taxes: Property subject to: Summary judgment: Questions of law: Extinguished interest: Separation agreement.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer had transferred to his former wife, the wife was not entitled to judgment as a matter of law. Any interest that the taxpayer had in the property was not extinguished by a separation agreement that he entered into after the conveyance.

[Code Sec. 6323 ]

Lien for taxes: Property subject to: Fraudulent conveyance: Summary judgment: Questions of law: Collateral estoppel: State court proceedings: Parties: Privity.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer transferred to his former wife, the wife was not entitled to judgment as a matter of law. A prior state court decision that dismissed with prejudice an action to declare the conveyance fraudulent did not estop the IRS from litigating the issue, since it was not a party in that case or in privity with the third party who brought the suit.

[Code Sec. 6325 ]

Lien for taxes: Property subject to: Summary judgment: Questions of law: Release of lien.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer transferred to his former wife, the wife was not entitled to judgment as a matter of law. An agreement under which the IRS released some of its claims against the taxpayer did not apply to the property at issue.

[Code Sec. 6502 ]

Lien for taxes: Property subject to: Summary judgment: Questions of law: Statute of limitations: Collection activities.--In an action brought by the IRS to foreclose tax liens on real property that a delinquent taxpayer transferred to his former wife, the wife was not entitled to judgment as a matter of law. Since the action to reduce the taxpayer's assessments to judgment was timely filed, IRS collection efforts were not barred by the statute of limitations.

MEMORANDUM OPINION AND ORDER

REINHARD, Judge:

Plaintiff, the United States of America , filed a complaint, naming as defendants, James C. Dunkel, Mary Grace McIntyre Dunkel, Virginia Dunkel, the Illinois Department of Revenue and the Alpine Bank of Illinois , seeking to foreclose certain federal tax liens against real property located at 6475 Sentinel Road , Rockford , Illinois . Plaintiff has filed a motion for summary judgment, and Mary Grace McIntyre Dunkel has opposed that motion and filed a cross-motion for summary judgment. ¹ Jurisdiction and venue are proper in this court as the real property at issue is located in this district and division.

The following material facts are taken from the statements of fact submitted by the parties pursuant to Local General Rules 12M and 12N and are not in dispute. ² The tax liens at issue arose from federal income tax assessments for the years beginning in 1981 and continuing through 1992 against James Dunkel. The assessment for the 1981 tax year was based on James Dunkel's refusal to pay income tax for that year and due on April 15, 1982 .

James Dunkel entered into a property settlement agreement with his former wife, Virginia Dunkel, dated January 28, 1982 . Pursuant to the agreement, James Dunkel was required to pay Virginia Dunkel approximately $325,000.00 in quarterly installments of about $7,300.00, to pay for Virginia and their three children's medical, dental and optical expenses and to pay for college expenses for each of the children.

On February 8, 1982 , James Dunkel married McIntyre Dunkel. At that time, McIntyre Dunkel was aware of James Dunkel's obligations to his former wife and his children. On about August 31, 1982 , James Dunkel, by quitclaim deed, conveyed the property at 6475 Sentinel Road to McIntyre Dunkel for no consideration. James Dunkel continued to reside at 6475 Sentinel Road after the conveyance. McIntyre Dunkel made the payments on the loan, insurance and taxes. According to James Dunkel's trial testimony in his criminal prosecution for tax evasion, he conveyed the property to McIntyre Dunkel "to protect [his] family." Also in 1982, James Dunkel sold many of his collectible cars and conveyed the remainder to McIntyre Dunkel. The marriage of James Dunkel and McIntyre Dunkel was dissolved on March 26, 1985 .

On January 6, 1986 , the government made an assessment against James Dunkel for unpaid income tax for the year 1981 in the amount of $36,746.00. On October 22, 1990 , an additional assessment was made against James Dunkel for the 1981 tax year in the amount of $114,313.52, which included $22,763.00 in tax, $4,560.00 in estimated tax penalty, $48,237.38 in negligence penalty and $38,753.14 in interest. Between October 1985 and May 1993, the government made numerous assessments for unpaid taxes, penalties and interest for the years 1982 through 1992. The government sent notices of the assessments and demand for payment to James Dunkel on or within sixty days of each assessment. There remains due and owing the amount of $920,275.73 plus interest and other additions as of May 4, 1998 .

