Lien for taxes: Priority of lien: Judgment creditor. --
A federal tax
lien against a subcontractor had priority over the judgment lien of the
subcontractor's creditor as to amounts owed by the general contractor to
the subcontractor. The subcontractor owed employer pension contributions
and federal taxes and had an outstanding amount due from a general
contractor. The contractor received a notice of levy from the IRS and,
the following year, the pension trustees received a judgment against the
contractor for the amount that he owed to the subcontractor. The IRS
successfully argued conversion by the trustees since they knew of the
IRS lien prior to receipt of the funds from the general contractor
pursuant to judgment.
ZOBEL, District Judge: Peabody Construction Company, Inc.
("Peabody") owed $27,642.32 to Baldwin Steel
("Baldwin") as payment for subcontracting work. In turn,
owed $31,185.60 to Trustees of the Iron Workers District Council of New
England Pension, Health and Welfare, Annuity, Vacation and Education
Funds (the "Trustees") in employer contributions under the
Employee Retirement Income Security Act. At the same time,
also owed money to the Internal Revenue Service (the "IRS")
for certain unpaid tax liabilities.
received a Notice of Levy from the IRS in 1999 regarding this
obligation. The Trustees sued
in federal court in 2000 as a reach-and-apply defendant.
raised the issue of this lien's potential priority over the Trustees'
claim, but neither Peabody nor Baldwin nor the Trustees moved to include
the IRS as a party to that suit.
notified the IRS about the suit, but the IRS never moved to join the
litigation or provided any detailed or dated documentation of its lien.
Consequently, nothing in the record specifically undermined the
Trustees' showing of a choate claim deserving payment, and the court
to pay the money it otherwise owed to
to the Trustees instead.
complied with this order.
In this law suit brought some years later, the
's payment to the Trustees as subverting the alleged priority of the IRS
lien and has named both Peabody and the Trustees as defendants. In Count
One, plaintiff asserts that
is liable for refusing to surrender to the IRS the funds owed to
. In Count Two, plaintiff alleges that the Trustees misappropriated
Baldwin's property in accepting Baldwin's funds from
, effectively arguing conversion, since the Trustees knew of the IRS
lien prior to accepting such funds. Plaintiff seeks payment from each
defendant in the amount of the lesser of either (1) the funds paid by
Peabody to the Trustees in the prior litigation, plus interest, or (2)
Baldwin's unpaid tax liabilities, plus interest and any applicable
Plaintiff and the Trustees each now separately moves for summary
judgment on Count Two. In order to establish a claim for conversion
law, plaintiff must show that
defendant intentionally and wrongfully exercised control or dominion
over the personal property; (2) the plaintiff had an ownership or
possessory interest in the property at the time of the alleged
conversion; (3) the plaintiff was damaged by the defendant's conduct;
and (4) if the defendant legitimately acquired possession of the
property under a good-faith claim of right, the plaintiff's demand for
its return was refused.
Evergreen Marine Corp. v. Six Consignments of Frozen Scallops, 4
F.3d 90, 95 (1st Cir. 1993). Factors one, three and four are easily
established in the instant case. The first factor of control or dominion
over the personal property requires "intentional deprivation of
property from the rightful owner." Kelley v. LaForce, 288
F.3d 1, 12 (1st Cir. 2002). In the instant case, the Trustees intended
to, and did, obtain control of the funds from
. Even though the Trustees received the funds at issue as the result of
a court order, "[i]t is no defense to conversion for defendant to
claim that he acted in good faith, reasonably believing that he had a
legal right to possession of the goods." Id.
The Trustees accepted the funds with knowledge that the IRS's interest
remained unresolved, and thus, at the risk of a subsequent decision in
the IRS's favor. With respect to the third factor, plaintiff alleged
damage from the deprivation of funds, and the Trustees have not
contested this allegation. Regarding factor four, the Trustees also have
not disputed plaintiff's claim that they had rejected plaintiff's demand
for payment. The remaining issue is the second factor, namely, whether
plaintiff had an ownership or possessory interest in the
funds at the time the Trustees acquired such funds.
Plaintiff asserts that its ownership interest derives from the IRS tax
lien against Baldwin, as filed in 1999 against
in the New Hampshire Office of the Secretary of State. The Trustees
dispute this claim on several grounds. First, the Trustees characterize
the funds paid by
as a setoff intended to compensate Baldwin's creditors and argue that,
under state law,
never had any property interest in setoff funds. Rather, the agreement
between Peabody and Baldwin intended for these funds to be paid directly
to Baldwin's creditors with no interest held or retained by
. Because a federal tax lien may only attach "what is defined as
property by state law," the Trustees maintain that IRS lien never
successfully attached the setoff funds. Markham v. Fay [ 96-1
USTC ¶50,118], 74 F.3d 1347, 1364 (1st Cir. 1996). Assuming arguendo
that a setoff existed, however, the right of setoff becomes choate only
upon its exercise. SeeHorton Dairy Inc. v. United States
USTC ¶50,195], 986 F.2d 286, 291 (8th Cir. 1993), and United
States v. Bell Credit Union [ 88-2
USTC ¶9564], 860 F.2d 365, 369 (10th Cir. 1988). The record
contains no evidence to support the Trustees' claim that
exercised the setoff, thereby making it choate, before the IRS filed its
lien. Although the Trustees refer the Court to exhibits they filed in a
separate action, these exhibits are not before this Court and, thus,
cannot be considered in connection with the instant motions.
The Trustees next contend that
's failure to pay its employee obligations constituted a material breach
of contract enforceable by the Trustees as intended third party
beneficiaries of the agreement between Baldwin and Peabody. The Trustees
argue further that upon nonpayment by Baldwin to the Trustees,
became directly liable to the Trustees as third-party beneficiaries. As
a result, the funds paid by
's property and, thus, never became subject to the IRS lien. Courts in
"have adopted the rule of the Restatement (Second) of Contracts §302
(1981), and limit enforcement by [third-party] beneficiaries to those
who are intended beneficiaries." Miller v. Mooney,
57, 62 (2000) (emphasis in original). "The intent must be clear and
definite" to establish third-party beneficiary status. Anderson
v. Fox Hill Village Homeowners Corp., 424
365, 366-367 (1997). As the Trustees have not identified any language in
the agreement between Baldwin and Peabody in support of their claim, or
any other evidence of intent to benefit the Trustees, this reasoning
fails to demonstrate why the IRS may not maintain a lien against the
funds owed by
The Trustee's last set of arguments challenge the perfection, filing and
refiling of the IRS lien and specifically rely upon an assertion that
the Uniform Commercial Code (the "UCC") governs federal tax
liens. In response, plaintiff argues, based on the plain text of IRS
regulations, that the Internal Revenue Code (the "IRC"), not
the UCC, governs federal tax liens. See, e.g., 26 C.F.R.
§301.6323(f)-1(c). The Trustees offer no authority in support of their
contrary position, and other courts have found that "[t]he
statutory UCC requirements for the creation and perfection of security
interests governing consensual, commercial transactions are completely
at odds with the framework for tax liens provided within the Internal
Revenue Code." In re Elliot [ 87-1
USTC ¶9118], 67 B.R. 866, 869 (D. R.I. 1986). Indeed, the cases the
Trustees cite resolve the questions of perfection and filing under the
IRC, not the UCC. See, e.g., Waste Management of
Missouri v. Evert [ 99-2
USTC ¶50,827], 188 F.3d 1002, 1004 (8th Cir. 1999); Griswold v.
U.S. [ 95-2
USTC ¶50,419], 59 F.3d 1571, 1575 (11th Cir. 1995); and U.S. v. New York State Dept. of Taxation and Finance [ 2003-1
USTC ¶50,300], 138 F.Supp.2d 392, 397 (
2001). The Trustees' further argument that plaintiff filed its Notice of
Lien in the wrong state reflects an incomplete reading of the IRC. The
statute in question places the site of personal property held by a
corporation in the state "at which the principal executive office
of the business is located," in this case,
, and not
as urged by the Trustees. 26 U.S.C. §6323(f)(2)(B).
Consequently, the Trustees have offered no persuasive challenge to
plaintiff's claim that the IRS lien constituted an ownership or
possessory interest in the
funds at the time these were paid to the Trustees.
The Trustees raised a separate concern about the amount of the IRS lien
and whether any responsible persons, for example a corporate officer,
may have already provided payment to the IRS in partial satisfaction of
the lien. Plaintiff already addressed this issue in its pleadings by
seeking damages in an amount equal only to the lesser of the funds
received by the Trustees or the total tax liability of
, including applicable accrued interest and penalties, as of the date
that judgment is entered. In other words, plaintiff's damages would in
no case exceed
's total outstanding tax liability.
Accordingly, plaintiff's motion for summary judgment (# 23 on the
docket) is allowed, and defendant's motion for summary judgment (# 25 on
the docket) is denied.
Derrington, et al., Plaintiffs v.
United States of America
District Court, West.
September 12, 2003
Collection: Tax liens: Validity and priority against third parties:
Constructive trust. --
The IRS was
entitled to levy upon funds held by a bankruptcy estate to satisfy a
debtor's delinquent tax obligations. Because funds transferred into the
bankruptcy estate by a third party as part of an investment plan were
determined to be a loan, the debtor was deemed the owner of the
transferred funds at the time of the levy. The third party's prior
testimony and an examination of the agreement between the third party
and the debtor indicated that the transaction constituted a loan. As
such, the transferred funds were appropriately subject to an IRS levy.
Moreover, the court rejected the third party's argument that a
constructive trust arose on its behalf to protect the transferred funds
from IRS levy. The court noted that the IRS levy preceded the event
giving rise to the possible establishment of a constructive trust.
GRANTING MOTION FOR SUMMARY JUDGMENT
LASNIK, District Judge: This matter comes before the Court on a motion
for summary judgment (Dkt. # 15) filed by defendant United States of
America ("the IRS"). The IRS seeks dismissal of claims for a
refund filed by plaintiffs Donald Derrington, et al.
(collectively, "Plaintiffs"). The Court grants the IRS's
motion for the reasons set forth in this Order.
This suit centers upon the ownership of approximately $235,000 seized in
2000 by the IRS to collect income taxes, interest and penalties owed by
G. Sloan Smith ("Smith"). The funds levied by the IRS were
payable to Smith or his nominee, Plains Group Ltd. ("Plains
Group"), due to claims Smith obtained against a bankruptcy estate
with funds supplied by Plaintiffs. Plaintiffs argue that they owned the
claims from which the funds were derived. The IRS contends that Smith
acquired the claims with money loaned to him by Plaintiffs and therefore
the IRS's liens against the claims trumps any interest Plaintiffs may
have had in the claims. Discussion of a fairly complex set of
transactions is necessary for resolution of this issue.
In the early 1990s, the IRS assessed Smith with federal income tax
liabilities arising from his failure to pay taxes owed for several
years. (Bedford Decl. ¶3). Pursuant to 26 U.S.C. §6321,
statutory liens arose against Smith's property and rights to property
for the tax liabilities. Id.
¶4. In November of 1993, the IRS recorded nominee liens against Plains
¶5; see also Bedford Decl. Exs. A-B (notices of federal tax
In 1991, Wallace and Clarice Hall ("the Halls") and their
entities entered bankruptcy proceedings in In re Wallace and Clarice
Hall, Bankr. No. 91-09143,
Bankruptcy Court, Western District of
. (Hankla Decl. Ex. A (Derrington Decl.) ¶2). The Halls held a fifty
percent interest in the Mariner Village Mobile Home Park in
Plaintiffs learned of an investment opportunity involving the Halls'
bankruptcy through John Widmer, a mutual friend of Plaintiffs and the
¶7. The plan called for Plaintiffs, along with other investors, to
purchase the unsecured claims against the Halls' estate, seek to have
the bankruptcy case dismissed, and then recoup the principal investment
plus points and interest with income generated by the Halls' interest in
¶ ¶5, 12. Plaintiffs initially planned to use an individual named Tim
Golden ("Golden") to raise the funds and implement the
investment plan. Id.
¶5. Golden gave a presentation to Plaintiffs in which he used a term
sheet that described a one-year loan to an unspecified borrower. Id.
Ex. 2. The plan called for Plaintiffs to earn a thirty-three percent
return on their investment: a fifteen percentage point origination fee
and eighteen percent interest. Id.
Golden was unable to complete the deal. Id.
¶2. However, in April of 1994, the Plaintiffs met with Smith and the
parties finalized a deal that was similar to that proposed by Golden. Id.
¶12. Plaintiff Donald Derrington described the plan as follows:
The deal with
Plains Group was to be the same as the deal with Golden, that is, we
were putting up half the money, that Sloan Smith or some other investor
would be going in on the rest of the transaction, and that our
investment was to be secured by Hall's 50% ownership in the
manufactured home park. The thrust was also to get the bankruptcy
dismissed, but that our investment was to be secured by Hall's 50%
ownership of the
manufactured home park. We were also going to receive a 15% loan fee and
18% interest. If the Halls ended up with
, we were going to be paid out over time. If the Halls did not end up
, we would have the security of the funds to be paid out on the
bankruptcy claims from the funds in the hands of the Hall bankruptcy
The net result
was that among the investors we put $325,000, which we paid to Sloan
Smith or Plains Group Ltd. about
April 21, 1994
Plaintiffs and Smith signed a document entitled "Agreement to
Consolidate Loans and Negotiate Settlement" (the
Ex. 3. The Agreement appears to have contemplated that the investors
would loan funds directly to the Halls and that the Halls would use the
proceeds to settle the claims against them. 1
See id. at ¶4 ("All funds loaned to the Halls by the undersigned
lenders shall be subject to the terms of a loan agreement between the
Halls and the undersigned lenders and shall be secured by the Halls
[sic] 50% ownership in Mariner Village Mobile Home Park.").
However, the Halls did not sign the Agreement. 2
April 21, 1994
, Plaintiffs deposited funds into a Plains Group bank account. Id.
¶13. Smith then used the funds to purchase claims against the Halls'
bankruptcy estate. (Hankla Decl. Ex. C (Derrington Dep.) at 44).
Derrington accompanied Smith while he negotiated the claim purchases. Id.
The claims appear to have been acquired in the name of the Plains Group.
(Hankla Decl. Ex. A ¶19).
Smith did not acquire all of the creditors' claims and the bankruptcy
trustee remained in control of the estate. Id.
¶ ¶16-17. The Halls' fifty percent interest in
was sold through the bankruptcy proceeding, and the investors were
therefore limited to the claims for repayment of the investment. Id.
November 2, 1994
, unbeknownst to Plaintiffs, the bankruptcy trustee made an interim
distribution on the claims acquired by the Plains Group in the amount of
¶22. The check distributing these funds was payable to Sloan Smith.
(Hankla Decl. Ex. D).
Smith did not inform Plaintiffs that he had received this distribution.
(Hankla Decl. Ex. A ¶22). Plaintiffs later learned of the distribution
from bankruptcy court records and demanded an accounting from Smith. Id.
¶27. Smith informed Plaintiffs that he had reinvested the funds in
other ventures. Id.
Shortly thereafter Plaintiffs hired an attorney and initiated a lawsuit
against Smith in the United States District Court for the District of
Oregon. In deposition testimony taken in that litigation the Plaintiffs
characterized the transaction as a loan to Smith or the Plains Group. See
Hankla Decl. Ex. C (Derrington Dep.) at 46 (testifying that he though he
was loaning money to Sloan Smith); Hankla Decl. Ex. B (Nortman Dep.) at
18-19 (testifying that he thought he was loaning money to Smith or the
Plains Group); Hankla Decl. Ex. F (Halver Dep.) at 18 (testifying that
he thought he was loaning money to the Plains Group). Plaintiffs
obtained a judgment against Smith and the Plains Group by default.
(Second Hankla Decl. Ex. F).
