Notice or Knowledge of Lien Page1

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United States of America , Plaintiff v. J. Leonard Padilla, Nelly Patino, Rose Moreno-Padilla, et al., Defendants.

U.S. District Court, East. Dist. Calif. ; CIV-S-01-2301 DFL GGH, June 6, 2005 .

[ Code Sec. 6323]

Procedure: Lien: Tax liability. --

An IRS tax-lien was not superior to the equitable lien of a third-party purchaser because the IRS was unable to offer any evidence that it had provided the purchaser with notice of its lien. Under Code Sec. 6323, a lien is not valid against a holder of a security interest until notice has been filed. Because the IRS failed to provide evidence of when it filed notice of its lien, the IRS could not establish the superiority of its lien.

MEMORANDUM OF OPINION AND ORDER

LEVI, District Judge: Plaintiff United States ("the government") moves for partial summary judgment against defendants J. Leonard Padilla ("Padilla") and Nelly Patino ("Patino"). The government separately moves for summary judgment on count one of the complaint against defendant Rose Moreno-Padilla ("Moreno-Padilla"). ¹

I.

The government filed this suit on December 17, 2001, seeking to foreclose on a sixty-acre property in Natomas (the "property" or the "Natomas property" to satisfy tax liabilities owed by Padilla, Moreno-Padilla, and Carlos Alcala, and to reduce to judgment the tax liability of Moreno-Padilla and Alcala. ² The tax assessments against Padilla are the same as those at issue in the related suit, United States v. J. Leonard Padilla, Alejandro Reid Padilla, and State of Cal. Franchise Tax Bd., No. CIV-S-01-2300-DFL-GGH (E.D.Cal. filed December 17, 2001 ). (FAC ¶¶10-48.) The tax assessments against Moreno-Padilla arise out of her unpaid income tax liability from the tax years 1996 and 1997. ( Id. ¶¶49-54.)

The Natomas property was purchased by Padilla and Moreno-Padilla in 1980 "in trust" for their children. (PSJ Mot. at 3.) As part of Padilla and Moreno-Padilla's divorce proceeding in 1993 in Sacramento County Superior Court, the court ruled that the two "intended the trust to be revocable and not to benefit the three children," such that legal title to the property was held equally by Padilla and Moreno-Padilla. (FAC ¶¶72, 78.) Part of the purchase price for the Natomas property was paid with a $25,000 loan from the prior owners, memorialized in a note and secured by a deed of trust. (Schrock Decl. Ex. 3.) In 1987, the note and deed of trust were purchased by Patino, giving her the legal right to collect the $25,000 from Padilla and Moreno-Padilla. (FAC ¶¶74-75.) In February 2000, Patino paid $45,655.29 in property taxes owed on the Natomas property. (Patino Opp'n Ex. C.)

On October 18, 2004 , the government moved for partial summary judgment on two issues: (1) whether the tax liens against Padilla attach to a one-half interest in the Natomas property, and (2) whether Patino has a valid lien interest in the property. (PSJ Mot. at 2.) On February 11, 2005 , the government filed a separate motion for summary judgment on count one of the complaint, to reduce to judgment the tax assessments against Moreno-Padilla. (Count 1 Mot. at 1.)

II.

A. Attachment of Liens to Padilla's Interest in the Natomas Property

A federal tax lien arises automatically at the time of the assessment of any unpaid tax and applies against all property and rights to property, whether real or personal, belonging to the taxpayer. 26 U.S.C. §§6321, 6322. To establish that a tax lien attached to Padilla's one-half interest in the Natomas property, the government must show that: (1) Padilla's tax liability was properly assessed; and (2) Padilla had an interest in the Natomas property after the tax liability arose. These two issues have been decided by other courts, such that collateral estoppel bars relitigation.

Collateral estoppel prevents relitigation of issues that have been actually, necessarily, and finally determined by a court of competent jurisdiction. Montana v. United States , 440 U.S. 147, 153, 99 S.Ct. 970 (1979). The issue of whether Padilla's tax liability was properly assessed was actually and necessarily determined in United States v. J. Leonard Padilla, Alejandro Reid Padilla, and State of Cal. Franchise Tax Bd. , No. CIV-S-01-2300-DFL-GGH (E.D.Cal. filed December 17, 2001 ). The pendency of an appeal in that case does not affect the finality of the judgment for purposes of collateral estoppel. See, e.g., Rob i v. Five Platters, Inc., 838 F.2d 318, 327 (9th Cir. 1988); Hawkins v. Risley, 984 F.2d 321, 325 (9th Cir. 1993). Additionally, the issue of whether Padilla has an interest in the property was necessarily and finally decided by the Sacramento County Superior Court in the 1993 proceeding. (Schrock Decl. Ex. 2.) Therefore, the motion for summary judgment on the issue of the attachment of Padilla's established tax liability to the Natomas Property is GRANTED. A tax lien of $2,158,760.41, plus interest and penalties accruing by operation of law since February 29, 2004 , attaches to Leonard Padilla's one-half interest in the Natomas property.

