Fact-Finding Page1

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United States of America v. Peabody Construction Company, Inc., et al.

U.S. District Court, Dist. Mass.; CIV. 02-11796-RWZ, February 24, 2005.

Related DC-Mass. case at 2001-2 USTC ¶50,694.

[ Code Sec. 6323]

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.

MEMORANDUM OF DECISION

ZOBEL, District Judge: Peabody Construction Company, Inc. ("Peabody") owed $27,642.32 to Baldwin Steel ("Baldwin") as payment for subcontracting work. In turn, Baldwin 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, Baldwin also owed money to the Internal Revenue Service (the "IRS") for certain unpaid tax liabilities. Peabody received a Notice of Levy from the IRS in 1999 regarding this obligation. The Trustees sued Peabody in federal court in 2000 as a reach-and-apply defendant. Peabody 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. Peabody 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 ordered Peabody to pay the money it otherwise owed to Baldwin to the Trustees instead. Peabody complied with this order.

In this law suit brought some years later, the United States challenges Peabody '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 Peabody is liable for refusing to surrender to the IRS the funds owed to Baldwin . In Count Two, plaintiff alleges that the Trustees misappropriated Baldwin's property in accepting Baldwin's funds from Peabody , 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 statutory additions.

Plaintiff and the Trustees each now separately moves for summary judgment on Count Two. In order to establish a claim for conversion under Massachusetts law, plaintiff must show that

(1) the 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 Peabody . 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 Peabody 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 Baldwin 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 Peabody as a setoff intended to compensate Baldwin's creditors and argue that, under state law, Baldwin 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 Baldwin . 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. See Horton Dairy Inc. v. United States [ 93-1 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 Peabody 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 Baldwin '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, Peabody became directly liable to the Trustees as third-party beneficiaries. As a result, the funds paid by Peabody never became Baldwin 's property and, thus, never became subject to the IRS lien. Courts in Massachusetts "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, 431 Mass. 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 Mass. 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 Peabody to Baldwin .

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 ( W.D. N.Y. 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, New Hampshire , and not Massachusetts 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 Peabody 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 Baldwin , 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 Baldwin '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.

 

 

Donald Derrington, et al., Plaintiffs v. United States of America , Defendant.

U.S. District Court, West. Dist. Wash. , at Seattle ; C02-5257L, September 12, 2003 .

[ Code Secs. 6323 and 6871]

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.

ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

I. INTRODUCTION

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.

II. DISCUSSION

A. Background.

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 Group. Id. ¶5; see also Bedford Decl. Exs. A-B (notices of federal tax lien).

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, United States Bankruptcy Court, Western District of Washington . (Hankla Decl. Ex. A (Derrington Decl.) ¶2). The Halls held a fifty percent interest in the Mariner Village Mobile Home Park in Everett , Washington . Id.

Plaintiffs learned of an investment opportunity involving the Halls' bankruptcy through John Widmer, a mutual friend of Plaintiffs and the Halls. Id. ¶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 Mariner Village . Id. ¶ ¶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 Mariner Village 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 Mariner Village manufactured home park. We were also going to receive a 15% loan fee and 18% interest. If the Halls ended up with Mariner Village , we were going to be paid out over time. If the Halls did not end up with Mariner Village , 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 trustee.

 

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 .

Id. ¶ ¶12-13.

Plaintiffs and Smith signed a document entitled "Agreement to Consolidate Loans and Negotiate Settlement" (the "Agreement"). Id. 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

On 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 Mariner Village was sold through the bankruptcy proceeding, and the investors were therefore limited to the claims for repayment of the investment. Id. On 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 $373,848. Id. ¶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. ( Bedford 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 Oregon 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 admin 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 U.S. 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 also Matsushita 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 [ 85-2 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 the claims.

In support of its argument that Smith owned the claims, the IRS cites the above-quoted deposition testimony given by Plaintiffs in the Oregon 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 Seattle 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 Smith." Id. 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 "bond."

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 California 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.

In Washington "[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 Crittenden ⁴ , 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 . ⁵ 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).

III. CONCLUSION

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 record.

¹ 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. at 5.

² 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.

³ 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 America , 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.").

⁴ In Crittenden the constructive trust arose at the time the taxpayer secretly overcharged the customers.