After the $373,848 distribution, approximately $235,000 remained due
from the Halls' bankruptcy estate on the Plains Group claims. (Hankla
Decl. Ex. I). Plaintiffs sued the bankruptcy trustee in an effort to
prevent distribution of the remaining amount to Smith. Id. Prior
to issuance of the default judgment against Smith in the Oregon
litigation, Plaintiffs and the bankruptcy trustee reached an agreement
whereby the trustee would deposit the remaining amount into Plaintiffs'
attorney's trust account pending resolution of the Oregon litigation. Id.
However, before the bankruptcy trustee transferred the funds to the
trust account, the IRS issued a notice of levy to the trustee commanding
him to pay the Plains Group property to the IRS for taxes owed by Smith.
Decl. Ex. C). Plaintiffs and the IRS negotiated for several months
regarding whether the IRS might release the levy and pursue its tax
claim in the
litigation. (Hankla Decl. Ex. I). Plaintiffs and the IRS were unable to
reach an agreement, and Plaintiffs initiated a wrongful levy action
against the IRS in this Court. (Hankla Decl. Ex. L). On
June 14, 2000
, the Court dismissed that action as time-barred. (Hankla Decl. Ex. T).
In September of 2000 the IRS obtained the levied funds, amounting to
$239,498.29. The levied funds paid all of Smith's outstanding tax
liabilities with the exception of approximately $3,000 due for 1990.
(Bedford Decl. ¶18). In April of 2001, Plaintiffs filed
istrative claims with the IRS in an attempt to recover the money seized
by the IRS. (Colvin Decl. Ex. L). The IRS denied Plaintiffs' claims.
(Colvin Decl. Ex. M). Plaintiffs initiated this lawsuit on
May 22, 2002
B. Summary Judgment Standard.
Summary judgment is proper if the moving party shows that "there is
no genuine issue as to any material fact and that [it] is entitled to
judgment as a matter of law." Fed. R. Civ. P. 56(c).
Once a defendant who is seeking summary judgment has demonstrated the
absence of a genuine issue of fact as to one or more of the essential
elements of the plaintiff's claims, the plaintiff must make an
affirmative showing on all matters placed at issue by the motion as to
which the plaintiff has the burden of proof at trial. Celotex Corp.
v. Catrett, 477
317, 323 (1986). In such a situation Fed. R. Civ. P. 56(e)
"requires the nonmoving party to go beyond the pleadings and by her
own affidavits, or by the `depositions, answers to interrogatories and
admissions on file,' designate `specific facts showing that there is a
genuine issue for trial."' Id.
at 324 (quoting Fed. R. Civ. P. 56(e)); see alsoMatsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87
(1986) ("When the moving party has carried its burden under Rule
56(c), its opponent must do more than simply show that there is some
metaphysical doubt as to the material facts.").
C. Ownership of the Claims Against the Hall Bankruptcy Estate.
All parties agree that the ownership of the claims against the Hall
bankruptcy estate is the key issue in this litigation. See Motion
at 12 ("The instant refund suit turns on a property question: who
owned the Plains Group claims against the Hall bankruptcy estate, Smith
or plaintiffs? If Smith owned the claims, then the government's liens
for taxes attached to them, the levy was proper, and this suit must be
dismissed."); Response at 13 ("[T]he only issue in this case
is who is the rightful owner of the funds levied upon by the IRS from
the Halls' bankruptcy estate? If Smith owned the claims, then the
Government's liens attached to that property and the levy was
proper."). When levying funds "the IRS `steps into the
taxpayer's shoes' ... [and] acquires whatever rights the taxpayer
himself possesses." United States v. National Bank of Commerce
USTC ¶9482], 472 U.S. 713, 725 (1985) (internal citation omitted).
"[S]tate law controls in determining the nature of the legal
interest which the taxpayer had in the property." Id.
at 722. Therefore, if under state law Smith owned the claims, the IRS
properly stepped into Smith's shoes when it levied the funds payable for
In support of its argument that Smith owned the claims, the IRS cites
the above-quoted deposition testimony given by Plaintiffs in the
litigation in which each of the Plaintiffs testified that the
transaction involved a loan to Smith or the Plains Group. Additionally,
the IRS cites a letter plaintiff Nortman wrote to Smith regarding the
"Loan to Plains Group Ltd/Plains Mgmt Ltd/Sloan Smith" in
which Nortman discussed payment of all "principle
[sic]/points/interest" due to the investors. (Hankla Decl. Ex. A.
Ex. 5). Additionally, when the Halls sued the bankruptcy trustee,
Plaintiffs' prior attorney wrote a letter to the Halls' attorney
threatening Rule 11 sanctions. (Hankla Decl. Ex. J). In that letter
Plaintiffs' attorney stated that his clients had "lent money to
Plains Group." Id.
The IRS also notes that once it became apparent that if the investment
constituted a loan to Smith or the Plains Group, Plaintiffs would not
recover the funds levied the by IRS, Plaintiffs' prior attorney advised
them not to refer to the transaction as a loan. For example, Plaintiffs'
prior attorney advised his clients "never to say anything that
undercuts our position that you owned and own the claim." (Hankla
Decl. Ex. N). Plaintiffs' prior attorney also stated in a letter to
Plaintiffs that if Plaintiffs ultimately were considered lenders to
Smith or Plains Group, they could "[k]iss the $235,000 in
goodbye." (Hankla Decl. Ex. O).
Plaintiffs argue that their prior testimony that the transaction
constituted a loan to Smith or the Plains Group should be disregarded
because they were inexperienced investors. See Response at 14
("To an unsavvy investor, such as the Plaintiffs, an advance of
money to an agent for him to purchase bankruptcy claims for the
Plaintiffs may have the feel or color of a `loan;' however, this is
clearly not a `loan' in the legal sense."). Additionally,
Plaintiffs attempt to explain their prior testimony by stating that
reference to "`loaning' the investment funds to Smith ... was their
short-hand way of describing the investment they made through
at 15 (emphasis in original) (citing Derrington Decl. Ex. D; Nortman
Decl Ex. C; Colvin Decl. Ex. O). Finally, Plaintiffs submit a purported
transcript of a telephone conversation in which Plaintiffs contend that
Smith stated that the transaction did not constitute a loan to him. 3
See Colvin Decl. Ex. F at 6.
Having considered the evidence in the light most favorable to
Plaintiffs, the Court finds that the transaction constituted a loan by
Plaintiffs to Smith or the Plains Group. Not only is this demonstrated
by Plaintiffs' prior testimony, but examination of the terms of the
agreement, admitted by all parties, shows that Plaintiffs loaned the
funds to Smith or the Plains Group and did not own the claims in the
Hall bankruptcy estate. For example, Plaintiffs admit that the terms of
the investment called for a thirty-three percent return on investment: a
fifteen percentage point origination fee and eighteen percent in
interest. See, e.g., Hankla Decl. Ex. A (Derrington Decl.) Ex. 2
(original terms sheet); Hankla Decl. Ex. A (Derrington stating that
"[w]e were also going to receive a 15% loan fee and 18% interest).
Plaintiffs maintained that this was their expected return even after
they denied the transaction was a loan. See, e.g., Hankla Decl.
Ex. R (
March 30, 2000
Nortman Dep.) at 19 (testifying that the agreement with Smith called for
a return composed of a fifteen point fee and eighteen percent interest).
The undisputed terms of the investment demonstrate that Plaintiffs did
not contemplate an equity investment, in which they would assume the
risk that the claims would not cover the funds they advanced (or the
chance that the claims would be worth more than their principal and
expected return). Furthermore, Plaintiffs' recent redefinition of the
transaction as an "investment," rather than a
"loan," does not support Plaintiffs' position. A loan is a
particular kind of investment; the most common is known as a
The evidence before the Court demonstrates that Plaintiffs' investment
constituted a purchase money loan to Mr. Smith. Plaintiffs did not own
the claims levied by the IRS.
D. Constructive Trust.
Plaintiffs contend that even if the Court determines that they did not
own the claims, the Court should find that a constructive trust in their
favor arose prior to the time the IRS liens attached to the property.
(Response at 16-18). In support of this argument Plaintiffs cite F.T.C.
v. Crittenden, 823 F.Supp. 699 (C.D. Cal. 1993). Relying upon
law that a constructive trust may exist if a court finds "merely
that the acquisition of property was wrongful and that the keeping of
the property ... would constitute unjust enrichment," the Crittenden Court
imposed a constructive trust retroactively to prime a federal tax lien. Crittenden,
823 F.Supp. at 703. Because the funds were wrongfully taken from
consumers when the taxpayer secretly overcharged them, by virtue of the
constructive trust "the funds ... belong[ed] to Crittenden's
injured customers, and not to Crittenden." Id.
"[a] constructive trust arises where a person holding title to
property is subject to an equitable duty to convey it to another on the
ground that he would be unjustly enriched if he were permitted to retain
it." Baker v. Leonard, 120 Wn. 2d 538, 547-48 (1993). Here,
in contrast to Crittenden4
, assuming that a constructive trust arose on Plaintiffs' behalf, such a
trust could not have been formed prior to the time the IRS liens
attached to the property. The parties do not dispute that Plaintiffs
intended Smith and the Plains Group to utilize Plaintiffs' funds to
acquire the creditors' claims. Smith could not have breached his duty to
convey the proceeds of those claims to Plaintiffs until he failed to
transfer to Plaintiffs the $373,848 interim distribution on
November 2, 1994
Because the IRS liens attached to the claims when they were purchased by
Smith/the Plains Group, any constructive trust on Plaintiffs' behalf
would have been inchoate when the tax liens attached and therefore would
not prime the liens. Blachy v. Butcher [ 2000-2
USTC ¶50,629], 221 F.3d 896, 906 (6th Cir. 2000).
For the foregoing reasons, the Court GRANTS the IRS's motion for summary
judgment (Dkt. # 15). The Clerk of the Court is directed to enter
judgment in favor of the IRS and against Plaintiffs. The Clerk of the
Court is also directed to send copies of this Order to all counsel of
Plaintiffs state that "at least on paper, the investors actually
entered into an agreement with the Halls in which the investors would
loan money to the Halls and the Halls agreed to pay points and
interest." (Response at 4). However, Plaintiffs admit that this was
not "the deal contemplated by the investors." Id.
Additionally, it is unlikely that the Halls could have used such loan
proceeds to pay off creditors because at the time the Agreement was
signed the Halls were in bankruptcy proceedings.
Because the statement is made by a person other than the declarant to
prove the truth of the matter asserted, the transcript constitutes
inadmissable hearsay evidence. Fed. R. Evid. 801, 802. A party may not
defeat a motion for summary judgment on the basis of inadmissible
hearsay evidence. Orr v. Bank of
, NT & SA, 285 F.3d 764, 783 (9th Cir. 2002). Additionally, even
if this transcript did not constitute inadmissible hearsay evidence, it
would not likely assist Plaintiffs because Smith appeared to be
speculating regarding what Hall's attorneys would consider the
transaction to be based upon the written agreement. See Colvin
Decl. Ex. F at 6 ( "I mean she faxed all the stuff down to her
attorney's [sic] yesterday and those guys got it all and they're saying
what the hell is this? This loan was made to Clarise [Hall], this wasn't
made to Sloan Smith. Sloan Smith is the facilitator, he's the guy who's
managing it. There's no loan to Sloan Smith.").
In Crittenden the constructive trust arose at the time the
taxpayer secretly overcharged the customers.
Plaintiffs contend that "a constructive trust arose when Smith
wrongfully purchased the claims in the name of Plains Management, Ltd.
(not the Plains Group) for his own purposes, and intended to keep the
proceeds for himself." (Response at 17). However, the parties do
not dispute that Smith acquired the claims through the Plains Group,
subsequently transferred them to Plains Management, and finally
transferred them back to the Plains Group. See, e.g., Hankla
Decl. Ex. A ¶ ¶14, 19 (Smith and Derrington acquired claims from funds
in "Plains Group Ltd." account and "another entity called
Plains Management was assigned the claims"); Hankla Decl. Ex. L
(wrongful levy complaint) ¶15 ( "Eventually, Smith caused Plains
Group Ltd. to assign the claims to defendant Plains Management (USA)
Ltd., or Plains Management Ltd. Thereafter, Smith caused Plains
Management (USA) Ltd., or Plains Management Ltd. to reassign the claims
to Plains Group Ltd."). Even if a constructive trust arose when the
claims were assigned from the Plains Group to Plains Management, the
trust would have been inchoate when the tax liens attached and therefore
would not prime the IRS liens. Blachy v. Butcher [ 2000-2
USTC ¶50,629], 221 F.3d 896, 906 (6th Cir. 2000).
States of America, Plaintiff v. Timothy J. McCarville, Evelyn W.
McCarville, Bank One, and Administrative Committee of the Money Purchase
Plan of Local 400 and Mechanical Contractors Association of North
Central Wisconsin, Defendants.
District Court, East.
August 21, 2003
Assessment of tax: Certificates of Assessments and Payments: Prima
facie case: Evidence: Frivolous arguments: Jurisdiction. --
of Assessments and Payments reflecting adjusted outstanding assessments
against a retired steamfitter for seven tax years established a prima
facie case of tax liability absent a showing of error. Because the
taxpayer merely denied liability and filed nothing that drew the
evidence into dispute, the government was entitled to have the
assessments reduced to judgment. His contention that he could not be
considered a "taxpayer" because he simply exercised his
inalienable right to work as a steamfitter was rejected as meritless.
The individual could not declare himself to be outside the scope of the
federal tax laws. Further, the court had jurisdiction over the case,
which involved federal law and federal taxation.
Tax liens: Date assessment created: Property subject to tax liens:
Employee pension plans: Evidence. --
liens against a delinquent taxpayer arose on the same dates as the
unpaid taxes were assessed by the IRS, and the individual introduced no
evidence to dispute that the government provided him with proper notice
and demand for payment. Thus, the liens, which attached to "all
property and rights to property," reached all of his rights and
property interests in an employee benefit plan. His contention that the
liens were not valid under state (
) law were rejected because tax liens are subject to federal law.
Statute of limitations: Three-year period: Tax returns: Forms W-2:
Substitute returns: Tolling of limitations period: Offers in compromise.
The IRS's tax
assessments against an individual who failed to timely file returns and
who contended that he was not subject to federal income tax were not
barred by the statute of limitations. The IRS assessed the taxes within
the permitted three-year period, and the government had 10 years in
which to collect the amounts owing. Neither the Forms W-2 filed by the
taxpayer's employer nor the substitute returns filed by the IRS
qualified as "returns" for purposes of starting the
limitations period. Instead, the untimely returns filed by the taxpayer
triggered the running of the statute of limitations, which was further
tolled by his two offers in compromise (OICs). He provided no evidence
contradicting the government's declaration regarding the periods during
which the OICs were pending and their effect on the limitations dates.
was not entitled to summary judgment on the issue of an individual's
liability for fraud penalties absent a showing that no rational jury
could find his claims regarding a lack of fraudulent intent to be
sincere. The taxpayer contended that he believed he did not owe the
assessed amounts and asserted that any false statements in his tax
withholding statements were inadvertent and constituted mistakes.
Although his self-serving allegations might seem incredible in the face
of the government's evidence of fraud, the record did not disclose the
taxpayer's education or level of sophistication.
GRIESBACH, District Judge: The United States filed this case on
August 3, 2001
, seeking to reduce federal tax assessments to judgment and foreclose
federal tax liens against personal property. The
also seeks to assess a penalty equal to 50% of his underpayment of taxes
against McCarville for civil fraud. The case is presently before me on
' motion for summary judgment against the main defendant, Timothy
I conclude that there is no dispute as to material fact regarding the
assessment of taxes owed by McCarville and the tax liens against his
personal property and therefore grant the government's motion as to
those issues. As to the civil fraud penalty, however, I conclude that a
factual dispute does exist and therefore deny summary judgment as to
Summary judgment is proper if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with any affidavits,
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);
Celotex Corp. v. Catrett, 477
317, 322 (1986).