B. Patino's Interest in the Natomas Property

The government moves for summary judgment on the issue of whether Patino has a valid, superior lien on the Natomas property. (PSJ Mot. at 7-9.) Patino asserts two separate lien interests in the property: (1) a lien interest arising from the 1987 purchase of the note and deed of trust; and (2) a lien interest arising from the payment of property taxes. ( Id. )

The government asserts that any lien created by the note and deed of trust has now expired, relying on Cal. Civ. Code §882.020(a)(1). ( Id. ) However, as the government concedes, this provision is inapplicable unless the last date fixed for payment is ascertainable from a recorded document. (Pl.'s Supplement to PSJ Mot. at 2-3; Reply at 3.) As the government has not provided evidence that the note, or any other document containing the final payment date of July 2, 1987 , was recorded, summary judgment cannot be granted on this basis. ³

The government argues that no valid and superior lien was created by the payment of property taxes in the absence of a written and recorded lien agreement. (PSJ Mot. at 8-9.) In opposition, Patino argues that she has an "equitable interest" in the property as either a lender, investor, or surety, and that there are factual issues regarding the nature of her interest. (Patino Opp'n at 3, 6-7.)

Although the California codification of the statute of frauds generally requires a written agreement to create an interest in property, the "equitable lien" doctrine is an exception to this general requirement. Cal. Civ. Proc. Code §1971; Jones v. Sacramento Sav. & Loan Ass'n, 248 Cal.App.2d 522, 530-31, 56 Cal.Rptr. 741 (1967); Grappo v. Coventry Fin. Corp., 235 Cal.App.3d 496, 509, 286 Cal.Rptr. 714 (1991). An equitable lien arises where the claimant advances money to the real property owner and both parties anticipate that the real property will serve as security for the debt. Id.

In her deposition testimony, Patino indicates that although she voluntarily paid the property taxes, she considered her payment an "investment" and assumed she would be reimbursed for the taxes, with interest, at the time the property was sold. (Schrock Decl. Ex. 4.) This evidence supports, or at the least, does not negate, an equitable lien on the property. There is no evidence of Moreno-Padilla or Padilla's intentions concerning Patino's payment of the property taxes. Because the government has not conclusively demonstrated the absence of a valid equitable lien on all or part of the Natomas property, the Statute of Frauds does not preclude Patino's lien.

However, the government, citing Cal. Civ. Code §1217, also advances an alternative argument, that even if Patino has a valid lien, it is not superior to the government's tax lien. (PSJ Mot. at 9.) However, §1217 merely clarifies that an unrecorded instrument is valid as between the parties; it does not support the contrary assertion that an unrecorded agreement is never valid as against third-parties. Indeed, under California 's "race-notice" priority system, an unrecorded agreement may be valid to establish priority over all except subsequent bona fide purchasers or encumbrancers for value who first record their interest. Cal. Civ. Code §1214. A judgment creditor is not a bona fide purchaser or encumbrancer for purposes of the statute. See, e.g., Livingston v. Rice, 131 Cal.App.2d 1, 3, 280 P.2d 52 (1955); Wells Fargo Bank v. Pal Inv., Inc., 96 Cal.App.3d 431, 438, 157 Cal.Rptr. 818 (1979). Beyond this, California law provides that "[o]ther things being equal, different liens upon the same property have priority according to the date of their creation." Cal. Civ. Code §2897.

Moreover, California law regarding priority is largely irrelevant to this case because federal law governs the relative priority of tax liens, as laid out in 26 U.S.C. §6323. Feiler v. United States [ 95-2 USTC ¶50,448], 62 F.3d 315, 316-17 (9th Cir. 1995). In general, in the absence of a controlling federal statute, the priority of a federally created tax lien is determined by the rule of "first in time is first in right." In re Kimura [ 92-2 USTC ¶50,397], 969 F.2d 806, 813 (9th Cir. 1992).

However, §6323 also creates certain exceptions to this general rule of first in time, first in right. Specifically, §6323(a) provides that the automatic tax lien imposed by §6321 "shall not be valid as against any ... holder of a security interest ... until notice" of the tax lien has been filed. A "security interest" is defined as:

any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money's worth.

26 U.S.C. §6323(h).

Assuming Patino can establish the existence of an equitable lien, her security interest, for purposes of §6323(h), came into existence on the date she paid the taxes. Therefore, although the lien authorized by §6321 attached automatically to Padilla's interest in the property, that lien is not valid as against Patino unless the government filed proper notice of its lien prior to February 2000. As the government has not provided any evidence as to when it filed notice of its lien in accordance with §6323(f), it has not demonstrated, as a matter of law, the superiority of its lien.