⁵ 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).

 

 

United 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.

U.S. District Court, East. Dist. Wis. ; 01-C-787, August 21, 2003 .

Related DC Wis. decision at 2003-1 USTC ¶50,398.

[ Code Sec. 6203]

Assessment of tax: Certificates of Assessments and Payments: Prima facie case: Evidence: Frivolous arguments: Jurisdiction. --

Certificates 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.

[ Code Secs. 6203, 6321 and 6323]

Tax liens: Date assessment created: Property subject to tax liens: Employee pension plans: Evidence. --

Federal tax 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 ( Wisconsin ) law were rejected because tax liens are subject to federal law.

[ Code Secs. 6323 and 6501]

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.

[ Code Secs. 6663 and 7402]

Penalties, civil: Fraud: Evidence: Summary judgment. --

The government 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.

DECISION AND ORDER

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 United States 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 the United States ' motion for summary judgment against the main defendant, Timothy McCarville.

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 that issue.

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 U.S. 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 United States 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 U.S. 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 U.S. at 322-24. There must be a genuine issue of material fact for the case to go to trial. Anderson, 477 U.S. at 247-48. "Material" means that the factual dispute must be outcome-determinative under governing law. Contreras v. City of Chicago , 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 U.S. 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 U.S. 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, 477 U.S. at 255.

The United States 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 United States 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 United States 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).

I. UNDISPUTED FACTS

McCarville and his wife Evelyn reside in Iola, Waupaca County , Wisconsin . During the years for which the United States 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.

On 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 . On 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 United States 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:

________________________________________________________________________________

Tax             Assessment      Amount          Accrued         Total Liability

Year            Date            Assessed,       Interest                       

                                Unpaid Balance  and Additions                  

________________________________________________________________________________

1982            3/15/91         $26,078.44      $0.00           $26,078.44     

________________________________________________________________________________

1983            3/15/91         $20,009.59      $0.00           $20,009.59     

________________________________________________________________________________

1984            3/15/91         $79,953.54      $0.00           $79,953.54     

________________________________________________________________________________

1985            9/10/90         $16,931.64      $31,391.23      $48,322.87     

________________________________________________________________________________

1986            5/30/90         $17,924.10      $35,157.19      $53,081.29     

________________________________________________________________________________

1987            5/30/90         $15,355.07      $30,362.66      $45,717.73     

________________________________________________________________________________

1988            4/23/90         $3,008.93       $5,824.79       $8,833.72      

________________________________________________________________________________

According to the United States , 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. The United States 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 United States indicates is owed.

Notices of federal tax lien were filed against McCarville with the Register of Deeds Office for Waupaca County , Wisconsin as follows:

            ____________________________________________________________

            Tax Year                Dates Notices of Tax Lien Filed    

            ____________________________________________________________

            1982, 1983, 1984        6/27/91 and 
2/12/01
                

            ____________________________________________________________

            1985, 1986, 1987        1/7/91 and 
5/5/00
                  

            ____________________________________________________________

            1988                    7/3/90 and 
12/24/02
                

            ____________________________________________________________

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 Appleton , Wisconsin . 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 admin 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.

On 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 $197,193.29. ⁴

II. ANALYSIS

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 United States 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). ⁵

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. ; United States 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 United States 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 in §6103(b), 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 and Treas. 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 United States 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 United States 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) before the United States 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 United States assessed the taxes on March 15, 1991 (1982-1984), September 10, 1990 (1985), and May 30, 1990 (1986-1987). McCarville filed his return for 1988 on February 13, 1990 . The United States then had three years to assess the taxes, which it did within about two months, on 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 date of 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 , to December 21, 2000 , the effective date of Congress' elimination of the provision suspending the statute of limitations during the pendency of an OIC.

The United States thus had to file this case by the times indicated in the following table.