The moving party has the initial burden of demonstrating that it is
entitled to summary judgment. Id.
at 323. As a plaintiff moving for summary judgment, the
must show that the evidence supporting its claims is so compelling that
no reasonable jury could return a verdict for the defendant. See
Select Creations, Inc. v. Paliafito Am., Inc., 911 F.Supp. 1130,
1149 (E.D. Wis. 1995); Anderson v. Liberty Lobby, Inc., 477
242, 248-50 (1986). Once this burden is met, McCarville must designate
specific facts to defend the cause of action, showing that there is a
genuine issue of material fact for trial. Celotex, 477
at 322-24. There must be a genuine issue of material fact
for the case to go to trial. Anderson, 477
at 247-48. "Material" means that the factual dispute must be
outcome-determinative under governing law. Contreras v. City of
, 119 F.3d 1286, 1291 (7th Cir. 1997). A "genuine" issue
of material fact requires specific and sufficient evidence that, if
believed by a jury, would actually support a verdict in a party's favor.
Fed. R. Civ. P. 56(e); Anderson, 477
at 249. Where the record taken as a whole could not lead a rational
trier of fact to find for the nonmoving party, there is no genuine issue
for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
574, 587 (1986).
In analyzing whether a question of fact exists, the court construes the
evidence in the light most favorable to the party opposing the motion. Anderson,
filed its motion for summary judgment on
April 2, 2003
, together with several affidavits. Six days later McCarville, who
represents himself, filed an "objection" to the motion for
summary judgment; no evidence was presented by McCarville. Thinking
perhaps that this was McCarville's brief in response to the motion, the
filed a reply brief. Notwithstanding the local rules, which provide for
only one response brief. Civil L.R. 7.1(c), McCarville also filed an
"opposition" to the motion for summary judgment on May 1,
again failing to submit any evidence. The
filed a reply to McCarville's second brief as well. 1
Then, because McCarville (as a pro se litigant) had not been
properly warned about summary judgment procedures and the need for
evidence, I gave McCarville those warnings and allowed him to file
evidentiary materials if he desired. On July 7, he filed a
"response" to the summary judgment motion. The first two pages
are attested to under penalty of perjury. In other words, the first two
pages of the response are verified, constituting some evidence. Almost
everything McCarville says in those two pages, though, cannot be taken
as facts in his favor. Other than his statement that for the years at
issue he worked as a steamfitter, he merely sets forth his legal
argument and legal conclusions. ( See, e.g., Pl.'s Resp. to Gov't
Motion for Summ. J. at 2 ("The law is a witness to the fact that I
am not liable for a federal income tax.").) "Self-serving
assertions without factual support in the record will not defeat a
motion for summary judgment." Jones v. Merchants Nat'l Bank
& Trust Co., 42 F.3d 1054, 1058 (7th Cir. 1994).
McCarville and his wife Evelyn reside in Iola,
. During the years for which the
seeks recovery for unpaid taxes, McCarville worked as a steamfitter.
In February 1982, McCarville signed and filed a 1981 federal income tax
return, jointly with his wife Evelyn. Federal income tax of about $2500
was withheld from his wages in 1981. In 1982, 1983, and 1984, however,
McCarville filed form W-4 with his employers, claiming that he did not
owe any federal income tax for the prior year and that he did not expect
to owe any federal income tax in each then-present year. In 1982, 1983,
and 1984, McCarville claimed he was exempt from the federal income tax
withholding requirements. In 1984, no federal income tax was withheld
form McCarville's wages.
McCarville did not file timely form 1040 income tax returns for 1982
through 1987. As a result, the Internal Revenue Service prepared
substitutes for income tax returns for those years. The IRS determined
that McCarville had federal income tax liability for 1982 through 1987
based on third-party information reported to the IRS (for example,
employer W-2 reports of wages paid). A civil income tax audit for 1982
to 1984 began in September 1985, but it was suspended in June 1986 due
to a criminal investigation. In October 1988, McCarville was convicted
of failing to file federal income tax returns for 1984 and 1985 and
sentenced to a term of imprisonment. In 1989, the civil income tax audit
resumed for years 1982 to 1984, and another began for 1985 to 1987.
February 27, 1990
, McCarville filed late income tax returns for 1983 through 1988. 2
Thereafter, a delegate of the Secretary of the Treasury assessed
McCarville for unpaid federal income taxes and related interest and
other additions, based on the substitute returns. The assessments were
made on May 30, 1990, for tax years 1986 and 1987, for unpaid taxes of
about $18,000 and $15,000 respectively (exclusive of interest);
September 10, 1990, for tax year 1985, for unpaid taxes of about $18,000
(exclusive of interest); and March 15, 1991, for tax years 1982, 1983,
and 1984, for unpaid taxes of about $13,000, $8,000, and $76,000
respectively (exclusive of interest and additions).
The 1988 return was filed late an
February 13, 1990
April 23, 1990
, a delegate of the Secretary of the Treasury assessed McCarville for
unpaid federal income taxes and additions for 1988, in the amount of
about $3,000 (exclusive of interest).
A delegate of the Secretary of the Treasury gave notice and demand to
McCarville for the payment of federal income taxes, penalties, and
interest for tax years 1982 through 1988. Despite the notices and
demands, though, the assessments remain due and owing.
After discovery in this case resulted in the
being provided with McCarville's copies the federal income tax returns
for 1982 through 1988 and some W-2 forms, the IRS adjusted the tax
liabilities assessed and some penalties against McCarville. As adjusted,
the assessments, with interest and additions through
March 10, 2003
, are as follows:
According to the
, the total liability (adding up the last column) owed as of
March 10, 2003
, was $281,997.18.
The IRS has an "integrated data retrieval system" (IDRS). IDRS
transcripts are also known as Certificates of Assessment and Payments.
has submitted IDRS transcripts regarding the amounts McCarville owes.
(Block Decl. ¶ ¶9, 17, Ex. H1-H7, J1-J7.) McCarville has presented no
evidence to contradict any of the amounts the
indicates is owed.
Notices of federal tax lien were filed against McCarville with the
Register of Deeds Office for
McCarville submitted to the IRS two offers to compromise his federal
income tax liabilities. The first offer in compromise (OIC) covered his
liability for tax years 1983 to 1988. The OIC was accepted for
processing by the IRS on
January 28 1991
, and was rejected by the IRS on
June 9, 1992
. The form OIC that McCarville signed included a waiver provision by
which he agreed to a tolling of the statute of limitations while the
first OIC was under consideration, plus one year afterward. 3
McCarville's second OIC covered tax liability for 1982 to 1988 and was
accepted for processing on
August 1, 2000
, and rejected by the IRS on
March 16, 2001
The U.A. Local Union Chapter 400 (UA) is located in
. Its members participate in the "Money Purchase Plan of Local 400
and Mechanical Contractors Association of Central Wisconsin" (the
"Money Purchase Plan") pursuant to collective bargaining
agreements between the UA and various employers represented by the
Mechanical Contractors Association of Central Wisconsin, Inc. Defendant
Bank One is the trustee of the Money Purchase Plan. Defendant
Administrative Committee is the sponsor and plan
istrator of the Money Purchase Plan. The Money Purchase Plan is an
employee benefit plan under the Employee Retirement Income Security Act.
McCarville is a retired member of the UA and has been a member since
1966. An individual account under the Money Purchase Plan was
established on his behalf. By virtue of employers' contributions to the
Money Purchase Plan made on his behalf, McCarville accrued certain
benefits under the Money Purchase Plan starting in 1985. McCarville has
a vested interest in the Money Purchase Plan. Upon retirement,
McCarville is entitled to receive pension payments in the form of a
qualified joint survivor annuity.
February 18, 2002
, McCarville applied for normal retirement benefits and asked that he be
paid $2,000 per month. He will receive benefits as long as there is an
account balance on his behalf under the Money Purchase Plan. His wife
Evelyn consented to this election of benefits, waived any interest in a
joint survivor annuity, and is the primary beneficiary for any death
benefit. As of
December 31, 2000
, the vested account balance was $165,000.58, with a lump sum value of
Over the course of this litigation McCarville filed numerous motions to
dismiss the case on jurisdictional grounds. He argued that this court
has no jurisdiction over him because he is not liable for income taxes.
He raises those arguments again in response to the summary judgment
motion. In addition, McCarville argues that the statute of limitations
has expired for the claims of the
in this case. I deal with the statute of limitations issue first, as it
would be dispositive if McCarville is right.
A. Statute of Limitations
The statute of limitations is an affirmative defense, Fed. R. Civ. P.
8(c), for which McCarville bears the burden of proof, see Law v.
Medco Research, Inc., 113 F.3d 781, 786 (7th Cir. 1997).
The IRS has three years after the filing of a "return" within
which to assess the amount of the tax. 26 U.S.C. §6501(a).
"`[R]eturn' means the return required to be filed by the taxpayer
and does not include any return filed by a person from whom a
taxpayer has received income. Id.
When a person fails to file his return as required, the Secretary of the
Treasury "shall make such return from his own knowledge and from
such information as he can obtain through testimony or
otherwise." 26 U.S.C. §6020(b)(1).
(For example, employers are required to report to the IRS the wages paid
to employees and the amount withheld for federal income tax.) But the
execution of a substitute return by the Secretary pursuant to §6020(b)
does not start the running of the statute of limitations period
for assessment and collection. §6501(b)(3).
If the IRS has assessed the amount of the tax within the permitted three
year period, the tax may be collected by a proceeding in court filed
within ten years after the assessment of the tax. 26 U.S.C. §6502(a)(1).
The Secretary has the authority to compromise any civil case arising
under the Internal Revenue Code prior to referral for prosecution of
such a case in court. 26 U.S.C. §7122(a).
An OIC must be submitted to the IRS on and according to its forms in
order to be accepted. ( See Third Kosmatka Decl., Ex. EE.)
Generally, when an OIC is accepted for processing by the IRS, the
running of the statute of limitations is suspended at least while the
OIC is pending. See 26 U.S.C. §6331(l)(5),
(k)(1). An OIC is pending beginning on the date the Secretary accepts
such offer for processing. §6331(k)(1).
For an OIC rejected before
January 1, 2000
, the running of the statute of limitations was suspended during the
period that an OIC was pending with the Secretary plus one year. See,
e.g., Treas. Reg. §301.7122-1(f) (1960). Consideration of an OIC
was conditioned on the taxpayer executing a waiver of the statute of
limitations for that period. Id.;
v. Harris Tr. & Sav. Bank [ 68-1
USTC ¶12,512], 390 F.2d 285, 288 (7th Cir. 1968). ( See also
Third Kosmatka Decl., Ex. EE at 1.) For an OIC rejected on or after
January 1, 2000
, the running of the statute of limitations was to be suspended during
the period that an OIC was pending plus thirty days. See§6331(l)(5)(k)(1),
(1998). However, as of
December 21, 2000
, Congress eliminated the suspension of the statute of limitations
during the pendency of an OIC. Community Renewal Tax Relief Act of 2000,
Pub. L. 106-554 App. G. §313(b)(3), 114 Stat. 2763. ( See also
the discussion in Pl.'s Reply at 9-10.)
McCarville argues that the United States has missed the statute of
limitations because it is now 2003 and the tax years at issue were
fifteen to twenty years ago. But the date of filing (in this case
August 3, 2001
) rather than the current date is the dispositive one for statute of
limitations purposes. And McCarville's contention does not address the
specific statute of limitations provisions of the tax code. If the
filed its complaint within the time period allowed by the statutes, the
action is not barred.
McCarville also argues that the dates upon which the statute of
limitations started running for the various tax years were the dates his
employer filed W-2s regarding the amounts McCarville was paid.
McCarville cites 26 U.S.C. §6103(b)(1)-(2)
as support for his argument. Section
6103(b)(1) provides a definition of "return" that includes
any tax return required by and filed with the Secretary by or on behalf
of a person. According to McCarville, his employer's W-2s constituted
returns filed on his behalf, in lieu of form 1040. Therefore, the
assessments for tax years 1982 through 1986 were all outside the three
year period when made in 1990 and 1991.
Even assuming that a W-2 would constitute a return under the definition
that subsection itself states that the definition McCarville cites
applies only to §6103,
which governs confidentiality and disclosure of tax returns and return
information. McCarville's contention flies in the face of §6501(a),
which defines "return" for purposes of the starting of the
limitations period as the return required to be filed by McCarville,
not his employer. That "return" is the return on the form
described in 26 U.S.C. §6011
Reg. §1.6012-1(a)(6) (describing 1040 and 1040A). The filing of a
W-2 does not constitute the filing of a tax return for purposes of the
statute of limitations. Bachner v. Comm'r [ 96-1
USTC ¶50,217], 81 F.3d 1274, 1279-81 (3d Cir. 1996); see
v. Birkenstock [ 87-2
USTC ¶9416], 823 F.2d 1026, 1030 (7th Cir. 1987). The substitute
returns filed by the Secretary do not start the period, either. §6501(b)(3).
McCarville does not provide evidence contradicting, nor does he even
dispute, the calculations proffered by the
in the Declaration of Pat Kosmatka, filed
April 2, 2003
, regarding the periods during which the OICs were pending and their
effect on the statute of limitations dates. Thus, those calculations are
taken as undisputed.
He does contend that the IRS Restructuring and Reform Act of 1998 (RRA)
eliminated any ability for a taxpayer to agree to an extension of the
statute of limitations. The portions of the law that he cites, though,
appear to apply to an installment agreement, which both parties here
agree they did not have. The RRA did amend §6502
by limiting the IRS's ability to secure agreements from taxpayers to
extend the statutory period for collection, but the revision, see
Pub. L. 105-206, 112 Stat. 685, even if applicable to OICs, cannot
affect the validity of the OIC waiver McCarville signed back in 1991.
McCarville did not file any return for 1982, so the statute of
limitations period did not commence (and thus could not have expired)
assessed taxes on
March 15, 1991
. McCarville filed his returns for 1983 through 1987 in February 1990,
so the three-year statute of limitations period had not expired when the
assessed the taxes on
March 15, 1991
September 10, 1990
May 30, 1990
(1986-1987). McCarville filed his return for 1988 on
February 13, 1990
then had three years to assess the taxes, which it did within about two
April 23, 1990
Based upon these assessment dates, the United States then initially had
ten years from each assessment date (March 15, 2001, September 10, 2000,
and May 30, 2000, and April 23, 2000) to file this case, pursuant to §6502.
An additional two years, four months, and eleven days are added on,
though, for 1985 through 1988 for the period of time during which
McCarville's first OIC was pending (January 28, 1991, to June 9, 1992
--one year, four months, eleven days) and for one year afterward.
Because the assessments for 1983 and 1984 were not made until the first
OIC was already pending, the tolled time runs only from the assessment
March 15, 1991
, meaning that an additional one year, two months, and twenty-four days,
plus one year, are added. An additional four months and twenty days are
added on for 1982 through 1988 for the period of time during which
McCarville's second OIC was pending from
August 1, 2000
December 21, 2000
, the effective date of Congress' elimination of the provision
suspending the statute of limitations during the pendency of an OIC.
thus had to file this case by the times indicated in the following
From the above table, it appears the only tax year for which the
was in danger of missing the statute of limitations was 1982. The case
was filed one day before the limitations period expired even for that
year. It therefore follows that McCarville's statute of limitations
McCarville contends that because of the IRS's delays in assessing and
prosecuting his tax liability, the amount due has grown substantially.
He provides no authority, though, for any equitable argument around
Congressional statutes setting forth the statute of limitations periods.
Moreover, he ignores the fact that if he did not have money withheld
from his paychecks, he himself received the benefit from those funds all
these years. I therefore reject this argument as well.