Summary judgment is DENIED on the issue of the existence and superiority of Patino's liens.

C. Moreno-Padilla's Tax Liability

The government separately moves for summary judgment on the amount of Moreno-Padilla's tax liability. (Count 1 Mot. at 2.) The IRS assessed unpaid tax liabilities in the amount of $239,284.00 for 1996 and $445.00 for 1997. ( Id. ) Moreno-Padilla submitted unsigned "amended returns" on or about September 2, 2003 . ( Id. ) The government asserts that the original assessments were correct and that the amended returns contain improper deductions. ( Id. )

In an action to collect taxes, the government bears the burden of proof. United States v. Stonehill [ 83-1 USTC ¶9285], 702 F.2d 1288, 1293 (9th Cir. 1983). A presumption of correctness attaches to the federal tax assessments, and their introduction establishes a prima facie case. Id. Where an assessment is based on a disallowance of claimed deductions, the government need not provide evidence to support the assessment for the presumption of correctness to attach. Karme v. Comm'r of Internal Revenue [ 82-1 USTC ¶9316], 673 F.2d 1062, 1065 (9th Cir. 1982). If the presumption of correctness attaches, the burden of proof shifts to the taxpayer to show that the determination is arbitrary or erroneous. Palmer v. United States [ 97-2 USTC ¶50,550], 116 F.3d 1309, 1312 (9th Cir. 1997).

As all of the issues in this case involve the propriety of Moreno-Padilla's claimed deductions, a presumption of correctness attaches to the assessments, which Moreno-Padilla must rebut. Even considering her untimely opposition, Moreno-Padilla has not made a sufficient showing to establish a question of fact as to the validity of the deductions. In opposing summary judgment, Moreno-Padilla disputes only the disallowance of the net operating loss carryback deduction and not any of the other disallowed deductions. (Opp'n 2-4.)

The only evidence Moreno-Padilla offers to support her argument that the net operating loss carryback deduction was proper is that her tax preparer believed it was proper. However, Moreno-Padilla does not offer an affidavit in support of this position. She instead relies on the following evidence: (1) the deduction was included in the amended return; and (2) a statement that her tax preparer will testify at trial as to the validity of the deduction. ⁴ ( Id. at 2, 5.) Reliance on the amended tax return is insufficient, given the presumption of correctness attaching to the government's assessment. Moreno-Padilla has the burden of demonstrating the validity of the deduction. The amended tax return does not specify the basis for the net operating loss carryback deduction or provide factual support for the deduction. (Schrock Decl. Ex. 5.) Reliance on the tax preparer's proposed trial testimony, in the absence of an affidavit, is likewise unavailing to create a genuine issue of material fact. Fed. R. Civ. P. 56(e); See also, S.A. Empresa De Viacao Aerea Rio Grandense v. Walter Kidde & Co., 690 F.2d 1235, 1238 (9th Cir. 1980) (holding that a party cannot create a genuine issue of material fact merely by making assertions in its legal memoranda).

The government is entitled to a presumption of correctness as to its assessments of Moreno-Padilla's tax liability. Moreno-Padilla has failed to offer sufficient evidence to rebut that presumption. Therefore, the motion for summary judgment as to count one of the complaint is GRANTED. The court finds that the government's assessments are correct and that Moreno-Padilla has unpaid accrued tax liabilities in the amounts of $429,755.03 for tax year 1996 and $734.23 for tax year 1997, plus any interest and penalties accruing since August 16, 2001.

III.

For the reasons set forth above, the motion for partial judgment is GRANTED as to the issue of the attachment of a tax lien to Padilla's interest in the property, but DENIED as to the issue of the existence and superiority of Patino's liens. The motion for summary judgment on count one is GRANTED.

IT IS SO ORDERED.

¹ As there are two separate motions, the motion for partial summary judgment will be cited as ( "PSJ Mot."), and the motion for summary judgment on count one will be cited as ( "Count 1 Mot.")

² Carlos Alcala was dismissed from this suit by agreement of the parties on November 18, 2004.

³ In its supplemental brief, the government asks that the court determine the amount of this lien. However, that issue is beyond the scope of this motion.

⁴ The court declines to grant a continuance to permit Moreno-Padilla to obtain additional factual support for her opposition. Moreno-Padilla has had ample time to prepare her opposition to this motion. The motion was filed on February 11, 2005 and originally set for hearing on March 11, 2005 . The hearing was continued only after Moreno-Padilla failed to file an opposition or statement of non-opposition, resulting, on March 2, 2005 , in the issuance of an order to show cause.

 

Catherine F. Quist, Clerk of Knox County General Sessions Court , Plaintiff v. Leon Wiesener, United States of America , The Internal Revenue Service, Defendants.

U.S. District Court, East. Dist. Tenn. , at Knoxville ; 3:03-CV-100, June 18, 2004 .