Plaintiff has moved for summary judgment, contending that the conveyance of the 6475 Sentinel Road property was fraudulent and should, therefore, be set aside under one or both alternatives established by Illinois law: fraud-in-fact or fraud-in-law. McIntyre Dunkel also filed an objection to plaintiff's motion for summary judgment in which she contends plaintiff is not entitled to summary judgment because there are questions of material fact. Specifically, she first argues that there is a question of fact as to whether James Dunkel had any interest in the property to which a lien could attach. Further, she contends there is a question of material fact as to whether James Dunkel had the intent to delay or hinder his creditors, as to whether the conveyance of the property left him unable to pay his debts, and as to the amount of James Dunkel's debts and assets at the time of the conveyance.

McIntyre Dunkel also moves for summary judgment raising the following contentions: (1) plaintiff released its interest in the property via a release of forfeiture agreement; (2) plaintiff is barred by the applicable statute of limitations because it did not file its foreclosure action until more than eleven years after its 1981 assessment in January 6, 1986; (3) James Dunkel's interest in the property, if any, was extinguished pursuant to a property settlement agreement between Jones Dunkel and Mary McIntyre Dunkel entered in court on April 9, 1985; (4) there are no facts to conclude that McIntyre Dunkel was the nominee of James Dunkel; and (5) plaintiff is collaterally estopped from litigating the issue of a fraudulent conveyance because the Circuit Court of Winnebago County, Illinois, in an action by Virginia Dunkel against McIntyre Dunkel dismissed the case with prejudice.

A court may grant summary judgment only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Essex v. United Parcel Serv., Inc., 111 F.3d 1304, 1308 (7th Cir. 1997). In evaluating a summary judgment motion, the court must resolve all inferences in the light most favorable to the nonmoving party. Id. To withstand summary judgment, the nonmovant must demonstrate that the record as a whole permits a rational factfinder to rule in his favor. Id. The question is whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law. Id.

McIntyre Dunkel's Motion for Summary Judgment

The bases for McIntyre Dunkel's motion for summary judgment consist of affirmative matters that she contends prevent plaintiff from prevailing in this case as a matter of law. The court will address each of these separately.

First, the release of interest signed by Assistant United States Attorney McKenzie was limited to the interest claimed via the previous forfeiture agreement entered by McIntyre Dunkel and James Dunkel. It expressly refers to a release of any interest in the real property described in the "Forfeiture Agreement." Further, it makes no mention of any interest arising under or related to any tax liens. Thus, the release of interest in no way eradicates plaintiff's claim in this case based on tax liens.

Second, McIntyre Dunkel contends this cause is barred by the statute of limitations. The court agrees with plaintiff's assertion as to the applicable statute of limitations. Under 26 U.S.C. §6502(a), which applies to plaintiff's action against McIntyre Dunkel, there is no time limitation for collection if the action to reduce the tax assessments to judgment is timely. Because the action to reduce assessments to judgment was filed against James Dunkel in a timely manner, the action here to collect on that judgment is also timely.

Third, the court flatly rejects McIntyre Dunkel's contention that any interest James Dunkel may have had as of April 9, 1985 was extinguished by the separation agreement signed on March 26, 1985 as part of their dissolution of marriage. As plaintiff points out, James Dunkel had already conveyed the property to McIntyre Dunkel in July 1982. There was, therefore, no interest for James Dunkel to transfer per the separation agreement and court order. Furthermore, the whole purpose of this action is an effort to defeat any attempt by James Dunkel to convey the property to avoid collection of the judgment (or contemplated judgment) against him. Conveyance of the property alone does not preclude plaintiff's claim.

Fourth, McIntyre Dunkel argues she is entitled to summary judgment on plaintiff's nominee theory of recovery because there is no evidence to support such a claim. This argument misses the mark as plaintiff has not sought summary judgment on this theory and has no need to submit any evidence at this time. Because McIntyre Dunkel has not submitted any evidence showing she is not a nominee of James Dunkel, plaintiff has no obligation to do so.

Fifth, McIntyre Dunkel contends that plaintiff is collaterally estopped from litigating the issue of fraudulent conveyance as the Circuit Court of Winnebago County, Illinois, in an action by James Dunkel's former wife, Virginia Dunkel, claiming the conveyance was fraudulent, dismissed the action with prejudice. Aside from any other basis to reject this argument, the contention is lacking for the simple reason that plaintiff was not a party nor in privity to any party in the state court action. A plaintiff cannot be collaterally estopped by an earlier determination in a case in which the plaintiff was neither a party nor in privity with a party. General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1083 (7th Cir. 1997).

For the foregoing reasons, the court denies McIntyre Dunkel's motion for summary judgment.

Plaintiff's Motion for Summary Judgment

Plaintiff seeks summary judgment based on its theories of fraudulent conveyance under Illinois law. Plaintiff contends, alternatively, that it is entitled to judgment as a matter of law under either a theory of fraud-in-fact or fraud-in-law. The court denies summary judgment on either basis because a question of material fact common to both exists.