B. Liability for Tax
According to McCarville, he cannot be considered a "taxpayer"
because he merely exercised his inalienable right to work as a
steamfitter --an occupation he says was lawful and innocent and a
common-law job. ( See, e.g., Def.'s Objection to Summ. J. at 1
("I still feel that applying the income tax against our
constitutionally secured right to work is an abridgement of this sacred
right.").) McCarville contends that no statute subjects him to tax
liability; he often repeats his mantra of "NO STATUTE-NO
JURISDICTION!" ( See, e.g., Def.'s Opp'n to Summ. J., Ex. 1,
Ex. 2 at 1.) He believes that the Internal Revenue Code is not positive
law and does not subject him to tax liability. And even under the
Internal Revenue Code, he says, federal taxes are due only from federal
employees and corporate officers and those who voluntarily subject
themselves to internal revenue laws.
I addressed these "jurisdictional" arguments previously and
found them to be without merit. In short, the Internal Revenue Code is
positive law that applies to McCarville, McCarville cannot declare
himself to be outside the scope of the internal revenue laws, and
although he has the right to work at the occupation of his choosing,
taxes can be imposed on his income. See Peth v. Breitzmann [ 85-1
USTC ¶9321], 611 F.Supp. 50, 53, 56 (E.D. Wis. 1985) (Reynolds, J.)
("For once and for all, wages are taxable income." "No
reasonable person could seriously think that, for example, the revenue
laws can be avoided, and the government's tax collection efforts can be
brought to a standstill, by the contention that wages are not
income."). Moreover, this court has jurisdiction over this case, as
it involves federal law, and federal income taxation in particular. See
26 U.S.C. §7402;
28 U.S.C. §§1340, 1345.
Liability for Assessed Taxes
Other than his jurisdictional and statute of limitations arguments,
McCarville has not really argued any other defense to liability for
assessed taxes, so I can assume he has none. In any event, the
has established that no reasonable jury could find for McCarville on
Federal tax assessments are presumptively correct. Advo Delta Corp.
Canada Ltd. v. United States [ 76-2
USTC ¶9570], 540 F.2d 258, 262 (7th Cir. 1976). Once the
puts forth evidence that federal tax assessments have been made and
balances are due, a prima facie case of tax liability has been
established and the burden shifts to the taxpayer to refute it. Id.;
accord Pittman v. Comm'r [ 96-2
USTC ¶50,658], 100 F.3d 1308, 1313 (7th Cir. 1996); United
States v. Stonehill [ 83-1
USTC ¶9285], 702 F.2d 1288, 1293-94 (9th Cir. 1983). 6
Certificates of Assessments and Payments carry a presumption of validity
and are sufficient evidence to show that assessments were made against a
taxpayer, in accordance with statutory and regulatory requirements.
Hefti v. IRS [ 93-2
USTC ¶50,591], 8 F.3d 1169, 1172 (7th Cir. 1993); Long v.
USTC ¶50,431], 972 F.2d 1174, 1181 (10th Cir. 1992). To rebut the
presumption of correctness, the taxpayer must show that the assessments
are incorrect; he cannot meet his burden by simply denying liability
generally. Advo Delta Corp. [ 76-2
USTC ¶9570], 540 F.2d at 262. The
has submitted certified Certificates of Assessments and Payments
reflecting adjusted outstanding federal income tax assessments against
McCarville for 1982 through 1988, with a total amount due as of
March 10, 2003
, of $281,997.18.
McCarville has filed nothing that draws into dispute the evidence
proffered by the
. McCarville implicitly admits that he did not file returns or pay the
amount of taxes owed. He submits nothing even suggesting that the
evidence of the
regarding the assessments is incorrect. His arguments regarding the
court's jurisdiction do not rebut the prima facie case
established by the
. No rational jury could fail to find for the
on this issue.
Summary judgment will be granted for the
on the matter of reducing the assessed amounts to judgment.
Liability for Fraud Penalty
In addition, the
seeks to reduce to judgment the civil fraud penalties assessed against
McCarville under 26 U.S.C. §6653(b)
for 1982, 1983, and 1984. Section
6653(b) provides that "if any part of the underpayment ... of
tax required to be shown on a return is due to fraud, there shall be
added to the tax an amount equal to 50 percent of the
Although the certificate of assessments and payments is proof of the
assessment, the United States admits that the burden of proof does not
shift to the taxpayer on this issue. The
admits that it has the burden to prove fraud by clear and convincing
evidence. (Pl.'s Mem. in Supp. at 6-7.) See also Pittman [ 96-2
USTC ¶50,658], 100 F.3d at 1319. To prove fraud, the
needs to establish that a person intended to evade taxes that he knew or
believed were owed.
does not need to prove the precise amount of the underpayment resulting
from fraud, but only that some part of the underpayment is attributable
In support of its motion, the United States points to a several pieces
of evidence from which a factfinder could reasonably conclude that
McCarville's underpayment of his taxes for the years in question was due
to fraud. While not conclusive, failure to file tax returns for an
extended period of time is persuasive circumstantial evidence of an
intent to defraud the
. Marsellus v. Comm'r [ 77-1
USTC ¶9129], 544 F.2d 883, 885 (5th Cir. 1977); Stoltzfus v.
United States [ 68-2
USTC ¶9499], 398 F.2d 1002, 1005 (3d Cir. 1968); Castillo v.
Comm'r [ CCH
Dec. 41,940], 84 T.C. 405, 409 (1985). Here, McCarville admits he
failed to file returns for seven years. The
has provided evidence that McCarville did file a 1981 income tax return,
establishing that McCarville knew about the need and had the ability to
file. In addition, McCarville was convicted for willful failure to file
a tax return for 1984 and thus is collaterally estopped from contesting
that his failure to file for that year was willful. Castillo [ CCH
Dec. 41,940], 84 T.C. at 409-10.
But a willful failure to file an income tax return is not the same as
fraud. Fraud denotes an intent to obtain an advantage by deceiving
another with material misstatements of fact. McCarville claims that he
is not liable for the taxes assessed against him. He claims he ceased
filing returns after he "realized that [he] was a person not liable
for the tax...." (Def.'s Obj'n to Summ. J. at 4; Def.'s Opp'n to
Summ. J., Ex. 10 at 1.)
Filing false W-4 forms also indicates an intent to evade the collection
of taxes. Granado v. Comm'r [ 86-1
USTC ¶9453], 792 F.2d 91, 92 (7th Cir. 1986); Castillo [ CCH
Dec. 41,940], 84 T.C. at 410. In Granado, the Seventh Circuit
upheld the assessment of civil fraud penalties under §6653(b),
where the taxpayer filed false W-4 forms and failed to file tax returns.
McCarville filed W-4 forms during 1982, 1983, and 1984, in which he
claimed to be exempt and avoid the withholding of federal income tax
from he wages, when he was not so exempt. His W-4 for 1982 indicated
that he had not paid taxes in 1981, which he had. Under Granado,
McCarville's false statements on his W-4s would support a finding of
fraud under §6653(b).
However, McCarville argues that his employer required him to fill out
the W-4s in order to be employed and that he checked the statements that
he did not incur a tax liability in the previous years and did not
expect liability in those current years because those statements
"were the closest language to not subject to available."
(Def.'s Opp'n to Summ. J. at 2-3.) In other words, McCarville argues
that he filled out the W-4s as he did because he believed he was not
subject to taxation at all, not because he intended to deceive the
government. He contends that "[a]ny mistakes, if there were any,
were inadvertant, not fraud." ( Id.
McCarville's claim that he truly believes he does not owe income taxes
constitutes evidence from which a factfinder could conclude that his
underpayment was not due to fraud. His claim that any false statements
in his W-4s were inadvertent and constitute mistakes likewise raises an
issue of fact that is not easily or properly resolved on summary
judgment. While these self-serving claims may seem incredible in the
face of the other evidence the
has highlighted, the record does not disclose McCarville's education or
level of sophistication. I am unable to conclude as a matter of law that
no rational jury could find his claims to be sincere. Accordingly,
summary judgment will not be granted on this issue.
Validity of Federal Tax Liens
If a person liable for federal taxes fails to pay them after assessment,
notice and demand, the amount of the unpaid taxes and any interest and
penalties "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.
"[A]ll property and rights to property" is "broad and
reveals on its face that Congress meant to reach every interest in
property that a taxpayer might have. Stronger language could hardly have
been selected to reveal a purpose to assure the collection of
taxes." United States v. Nat'l Bank of Commerce [ 85-2
USTC ¶9482], 472 U.S. 713, 719-20 (1985) (citation omitted)
(internal quotation marks omitted). The federal tax lien arises at the
time the tax is assessed; it continues until the liability is satisfied
or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322.
In the present case, the federal tax liens thus arose on the same dates
as the unpaid taxes were assessed: March 15, 1991, for the liabilities
for the 1982, 1983, and 1984 tax years; September 10, 1990, for the
liability for the 1985 tax year; May 30, 1990, for the liabilities for
the 1986 and 1987 tax years; and April 23, 1990, for the liability for
the 1988 tax year. McCarville provides no evidence to dispute that the
gave proper notice and demanded payment of the assessment. As the liens
reach "all property and rights to property," there can be no
dispute whatsoever that the liens reach all of McCarville's right and
property interest in the Money Purchase Plan.
Under 26 U.S.C. §6323,
the liens are valid against certain persons when a Notice of Federal Tax
Lien is filed. Here, the notices of federal tax lien for 1982 to 1984
were filed on
January 7, 1991
, and timely refiled on
February 12, 2001
. The notices of federal tax lien for 1985 to 1987 were filed on
June 27, 1991
, and timely refiled on
May 5, 2000
. The notice of federal tax lien for 1988 was filed on
July 3, 1990
, but lapsed. Another notice of federal tax lien for 1988 was filed on
December 24, 2002
. The notices of federal tax liens were filed in
, where McCarville resides.
January 7, 1991
June 27, 1991
, the IRS perfected its lien against the pension plan and related
benefits by filing a tax lien in the personal property records of
. See 26 U.S.C. §6323(f)(2)(B).
McCarville argues that the notices of federal tax liens are not
certified as required by
law and not properly signed. ( See Def.'s Opp'n to Summ. J., Ex.
8.) The matter of federal tax liens is one of federal, not state, law,
however. United States v. Union Cent. Life Ins. Co. [ 62-1
USTC ¶9103], 368 U.S. 291, 293-94 (1961); Kivel v. United States
USTC ¶9415], 878 F.2d 301, 303 (9th Cir. 1989). Title 26 U.S.C. §6323(f)(3)
provides that the Secretary prescribes the form and content of the
notices and that such notices shall be valid notwithstanding any other
provision of law. Delegation authority to sign notices of tax liens is
set out in IRS Delegation Order 196 ( see Locke Decl., Ex.) and
McCarville has provided no evidence contradicting the evidence of the
that the IRS officers who authorized the notices at issue in this case
were proper designees.
seeks summary judgment on its claim as well as on McCarville's
counterclaim seeking release of the tax liens. Because the
has established upon undisputed facts that the tax liens are valid,
summary judgment must be granted against McCarville on his counterclaim.
Summary judgment must be granted against Timothy McCarville in favor of
has not, however, moved for summary judgment against the other
defendants and has not dismissed its claims against Evelyn McCarville
even though it indicated in its opening brief that it no longer seeks a
money judgment against her. McCarville also filed a crossclaim, which
must be addressed. Therefore, I will set a telephonic status conference
call to discuss the resolution of the remainder of this case.
For the foregoing reasons, IT IS ORDERED that the motion for
summary judgment filed by the
against Timothy McCarville is granted in part and denied in part. The
motion is denied as to the civil fraud penalties. In all other respects
the motion of the
for summary judgment is granted.
IT IS ORDERED that McCarville's counterclaim is dismissed.
IT IS ORDERED that a telephonic status conference will be held on
September 19, 2003, at 9:30 a.m. to discuss further proceedings in the
Because McCarville proceeds pro se, I have been generous and have
considered both briefs filed in response to the motion for summary
did not seem to have these returns until McCarville provided the
during discovery with copies stamped "received" by the IRS on
February 27, 1990
. Taking the facts in McCarville's favor, those returns were indeed
February 27, 1990
. No "received"-stamped copy was provided regarding 1982,
though, and McCarville has not sworn in his summary judgment filings
that it was ever filed with the IRS.
Although a copy of the first OIC no longer exists (it was apparently
destroyed after six years), the United States has presented evidence
that the form at that time contained the waiver provision and that it
would not have accepted the OIC if the waiver had not been made.
McCarville has produced no contrary evidence.
The proposed finding of fact submitted by the United States on this
point indicates an amount of $197,193.99, but the exhibit itself,
Choudoir Decl., Ex. F, indicates $197,193.29.
The period provided by §6502(a)(1)
was expanded from six years to ten years, effective for taxes assessed
after November 5, 1990, and taxes assessed before that date if the prior
six-year period had not expired by November 5, 1990. Omnibus Budget
Reconciliation Act of 1990, Pub. L. 101-508 §11317(a)(1), (c), 104
Stat. 1388. As the assessments against McCarville occurred in 1990 and
1991, the ten year period applies for all tax years at issue in this
The burden of proof provision of 28 U.S.C. §7491
does not apply here, as examination of McCarville's tax liability
commenced before the effective date of that provision. RRA, Pub. Law
105-206 §300(c), 112 Stat. 685.
Since the years in issue, §6653
has been amended and this provision was deleted.
USTC ¶50,438] Somerset Limited Partnership, an Illinois limited
partnership, and Hohmann OP Holdings, LLC, an Illinois limited liability
company, Plaintiffs v. Julian Wineberg and The United States of America,
Defendants United States of America, Plaintiff v. Julian Wineberg and
Hohmann OP Holding, LLC, Defendants
U.S. District Court, No. Dist.
, East. Div., 01-C 0190, 01 C 4095, 4/29/2002, 198 F. Supp. 2d 969
Tax liens: Interpleader action.--The government had a valid tax
lien on a delinquent individual's right to funds held by a limited
liability company (LLC) that exercised its option to buy his interest in
a limited partnership. When the LLC exercised the option, it withheld
payment because it was uncertain of the status of multiple tax liens on
the property. Thus, an interpleader action was filed to determine the
appropriate payee of the sale proceeds while the government brought a
separate action to foreclose its lien against the taxpayer's rights in
the option contract. The LLC failed to respond to the government's
motion and, thus, judgment was entered in the government's favor; the
court determined that the tax lien against the taxpayer's right to the
funds under the contract with the LLC was valid.
Offers in compromise: Delegations of authority: Government counsel:
Attorney's fees: Interpleader action.--A limited liability company
(LLC) was not entitled to recover attorney's fees that it incurred in
connection with a compromise allegedly made by a government attorney in
order to settle a tax case that was the subject of an interpleader
action. The government's attorney allegedly promised the LLC that in
exchange for its assistance in the tax case against the taxpayer, it
would be entitled to take its attorney's fees out of proceeds owed to
the taxpayer. However, even if such a promise were made, it would be
unenforceable under Code
Sec. 7122 because the government's attorney lacked actual authority
to compromise or settle a tax case. Furthermore, equitable estoppel did
not apply because any reliance on the government's agent that was
contrary to the law was unreasonable.
MEMORANDUM OPINION AND ORDER
Wineberg had a limited partnership interest in Somerset Limited
Partnership. In 1998, Mr. Wineberg entered into a "Cash Option
Agreement" with Hohmann OP Holdings, L.L.C., giving Hohmann the
option to buy Mr. Wineberg's interest in
for $426,822. Hohmann exercised the option on
July 1, 1999
, but has not paid Mr. Wineberg because it was uncertain about the
status of certain tax liens and levies on Mr. Wineberg's property. The
federal government has millions of dollars of tax liens and levies on
Mr. Wineberg's property covering tax years from 1978 to 1986.
and Hohmann (collectively "Hohmann") filed an interpleader
action against the
and Mr. Wineberg to determine the appropriate payee of the money held by
Hohmann. The government brought a separate action to foreclose a lien
against Mr. Wineberg's rights to the proceeds of the options contract
with Hohmann. I consolidated the cases, see Minute Order of
August 15, 2001
, and the government moves for summary judgment. Hohmann responds and
moves for partial summary judgment.
judgment is proper when the record "show[s] that there is no
genuine issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).