[ Code Sec. 6321]

Liens for taxes: Validity and priority against third parties: Notice or knowledge of liens: Property subject to: After-acquired property. --

The proceeds of the auction of the personal property of a corporation were ordered to be disbursed to the United States and not to a third party. Because a federal tax lien had attached to the personal property, the lien automatically had also attached to the sale proceeds of that property.

[ Code Sec. 6323]

Liens for taxes: Validity and priority against third parties: Notice or knowledge of liens. --

The proceeds of the auction of the personal property of a corporation were ordered to be disbursed to the United States and not to a third party. The federal tax lien on the corporation under its legal name constituted proper constructive notice of the lien to the third party, who had a judgment against the corporation, but under a slightly different name. Requiring the government to file a notice of tax lien using all of the possible names of the taxpayer would be an unreasonable burden. Because the notice was properly filed using the taxpayer's registered corporate name, proper notice has been given, and the lien had priority over all subsequent lien holders.

MEMORANDUM OPINION

PHILLIPS, District Judge: The United States of America has moved for summary judgment [Doc. 12], to which defendant Leon Wiesener (Wiesener) has responded [Doc. 18]. Wiesener has also moved for summary judgment [Doc. 14], which the United States has opposed [Doc. 17]. For the reasons discussed below, the court finds in favor of the United States .



FACTS

On January 31, 2000 and April 17, 2000, the Internal Revenue Service (IRS) made two assessments against "Joint Effort, Inc.," Employer Identification Number 62-0968367, for employment taxes for the quarters ending September 30, 1999 and December 31, 1999. On June 19, 2000 , Wiesener filed a Civil Warrant and Oath of Account in the General Sessions Court for Knox County , Tennessee ( General Sessions Court ) against "Joint Effort Productions, Inc.," for breach of contract to pay for stock purchased. Wiesener and Joint Effort Productions, Inc. appeared before a judge on October 2, 2000 , and announced that the parties had reached an agreement. Subsequently, on October 10, 2000 , an Agreed Judgment was entered in favor of Wiesener and against Joint Effort Productions, Inc. for $15,000.00 plus ten percent (10%) statutory interest to begin accruing one year after the date of the judgment. The parties agreed that the judgment would not be executed upon until after October 3, 2001 . To date, Wiesener has recovered nothing from Joint Effort Productions, Inc. in satisfaction of the Agreed Judgment.

On April 22, 2002 , the Internal Revenue Service (IRS) filed a Notice of Federal Tax Lien, No. 62-0968367, in the Knox County Register of Deeds Office against "Joint Effort," for $55,247.04 in unpaid tax assessments by "Joint Effort, a corporation." However, no Notice of Federal Tax Lien was filed against "Joint Effort Productions, Inc." On November 12, 2002 , Wiesener filed an Execution and Non-Wage Third Party Garnishment (Garnishment) against Joint Effort Productions, Inc. The personal property of Joint Effort Productions, Inc. was then sold at public auction on November 16, 2002 . On that same day, Wiesener served the Garnishment with instructions to seize the proceeds of the auction. Subsequently, the Garnishee, Dyer Realty and Auction Services, placed $10,703.85 in proceeds in the Registry of the General Sessions Court for disbursement pursuant to the Garnishment. At the time the funds were placed in the Registry, Wiesener was the only creditor to execute upon the proceeds of the sale of the personal property. The IRS failed to execute upon either the personal property of Joint Effort Productions, Inc. or the proceeds from the sale prior to the funds being placed in the Registry.

On January 8, 2003 , the IRS issued a Notice of Levy to the General Sessions Court , attempting to attach the funds deposited by the Garnishee into the Registry. Catherine F. Quist (Quist), Clerk of the General Sessions Court , Civil Division, refused to disburse the funds to Wiesener. On January 22, 2003 , Quist filed a Motion for Instruction in the General Sessions Court as to the appropriate disbursement of the funds. On February 6, 2003, Wiesener filed a Petition for Writ of Mandamus in the Chancery Court for Knox County, Tennessee (Chancery Court) against Quist, ¹ request that Quist be commanded to pay him the $10,703.85 held in the Registry. Quist filed a Complaint in Interpleader in this court against Wiesener, the United States of America and the IRS on February 10, 2003 . On February 25, 2003 , Quist filed a Motion to Stay Proceedings in the Chancery Court pending resolution of the Interpleader action filed in this court.

Rule 56 of the Federal Rules of Civil Procedure provides that the judgment sought "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the initial burden of demonstrating the absence of any genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party properly supports a motion for summary judgment, the burden of proof shifts to the non-moving party, who "must set forth specific facts showing that there is a genuine issue of material fact for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). It is not enough for the party opposing a properly supported motion for summary judgment to "rest on mere allegations or denials of his pleadings." Id. at 248.