Under both theories, plaintiff's rely, in part, on the assertion that at the time James Dunkel conveyed the property to McIntyre Dunkel he was unable to pay his debts. The only evidence plaintiff points to in this regard is James Dunkel's prior testimony that at the time he conveyed the property his financial situation "was a little bit tight" and that he also conveyed some other property to McIntyre Dunkel at that time. In response, McIntyre Dunkel has submitted the affidavit of James Dunkel in which he asserts he had assets in the amount of about $925,000.00 as of 1981 and 1982 and that his tax obligation for 1981 did not leave him insolvent. While plaintiff contends James Dunkel's affidavit as to the value of his assets is meaningless because he cannot render an opinion as to value, under established Illinois law a property owner is competent to render an opinion as to the value of his property, see In re Marriage of Vucic, 216 Ill. App. 3d 692, 576 N.E.2d 406, 413 (2d Dist. 1991); Department of Transp. v. Central Stone Co., 200 Ill. App. 3d 841, 558 N.E.2d 742, 750 (4th Dist. 1990) (Landowner's opinion admissible as lay opinion of value.). Although the court does not necessarily accept as accurate all estimates of value contained within James Dunkel's affidavit, the court finds it sufficient overall to raise a question of material fact as to James Dunkel's ability to meet his debts at the time he conveyed the property to McIntyre Dunkel. Therefore, on that basis only the court denies summary judgment to plaintiff on both its fraud-in-fact and fraud-in-law claims. ³

¹ Both Virginia Dunkel and the Illinois Department of Revenue have disclaimed any interest in the 6475 Sentinel Road property. On April 15, 1998 , Magistrate Judge P. Michael Mahoney, pursuant to stipulation of the parties, entered an agreed order establishing Alpine Bank's priority of mortgage lien and providing that Alpine Bank's lien would be satisfied in full from the proceeds of a sale of 6475 Sentinel Road before any proceeds are distributed to plaintiff.

² Without unnecessary elaboration, the court has ignored any factual assertions via the affidavit of James Dunkel that are inconsistent with prior statements made by James Dunkel as part of his sworn testimony. See Bank of Illinois v. Allied signal Safety Restraint Sys., 75 F.3d 1162, 1169 (7th Cir. 1996); Buckner v. Sam's Club, Inc., 75 F.3d 290, 292 (7th Cir. 1996).

³ The court recognizes that the under the fraud-in-fact claim, the issue of James Dunkel's indebtedness is only one of several factors that bear on the ultimate issue of actual intent to hinder, delay or defraud a creditor. See 740 ILCS 160/5. However, such a factor is material where, as here, there are other factors which do not necessarily support a finding of such intent.

 

 

[97-1 USTC ¶50,448] United States of America , Plaintiff v. Andrew E. Blanche, Cynthia D. Blanche, William S. Hewitt, Hank Wilson , and Lomas Mortage , U.S.A. , Defendants

U.S. District Court, West. Dist. Tex., San Antonio Div., Civ. SA-95-CA-0419, 2/28/97

[Code Sec. 6323 ]

Tax lien: Validity against third parties: Purchasers.--A tax lien attached to a delinquent taxpayer's real property and was effective against married individuals who purportedly acquired the property by an assumption deed from the taxpayer's wife. The transferees did not qualify as purchasers under state ( Texas ) law because they did not acquire a valid interest in the property prior to the filing of the lien. There was no evidence that the taxpayer authorized his wife to dispose of their entire, joint-managed community property, and the wife could not transfer her one-half, undivided interest to the transferees. Also, the transferees forfeited their right to specific performance under a contract for sale of the property when they failed to secure financing to complete the purchase.

[Code Sec. 6323 ]

Estoppel: Detrimental reliance: Estoppel by silence.--The IRS was not estopped from denying title to the transferees of real property subject to a tax lien simply because they might have detrimentally relied on an earnest money contract with the delinquent taxpayer. There was no evidence that the taxpayer falsely represented to the transferees that they were the owners of the property or that he had concealed any material facts. Moreover, the transferees did not have a claim for estoppel by silence because there was no evidence that the taxpayer induced them to make improvements to the property, and the parties did not have a confidential or fiduciary relationship.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

PRADO, District Judge:

On March 5, 1996 , a trial before the bench was held in the above-styled and numbered cause. The case comes to this Court pursuant to the Internal Revenue Code of 1986, as amended, 26 U.S.C. §§7402, 7403 and 28 U.S.C. §§1340, 1345.