In determining whether a genuine issue of material fact exists, I must
construe all facts in the light most favorable to the non-moving party
and draw all reasonable and justifiable inferences in its favor. Anderson
v. Liberty Lobby, Inc., 477
242, 255 (1986). Mr. Wineberg did not respond to the government's
motion, so I enter judgment in favor of the government and against Mr.
Wineberg in the amount of $1,318,480.21, plus interest and other
statutory penalties, and I find that the government has a valid and
subsisting lien on Mr. Wineberg's right to money under the contract with
Hohmann. Hohmann has no objection to this disposition, but the parties
dispute whether Hohmann is entitled to attorneys' fees out of the money
it owes to Mr. Wineberg and whether the government is entitled to
interest under 815 ILCS 205/2.
argues that Hohmann's attorneys' fees may not be taken out of the
$426,822 that it will receive as a result of the lien foreclosure.
Hohmann does not contend that its claim for attorneys' fees is superior
to the government's lien, which attached in 1990, more than eight years
before Hohmann entered into the options agreement with Mr. Wineberg.
Instead it says that the government's attorney, Mr. Snoeyenbos, promised
Hohmann that, in return for its assistance in providing information for
the government's suit against Mr. Wineberg, Hohmann would be entitled to
take its attorneys' fees from the money owed to Mr. Wineberg. The
government submits an affidavit stating that there was no such
agreement, so there is a factual question that I cannot decide here. But
even if there were such an agreement, it would be unenforceable against
the government as a matter of law.
to compromise or settle "any civil or criminal case arising under
the internal revenue laws" is vested in the Secretary of the
Treasury, 26 U.S.C. §7122(a), and may be redelegated to Section Chiefs
and Assistant Section Chiefs, but may not be redelegated to
attorneys-of-record, 28 C.F.R. Pt. 0, Subpt. Y, App. (Tax Div. Directive
No. 105 §3) ("Directive 105"). There is no dispute that Mr.
Snoeyenbos is the attorney of record, so he lacks the authority to
compromise cases arising under the tax code. Hohmann argues that §7122
applies only to cases against taxpayers, but it cites no
authority for that proposition, and the statute says "any civil or
criminal case." "Any" case means any case, see
v. Ballistrea, 101 F.3d 827, 836 (2d Cir. 1996); see also
Lexington Ins. Co. v. Rugg & Knopp, Inc., 165 F.3d 1087, 1089
(7th Cir. 1999) (" '[E]very' means 'every.' "), not just
taxpayer actions. Hohmann also argues that Mr. Snoeyenbos' signature on
a stipulation for entry of judgment against Mr. Wineberg in the
foreclosure action is evidence that he had authority to compromise
cases. However, that stipulation did not compromise the government's
claim; it entitled to government to all the relief it sought, unlike the
claim for attorneys' fees, which would reduce the government's recovery.
Moreover, even if it were evidence of authority to compromise, it is
evidence only as to the foreclosure case, 1
not the interpleader case, and redelegations under the regulations are
made "on a case-by-case basis." Directive 105 §3. In response
to the government's motion, it was Hohmann's burden to come forward with
evidence of Mr. Snoeyenbos's authority to create a factual issue for
trial; it did not discharge or shift that burden merely by filing a
cross-motion. On Hohmann's own motion, Mr. Snoeyenbos' statement in his
affidavit that he never represented that he was a Section Chief or had
the power to compromise a case or claim would be sufficient to create a
question of fact to avoid summary judgment.
that, even if Mr. Snoeyenbos lacked actual authority to enter into an
agreement about fees, the government should be estopped from contesting
an award of attorneys' fees. Equitable estoppel cannot apply here
because Directive 105 clearly states that mere attorneys-of-record have
no authority to compromise cases, and "those who deal with the
[g]overnment are expected to know the law and may not rely on the
conduct of [g]overnment agents contrary to law." Heckler v.
Community Health Servs. of Crawford County, Inc., 467 U.S. 51, 63,
66 (1984) (holding that where regulations clearly circumscribed the
authority of government official and party relied on oral statement of
official that exceeded authority, any reliance was unreasonable). I
grant the government's motion and deny Hohmann's motion with regard to
Illinois Interest Act, creditors are entitled to interest at a rate of
5% a year on debts after they become due. 815 ILCS 205/2. An
unconditional tender of the full amount due will stop the accrual of
interest. See Yassin v. Certified Grocers of Ill., Inc., 551
N.E.2d 1319, 1321 (
1990) (full amount); Steward v. Yoder, 408 N.E.2d 55, 57 (Ill.
App. Ct. 1980) (unconditional). Tender only tolls the accrual of
interest if it is "kept good"; that is, it "must be kept
at all times subject to be received by the creditor when he calls for
it." Aulger v. Clay, 109
487, 1884 WL 9815, at *4 (Ill. Mar. 26, 1884); see also Schmahl v.
A.V.C. Enters., Inc., 499 N.E.2d 572, 575 (Ill. App. Ct. 1986)
(defining tender as an offer to pay "coupled with the present
ability of immediate performance").
The facts here
are not in dispute. On
July 1, 1999
, when Hohmann exercised its option to buy Mr. Wineberg's interest in
, it became liable to pay Mr. Wineberg. Hohmann (through Somerset) was
aware of the liens and levies against Mr. Wineberg's property, so, also
on July 1, 1999, it sent a check to Mr. Wineberg, payable jointly to Mr.
Wineberg and the IRS, for $384,130, or 90% of the amount due under the
contract. The check was never negotiated, and fifteen months later, on
October 10, 2000
, Hohmann stopped payment on the check. On
January 10, 2001
, Hohmann filed the interpleader action. The government argues that the
check was not legally sufficient tender because it was for an amount
less than the total due under the options agreement. Hohmann attaches to
its response and cross-motion the options agreement, which called for a
"holdback amount" of 10% at the closing. §§1.3 and 1.4 The
options agreement called for only a 90% payment at closing, so the July
1, 1999, check was a tender of the full amount due on that day.
also argues that the check was not sufficient to stop the accrual of
interest because it imposed a condition not contemplated by the options
agreement that the IRS endorse the check. The Illinois Supreme Court
stated, nearly sixty years ago, that "[a] tender, to be effectual,
must be without conditions other than those specified in the contract
between the parties." Ortman v. Kane, 60 N.E.2d 93, 97 (
1945). There the extra-contractual condition imposed was payment of
interest above and beyond the amount agreed to by the parties. Id.
More recent formulations of the definition of "tender" suggest
that it "must be without conditions to which the creditor can
have a valid objection or which will be prejudicial to his rights."
Arrio v. Time Ins. Co., 751 N.E.2d 221, 227 (Ill. App. Ct. 2001)
(emphasis added); MXL Indus., Inc. v. Mulder, 623 N.E.2d 369, 377
(Ill. App. Ct. 1993) (same; citing 74 Am. Jur.2d Tender §24, at
561-62 (1974)); Telemark Devel. Group, Inc. v. Mengelt, No. 00 C
3626, 2001 WL 477219, at *2 (N.D.
May 7, 2001
) (Shadur, J.). In Telemark, the court held that a creditor could
have no valid objection to a condition that the creditor admit no
greater amount was due because the amount tendered was in fact
everything the creditor was entitled to. Id.
at *4. The "condition" imposed here, signature by the IRS, did
not change the amount due under the contract. On matters of state law, I
must predict what the Illinois Supreme Court would decide, see Mutual
Service Cas. Ins. Co. v. Elizabeth State Bank, 265 F.3d 601, 612
(7th Cir. 2001) (diversity context), and I conclude that the more recent
appellate court cases, relying on an authoritative standard reference,
provide a better basis for prediction than an older Illinois Supreme
Court decision that is not directly on point. Here Mr. Wineberg could
not reasonably have objected to the fact that the check was jointly
payable to the IRS in light of the substantial liens and levies against
him. Nor was he prejudiced by joint payment, because, as I have already
determined, the lien was valid. Thus the check, jointly payable to Mr.
Wineberg and the IRS, tolled the accrual of interest.
Hohmann failed to "keep the tender good" when it stopped
payment on the check on
October 10, 2000
, because Wineberg could not act immediately to accept the money. See
Schmahl, 499 N.E.2d at 575. Hohmann argues that the interpleader
lawsuit, filed three months later, was valid tender. Although Hohmann
did not contest the amount due when they filed the interpleader action,
they effectively asked the court to decide how to make the payment but
did not deposit any funds with the court, so action was not a valid
tender because it did not make the money immediately available. See
Aulger, 1884 WL 9815, at *3 ("We have only to turn to any book
of precedents to find that a plea of tender must aver a readiness, at
all times after it is made, to pay the money, and he must bring it into
court."). The government's motion and Hohmann's motion are granted
in part and denied in part with regard to interest: Hohmann is liable
for interest from
October 10, 2000
government's motion for summary judgment is GRANTED as to attorneys'
fees, and GRANTED IN PART and DENIED IN PART as to interest.
and Hohmann's cross-motion for partial summary judgment is, accordingly,
DENIED as to attorney's fees and GRANTED IN PART and DENIED IN PART as
to interest. The government shall calculate the total interest due to
it, using the 5% interest rate provided for by the Interest Act,
October 10, 2000
, and serve it on Hohmann, who shall stipulate to the accuracy of the
calculations. The parties are ORDERED to submit the stipulation to me no
May 15, 2002
. Judgment will be entered on that date.
The stipulation was signed before the cases were consolidated. See
attachment to the government's Response to Motion to Consolidate, filed
; see also Minute Order of
USTC ¶50,694] Trustees of the Iron Workers District Council of New
England Pension, Health and Welfare, Annuity, Vacation and Education
Funds, Plaintiffs v. Baldwin Steel Co., Inc., Defendant and Defendant in
Cross-Claim v. Peabody Construction Co., Inc., reach and apply Defendant
v. C.H. Nickerson & Co., Inc., reach and apply Defendant and
Plaintiff in Cross-Claim
District Court, Dist. Mass., CIV. 00-10686-MBB, 8/13/2001
Validity of lien: Priority: Filing status: Judgment creditor.--It
remained to be determined whether a general contractor withholding an
amount it owed to a subcontractor for work performed on a number of
different projects could release to creditors part of the funds in
satisfaction of the contract or whether an IRS levy on the amounts had
priority. If, following a final judgment on the contract issue, the
creditors served a writ of execution on the general contractor before
the IRS made a proper filing under Code
Sec. 6323(f) , they would be granted "judgment lien
creditor" status under state (Massachusetts) law and, thus, would
be entitled to the withheld funds.
MEMORANDUM AND ORDER RE: PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT
AGAINST REACH AND APPLY DEFENDANT PEABODY CONSTRUCTION CO., INC.
(DOCKET ENTRY #32)
this court is a motion for summary judgment on Count II filed by
plaintiffs Trustees of the Iron Workers District Council of New England
Pension, Health and Welfare, Annuity, Vacation and Education Funds
("the Funds") (collectively: "plaintiffs"). (Docket
Entry #32). Plaintiffs move for summary judgment under Count II against
reach and apply defendant Peabody Construction Company, Inc.
("Peabody"). Plaintiffs responded to the
April 10, 2001
Procedural Order and the summary judgment motion (Docket Entry #32) is
therefore ripe for review.
In Count I of
the three count complaint, plaintiffs seek to recover delinquent
employee benefit plan contributions under The Employee Retirement Income
Security Act ("ERISA"), 29 U.S.C. §§1132 & 1145, from
Baldwin Steel Company, Inc. ("Baldwin"). (Docket Entry #32).
July 5, 2000
, plaintiffs obtained a default judgment against Baldwin, the principal
defendant, in the amount of $31,185.60. The $31,185.60 reflects money
which Baldwin owes the Funds as delinquent contributions under section
515 of ERISA for
's member employees and the hours worked by such employees on eight
construction projects. 1
two counts in the complaint are against reach and apply defendants
Peabody (Count II) and C.H. Nickerson & Company, Inc.
("Nickerson") (Count III). In December 2000 this court allowed
the parties' joint stipulation to dismiss Count III with prejudice and
without costs. In October 2000 Nickerson obtained a default judgment on
its cross-claim against
in the total amount of $52,197.66, together with prejudgment interest
April 28, 2000
, at the rate of 12% per annum until entry of a judgment. 2
(Docket Entry #28). Accordingly, plaintiffs' reach and apply claim
in Count II is the only remaining unresolved claim.
agree that Peabody, the general contractor, is presently withholding an
amount of $27,642.32, which it owes Baldwin, the subcontractor, for work
performed on a number of different construction projects. According to
, it cannot release these funds because on
September 2, 1999
, the Internal Revenue Service ("the IRS") served
a notice of levy seeking payment of any funds held by
's debtor, up to the amount of $26,197.61. The $26,197.61 sum represents
the total amount
owed the IRS in taxes at the time of the
September 2, 1999
notice of levy. Although the IRS has not intervened in this action,
submits that this court must decide whether plaintiffs' reach and apply
action trumps the IRS' notice of levy on the $27,642.32 withheld funds.
of the IRS' levy versus plaintiffs' right to the withheld funds depends,
inter alia, upon plaintiffs' status as a judgment lien creditor
in Count II, 3
the dates of the IRS notice and demand to Baldwin, and the timing and
perfection of Baldwin's debt to the Funds under state and federal law.
The summary judgment record in this respect shows the following.
As a signatory
to collective bargaining agreements,
agreed to make certain contributions to the Funds for each ironworker or
member employee it employed. In November 1997 John Hurley, Jr.
("Hurley"), Trustee of the Funds, calculated that Baldwin
failed to make $42,043.61 of the required contributions to the Funds for
the period from January to September 1997 on eight construction
projects, including the New Camfield Gardens project. (Docket Entry
#42). The schedule attached to the contract for the
' project, however, is dated
February 2, 1998
. It is therefore unclear when the member employees' work took place on
this project such that the Funds could calculate the number of hours
they worked and the amount of
's corresponding contributions for such hours. By April 1999 Baldwin
owed the Funds in excess of $40,000 in delinquent contributions for work
's subcontractor. Accordingly, between November 1997 and April 1999,
's debt to the Funds exceeded the $27,642.32 currently withheld funds.
This court draws the only reasonable inference that
owed the Funds delinquent contributions in excess of the $27,642.32
between November 1997 and April 1999.
, as general contractor, and
, as a subcontractor, had a contract covering each of these eight
projects. The contracts required
to "pay all of its obligations incurred in the furtherance of the
performance of" the contracts. The contracts further stated that it
was a "condition precedent" to
's obligation to pay Baldwin that Baldwin "shall have furnished to
] lien releases from"
's "subcontractors, materialmen and suppliers." The contract
's bills with a joint check to Baldwin and its creditor. Alternatively,
could retain the sum until
furnished proof that the claim was satisfied or discharged. As stated in
the contracts, however, these provisions did not "impose any
obligation" on Peabody "to pay such bills." 4
(Docket Entry #36, Ex. 12). In short, although the contracts gave
Peabody "the right to pay all sums necessary to obtain"
release of any claims or liens against Baldwin and to deduct the same
amount from the amount
owed Baldwin, the contracts did not require
In a letter
September 25, 1997
, Hurley referred to a meeting between the Funds and
about the delinquent contributions on two of the eight construction
projects. The letter then advised
that the Funds would accept a joint check issued to the union and to
's future payments to
under the projects.