____________________________________________________________________________________

Tax     Return     Assessment Plus Ten   OIC 1 Tolling  OIC 2        New Statute of

 Year     Filed       Date        Years                      Tolling       Limitations   

                                                                      Date          

____________________________________________________________________________________

1982    2/27/90    3/15/91    3/15/01                   4m, 20d      8/4/01        

____________________________________________________________________________________

1983    2/27/90    3/15/91    3/15/01    2y, 2m, 24d    4m, 20d      10/28/03      

____________________________________________________________________________________

1984    2/27/90    3/15/91    3/15/01    2y, 2m, 24d    4m, 20d      10/28/03      

____________________________________________________________________________________

1985    2/27/90    9/10/90    9/10/00    2y, 4m, 11d    4m, 20d      6/10/03       

____________________________________________________________________________________

1986    2/27/90    5/30/90    5/30/00    2y, 4m, 11d    4m, 20d      3/3/03        

____________________________________________________________________________________

1987    2/27/90    5/30/90    5/30/00    2y, 4m, 11d    4m, 20d      3/3/03        

____________________________________________________________________________________

1988    2/13/90    4/23/90    4/23/00    2y, 4m, 11d    4m, 20d      
1/23/03
       

____________________________________________________________________________________

From the above table, it appears the only tax year for which the United States 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 defense fails.

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.

1. 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 United States has established that no reasonable jury could find for McCarville on this issue.

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 United States 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. United States [ 92-2 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 United States 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 United States . 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 United States regarding the assessments is incorrect. His arguments regarding the court's jurisdiction do not rebut the prima facie case established by the United States . No rational jury could fail to find for the United States on this issue.

Summary judgment will be granted for the United States on the matter of reducing the assessed amounts to judgment.

2. Liability for Fraud Penalty

In addition, the United States 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 underpayment." ⁷ 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 United States 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 United States needs to establish that a person intended to evade taxes that he knew or believed were owed. Id. The United States does not need to prove the precise amount of the underpayment resulting from fraud, but only that some part of the underpayment is attributable to fraud. Id.

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 United States . 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 United States 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. at 3.)

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 United States 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.

3. 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 United States 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 Waupaca County , where McCarville resides.

On January 7, 1991 , and 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 Waupaca County . See 26 U.S.C. §6323(f)(2)(B).

McCarville argues that the notices of federal tax liens are not certified as required by Wisconsin 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 [ 89-2 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 United States that the IRS officers who authorized the notices at issue in this case were proper designees.

III. MCCARVlLLE'S COUNTERCLAIM

The United States seeks summary judgment on its claim as well as on McCarville's counterclaim seeking release of the tax liens. Because the United States has established upon undisputed facts that the tax liens are valid, summary judgment must be granted against McCarville on his counterclaim.

IV. CONCLUSION

Summary judgment must be granted against Timothy McCarville in favor of the United States . The United States 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 United States 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 United States 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 case.

¹ Because McCarville proceeds pro se, I have been generous and have considered both briefs filed in response to the motion for summary judgment.

² The United States did not seem to have these returns until McCarville provided the United States during discovery with copies stamped "received" by the IRS on February 27, 1990 . Taking the facts in McCarville's favor, those returns were indeed filed on 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.

³ 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.

⁴ 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.

⁵ 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 case.

⁶ 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.

⁷ Since the years in issue, §6653 has been amended and this provision was deleted.

 

[2002-1 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. Ill. , East. Div., 01-C 0190, 01 C 4095, 4/29/2002, 198 F. Supp. 2d 969

[Code Sec. 6323 ]

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.

[Code Secs. 6323 and 7122 ]

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

BUCKLO, District Judge:

Julian 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 Somerset 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. Somerset and Hohmann (collectively "Hohmann") filed an interpleader action against the United States 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.

I.

Summary 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 U.S. 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.

A.

The government 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.

The authority 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 United States 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.

Hohmann urges 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 attorneys' fees.

B.

Under the 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 ( Ill. 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 Ill. 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 Somerset , 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.

The government 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 ( Ill. 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. Ill. 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.

Nevertheless, 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 and Somerset 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 .

II.

The government's motion for summary judgment is GRANTED as to attorneys' fees, and GRANTED IN PART and DENIED IN PART as to interest. Somerset 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, beginning on 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 later than noon , May 15, 2002 . Judgment will be entered on that date.

¹ The stipulation was signed before the cases were consolidated. See attachment to the government's Response to Motion to Consolidate, filed 8/6/01 ; see also Minute Order of 8/15/01 (granting consolidation).

 

 

[2001-2 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

U.S. District Court, Dist. Mass., CIV. 00-10686-MBB, 8/13/2001

[Code Sec. 6323 ]

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)

BOWLER, Magistrate Judge:

Pending before 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.