The United States contends that the Federal Tax Lien it filed against "Joint Effort, Inc." also covers "Joint Effort Productions, Inc.," and was filed prior to the lien of Wiesener. The Government asserts its notice was filed in a manner such that a reasonable inspection would have revealed the notice of the Federal Tax Lien.

Wiesener argues that in order for a Federal Tax Lien to be enforceable, notice must be provided pursuant to Tenn. Code Ann. §67-1-1403(b), which requires the lien be filed with the Knox County Register of Deeds. Determination of the sufficiency of filing of a Federal Tax Lien is governed by federal law. See United States v. Polk [ 87-2 USTC ¶9432], 822 F.2d 871, 873 (9 ^th Cir. 1987). The lien must be filed and indexed such that "a reasonable inspection of the index will reveal the existence of the deed." 26 U.S.C. 6323(f)(4). See Van Dolen v. Dept. of the Treasury [ 96-1 USTC ¶50,266], 929 F.Supp. 1083, 1086 (M.D. Tenn. 1996).

In Continental Investments v. United States of America [ 53-2 USTC ¶9625], 142 F.Supp. 542 (W.D. Tenn. 1953), the United States District Court for the Western District of Tennessee found that the purpose of registration of a Federal Tax Lien is to provide constructive notice to all interested parties, including judgment creditors. Id. at 544 (W.D. Tenn. 1953). Registration of a Federal Tax Lien will only serve as constructive notice of what is "upon [the] face" of the lien. Id. The Western District held that the use of the name W.G. Clark, Sr. on a tax lien filing was insufficient to impute constructive notice to the creditors of W.R. Clark, Sr. Id. Accordingly, Wiesener argues the use of only "Joint Effort" was wholly inadequate notice to the judgment creditors of "Joint Effort Productions, Inc.," as a lien search of "Joint Effort Productions, Inc.," did not reveal the IRS' Notice of Federal Tax Lien.

The Knox County Recorder of Deeds maintains a computerized indexing system for performing lien searches, which may be performed by inputting a "name or organization" into the system. Different inputs into the system yield different results:

1. When the name "Joint" is searched, the following liens are listed: 1) the Federal Tax Lien filed on April 30, 2002 against Joint Effort; 2) a lien filed by Wenger Corporation on July 2, 2002 against Joint Effort Productions; and 3) a lien filed by Leon Wiesener on November 13, 2002 against Joint Effort Productions.

 

2. When the name "Joint Effort" is searched, the following liens are listed: 1) the Federal Tax Lien filed on April 30, 2002 against Joint Effort; 2) a lien filed by Wenger Corporation on July 2, 2002 against Joint Effort Productions; and 3) a lien filed by Leon Wiesener on November 13, 2002 against Joint Effort Productions.

 

3. When the name "Joint Effort Productions" is searched, the following liens are listed: 1) a lien filed by Wenger Corporation on July 2, 2002 against Joint Effort Productions; and 2) a lien filed by Leon Wiesener on November 13, 2002 against Joint Effort Productions.

The Tennessee Anytime website provides a tool for searching information about Tennessee corporations. The "Tennessee Secretary of State Business Information Search" reveals three listings for entities with the names "Joint Effort" or "Joint Effort Productions." The three entities listed share the same identification number --0016984, the same date of formation --November 28, 1975, the same place of incorporation --Knox County, the same principal office located at 1805 Maryville Pike, Knoxville, Tennessee 37920, and the same registered agent --Conrad R. Loy, Jr.

To accept Wiesener's argument is to impose on the IRS, if it wants to be sure of its liens, the burden of checking whether the taxpayer has acquired property under a different name from the name under which the taxpayer has filed a return. In Kivel v. United States [ 89-2 USTC ¶9415], 878 F.2d 301, 303 (9 ^th Cir. 1989), the Ninth Circuit Court of Appeals ruled that the IRS is not required to record Federal Tax Liens under every known name of the taxpayer. The Middle District of Tennessee has found that the filing of a Federal Tax Lien under the taxpayer's legal name constitutes proper constructive notice. See Van Dolen v. Dept. of the Treasury [ 96-1 USTC ¶50,266], 929 F.Supp. 1083, 1086 (M.D. Tenn. 1996) ("If Congress had intended to impose upon the Internal Revenue Service the duty to investigate what property is owned by a delinquent taxpayer, record the name under which it was acquired, and file a separate notice of tax lien for each such name, it could have done so"). Id. at 1086 (citing Kivel [ 89-2 USTC ¶9415], 878 F.2d at 303).

An otherwise valid and properly recorded notice of Federal Tax Lien is effective even when there are minor errors or omissions in the name identified on the notice. See United States v. Sirico [ 66-1 USTC ¶9209], 247 F.Supp. 421, 422 (S.D. N.Y. 1965); see also United States v. Feinstein [ 89-2 USTC ¶9547], 717 F.Supp. 1552, 1557 (S.D. Fla. 1989):

The mere fact that a full name is not given or that there is an addition, omission or errors, does not, in and of itself, invalidate the notice. [ ] The essential purpose of the filing of the lien is to give constructive notice of its existence. [ ] The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, [ ] but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim. [ ].