Plaintiff United States (hereinafter "IRS") seeks to reduce to judgment a federal income tax assessment against Defendant William S. Hewitt (Hewitt), to foreclose a federal tax lien on certain real property, and to receive a judgment for any unpaid tax liability not satisfied by the sale of the property at issue. Defendants Andrew E. and Cynthia D. Blanche (the Blanches) filed a counter-claim against Hewitt for specific performance under a failed contract for sale of the property. Hewitt filed a cross-claim against Lomas Mortgage U.S.A. and the Blanches alleging a conspiracy to deprive him of his property and seeking back rental payments for the Blanches' occupancy.

Immediately prior to trial, the Court was informed that Lomas Mortgage U.S.A. had filed for bankruptcy. No representative of Lomas appeared at trial. Consequently, Hewitt's conspiracy claim against Lomas and the Blanches was severed by the Court prior to trial.

Pursuant to Federal Rules of Civil Procedure 52(a) and 58, the Court hereby enters the following findings of fact and conclusions of law.

FINDINGS OF FACT

The evidence submitted to the Court in this trial shows as follows:

(1) On May 27, 1991 , the IRS assessed a federal income tax liability against Defendant William S. Hewitt for the 1990 tax year. As of March 1, 1996 , this tax liability totaled $25,276.20, and continues to accrue interest and penalties until paid.

(2) At the time of the tax liability assessment, Hewitt and his wife, Peggy L. Hewitt, were the owners of certain real property described as:

Lot Number One (1), Block Number One (1), NORTHCLIFF COUNTRY CLUB ESTATES COMMUNITY, SECTION 1, a subdivision in Guadalupe County, Texas, according to plat recorded in Volume 4, Pages 63-65, Plat Records, Guadalupe County, Texas.

(hereafter referred to as "the property"). The IRS filed a tax lien on the property on January 18, 1994 , in Guadalupe County, Texas.

(3) On May 20, 1990 , prior to the filing of the tax lien, the Hewitts entered into an earnest money contract to sell the property to the Blanches.

(4) Pursuant to the terms of a lease option addendum in the Earnest Money Contract, the Blanches began occupying the property on June 25, 1990 , as lessees. The lease option in the earnest money contract called for monthly payments of $1000.00 for a period of one year beginning July 1, 1990 through June 30, 1991 . A portion of that payment, $250.00 per month, would be credited back to the Blanches at the end of the option, to be applied to the purchase of the property.

(5) The purchase price of the property at the end of the contract period was $139,500.00 minus the credit back of $3,000.00. In addition to the monthly lease payments, the contract called for the Blanches to tender earnest money of $100.00 with the initial contract, $2,500.00 on July 1, 1990 , and $1,500.00 on January 1, 1991 . The earnest money contract further required the Blanches to secure outside financing for the purchase of the property.

(6) A standard inspection report on the property completed on June 19, 1990 , by SIDCO Inspection Service, revealed several needed repairs, including structural problems with the roof. This report did not include inspection of structural damage to the pool.

(7) All the payments required under the contract were made by the Blanches, however, they did not purchase the property on the closing date of August 31, 1991 .

(8) The earnest money contract, including the lease option, expired by its own terms on June 30, 1991 . Thereafter, the Blanches remained in possession of the property and continued to make $1000.00 monthly 'lease' payments.

(9) The Blanches did not complete their purchase of the property because they believed that the Hewitts first needed to make repairs to the property in order to bring it up to code. Based on conversations with their broker, it was the Blanches' belief that the property did not meet city inspection codes.

(10) The Blanches spoke to two or three mortgage companies. They were told that it would be impossible for them to secure financing if the property failed to meet city codes. Based on what their broker told them, the Blanches decided it would be a waste of money to actually put in an application for financing before the repairs were done. Because no application was made, the Blanches were never given or denied financing.

(11) Hewitt testified that he was unable to make most of the repairs because he was living outside of the state. Hewitt argued that even if he failed to make the repairs as required under the contract, the Blanches could have made the repairs and they would have been reimbursed or, alternatively, they could have opted out of the contract in light of the alleged cost to repair the property. Nonetheless, Hewitt stated that he spoke with Mr. Blanche a number of times after receiving correspondence ¹ from him regarding the repairs in question and instructed Mr. Blanche to either send him estimates or make the repairs and he would reimburse for the cost.

(12) Hewitt maintained that most of the needed repairs were minor except for the roof, which Allstate Insurance Company replaced in May of 1991. There is a factual dispute about the condition of the roof following these repairs. The Blanches say that Allstate only replaced damaged shingles and did nothing about the structural problems. Hewitt says he was assured by the roofer that the roof was in good shape after the repairs and contends that his obligation was satisfied. No inspection was done after the Allstate repairs were complete.