BACKGROUND

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). On 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 Baldwin 's member employees and the hours worked by such employees on eight construction projects. ¹

The remaining 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 Baldwin in the total amount of $52,197.66, together with prejudgment interest from 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 against Peabody in Count II is the only remaining unresolved claim.

The parties 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 Peabody , it cannot release these funds because on September 2, 1999 , the Internal Revenue Service ("the IRS") served Peabody a notice of levy seeking payment of any funds held by Peabody , as Baldwin 's debtor, up to the amount of $26,197.61. The $26,197.61 sum represents the total amount Baldwin 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, Peabody 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.

The priority 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, Baldwin 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 New Camfield Gardens ' 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 Baldwin 's corresponding contributions for such hours. By April 1999 Baldwin owed the Funds in excess of $40,000 in delinquent contributions for work as Peabody 's subcontractor. Accordingly, between November 1997 and April 1999, Baldwin 's debt to the Funds exceeded the $27,642.32 currently withheld funds. This court draws the only reasonable inference that Baldwin owed the Funds delinquent contributions in excess of the $27,642.32 between November 1997 and April 1999.

Peabody , as general contractor, and Baldwin , as a subcontractor, had a contract covering each of these eight projects. The contracts required Baldwin 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 Peabody 's obligation to pay Baldwin that Baldwin "shall have furnished to [ Peabody ] lien releases from" Baldwin 's "subcontractors, materialmen and suppliers." The contract allowed Peabody to pay Baldwin 's bills with a joint check to Baldwin and its creditor. Alternatively, Peabody could retain the sum until Baldwin 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 Peabody owed Baldwin, the contracts did not require Peabody to pay Baldwin 's bills.

In a letter dated September 25, 1997 , Hurley referred to a meeting between the Funds and Baldwin about the delinquent contributions on two of the eight construction projects. The letter then advised Peabody that the Funds would accept a joint check issued to the union and to Baldwin for Peabody 's future payments to Baldwin under the projects.

In a letter dated December 5, 1997 , Hurley stated that the Funds would greatly appreciate any assistance from Peabody 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 Peabody remit the money it owed Baldwin in a joint check with the union and Baldwin as signatories. ⁶ (Docket Entry #36, Ex. 4). Further negotiations ensued. In late August 1999 Peabody prepared final payment and release forms for the eight construction projects. The final payment and release forms definitively set the amount Peabody owed Baldwin under the contracts ($27,642.32) and noted that Peabody would pay Baldwin that amount in return for a release of liability. Hence, this $27,642.32 amount Peabody owed Baldwin was fixed and determinable on the date of the September 2, 1999 notice of levy.

As permitted under the contracts, Peabody 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 Peabody was prepared to jointly pay Baldwin and the union on these seven projects. ⁷ Accordingly, there is an inference that between April and August 1999, Baldwin 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

In September 1999, however, Peabody received the notice of levy from the IRS. Because of the IRS notice, Peabody 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 executed.

Under the default judgment, Baldwin owes plaintiffs $31,185.60 for delinquent contributions on these eight projects. Since 1998, Baldwin has been out of business. ⁹ Plaintiffs therefore seek to reach and apply the $27,642.32 amount Peabody owes Baldwin on these eight projects to the $31,185.60 default judgment Baldwin owes plaintiffs.

The September 2, 1999 notice of levy directs Peabody to pay the IRS any "property or rights to property" that Peabody is obligated to pay Baldwin . The notice states that the IRS has "given the notice and demand required by the Code" to Baldwin . (Docket Entry #40, Ex. A). Nevertheless, Baldwin has not paid the $26,197.61 total amount owed for the tax periods ending in March, June and September 1998. ¹⁰ On October 19, 1999 , the IRS issued Peabody a final demand. In a June 23, 2000 letter from Peabody 's counsel to the Office of the District Counsel of the IRS, Peabody notified the IRS of this action and inquired if the IRS planned to intervene. There is no indication that the IRS responded to Peabody 's letter of inquiry. ¹¹

DISCUSSION

Plaintiffs move for summary judgment on their claim to reach and apply the entire $27,642.32 contract debt, which Peabody owes Baldwin, to plaintiffs' $31,185.60 default judgment against Baldwin . 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 ( Mass. 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 ( Mass. 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 Baldwin to plaintiffs establishes the necessary indebtedness between the plaintiff and the principal defendant, Baldwin. ¹²

"The 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 Peabody owes to Baldwin 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).