Sirico [ 66-1 USTC ¶9209], 247 F.Supp. at 422.

In the view of the court, because the notice of Federal Tax Lien appears when the names "Joint" and "Joint Effort" are input into the system, a reasonable inspection of the Knox County indexing system by Wiesener would have revealed the earlier Federal Tax Lien. As noted, "Joint Effort, Inc." and "Joint Effort Productions, Inc." are the same entity. According to the records of the Tennessee Secretary of State, Joint Effort, Inc. and Joint Effort Productions, Inc. have the same identification number --0016984, the same date of formation --November 28, 1975, the same place of incorporation --Knox County, the same principal office located at 1805 Maryville Pike, Knoxville, Tennessee 37920, and the same registered agent --Conrad R. Loy, Jr. The records also indicate that the entity changed names more than once and that it was admin istratively dissolved on September 20, 2002 , which was shortly before the sale of property giving rise to the funds at issue in this case. Accordingly, the Federal Tax Lien was properly filed against Joint Effort, Inc., the taxpayer's legal name, and constituted proper constructive notice that the property of "Joint Effort Productions, Inc." was encumbered.

The IRS asserts that the Federal Tax Lien attached to all property and rights to the property of Joint Effort, Inc. See 26 U.S.C. §6321, 6322. The Federal Tax Lien attaches to property whether real or personal and after acquired property. See 26 U.S.C. §6321; United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447, 453 (1993). Assuming that the order of sale destroyed the liens on the specific property sold at the auction of November 2002, then the lien was transferred to the proceeds realized from the sale. See Phelps v. United States [ 75-1 USTC ¶9467], 421 U.S. 330, 334 (1975); Beaty v. United States [ 91-2 USTC ¶60,077], 937 F.2d 288, 292 (6 ^th Cir. 1991) (stating that "when a tax lien is displaced by a transfer, a lien on the proceeds of the transfer does result"); In re Nevada Environmental Landfill, 81 B.R. 55, 56 (Bankr. D. Nev. 1987). "The lien reattaches to the thing and to whatever is substituted for it ..." The owner and the lien holder, whose claims have been wrongfully displaced, may follow the proceeds wherever they can distinctly trace them. Phelps [ 75-1 USTC ¶9467], 421 U.S. at 334-35.

The court finds that when the property of Joint Effort was sold at auction, the Government's lien attached to the proceeds realized from the sale of the property. If the sale did not divest the liens, then the Federal Tax Lien attached to the sale proceeds immediately upon their creation, as after-acquired property of the taxpayer. See McDermott [ 93-1 USTC ¶50,164], 507 U.S. at 453. Accordingly, the Federal Tax Lien against Joint Effort, Inc. is attached to the funds at issue in this interpleader suit. Because Wiesener did not become a judgment lien creditor of Joint Effort until November 13, 2002, which was after the notice of Federal Tax Lien was filed in accordance with §6323, the Federal Tax Lien is valid against and prior to Wiesener's judgment lien. The proceeds of the auction of the personal property of Joint Effort Productions, Inc., having been placed in the Registry of the General Sessions Court , must now be disbursed by Quist to the United States .

The motion for summary judgment by the United States is GRANTED and the summary judgment motion of Wiesener is DENIED. The Knox County Clerk is DIRECTED to release the interpleaded funds to the United States .

ORDER TO FOLLOW.

JUDGMENT ORDER

For the reasons stated in the memorandum opinion filed contemporaneously with this order, the summary judgment motion of the United States [Doc. 12] is GRANTED and the motion of Leon Wiesener [Doc. 14] is DENIED. Catherine F. Quist, Clerk of the Knox County General Sessions Court, is DIRECTED to release the interpleaded funds to the United States.

¹ On April 11, 2003 , Wiesener filed a First Amended Petition for Writ of Mandamus, naming the United States of America and IRS as Defendants and requesting the Chancery Court order that the IRS' lien is not effective against the funds held by Quist in the Registry of the General Sessions Court .

 

In the Matter of Spearing Tool and Manufacturing Co., Inc., Debtor. Crestmark Bank and Crestmark Financial Corporation, Plaintiffs v. United States of America , Defendant.

U.S. District Court, East. Dist. Mich. , So. Div.; 03-72070, November 5, 2003 .

Reversing a BC-DC Mich. decision, 2003-1 USTC ¶50,525.