(13) The terms of the earnest money contract did not require Hewitt to make repairs unless or until he was in "receipt of all loan approvals and inspection reports." ² The Blanches proceeded as if all the repairs found on the inspection report were to be made by the Hewitts regardless of loan approval.

(14) According to the earnest money contract, repairs exceeding $1,500.00 would not be covered by the Hewitts. ³ The addendum to the contract repeats two of the contract provisions. The addendum specifies that a licensed inspector would inspect the property and that the Hewitts would be responsible for making repairs based on that inspection. There is nothing in the addendum to indicate that the $1500.00 repair limit in the main body of the contract would not apply to the repairs found by the inspection. The addendum merely states that once the Hewitts' obligations are satisfied, all other repairs would be up to the Blanches. The roof, in a special provision, had an additional warranty expiring June 6, 1991 .

(15) The Blanches insist that the Hewitts were obligated to make all the repairs listed by the inspection report, notwithstanding the $1500.00 contract limitation. Further, the Blanches appear to have believed that all repairs were to be made before the Blanches had an obligation to apply for third-party financing. These contentions are disputed by Hewitt and are not consistent with the language of the contract itself.

(16) The Blanches have never tendered the full contract price for the property and do not do so now. Mr. Blanche testified that with all the repairs and improvements that have been made, he believes enough money has been expended. However, the Court notes that at least some of the money went to accommodate the Blanches' desire for improvements to the property, not merely repair or replacement.

(17) The Blanches continued making the monthly lease payment of $1000.00 to the Hewitts after the earnest money contract and lease option expired. ⁴ As of September 1991, the checks were made payable only to Peggy L. Hewitt by her instructions; ⁵ the last payment being made on April 10, 1992.

(18) During the time the Blanches were making the checks payable to Mrs. Hewitt, they discussed with her the possibility of purchasing the property by taking the property as is, assuming the outstanding mortgage, and giving her a $20,000 note in addition to the earnest money they already paid. However, once Lomas Mortgage U.S.A. began foreclosure proceedings, sometime in the early spring of 1992, the Blanches and Mrs. Hewitt agreed to different terms. In consideration for the assumption agreement, the Blanches were to take the property as is, assume the unpaid mortgage balance of $59,703.43 and any other encumbrances on the property, cure the default with the mortgage company of $7,269.73, and apply the earnest money given under the contract that had previously expired.

(19) The Blanches were concerned they would not have good title to the property without Hewitt's signature. On May 8, 1992 , the Blanches sent a letter to Mrs. Hewitt explaining the need for power of attorney from Hewitt to convey the property. At this point, the Blanches did not know whether the Hewitts had divorced, separated, or even if Mrs. Hewitt was in contact with her husband.

(20) Once the assumption agreement and deed were drafted they were sent via facsimile to Mrs. Hewitt in Tacoma , Washington , to be signed by both her and Hewitt. When they were returned via facsimile to the Blanches, the only signature on the documents was that of Mrs. Hewitt. The documents were notarized July 2, 1992 , as the date the assumption deed and assumption agreement were executed by Mrs. Hewitt.

(21) After receiving the documents from Mrs. Hewitt, the Blanches had a conversation with her that led them to believe she had received approval from her husband regarding the conveyance of the property. ⁶ Believing that Hewitt had consented to the sale, the Blanches sent the assumption deed and agreement back to Mrs. Hewitt so she could have Hewitt sign them. However, the Blanches never heard back from Mrs. Hewitt regarding when Hewitt would sign the papers. The Blanches were obviously still concerned that Hewitt's signature was not on the documents. Consistent with this concern, a letter sent by Mrs. Blanche to Mrs. Hewitt on September 20, 1992 , reiterated the need for Hewitt's signature on the documents.

(22) After Lomas Mortgage U.S.A. instituted foreclosure proceedings, the Blanches were able to assume the loan on the property by curing the default amount. The Blanches filed the assumption deed, still unsigned by Hewitt, with the County Clerk of Guadalupe County, Texas on August 24, :L992. Thereafter the Blanches began to take steps to repair and improve the property, all the while believing they were the true owners of the subject property.