Inasmuch as Baldwin 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, 101 U.S. 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).

Under chapter 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 ( Mass. 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, Peabody admits that it continues to withhold the sum of $27,642.32 from the amount it owes Baldwin . (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 the amount Peabody was prepared to release to Baldwin 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 establishes that Peabody owed Baldwin the sum of $27,642.32. Plaintiffs may reach and apply this sum to satisfy the $47,820.91 debt Baldwin 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).

Under 26 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 against Baldwin 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 Baldwin is not in the record. Nevertheless, the September 2, 1999 notice of levy states that the IRS had, at that time, given Baldwin 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 U.S. 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).

Massachusetts law recognizes assignments of choses in action. Palmer v. Merrill, 1850 WL 4568 at *4 ( Mass. 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 ( Mass. 1929). As such, they have pecuniary value. Massachusetts law denotes similar interests as property. See, e.g., Reardon v. Whalen, 29 N.E.2d 23, 23 ( Mass. 1940) ("share as next of kin in an undistributed estate is property"); McCann v. Randall, 17 N.E. 75, 78 ( Mass. 1888) ("negotiable paper is property"). In sum, whether characterized as a debt, an account receivable or an equitable chose in action, Peabody 's debt to Baldwin 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 Peabody .

Plaintiffs, however, posit that Peabody set off the amounts it owed to Baldwin by the amount Baldwin owed to the Funds. They reason that the IRS could not levy against the $27,642.32 Peabody debt because Baldwin was owed nothing under the contracts and the IRS' rights cannot be any higher than the rights of the taxpayer. (Docket Entry #34).

Plaintiffs are 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 Massachusetts 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 Peabody acknowledged that it owed Baldwin $27,642.32 under the contracts. (Docket Entry #36, Ex. 7). At the time of the September 2, 1999 notice of levy, Peabody 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 Baldwin 's unpaid bills. The contracts did not obligate or require Peabody to pay Baldwin 's creditor, i.e., the Funds. Nor did the contracts require Peabody to set-off the money Baldwin owed the Funds from the amount Peabody owed Baldwin . 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 contract under Massachusetts 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).

Peabody therefore remained obligated to perform the executory contract and to pay Baldwin 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 Peabody 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.

"[P]riority 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." ¹⁶ Smith 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[2] (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' ").

The priority at issue in the reach and apply count is between Baldwin '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 Baldwin . 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 Baldwin 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 Baldwin is also not contained in the record. ¹⁸ On this sole issue, this court will afford the parties up to and including 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 $47,820.91.

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).

Treasury 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 lien against Peabody 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 established.

Under section 6323, however, plaintiffs must also obtain a writ of execution against Peabody 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").

Massachusetts 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 ( Mass. 1904). Plaintiffs, however, did not obtain an injunction when they filed the reach and apply claim. ²⁰ Cf. Rioux v. Cronin, 109 N.E. 898, 901 ( Mass. 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 execution on Peabody , 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").

CONCLUSION

The summary 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.

¹ The July 5, 2000 Memorandum and Order sets out the nature of Baldwin 's section 515 liability.

² 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").

³ 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 present time.

⁴ 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, 549-550 ( Mass. 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 unavailing.

⁵ Hurley also refers to a fifth project, "the Cheverus School -- East Boston ."

⁶ As indicated supra, the contracts allowed but did not require Peabody to issue a joint check to Baldwin and Baldwin 's creditors.

⁷ Peabody allotted an additional $10,000 for Baldwin's work on the New Camfield Gardens project.

⁸ 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 Baldwin 's debt to the Funds. It can be equally inferred that Baldwin '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 Peabody was prepared to issue joint checks to the union and Baldwin in the amount of $17,011.32 can simply evidence that Peabody owed Baldwin $17,011.32 on the seven projects in late August 1999, not that Baldwin 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.

⁹ Specifically, Thomas E. Broderick, Fund Administrator, avers that, "Since 1998, Baldwin has been out of business." (Docket Entry #33). There is no evidence that Baldwin filed for bankruptcy thereby raising the execution procedures of Massachusetts General Laws chapter 235, section 24.