[ Code Sec. 6323]

Tax liens: Validity and priority against third parties: Bankruptcy proceeding: Notice or knowledge of lien: Wrong name: State law. --

The district court reversed the bankruptcy court's ruling that federal tax liens against a debtor manufacturing company had priority over a bank's liens, even though the federal liens did not identify the debtor by its name as registered with the state ( Michigan ). The district court concluded that the distinction between a typographical error and the IRS's erroneous use of a version of the debtor's name that was not the version registered with the state was meaningless. The source of the error would not be relevant to whether a subsequent searcher would discover the error. Fairness dictated that where a reasonable searcher would not have notice of the federal tax lien, the IRS liens should not have priority over other lenders. Thus, summary judgment in favor of the IRS on the grounds that its liens were valid according to federal law, and that they had priority over the bank's subsequent liens, was improper.

ORDER REVERSING THE OPINION AND ORDER OF THE BANKRUPTCY COURT

EDMUNDS, District Judge: Plaintiffs in this adversary action, Crestmark Banks and Crestmark Financial Corp. (collectively, "Crestmark"), appeal a Bankruptcy Court order denying their motion for summary judgment and granting summary judgment sua sponte to the Internal Revenue Service. The Bankruptcy Court ruled that federal tax liens had priority over Crestmark's, even though the federal liens did not identify the debtor by its name as registered with the State of Michigan . For the reasons fully explained below, the Court REVERSES the Bankruptcy Court's order.



I. Background

In April of 1998, the debtor, Spearing Tool and Manufacturing Co., and Crestmark Bank entered into a lending agreement. The debtor granted Crestmark Bank a security interest in all of its assets, including accounts receivables. Crestmark Bank perfected its security interest by filing a UCC financing statement.

In April of 2001, Crestmark Financial Corp. ("CFC") entered into a secured financing arrangement with the debtor, whereby CFC agreed to purchase accounts receivables from the debtor. The debtor granted CFC a security agreement in all of its assets, including accounts receivables. On April 21, 2001 , CFC perfected its security interest by filing a UCC financing statement.

On October 15, 2001 , the IRS filed two notices of federal tax lien with the Michigan Secretary of State for a total amount of $202,770.11. This appeal centers on the name of the debtor the IRS used on its tax liens. The IRS filed the liens under the name "Spearing Tool & MFG Company, Inc." The debtor's exact registered name, however, is "Spearing Tool and Manufacturing Co."

CFC submitted periodic lien search requests for the debtor to the State of Michigan , using the debtors exact registered name. The results did not disclose the IRS liens. Relying on the absence of liens in the search results, CFC made funding advances to the debtor between October 15, 2001 , and April 6, 2002 .

On April 16, 2002 , the debtor filed for bankruptcy relief under chapter 11. On April 18, 2002 , the Bankruptcy Court entered a Consent Order Approving Factoring of Accounts Receivable Under Factoring Agreement, Use of Cash Collateral, and Granting Adequate Protection. The order provided for a $200,000 reserve account to be managed by Crestmark and funded by pre-petition accounts receivable collections. The amount currently in the reserve account, approximately $153,058.33, is the amount now in controversy. The Bankruptcy Court's order reserved for future determination the respective rights of Crestmark and the IRS in the account balance.



II. Standard of Review

This Court has jurisdiction to hear appeals from final judgments, orders and decrees issued by bankruptcy judges in cases and proceedings under the Bankruptcy Code. See 28 U.S.C. §158(a)(1). Findings of fact are reviewed under the clearly erroneous standard. See Fed. R. Bankr. P. 8013; Fed. R. Civ. P. 52. Conclusions of law are reviewed de novo. See In re Caldwell , 851 F.2d 852, 857 (6th Cir. 1988); Corzin v. Fordu (In re Fordu), 209 B.R. 854, 857 (B.A.P. 6th Cir. 1997).



III. Analysis

The issue on summary judgment was whether the IRS's liens had priority over CFC's because under state law, liens must be filed under the debtor's actual registered name. The Bankruptcy Court decided that the IRS's liens were valid according to federal law, and that they have priority over CFC's liens granted after the IRS filed its liens.

Federal law controls the priority of tax liens versus Crestmark's interest. See Aquilino v. United States [ 60-2 USTC ¶9538], 363 U.S. 509, 513-14 (1960); United States v. Bank of Celina [ 83-2 USTC ¶9688], 721 F.2d 163, 166 (6th Cir. 1983).

A. Federal Liens' Compliance with State Requirements

Crestmark argues that the IRS liens do not have priority because they do not comply with Michigan state law governing the name of the debtor on a financing statement. Michigan statutes provide:

§440.9503. Name of debtor and secured party

 

9503. (1) A financing statement sufficiently provides the name of the debtor if it meets all of the following that apply to the debtor:

 

(a) If the debtor is a registered organization, only if the financing statement provides the name of the debtor indicated on the public record of the debtor's jurisdiction of organization which shows the debtor to have been organized.

 

§440.9506. Effect of errors or omissions

 

9506. (1) A financing statement substantially satisfying the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement obviously misleading.