(23) The repairs and/or improvements of items made to the property by the Blanches, in addition to the $969.00 expended prior to the expiration of the Lease Option, include the following:

2/25/94 : Extensive work on the in-ground pool by Gary Pools to repair structural damage, install hot tub, and replace various inoperative items totaling $15,650.00;

3/14/94 : Yard clearing by Richard Bosquez for a total of $293.50;

4/15/94 : Water heater replacement by Mr. Rooter Plumbing totaling $3186.08;

1/26/95 : Privacy Fence installation by Arrowhead Fence & Supply Co., Inc. totaling $637.00;

Date unknown: Electrical work by unknown company for $580.00;

Date unknown: Heating and air conditioning work by unknown company for $600.00;

Date unknown: Garage door & opener work by unknown company for $750.00.

There are additional itemized costs/expenditures submitted by the Blanches ⁷ ; however the evidence is unclear whether these additional costs were merely projections or had been undertaken at the time of trial. These costs include heating and air conditioning repairs for $2500.00, roof repairs for $7500.00, fence repairs for $2000.00 dollars, and ceiling and other consequential damage repairs stemming from the roof damage for $2500.00.

(24) Hewitt testified that he and Mrs. Hewitt purchased the property by way of assumption using combined funds in June of 1988. They lived in the home for approximately one year before they moved and rented the property out. Hewitt stated that he has no intention of returning to live and claim the property as his homestead.

(25) Hewitt testified that he never ratified or consented to the assumption of the property by the Blanches. There is no admissible evidence to contradict this statement. While the Court, as finder of fact, is entitled to disbelieve Hewitt's testimony, other evidence leads the Court to believe that Mrs Hewitt, in fact, attempted to convey the property without her husband's consent.

(26) Hewitt separated from his wife in August of 1991 but he says that Mrs. Hewitt knew how to contact him at any time. However, he admits that there was no contact between himself and Mrs. Hewitt between May 1992 and September 1992. He testified that he first found out about the foreclosure proceedings in a conversation with his wife in September of 1992, after she had already made the attempted conveyance of the property. He does not admit to approving or ratifying the sale at that time. Subsequently, he found out about the assumption by the Blanches from the recorded deed at the Guadalupe County courthouse.

(27) Any findings of fact above should be construed as conclusions of law to the extent necessary.

CONCLUSIONS OF LAW

(1) The income tax assessment against William S. Hewitt is correct and should be reduced to judgment.

(2) The IRS tax lien is valid and attaches to the property in question. However, the lien may be ineffective as to the Blanches if they qualify as "purchasers" under 26 U.S.C. §6323(a). A "purchaser" is:

... a person who, for adequate and full consideration in money or money's worth, acquires an interest ... in property which is valid under local law against subsequent purchasers without actual notice ...

26 U.S.C. §6323(h)(6).

(3) If the Blanches have a valid interest in the property, that interest attached at the time of the assumption deed and the later filing of the tax lien is ineffective as to that interest. 26 U.S.C. §6323.

(4) As an initial matter, the question of what rights and/or interests the Blanches have in the property must first be determined under applicable Texas law before federal law can be used to impose and enforce a tax lien on the property at issue. See Medaris v. United States [89-2 USTC ¶9565], 884 F.2d 832, 833 (5th Cir. 1989); 26 U.S.C. §6323(a) (interests must be determined under local law).

(5) There are no homestead claims to the property. Hewitt unequivocally stated that he has no intention of returning to live and claim the homestead exemption guaranteed under the Texas Constitution Art. XVI §50. See e.g., Sims v. Beeson, 545 S.W.2d 262, 263 (Tex.Civ.App.--Tyler 1976, writ ref'd n.r.e); Prince v. North State Bank of Amarillo, 484 S.W.2d 405, 409 (Tex.Civ.App.--Amarillo 1972, writ ref'd n.r.e.) (following well-settled law in Texas that in order to have abandonment of a homestead right owner must not occupy and intend to claim as homestead).

(6) The Hewitts acquired the property during their marriage using combined funds; therefore, it must be characterized as joint-managed community property under Texas law. See Tex. Fam. Code §§5.01(b), 5.22(c). Section 5.22(c) provides in relevant part that the community property "... is subject to the joint management, control, and disposition of the spouses, unless the spouses provide otherwise by power of attorney in writing or other agreement (emphasis added)." In the instant case, there is no admissible evidence to show that Hewitt gave any consent or authorization to Mrs. Hewitt, either in writing or orally, which would allow her to control or dispose of the property at any time either before or after the attempted conveyance of the assumption deed to the Blanches.