In a letter
December 5, 1997
, Hurley stated that the Funds would greatly appreciate any assistance
with the Funds' collection efforts regarding four of the eight
construction projects. 5
Two years later, in an
April 15, 1999
letter, Hurley requested that
remit the money it owed
in a joint check with the union and Baldwin as signatories. 6
(Docket Entry #36, Ex. 4). Further negotiations ensued. In late August
prepared final payment and release forms for the eight construction
projects. The final payment and release forms definitively set the
owed Baldwin under the contracts ($27,642.32) and noted that
that amount in return for a release of liability. Hence, this $27,642.32
was fixed and determinable on the date of the
September 2, 1999
notice of levy.
under the contracts,
planned to issue the money on seven of the construction projects in the
form of joint checks with the union and Baldwin as signatories. The
joint checks totaled $17,011.32, the amount
was prepared to jointly pay Baldwin and the union on these seven
Accordingly, there is an inference that between April and August 1999,
reduced its debt to the Funds from in excess of $40,000 (Docket Entry
#36, Ex. 4) to $17,011.32. If, during this time period the IRS had made
notice and demand upon Baldwin in the amount of $26,197.61, then
Baldwin's debt to the IRS would exceed Baldwin's debt to the Funds and,
being first in time to the later increase in Baldwin's debt to the Funds
(which now stands at $47,820,91 (Docket Entry #21, p. 12)),. the amount
of the IRS debt which exceeds the Funds' $17,011.32 debt ($26,197.61 -
$17,011.32 or $9,186.29) would take priority. 8
received the notice of levy from the IRS. Because of the IRS notice,
has not paid the $27,642.32 either to the Funds in the form of a joint
check or to the IRS. The final payment and release forms were never
owes plaintiffs $31,185.60 for delinquent contributions on these eight
projects. Since 1998,
has been out of business. 9
Plaintiffs therefore seek to reach and apply the $27,642.32 amount
owes Baldwin on these eight projects to the $31,185.60 default judgment
September 2, 1999
notice of levy directs
to pay the IRS any "property or rights to property" that
is obligated to pay
. The notice states that the IRS has "given the notice and demand
required by the Code" to
. (Docket Entry #40, Ex. A). Nevertheless,
has not paid the $26,197.61 total amount owed for the tax periods ending
in March, June and September 1998. 10
October 19, 1999
, the IRS issued
a final demand. In a
June 23, 2000
's counsel to the Office of the District Counsel of the IRS,
notified the IRS of this action and inquired if the IRS planned to
intervene. There is no indication that the IRS responded to
's letter of inquiry. 11
move for summary judgment on their claim to reach and apply the entire
$27,642.32 contract debt, which
owes Baldwin, to plaintiffs' $31,185.60 default judgment against
. The reach and apply statute in Massachusetts General Laws chapter 214,
section 3(6) ("chapter 214"), described as "very broadly
written," Tilcon Capaldi, Inc. v. Feldman, 249 F.3d 54, 61
(1st Cir. 2001), "combines in a single proceeding two different
matters or steps in procedure, one at law and the other in equity."
Stockbridge v. Mixer, 102 N.E. 646, 647 (
1913); see generally 31 Joseph R. Nolan & Laurie J. Sartorio Massachusetts
Practice §382 n. 2 (1993).
The first step
is in the nature of an action at law and requires the plaintiff to
establish the debt owed by the principal defendant to the plaintiff. Massachusetts
Electric Company v. Athol One, Inc., 462 N.E.2d 1370, 1372 (
1984) ("in the first step," the plaintiff must show the
existence of a debt owed to the plaintiff by "the principal
defendant"); Stockbridge v. Mixer, 102 N.E. at 647 (first
step "is the establishment of an indebtedness on the part of the
principal defendant to the plaintiff"). The $31,185.60 default
judgment owed by
to plaintiffs establishes the necessary indebtedness between the
plaintiff and the principal defendant, Baldwin. 12
second step involves the process of satisfying the debt," i.e.,
the $31,185.60 default judgment, "out of the property held by one
who owes a debt to the principal defendant." Massachusetts
Electric Company v. Athol One, Inc., 462 N.E.2d at 687. The
referenced property in this instance is the $27,642.32 which
under the contracts. Under chapter 214, the plaintiff "must show
that this property, by its nature, is incapable of attachment or of
taking on execution in a legal action." Massachusetts Electric
Company v. Athol One, Inc., 462 N.E.2d at 688. Indeed, section 3(6)
of chapter 214 describes the debtor's debt to the third party as one
"which cannot be reached to be attached or taken on
execution." Mass. Gen. L. ch. 214, §3(6).
went out of business in 1998, it likely lacks any property upon which
plaintiffs could levy in an execution at law. See Case v. Beauregard,
688, 691 (1879) (complainant could not levy an execution at law because
the partnership was largely indebted and the partners had no property
"upon which complainant could levy an execution at law"). It
is therefore doubtful that plaintiffs could obtain the $27,642.32 in an
execution at law. See generally Leffler v. Todd, 55 N.E.2d 767,
769-770 (Mass. 1944) ("The plaintiff could have attached money due
from [third party] to [principal defendant] by a trustee writ in an
action at law if service of the writ was made upon [third party] at
times when it held funds belonging to [principal defendant]"); 31
Joseph R. Nolan & Laurie J. Sartorio Massachusetts Practice
§384 n.10 (1993) ("[u]nder ordinary circumstances, a debt due to
the debtor may be the subject of trustee process" but if the debt
is subject to "contingencies so that the obligation is not one due
unconditionally a creditor may resort to an action to reach and apply
such obligation"). In any event, by not raising the issue, Baldwin
and Peabody waived this requirement. See Leffler v. Todd, 55
N.E.2d at 770 (Mikado "if sued in equity could waive the defence
that the creditor had an adequate remedy at law"); White Sewing
Machine Company v. Morrison, 122 N.E. 291, 291-292 (Mass. 1919) (the
defendant waived "objection that the plaintiff has a plain,
adequate and complete remedy at law" by proceeding to the merits in
statutory reach and apply action).
214, it is also incumbent to establish the debt due from the third party
to the principal defendant. Lennox v. Haskell, 148 N.E. 811, 813
1925) ("the plaintiff's claims against the firm should be
established as well as the account between the firm and the corporation,
and the debt due the firm from the corporation"). In this respect,
admits that it continues to withhold the sum of $27,642.32 from the
amount it owes
. (Docket Entry #39). In answer to an interrogatory to identify the
funds referred to in its affirmative defense, 13
Peabody also provided the $27,642.32 figure. This figure corresponds to
was prepared to release to
in August 1999, prior to its receipt of the
September 2, 1999
notice of levy. 14
(Docket Entry #36, Ex. 7). Accordingly, the summary judgment record
the sum of $27,642.32. Plaintiffs may reach and apply this sum to
satisfy the $47,820.91 debt
owes the Funds up to the amount of the $31,185.60 default judgment.
Turning to the
issue of priority, as explained below, plaintiffs may receive the entire
amount if they establish, by summary judgment, that Baldwin's debt to
them was perfected and choate in an amount in excess of the $26,197.61
tax lien before the IRS made notice and demand on Baldwin and that the
debt remained in excess of the tax lien thereafter. Furthermore, because
plaintiffs will soon be judgment lien creditors they may recover the
entire $27,642.32 if they execute the reach and apply judgment before
the IRS makes a proper filing of the lien under section 6323(f).
U.S.C. §§6321 and 6322, "a federal tax lien arises automatically
upon assessment and nonpayment of a tax liability, once notice of the
assessments and demand for payment are duly given." Smith
Barney, Harris Upham & Company, Inc. v. Connolly [95-1 USTC ¶50,010],
887 F.Supp. 337, 341 (D.Mass. 1994). A federal tax lien therefore arose
when it received the statutory notice and demand for payment. See
26 U.S.C. §6303 (defining proper notice and demand for payment).
Unfortunately, the exact date of the IRS' notice and demand upon
is not in the record. Nevertheless, the
September 2, 1999
notice of levy states that the IRS had, at that time, given
the required notice and demand. The taxes are for the tax periods ending
March 31, June 30 and
September 30, 1998
. Accordingly, the tax lien arose automatically sometime after
March 31, 1998
, and prior to
September 2, 1999
The tax lien
created under 26 U.S.C. §6321 ("section 6321") extends to
"all property and rights to property, whether real or personal,
belonging" to the debtor. 26 U.S.C. §6321. Unlike a notice of levy
to a third party, the tax lien extends to the taxpayer's after-acquired
property. See Plymouth Savings Bank v. IRS [99-2 USTC ¶50,807],
187 F.3d 203, 206 (1st Cir. 1999) (section 6321 tax lien "attaches
to property acquired by the delinquent taxpayer after the initial
imposition of the lien"); 26 C.F.R. §391.6331-1 ("a levy
extends only to property possessed and obligations which exist at the
time of the levy"). State law determines "the nature of the
legal interest which the taxpayer has" in the property at issue. McIntyre
v. United States [2000-2 USTC ¶50,613], 222 F.3d 655, 658 (9th Cir.
2000); Interstate Funding Corporation v. Direct Link Cable, Inc.,
826 F.Supp. 437, 438 (S.D.Fla. 1993). The language "property and
rights to property" in section 6321 has no statutory definition. In
the Matter of Orr [99-2 USTC ¶50,668], 180 F.3d 656, 664 (5th Cir.
1999), cert. denied, 529
1099 (2000). A number of appellate courts, however, interpret the
language "to mean state-law rights or interests that have pecuniary
value and are transferable." Drye Family 1995 Trust v. United
States [98-2 USTC ¶50,651], 152 F.3d 892, 895 (8th Cir. 1998), aff'd
[99-2 USTC ¶51,066], 528 U.S. 49 (1999).
law recognizes assignments of choses in action. Palmer v. Merrill,
1850 WL 4568 at *4 (
1850). As expressed by the
Massachusetts Supreme Judicial Court
, equitable choses in action may pass by assignment and bear "a
close resemblance to certificates of stock" and, like stock
certificates, "are frequently sold in open market." Goodhue
v. State Street Trust Company, 165 N.E. 701, 704 (
1929). As such, they have pecuniary value.
law denotes similar interests as property. See, e.g., Reardon v.
Whalen, 29 N.E.2d 23, 23 (
1940) ("share as next of kin in an undistributed estate is
property"); McCann v. Randall, 17 N.E. 75, 78 (
1888) ("negotiable paper is property"). In sum, whether
characterized as a debt, an account receivable or an equitable chose in
's debt to
is a property right under state law. 15
The federal tax lien therefore reaches Baldwin's contractual right to
receive the $27,642.32 payment from
however, posit that
set off the amounts it owed to Baldwin by the amount
owed to the Funds. They reason that the IRS could not levy against the
was owed nothing under the contracts and the IRS' rights cannot be any
higher than the rights of the taxpayer. (Docket Entry #34).
correct insofar as the section 6321 lien "cannot rise above the
rights of the taxpayer." Equitable Life Assurance Society of the
United States v. United States [64-1 USTC ¶9433], 331 F.2d 29, 33
(1st Cir. 1964); see also Federal Tax Coordinator ¶V-5219 (2d
2001) (third party's duty to pay IRS "exists only to the extent to
which the taxpayer has a right in the property possessed by" the
third party). Indeed, various cases apply this so-called "no
debt" rule in the context of disputes involving a
taxpayer-contractor's failure to pay his suppliers and the IRS. See
United States v. Palmer-Smith Company [88-1 USTC ¶9300], 679
F.Supp. 641, 645-646 (E.D.Mich. 1987); Van Etten v. New York
State-Natural Gas Corporation [61-1 USTC ¶9331], 192 F.Supp. 837,
839-840 (M.D.Pa. 1961); Atlantic Refining Company v. Continental
Casualty Company [60-1 USTC ¶9413], 183 F.Supp. 478, 482-484
(W.D.Pa. 1960). In general, a section 6321 "lien only attaches to
that part of the unpaid portion of the contract price to which the
taxpayer delinquent contractor," i.e., Baldwin, "would
be entitled under the applicable state law." Randall v. Colby
[61-1 USTC ¶9178], 190 F.Supp. 319, 330 (N.D.Iowa 1961). This requires
examining whether, at the time of the notice of levy, Baldwin had any
interest in the $27,642.32 contractual debt under
law. See Progressive Consumers Federal Credit Union v. United States
[96-1 USTC ¶50,160], 79 F.3d 1228, 1235 (1st Cir. 1996) (" 'state
law controls in determining the nature of the legal interest . . . in
the property . . . to be reached by the [federal revenue act]' ").
Turning to the
nature of Baldwin's interest under state law, in August 1999
acknowledged that it owed
$27,642.32 under the contracts. (Docket Entry #36, Ex. 7). At the time
September 2, 1999
notice of levy,
was in the process of exercising its non-obligatory means of paying the
contract price by issuing a joint check to the union and to Baldwin for
the monies owed and thereby paying
's unpaid bills. The contracts did not obligate or require
's creditor, i.e., the Funds. Nor did the contracts require
to set-off the money Baldwin owed the Funds from the amount
. The Funds were not third party beneficiaries of the contracts.
Although Baldwin's right to the contract price required it to furnish
sufficient evidence of lien releases, if requested, Baldwin's failure to
furnish such evidence did not result in a material breach of the
law. See generally Lease-It, Inc. v. Massachusetts Port Authority,
600 N.E.2d 599, 602 (Mass.App.Ct. 1992) (material or substantial breach
impacts the essential feature of the parties' agreement and goes to the
root of agreement); O'Connell Management Company v. Carlye-XIII
Managers, Inc., 765 F.Supp. 779, 783 (D.Mass. 1991) (material breach
by one party excuses the other party from further performance; also
listing factors to consider in deciding materiality); Ward v.
American Mutual Liability Insurance Company, 443 N.E.2d 1342,
1343-1344 (Mass.App.Ct. 1983) (collecting cases).
therefore remained obligated to perform the executory contract and to
the contract price. The Funds' 1997 entreaty to Peabody to receive
payment as well as its stated intention to secure payment of the
delinquent contributions under any public construction bond, see
Mass. Gen. L. ch. 149, §29, did not extinguish or affect Baldwin's
contractual right to the contract price. Accordingly, Baldwin had a
sufficient interest in the entire amount
owed it under the contracts ($27,642.32) at the time of the notice of
levy and the section 6321 lien therefore attached to the entire amount.
is determined by federal law." Smith Barney, Harris Upham &
Company, Inc. v. Connolly [95-1 USTC ¶50,010], 887 F.Supp. at 342.
"Priority for purposes of federal law is governed by the common law
principle that the first in time is the first in right." 16Smith Barney, Harris Upham & Company, Inc. v. Connolly [95-1
USTC ¶50,010], 887 F.Supp. at 342 (internal quotation marks omitted); accord
First New Hampshire National Association v. Carrabassett Investment
Corporation [93-1 USTC ¶50,161], 813 F.Supp. 919, 922 (D.N.H. 1993)
(priority of federal tax lien turns on "the familiar 'first in
time, first in right' "). "Competing creditor liens generally
take priority over IRS liens only if they are perfected and choate when
the taxes giving rise to the federal lien are assessed." First
New Hampshire National Association v. Carrabassett Investment
Corporation [93-1 USTC ¶50,161], 813 F.Supp. at 922; accord
Bellegarde Custom Kitchens v. Select-A-Home, Inc., 385 F.Supp. 318,
321 (D.Me. 1974); see generally Michael I. Saltzman IRS
Practice and Procedure ¶16.02 (1981) (discussing choate lien
doctrine). "To be choate, the lien must be perfected so that there
is nothing more that needs to be done, that the identity of the lienor,
the property subject to the lien and the amount of the lien are
established." First New Hampshire National Association v.