¹⁰ 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 Baldwin any earlier than March 31, 1998.

¹¹ The IRS' failure to intervene is best explained by the statement made by one commentator that:

[T]he 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.

Michael I. Saltzman IRS Practice and Procedure ¶16.02[1] (1981).

¹² Peabody argues that "there needs to be a determination of the specific amount that is due the Plaintiff's on the Peabody projects." (Docket Entry #39). Peabody submits that if this amount is less than the sum of $27,642.32 being withheld by Peabody , 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 Baldwin . Peabody owes Baldwin 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 Peabody was the general contractor.

The IRS has a $26,197.61 tax lien against Baldwin 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 Peabody owes Baldwin to the $47,820.91 debt Baldwin 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 Baldwin '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.

¹³ Peabody 's affirmative defense alleges that it "is unable to release any funds otherwise due Baldwin as the result of a notice of levy served upon Peabody by the [IRS] for funds due from Baldwin ." (Docket Entry #6).

¹⁴ A notice of levy is an admin 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 U.S. 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.

[A] levy 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 $27,642.32 amount Peabody owed Baldwin was fixed and determinable on September 2, 1999.

¹⁵ 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[3][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).

¹⁶ As previously noted, the federal tax lien arose sometime between March 31, 1998 , and September 2, 1999 .

¹⁷ See footnote number 12. The summary judgment record establishes that Baldwin owed the Funds in excess of $40,000 in delinquent contributions between 1997 and April 1999.

¹⁸ 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.

¹⁹ 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 number three.

²⁰ An application for a prejudgment injunction at this point in time would be untimely.

²¹ See pages 20 to 21.

 

 

[2001-1 USTC ¶50,250] Albert C. Reid, Plaintiff v. United States of America and C. Dudley, Defendants

U.S. District Court, West. Dist. Wash., at Tacoma, C98-5432, 1/31/2001

[Code Secs. 6321 and 7401 ]

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 ( Washington ) 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, the taxpayers.

[Code Sec. 6323 ]

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 amounts.

[Code Sec. 6321 ]

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 ( Washington ) law because the couple acquired them after marriage, and the husband's tax debts were presumed to be community debts since they were incurred after marriage.

[Code Secs. 6334 and 7433 ]

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 SUMMARY JUDGMENT

BURGESS, District Judge:

This case is the result of the consolidation of two preexisting cases. In USA v. Reid, C99-5565, the United States 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 United States 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.

Although the 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 lakefront property).

This matter comes before the court on cross motions for summary judgment and a motion by the United States 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.

Defendant United States 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 United States began. Defendant also seeks summary judgment on its claims described above and dismissal of Mr. Reid's complaint.

1. 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 U.S. 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.

2. The Plaintiff's Motion for Partial Summary Judgment

The 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 (emphasis added).

Here, 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 1934.

Adding 65 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.

In response, 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.

Plaintiff 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 United States 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.

3. The Defendant's Motion to Amend Complaint

The United States 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.

The United States discovered the transfer of the lakefront property during a title search of Kitsap County records completed after the deposing the Reids. The United States 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 lakefront property.

FRCP 15(a) 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,-- U.S. --, 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 United States seeks to foreclose upon.

The Reid's primary argument against granting this motion is an allegation of unjust delay on the part of the United States . However, as noted in the United States ' 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 United States 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.

The court 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 procedure.

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 United States ' 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 United States timely effort to add the newly discovered evidence to the complaint, the motion to amend is GRANTED.

4. The Defendant's Motion for Summary Judgment

The United 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.

a. 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 United States asks the court to set aside this transfer as fraudulent, under the Uniform Fraudulent Transfer Act (UFTA) as adopted by Washington State 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:

(1) With actual intent to hinder, delay or defraud any creditor of the debtor.

A 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 United States 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 United States ' 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 "without consideration".

The Reids have not put forward any evidence to counter the allegations or proof of the United States , 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 United States may avoid this transfer as fraudulent and proceed to establish and foreclose its tax liens on the property.

b. Tax Assessments

The United States 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 United States 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).

Mr. Reid 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.

In Weimerskirch, 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 amounts.

The United States ' 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 United States as of the date of this order.