(7) Because it is clear under Tex. Fam. Code §5.22(c) that Mrs. Hewitt alone could not convey the entire property, the next issue presented is whether Mrs. Hewitt conveyed her undivided, one-half interest in this joint-managed, non-homestead community property by entering into an assumption agreement and assumption deed to convey the property to the Blanches. ⁸

(8) The Texas courts of appeals are split on whether one spouse may convey his or her undivided interest in joint-managed community property to a third person without first obtaining the other spouse's consent. Compare Vallone v. Miller, 663 S.W.2d 97, 98-99 (Tex. App.--Houston [14th Dist.] 1983, writ ref'd n.r.e) (holding conveyance invalid only because the instrument purported to convey entire interest not just one-half undivided interest held by spouse); ⁹ Williams v. Portland State Bank, 514 S.W.2d 124, 127 (Tex.Civ.App.--Beaumont 1974, writ dism'd) (finding that §§5.22 & 5.24 of the Texas Family Code do not foreclose one spouse from encumbering his or her one-half, undivided community property interest without first receiving consent from the other spouse) with Dalton v. Don J. Jackson, Inc., 691 S.W.2d 765, 768 (Tex. App.--Austin 1985, no writ) (declining to follow rule that would allow for one spouse to "unilaterally effect a partition of joint management community property").

(9) In light of the fact that the Texas Supreme Court has not yet spoken on this issue, this Court finds the better rule in accordance with Texas law to be that from the Dalton court. As Dalton points out, §5.22(c) of the Texas Family Code is very specific in its language concerning the disposition of joint management community property. Dalton , 691 S.W.2d at 767 and commentaries cited therein. Section 5.22(c) unequivocally states that the property must be managed, controlled and disposed of jointly unless there is written or some other authorization by either spouse to do otherwise. Furthermore, there are both constitutional and statutory procedures that must be followed to partition a community property interest, which would be circumvented if a partial conveyance by one spouse were allowed under the law. See Tex. Const. Art. XVI §15; Tex. Fam. Code §5.54; Dalton , 691 S.W.2d at 768. Accordingly, this Court finds that the attempted conveyance of the entire property by Mrs. Hewitt did not transfer her one-half, undivided interest to the Blanches.

(10) Alternately, the Blanches contend that Mrs. Hewitt could convey not only her interest but that of her husband because under unusual circumstances, such as abandonment, Mrs. Hewitt could manage, control and dispose of the community property as she saw fit. Tex. Fam. Code §5.25. This argument, however, does not lend itself to the facts of this case. Hewitt gave uncontradicted testimony to the effect that although he did not speak to his wife for a period of time, she still knew how to contact him. Assuming, without deciding, that Hewitt abandoned his wife, Mrs. Hewitt did not comply with the statutory procedures of §5.25 that would have entitled her to the sole management, control and disposition of the community property under Texas law. Id. The Court has not found nor has it been cited any other authority under which Mrs. Hewitt would have the right to convey the property without her husband's consent solely on the basis of abandonment.

(11) The Blanches argue that they are entitled to specific performance in light of Hewitt's failure to meet his obligations under the earnest money contract. The earnest money contract is unambiguous on its face. The contract gives the Blanches the option of leasing before the closing date of August 31, 1991 , not an option to buy. The plain meaning of the contract binds the Hewitts to sell and the Blanches to buy by the closing date. This is evidenced by the terms of the agreement requiring that in the event of default on the buyer's part, the seller can either sue for specific performance or take earnest money as liquidated damages. Texas law is clear that a contract for sale exists when the buyer has both these remedies. See, e.g., Gala Homes, Inc. v Fritz, 393 S.W.2d 409, 410 (Tex.Civ.App.--Waco 1965, writ ref'd n.r.e.) (citing to Paramount Fire Ins. Co v. Aetna, 163 Tex. 250, 253, 353 S.W.2d 841, 843 (Tex. 1962) and Moss v. Wren, 102 Tex. 567, 570, 120 S.W. 847 (Tex.1909)); Tabor v. Ragle, 526 S.W.2d 670, 675 (Tex.Civ.App.--Ft. Worth 1975, writ ref'd n.r.e.); Broady v. Mitchell, 572 S.W.2d 36, 40 (Tex.Civ.App.--Houston [1st Dist.] 1978, writ ref'd n.r.e.).

(12) Although the Blanches had the remedy of specific performance under the initial earnest money contract, they forfeited that right when they did not meet their end of the bargain to secure outside financing to purchase the property. See Cowman v. Allen Monuments, Inc., 500 S.W.2d 223, 226 (Tex.Civ.App.--Texarkana 1973, no writ) (ruling that a party who has materially breached the contract by failing to meet contract requirement cannot claim specific performance) (recognized in Hudson v. Wakefield, 645 S.W.2d 427, 430 (Tex.1983)). Although the Blanches argue that outside financing was unavailable, the Blanches merely approached certain mortgage companies and decided not to apply based on their belief that the property would not meet city codes. The Court has insufficient evidence on which to find that the Blanches were prevented from obtaining financing by Hewitt's failure to repair. Thus the Court finds that the Blanches are not entitled to specific performance on the contract for sale of the property.