Carrabassett Investment Corporation [93-1 USTC ¶50,161], 813
F.Supp. at 922 n. 3; see Bellegarde Custom Kitchens v. Select-A-Home,
Inc., 385 F.Supp. at 321 ("requirement of choateness is met
only if 'the identity of the lienor, the property subject to the lien,
and the amount of the lien are established' "); see, e.g.,
Progressive Consumers Federal Credit Union v. United States [96-1
USTC ¶50,160], 79 F.3d at 1238 (lien choate because it identified
lienor, described the property and established amount of "lien so
that nothing more needed to be done for the lien to be 'perfected'
at issue in the reach and apply count is between
's creditors, the IRS and the Funds. The Funds' section 515 ERISA claim
for delinquent contributions against Baldwin was choate as to the amount
of $17,011.32 prior to the IRS notice and demand upon
. The identity of the lienor (the Funds), the property at issue (the
delinquent contributions) and the amount of the lien (at least
$17,011.32) was established in 1997, prior to any notice and demand by
the IRS. Unfortunately, the summary judgment record is deficient with
respect to whether the amount
owed the Funds for delinquent contributions under section 515 fell below
the $26,197.61 tax lien after April 1999. 17
The date of the IRS notice and demand upon
is also not contained in the record. 18
On this sole issue, this court will afford the parties up to and
September 7, 2001
, to supplement the summary judgment record. 19
In the event the Funds' interest fell below $26,197.61 and, at that
time, the IRS had made the required notice and demand to effectuate the
tax lien, then the tax lien would be prior in time to any subsequent
increase in the Funds' interest to the presently owed amount of
It is also
worth examining plaintiffs' status as judgment lien creditors. Section
6323(a) of The Federal Tax Lien Act ("section 6323(a)"), 26
U.S.C. §6323(a), creates four categories of persons where the
"first in time, first in right" rule does not apply. See
generally Michael I. Saltzman IRS Practice and Procedure ¶16.03
(1981). These include "judgment lien creditors." 26 U.S.C. §6323(a).
Under section 6323(a), a judgment lien creditor takes priority over a
federal tax lien already in existence under section 6321 if the federal
tax lien has not been filed in accordance with the requirements of
section 6323(f). See Michael I. Saltzman IRS Practice and
Procedure ¶16.03 (1981). Simply stated, "because of section
6323(a), to be 'first in right' over a judgment lien creditor, the
notice of the federal tax lien must be filed 'first in time.' " Durand
State Bank v. Earlywine, 675 N.E.2d 1028, 1030 (Ill.App.Ct. 1997); see
Smith Barney, Harris Upham & Company, Inc. v. Connolly [95-1
USTC ¶50,010], 887 F.Supp. at 342 (discussing section 6323(a) as
applied to the special category of judgment lien creditors).
Regulations define a "judgment lien creditor" as "a
person who has obtained a valid judgment, in a court of record and of
competent jurisdiction, for the recovery of specifically designated
property or a certain sum of money." 26 C.F.R. §301.6323(h)-1(g).
Where, as here, the judgment at issue is for a particular sum of money,
the regulation additionally requires the judgment lien creditor to
perfect the lien. 26 C.F.R. §301.6323(h)-1(g); Smith Barney, Harris
Upham & Company, Inc. v. Connolly [95-1 USTC ¶50,010], 887
F.Supp. at 342-343. "The regulation's definition of 'perfection'
merely restates the requirements for a choate lien." Hodgins v.
Marguette Iron Mining Company, 503 F.Supp. 88, 91 (W.D.Mich. 1980).
Thus, "A judgment lien is not perfected until the identity of the
lienor, the property subject to the lien, and the amount of the lien are
established." 26 C.F.R. §301.6323(h)-1(g). Plaintiffs' judgment
in Count II will be established when the final judgment issues inasmuch
as the identity of the lienor (plaintiffs), the property subject to the
lien (the $27,642.32 withheld amount or a portion thereof), and the
amount of the lien (the $31,185.60 default judgment) will be
6323, however, plaintiffs must also obtain a writ of execution against
on the $27,642.32 amount in order to perfect their judgment lien and
become a "judgment lien creditor" within the meaning of
section 6323(a). As stated in the regulation, "If under local law
levy or seizure is necessary before a judgment lien becomes effective
against third parties acquiring liens on personal property, then a
judgment lien under such local law is not perfected until levy or
seizure of the personal property involved." 26 C.F.R. §301.6323(h)-1(g);
see, e.g., Interstate Funding Corporation v. Direct Link Cable, Inc.,
826 F.Supp. 437, 438-439 (S.D.Fla. 1993) (Florida law adhered "to
the common law rule that a lien is obtained on the personal property of
a debtor only when a writ of execution is delivered to the
sheriff," hence, judgment creditor's lien is not perfected
"until judgment creditor delivers a writ of execution").
law requires a writ of execution to effectuate a judgment lien. See
Rudolph Electrical Company, Inc. v. Gibbs Oil Company, 454 N.E.2d
1288, 1288 (Mass.App.Ct. 1983); Elias Brothers Restaurant, Inc. v.
Acorn Enterprises, Inc., 931 F.Supp. at 938-939; Smith Barney,
Harris Upham & Company, Inc. v. Connolly [95-1 USTC ¶50,010],
887 F.Supp. at 345. A lien in equity, such as under a reach and apply
count, "stands as well as any other lien." Snyder v. Smith,
69 N.E. 1089, 1090 (
1904). Plaintiffs, however, did not obtain an injunction when they filed
the reach and apply claim. 20Cf. Rioux v. Cronin, 109 N.E. 898, 901 (
1915) (noting that filing of bill to reach and apply accompanied by
issuance of injunction "does create a lien in favor of the
creditor"). Accordingly, after entry of the final judgment,
plaintiffs must obtain a writ of execution to obtain priority over the
IRS tax lien as a judgment lien creditor. They may seek enforcement of
the judgment in this court. See Fed. R. Civ. P. 69; Mass. R. Civ.
P. 69 ("process to enforce a judgment for the payment of money
shall be a writ of execution"). Once plaintiffs serve the writ of
, they will become a "judgment lien creditor" under section
6323(a) if, at that point in time, the IRS has not made the proper
filing under section 6323(f). See, e.g., Rudolph Electrical Company,
Inc. v. Gibbs Oil Company, 454 N.E.2d at 1288-1289 (Gibbs became
"judgment lien creditor" under section 6323(a) when judgment
entered and "the writ of attachment which was issued on that
judgment was recorded in the appropriate registry of deeds").
judgment motion (Docket Entry #32) is ALLOWED to the extent that
plaintiffs may reach and apply $17,011.32 of the $27,642.32 withheld
funds. The motion is otherwise held in abeyance pending receipt of the
aforementioned material 21
on or before September 7, 2001.
The July 5, 2000 Memorandum and Order sets out the nature of
's section 515 liability.
By letter addressed to the clerk, Nickerson requests an execution of the
$52,197.66 amount together with interest. Execution cannot occur until
issuance of a final judgment or the entry of a separate judgment on the
cross-claim under Rule 54(b), Fed. R. Civ. P. This court doubts the
necessity for entering a separate final judgment. Rule 54(b) requires, inter
alia, that there be no reason for delay. Great American Trading
v. I.C.P. Cocoa, Inc., 629 F.2d 1282, 1286 (7th Cir. 1980).
Moreover, separate judgments are generally not allowed as a matter of
course. See Willhauck v. Halpin, 953 F.2d 689, 701 (1st Cir.
1991) (Rule 54(b) creates "an exception to the longstanding
prudential policy against piecemeal appeals").
Although at this juncture plaintiffs are not judgment creditors of
Peabody, this court will be entering such a judgment forthwith and, in
the event plaintiffs obtain a writ of execution, they will become
judgment lien creditors within the meaning of 26 U.S.C. §6323
("section 6323"), as discussed infra, with priority
over the IRS lien unless the IRS first files notice of the lien in the
manner prescribed by section 6323(f). In the interest of judicial
economy, therefore, this court will discuss this issue. See Elias
Brothers Restaurant, Inc. v. Acorn Enterprises, Inc., 931 F.Supp.
930, 938 (D.Mass. 1996) (deciding issue regarding trustee execution of
judgment prior to judgment "in the interest of judicial
economy"). Inasmuch as the summary judgment record is incomplete
because it lacks evidence of whether the IRS filed a proper notice under
section 6323(f), however, this court will not resolve this issue at the
The Funds only benefitted [sic] from this provision incidentally.
Baldwin and Peabody did not intend to create a benefit to the Funds
through this provision. See Miller v. Mooney, 725 N.E.2d 545,
2000) (third party beneficiaries must be "intended
beneficiaries"); Taylor Woodrow Biltman Construction Corporation
v. Southfield Gardens Company, 534 F.Supp. 340, 343-344 (D.Mass.
1982) ("as to performance bonds, it is generally held that
subcontractors and materialmen are not third party beneficiaries");
see, e.g., Rousseau v. Diemer, 24 F.Supp.2d 137,
145 (D.Mass. 1998). Plaintiffs' third party beneficiary argument is
Hurley also refers to a fifth project, "the
As indicated supra, the contracts allowed but did not require
to issue a joint check to Baldwin and
allotted an additional $10,000 for Baldwin's work on the
It is, however, a material issue of fact as to whether Baldwin's debt to
the IRS ($26,197.61) ever exceeded the amount of
's debt to the Funds. It can be equally inferred that
's debt to the Funds remained in excess of $40,000 at all times. The
summary judgment record indicates that Baldwin's debt to the union was
in excess of $40,000 in 1997 (Docket Entry ##21 & 42), remained in
excess of $40,000 in April 1999 (Docket Entry #36, Ex. 4) and remained
outstanding in the amount of $47,820.91 in 2000 (Docket Entry #21). In
light of such evidence, the fact that
was prepared to issue joint checks to the union and Baldwin in the
amount of $17,011.32 can simply evidence that
owed Baldwin $17,011.32 on the seven projects in late August 1999, not
only owed the union $17,011.32 at that time. Instead of a reduction of
that debt between April and August 1999, the union and Baldwin could
simply have separately negotiated their own payment plan on the overage.
Specifically, Thomas E. Broderick, Fund Administrator, avers that,
has been out of business." (Docket Entry #33). There is no evidence
filed for bankruptcy thereby raising the execution procedures of
Massachusetts General Laws chapter 235, section 24.
It is therefore reasonable to assume, based on the present record, that
the IRS did not assess the taxes and make notice and demand on
any earlier than March 31, 1998.
The IRS' failure to intervene is best explained by the statement made by
one commentator that:
government no longer claims that a taxpayer-contractor has any
"property" in retainages due him under a construction contract
he has breached by failing to pay laborers and materialmen. Therefore,
the claims of these laborers and materialmen risk no competition from
the tax lien.
Saltzman IRS Practice and Procedure ¶16.02 (1981).
argues that "there needs to be a determination of the specific
amount that is due the Plaintiff's on the
projects." (Docket Entry #39).
submits that if this amount is less than the sum of $27,642.32 being
, then this court needs to decide whether the reach and apply action
trumps the IRS' notice of levy on the remaining funds. This court
disagrees on the need to make the former determination. Plaintiffs have
a $31,185.60 default judgment against
a contractual debt of $27,642.32, as noted infra. Accordingly,
under section 3(6) of chapter 214, plaintiffs can reach and apply the
$27,642.32 property of the debtor, Baldwin, to the $31,185.60 judgment.
In any event, this court finds, based on the summary judgment record,
that all of the $31,185.60 involves the eight projects for which
was the general contractor.
The IRS has a
$26,197.61 tax lien against
that arose at the time of notice and demand, as discussed infra.
Baldwin had a debt to the Funds that was either in excess of $40,000 at
all times or fell to $17,011.32 sometime between April and August 1999,
only to increase later to the present amount of $47,820.91. Plaintiffs
can reach and apply the $27,642.32 debt
owes Baldwin to the $47,820.91 debt
owes plaintiffs for delinquent contributions. If first in time, it will
take priority over the IRS tax lien. Thus, the relevant inquiry for
purposes of determining the priority between Baldwin's debt to the IRS
and Baldwin's debt to the Funds is whether
's debt to the Funds was first in time under federal law and, if so,
whether it remained first in time in an amount that exceeded the
$26,197.61 tax lien after that lien arose.
's affirmative defense alleges that it "is unable to release any
funds otherwise due Baldwin as the result of a notice of levy served
by the [IRS] for funds due from
." (Docket Entry #6).
A notice of levy is an
istrative tool used by the IRS to levy against the property of the
taxpayer held by a custodian or third party. See United States v.
National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720
(1985); 26 U.S.C §§6331 & 6332. The levy "typically 'does not
require any judicial intervention.' " United States v. National
Bank of Commerce [85-2 USTC ¶9482], 472
at 720. The taxpayer's property held by the third party custodian at the
time of the notice and levy, however, must be fixed and determinable.
extends only to property possessed and obligations which exist at the
time of the levy. Obligations exist when the liability of the obligor is
fixed and determinable although the right to receive payment thereof may
be deferred until a later date.
26 C.F.R. §301.6331-1;
accord Reiling, Jr. v.
United States [77-1 USTC ¶9269], 1977 WL 1094 at *2 (N.D.Ind. Feb. 2, 1977); United
States v. Risque Management of Florida, Inc. [95-2 USTC ¶50,621],
1995 WL 749635 at *2 (N.D.Fla. Oct. 5, 1995); see Rev. Rul.
75-554 (1975). As previously noted in the factual background, the
was fixed and determinable on September 2, 1999.
It is also worth noting that contract claims, even if not fixed in
amount, are generally the "types of interest" which create
"a sufficient right to allow a federal tax lien to attach."
William D. Elliott, Federal Tax Collections, Liens & Levies
¶9.09[b][iv] (2001). Thus, analogous claims constitute property or
property rights within the meaning of section 6321. See, e.g.,
In the Matter of Orr [99-2 USTC ¶50,668], 180 F.3d at 663-664
(spendthrift trust); Raihl v. United States [93-1 USTC ¶50,290],
152 B.R. 615, 618 (9th Cir. 1993) (" 'unqualified contractual right
to receive property is' " property within the meaning of section
6321 which therefore reaches "ERISA qualified pension
interests"); United States v. Stonehill [96-1 USTC ¶50,318],
83 F.3d 1156, 1159-1160 (9th Cir. 1996) (chose in action); Randall v.
H. Nakashima & Company, Ltd. [76-2 USTC ¶9770], 542 F.2d 270,
273-274 (5th Cir. 1976).
As previously noted, the federal tax lien arose sometime between
March 31, 1998
September 2, 1999
17See footnote number 12. The summary judgment record establishes
owed the Funds in excess of $40,000 in delinquent contributions between
1997 and April 1999.
If the amount Baldwin owed the Funds was at all times greater than the
amount of the tax lien, it is not necessary for the summary judgment
record to include the date of the notice and demand inasmuch as it
occurred sometime between March 31, 1998 and the September 2, 1999
notice of levy.
Although not required, the parties may supplement the record by
including Rule 56(c) material with respect to whether the IRS filed
proper notice of the tax lien under section 6323(f). See footnote
An application for a prejudgment injunction at this point in time would
Lien for taxes, foreclosure of: Fraudulent conveyance: Motion to
amend complaint.--The transfer of certain real property by a married
couple to a purported charitable society constituted a fraudulent
conveyance because it was undertaken to hinder, delay or defraud
creditors or other persons. Thus, under state (
) law, the transfer was voidable. It was made in anticipation of a
pending suit, for inadequate consideration, and to an organization with
no identified members other than the couple. Moreover, the transfer
occurred after the government began collection efforts against the
taxpayers. As a result, the government was permitted to avoid the
transfer and foreclose its tax liens against the property. It's motion
to amend the complaint in order to name the society as a defendant was
granted. The society was not unduly prejudiced by that action because it
had constructive notice and knowledge of the suit through its members,
Tax assessments: Validity of:--The government's submission of
Forms 4340, Certificate of Assessments and Payments, was sufficient to
establish the validity of assessments against a taxpayer. His statement
that the presumption of correctness accorded Forms 4340 did not apply in
cases of unreported income was rejected. The assessments were based on
the reports of entities that had paid wages or interest to the husband,
and he produced no evidence to rebut his receipt of the reported
Tax liens: Community property: Tax liability.--Tax liens were
effective to reach married taxpayers' property in circumstances where
the husband failed to pay outstanding assessments. The properties at
issue constituted marital property under state (
) law because the couple acquired them after marriage, and the husband's
tax debts were presumed to be community debts since they were incurred
Levies: Property exempt from levy: Suits by taxpayers: Civil damages:
IRS conduct: Unauthorized collection.--Married taxpayers were denied
an award of damages resulting from the government's allegedly unlawful
and unauthorized collection of exempt income based on a levy against the
husband's military pension. The funds were not exempt from under Code
Sec. 6334(a)(9) . During the period in question, neither the husband
nor the wife was over age 65 and, thus, they were not entitled to an
exemption from the levy. The mere fact that they were over age 65 at the
time of the lawsuit was irrelevant. Moreover, the husband's allegation
that the government negligently levied against his benefits was not
supported by the evidence.
ORDER GRANTING THE UNITED STATES' MOTIONS TO AMEND COMPLAINT AND FOR
This case is
the result of the consolidation of two preexisting cases. In USA v.
Reid, C99-5565, the
brought suit to reduce outstanding tax assessments to judgment and to
foreclose its tax liens on the property of Albert C. Reid and Bodil Reid
In Albert C. Reid v. United Stares and C. Dudley, C98-5432, Mr.
Reid brought suit against the
for unlawful collection activities. The suits are now combined under the
latter title and number and the court will refer to the parties by their
roles in the titled suit. The court has jurisdiction over these actions
pursuant to a number of statutory grants, 26 U.S.C. §§7402, 7403 and
28 U.S.C. §§1340, 1345.
delinquent tax account is in the name of Mr. Reid, Mrs. Reid is a party
to the suit by her status as his spouse and her community property
interest in both the debts and the properties sought to satisfy such
debts. The properties at issue here are the residence of the Reids,
22759 Jefferson Point Road, NE, Kingston, Washington, 98346 (the
residence) and 3435 Longhorn Drive NW, Bremerton, Washington, 98312 (the
comes before the court on cross motions for summary judgment and a
motion by the
to amend its complaint. Plaintiff, Albert C. Reid, moves for partial
summary judgment asking the court to declare that the levy of Reid's
military pension by the Internal Revenue Service (IRS) resulted in
unlawful and unauthorized collection of exempt income. Plaintiff seeks
to recover damages under 26 U.S.C. §7433.
seeks leave to amend its complaint to add the "Truth in Life
Society" as a defendant and to set aside the transfer of the
lakefront property to the society as fraudulent. The "Truth in Life
Society" is the transferee the lakefront property previously owned
by Albert and Bodil Reid. This transfer was completed without
consideration in 1996, after the collection efforts of the
began. Defendant also seeks summary judgment on its claims described
above and dismissal of Mr. Reid's complaint.
Summary Judgment Standard
Rule 56 of the
Federal Rules of Civil Procedure governs summary judgment. Summary
judgment is appropriate when there is no genuine issue of material fact.
Tzung v. State Farm Fire & Casualty Co. v. Martin, 872 F.2d
319, 320 (9th Cir. 1989). During the analysis of a summary judgment
motion, the burden of proof will shift between the moving and defending
parties. FRCP 56, Celotex Corp. v. Catrett, 477
317, 323, 106 S.Ct. 2548 (1986). Initially, the moving party bears the
burden of coming forward and identifying "the pleadings,
depositions, answers to interrogatories and admissions on file, together
with the affidavits, if any" which demonstrate the absence of a
genuine issue of material fact. Id.
At that point, the burden shifts to the non-moving party, who must go
beyond the pleadings and designate "specific facts showing that
there is a genuine issue for trial." Id.
The Plaintiff's Motion for Partial Summary Judgment
Plaintiff's motion for partial summary judgment states that the issue
for resolution is whether 26 U.S.C. §6334(a)(9) applies equally to
retirement benefits and wages salary or income. He argues that if the
court agrees with this premise, then the Defendant is liable for
unauthorized collection of his retirement benefits. Plaintiff relies on Arford
v. United States [92-1 USTC ¶50,229], 934 F.2d 229 (1991). However,
Arford is distinguishable from the case at bar. In Arford,
the plaintiffs sued the government for quiet title to and recovery of
retirement pay seized as a result of an IRS levy served on the
Retirement Pay Division of the Air Force. Id.
at 231. The Court of Appeals held that the Arfords had the right
to challenge the procedural aspects of the lien, but not the
underlying merit of the tax assessments which lead to the lien. Id
plaintiff's procedural challenge goes to whether or not he was entitled
to any exemptions from the levied amount. Plaintiff claims that his
"married, filing jointly" tax status and the age of Plaintiff
and his spouse being over 65 create exemptions. However, in its
response, the Defendant submits a copy of a Health Benefits Registration
Form, received in response to a subpoena from Office of Personnel
Management which shows that both the Plaintiff and his wife were born in
years to 1934 results in a total of 1999. During the period of time in
question for this lawsuit, Plaintiff and his wife would not have been
entitled to an exemption for being 65 years old, since they were not
that age. The fact that each of them is over the age of 65 currently is
irrelevant to this lawsuit.
To succeed in
a claim for damages under 26 U.S.C. §7433(a), the Plaintiff must
demonstrate that his harm was a result of the reckless or intentional
disregard of the Internal Revenue Code, or any regulations promulgated
under it, by an officer or employee of the Internal Revenue Service. See
26 U.S.C. §7433(a) (1986). Plaintiff alleges that the IRS acted
negligently in their levy of his retirement benefits, however, he does
not support that allegation with any evidence, nor would simple
negligence meet the standard required by the statute.
the Defendant produces evidence of a variety of income sources to the
Reids which the revenue officer in charge of collections on their
account was aware of. See Declaration of Dana F. Pellman.
Further, since levy exemptions are measured against total income, not
each income source individually, there is not a clear showing that Mr.
Reid would have been entitled to any exemption amount. See 26 CFR
§301.6334-2 and -3.
bears the burden of proof on his motion for partial summary judgment,
and the court must view the evidence presented in the light most
favorable to the non-moving party. The
has presented evidence, both documentary and testimonial, which tends to
rebut the allegation that the collection actions of the IRS included any
intentional or reckless disregard of the Internal Revenue Code or
regulations promulgated thereunder. Therefore, the motion for partial
summary judgment by Mr. Reid must be DENIED.
The Defendant's Motion to Amend Complaint
seeks the leave of the court to amend their complaint to add the
"Truth in Life Society" as a defendant. The "Truth in
Life Society" is the beneficiary of the transfer of certain real
property previously owned by Mr. and Mrs. Reid. The Reids transferred
title of the lakefront property by quitclaim deed, for no consideration
to the "Truth in Life Society" on
November 4, 1996
. The "Truth in Life Society" is headquartered at the Reids'
residence. Mrs. Reid admitted during her deposition that she and her
husband were members, but did not put forward any other information
about the society. Mr. Reid refused to answer any questions about the
society on Fifth Amendment grounds.
discovered the transfer of the lakefront property during a title search
records completed after the deposing the Reids. The
brings this action under 26 U.S.C. §7403 which is titled "Action
to Enforce Lien of Subject Property to Payment of Tax." Subpart (b)
of this section requires that "All persons having liens upon or
claiming any interest in the property involved in such action shall be
made parties thereto." Thus, the "Truth in Life Society"
must be made a party since it is recorded as holding an interest in the
slates that after a response to a pleading, the original pleading may
only be amended by leave of court or written leave from the adverse
party, further, that "leave shall be freely given when justice so
requires." The Ninth Circuit interprets Rule 15(a) "with
extreme liberality." DCD Programs v. Leighton, 833 F.2d 183,
186 (9th Cir. 1987). The Ninth Circuit reviews a decision granting leave
to amend for abuse of discretion, in light of a policy which favors
amendment. Plumeau v. School Dist. No. 40, 130 F.3d 432, 439 (9th
Cir. 1997). Amendment is favored even when the motion will add causes of
action or parties. Acri v. International Ass'n. Of Machinists,
781 F.2d 1393, 1398-99 (9th Cir.), cert. denied,--
--, 107 S.Ct. 73, 93 L.Ed.2d 29 (1989).
A motion to
amend is evaluated according to four factors: bad faith, undue delay,
prejudice, and futility. DCD Programs, Ltd. v. Leighton, 833 F.2d
183, 186 (9th Cir. 1987). This amendment is not sought in bad faith (for
example, to destroy jurisdiction in a diversity action as in Sorosky
v. Burroughs Corp., 826 F.2d 794 (9th Cir. 1987)). In this case, the
"Truth in Life Society" will not be unduly prejudiced because
it has had constructive notice and knowledge of this suit through two of
its members (Mr. and Mrs. Reid). This amendment is clearly not futile,
as the society holds an interest in the property that the
seeks to foreclose upon.
primary argument against granting this motion is an allegation of unjust
delay on the part of the
. However, as noted in the
' motion, the Reids have not been forthcoming about the existence of the
"Truth in Life Society" or their roles within the society, nor
have they advanced any evidence to contradict the allegation that the
society is merely an alter ego. The
discovered that the "Truth in Life Society" held an interest
in the lakefront property only a month before the motion to amend was
filed--a month is not an undue delay.
reviewed the authority cited by the Reids in their opposition to this
motion, however, each of those cases dealt with questions of joinder,
which relates to a separate rule and standard under the rules of civil
In any event,
the Ninth Circuit states that delay alone is not sufficient to justify a
denial of motion to amend. DCD Programs, 826 F.2d at 187. In
fact, some of the delay in this case results from the Reid's motion for
an extension of time to reply to the
' motion to amend complaint and for summary judgment.
In light of
the Reid's failure to timely disclose the existence of the "Truth
in Life Society"; its interest in the lake front property which is
a subject of this action and the
timely effort to add the newly discovered evidence to the complaint, the
motion to amend is GRANTED.
The Defendant's Motion for Summary Judgment
States asks for summary judgment on its claims: (1) to avoid the 1996
transfer of the lakefront property to the "Truth in Life
Society" as fraudulent, to establish and foreclose its tax liens on
the property; (2) to reduce tax assessments from 1987 and 1992 through
1995 to judgment; and (3) to foreclose tax liens against the real
property of Albert Reid.
Transfer of Property
In 1996 the
Reids transferred their interest in the lakefront property via a Quit
Claim Deed to the "Truth in Life Society." The "Truth in
Life Society" is headquartered at the same address as the Reids
residence. This transfer was made for no consideration. The
asks the court to set aside this transfer as fraudulent, under the
Uniform Fraudulent Transfer Act (UFTA) as adopted by
at RCW 19.40.011, et seq.
The UFTA, at
section 19.40.041, provides in pertinent part:
(a) A transfer
made or obligation incurred by a debtor is fraudulent as to a creditor,
whether the creditor's claim arose before or after the transfer was made
or the obligation was incurred, if the debtor made the transfer or
incurred the obligation:
actual intent to hinder, delay or defraud any creditor of the debtor.
fraudulent transfer can be defined as "a transaction by means of
which the owner of [real or personal] property has sought to place the
[land or goods] beyond the reach of his or her creditors. . . ." Freitag
v. McGhie, 113 Wn.2d 816, 821-22, 947 P.2d 1186 (1997). Under the
UFTA, the burden of proof rests upon the party alleging the fraudulent
transfer. Sedwick v. Gwinn, 73 Wn. App. 879, 885, 873 P.2d 528
(1994). Proof of actual intent to hinder, delay or defraud must be shown
by clear and satisfactory proof. Clearwater v. Skyline Construction
Co., Inc., 67 Wn. App. 305, 321, 835 P.2d 257 (1992), review denied,
121 Wn.2d 1005, 848 P.2d 1263 (1993). The burden is on the party
alleging a fraudulent transfer, but the burden shifts to the defendant
to prove good faith when the consideration for the transfer is shown to
be grossly inadequate. Workman v. Bryce, 50 Wn.2d 185, 189, 310
P.2d 228(1957). Any transfer made by a debtor with the intent to delay
or defraud a creditor is subject to being set aside. Rainier Nat'l
Bank v. McCracken, 26 Wn.App. 498, 506, 615, 615 P.2d 469 (1980),
review denied, 95 Wn. 2d 1005 (1981).
The UFTA lists
a number of badges of fraud for the court's consideration in determining
whether a debtor acted with actual intent to delay or defraud at RCW
19.40.041(b). The United States argues that the actual intent of the
Reids to delay or defraud is demonstrated by a number of these badges,
including: (1) transfer to an insider, (2) debtor retains possession or
control after transfer, (3) transfer concealed, (4) prior to transfer,
debtor subject forced collection action, (5) transfer occurred shortly
before or after substantial debts were incurred, and (6) transfer made
for no consideration.
In support of
its contention, the
submitted the following evidence. In her deposition, Mrs. Reid admitted
that she and her husband were members of the "Truth in Life
Society", but declined to name any other members or to describe the
nature and purpose of the society. Mr. Reid refused to answer any
questions about the society during his deposition on Fifth Amendment
grounds. The Quit Claim Deed filed with the Kitsap County Auditor's
office shows the society's address to be the same as the Reids
residence. Mrs. Reid stated in her deposition that she and her husband
owned the lakefront property, while the Answer to the
' complaint denies ownership. Mr. Reid was aware of the collection
activities on his account prior to the date of the transfer, as
evidenced by his letter to the Kitsap County Auditor dated
June 8, 1995
. The transfer was executed before Mr. Reid filed his tax returns for
years 1992-1995. The Quit Claim Deed states that the transfer was made
The Reids have
not put forward any evidence to counter the allegations or proof of the
, even though the lack of consideration on this transfer was enough to
shift the burden of proof to them. See Workman, supra. Therefore,
the court finds that the transfer of the lakefront property was made
with the intent to delay or defraud; that the
may avoid this transfer as fraudulent and proceed to establish and
foreclose its tax liens on the property.
submits copies of Forms 4340 Certificates of Assessments and Payments.
Generated under seal and signed by an authorized delegate of the
Secretary of the Treasury, Forms 4340 are admissible in to evidence as
self-authenticating official records of the
carrying a presumption of correctness. Hughes v. United States
[92-1 USTC ¶50,086], 953 F.2d 531 (9th Cir. 1992), Rossi v. United
States, 755 F.Supp. 314, 318 (D. Or. 1990).
argues that the presumption of correctness does not apply in cases of
unreported income. He relies primarily upon United States v. Janis
[76-2 USTC ¶16,229], 428 U.S. 433, 96 S.Ct. 3021 (1976) and Weimerskirch
v. Commissioner [79-1 USTC ¶9359], 596 F.2d 358 (9th Cir. 1979). In
Janis, police acting on a warrant seized various records from the
Plaintiff which contained the "gross volume" of his gambling
activities for a 77 day period during which he had not filed a tax
return. Janis, supra. The IRS used the seized information as the
basis for a civil collection suit. Id.
In spite of the fact that the warrant and seizure was eventually held to
be invalid, the Supreme Court held that the IRS could use the evidence
in a civil suit. Id.
This is clearly distinguishable from the case at bar. Contrary to the
manner that Mr. Reid presents it. Janis states that the
assessment against the plaintiff was valid, even though it relied on
improperly seized information.
the plaintiff contested a tax assessment based on unreported income. Weimerskirch
[79-1 USTC ¶9359], 596 F.2d 358 (9th Cir. 1979). The Commissioner
based the assessment on information that plaintiff sold heroin, but
failed to produce the evidence at trial which linked plaintiff with the
sale of heroin, so the assessment was held to be invalid. Id.
The situation in Weimerskirch is clearly distinguishable from
this case. This is not a case of "illegal" unreported income.
Here, the assessments were based on the reports of those entities who
paid wages or interest to Mr. Reid. He disputes his status as an
employee at any time relevant to the assessments in this case, however,
he puts forward no evidence which rebuts his receipt of the reported
' submission of Forms 4340 is sufficient to establish the validity of
the assessments against Mr. Reid. Therefore, Mr. Reid is liable for the
assessed tax liabilities, statutory interest, penalties and additions,
minus any credits as calculated by the
as of the date of this order.
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