(13) Further, as previously discussed, the Blanches have never offered to perform their part of the earnest money contract by tendering the contract price. The Blanches are not entitled to specific performance where they are not willing to abide by the terms of the contract they seek to enforce. ¹⁰

(14) The Blanches also appear to allege in the alternative that they should be granted specific performance because Hewitt refused to recognize their option to purchase the property by way of the assumption deed and agreement. This contention fails for two reasons. First, even assuming the initial agreement was an option contract rather than a contract for sale, the contract failed or expired by its own terms on June 30, 1991 , and therefore had no continuing effect on the subsequent agreement between the Blanches and Mrs. Hewitt. Second, assuming the contract could be construed to allow the Blanches the option of purchasing, as opposed to leasing, and that option could have been extended past the expiration date of June 30, 1991, the Blanches would still have failed to strictly adhere to the conditions of the option under the contract by failing to securing outside financing or otherwise tendering the contract price by the 'option' date. See Scott v. Vandor, 671 S.W.2d 79, 84 (Tex.Civ.App.--Houston [1st. Dist.] 1984, writ ref'd n.r.e) (applying rule that option can only be accepted if purchaser complies with terms of the agreement). Thus the Court finds that the Blanches are not entitled to specific performance of the contract as an option contract.

(15) The Blanches also make a vague claim of estoppel alleging that the IRS, through the Hewitts, is estopped from denying them title to the property because the Blanches detrimentally relied on the earnest money contract to give them title to the property. In order to assert equitable estoppel, the party raising this defense must prove all of the following elements: (1) a false representation or concealment of material facts (2) made with knowledge, actual or constructive, of those facts, (3) with the intention that it should be acted on, (4) to a party without knowledge, or the means of acquiring knowledge of those facts, (5) who detrimentally relied upon the misrepresentation. Casa El Sol-Acapulco, S.A. v. Fontenot, 919 S.W.2d 709, 717 (Tex. App.--Houston [14th Dist.] 1996, writ dism'd by agr.) (citing Schroeder v. Texas Iron Works, 813 S.W.2d 483, 489 ( Tex. 1991)).

(16) The Blanches' estoppel argument fails because there is no evidence in the record that Hewitt falsely represented to the Blanches that they were the owners of the property or that he concealed material facts leading the Blanches to believe that they had acquired title to the property. See Barfield v. Howard M. Smith Co., 426 S.W.2d 834, 838 (Tex.1968) (finding that failure to prove one or more of elements is fatal); see also Heckler v. Community Health Serv., 467 U.S. 51, 59-60 (1984) (at minimum, elements of estoppel must be proven). On the contrary, the evidence supports a finding that the Blanches knew there were problems in their dealings with Hewitt early on, evidenced by their admission of Hewitt's comment that he was thinking of putting the property up for sale in the summer of 1991 and their admitted failure to make sure that Hewitt consented to the assumption. Barfield, 426 S.W. 2d at 838 (party must use due diligence to ascertain the truth of matters upon which they rely). Moreover, if the Blanches relied on the contract to give them equitable title to the property, their reliance was misplaced and unreasonable since they did not fulfill the terms of the contract by obtaining or seeking to obtain outside financing nor did they tender the full purchase price. See Heckler, 467 U.S. at 59 (using the defense of equitable estoppel requires a reasonable reliance in addition to a change of position which makes the party worse off).

(17) The Blanches also claim estoppel because the Hewitts knew and did not object to the investments and valuable improvements made to the property by the Blanches. Estoppel by silence maybe a valid defense in cases where one party leads another to act by the first party's silence; however, there must be a fiduciary duty or a confidential relationship which gives rise to a duty to speak. Barfield, 426 S.W.2d at 838; Casa El Sol-Acapulco , S.A. v. Fontenot, 919 S.W.2d at 719.

(18) The evidence in this case does not support a claim of estoppel by silence. First, there is no evidence that Hewitt induced the Blanches by his silence to make improvements or investments to the property, nor is there evidence that Hewitt knew such improvements or investments were being made. Second, no confidential or fiduciary relationship exists in this case that would warrant such a claim. These parties were dealing at arms length as purchaser and seller. Therefore, this Court finds no support for the Blanches' claim of estoppel.

(19) Since this Court finds the property has not been conveyed nor may specific performance be compelled, the Blanches fail as "purchasers" pursuant to 26 U.S.C. §6323. Under Texas law, the Blanches have no valid interest in the property which would have attached before the tax lien was filed.