 

(2) Except as otherwise provided in subsection (3), a financing statement that fails sufficiently to provide the name of the debtor in accordance with section 9503(1) is seriously misleading.

 

(3) If a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with section 9503(1), the name provided does not make the financing statement seriously misleading.

Mich. Comp. Laws Ann. §§440.9503, 440.9506 (West 2003 Supp.).

The Bankruptcy Court rejected Crestmark's position that because the IRS liens did not comply with Michigan law, the liens should not be granted priority. The court relied on the Supreme Court's holding in United States v. Union Cent. Life Ins. Co. [ 62-1 USTC ¶9103], 368 U.S. 291, 294 (1961):

While §3672(a)(1) [the precursor to §6323] unquestionably requires notice of a federal lien to be filed in a state office when the State authoritatively designates an office for that purpose, the section does not purport to permit the State to prescribe the form or contents of that notice. Since such an authorization might well result in radically differing forms of federal tax notices for the various States, it would run counter to the principle of uniformity which has long been the accepted practice in the field of federal taxation.

Crestmark argues that Union Central is not dispositive of the issue in this case because Union Central concerned the design of the form itself (specifically, if certain information needed to be included on the IRS form), but here, the design of the form is not at issue; rather, the manner in which the IRS completed the form is the issue. Not only was the necessity of including specific property descriptions the issue in Union Central, but the conflict among two circuit court cases that Union Central sought to resolve also decided whether IRS liens were required by state law to recite specific property descriptions when federal law imposed no such requirement. See Youngblood v. United States [ 44-1 USTC ¶9314], 141 F.2d 912 (6th Cir. 1944); United States v. Rasmuson [ 58-1 USTC ¶9399], 253 F.2d 944 (8th Cir. 1958).

Crestmark contends that this distinction is important because Union Central focused on the impracticality and lack of consistency if the IRS was required to comply with each states' different requirements for liens, but in this case that is simply not an issue: filling out a form correctly does not implicate the same concerns as creating a different form for different states.

Crestmark reads Union Central's holding too narrowly. Union Central expressly prevents states from prescribing the content of IRS liens, not just the form. [ 62-1 USTC ¶9103], 368 U.S. at 294. Moreover, while some of the reasoning in support of the holding does not seem applicable to this case, other parts of the Court's reasoning support the decision to apply Union Central to this case. The Court cited the tax code, amended in 1954, which stated that IRS liens were valid if filed on the IRS form "notwithstanding any law of the State or Territory regarding the form or content of a notice of lien." The Court used this amendment to support the conclusion that Congress did not intend for state laws to control the form or content of IRS lien forms. The current tax code provides: "The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice or lien." 26 U.S.C. §6323(f)(3). The current statute is even broader than the one relied on by Union Central, but its message is the same: state law will not invalidate an IRS lien because of its form.

The issue thus becomes whether the lien in this case complied with federal law. The government concedes that the most applicable test is that of reasonableness. In cases where the government has made errors in the debtor's name on the lien, courts inquire whether a reasonable search of the index would have disclosed the error-laden federal tax lien. If such a search would have disclosed the existence of the lien then the notice of federal lien meets the statutory requirements of 26 U.S.C. §6323. The Bankruptcy Court disagreed, finding that cases involving errors in the legal name of the debtor were not controlling because here, there was no error --the IRS used a version of the debtor's name, just not the version registered with the State of Michigan . This Court concludes that the distinction between a typographical error and an error in choosing the version of the name is meaningless. The source of the error (sloppiness vs. good faith belief that the recited name was correct) is not relevant to whether a subsequent searcher would discover the lien.

Several courts have applied the reasonableness test. For example, in Richter's Loan Co. v. United States [ 56-2 USTC ¶9706], 235 F.2d 753 (5th Cir. 1956), the notice of tax lien was filed under the taxpayers' name of "Freidlander," when the taxpayers' actual name was "Friedlander." An incorrect address was also listed below the taxpayers' names. The Fifth Circuit rejected the argument that the misspelled name was insufficient to put persons on notice that Joseph Freidlander had a lien against him by concluding that a slight misspelling could not mislead searchers of the tax liens that there was a notice of lien against the taxpayer. Id. at 755.

In United States v. Sirico [ 66-1 USTC ¶9209], 247 F.Supp. 421 (S.D. N.Y. 1965), a mortgagee claimed its lien was superior to federal tax lien filed three years earlier because the tax lien only referred to the taxpayer by her first initial, "A. Sirico," instead of her full name, "Assunta Sirico." The court concluded:

The mere fact that a full name is not given or that there is an addition, omission or substitution of letters in a name, or even errors, does not, in and of itself, invalidate the notice. The essential purpose of the filing of the lien is to give constructive notice of its existence. The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim.

Id. at 422.

Courts applying the reasonableness test necessarily consider the recording method employed by the state or county. In Hudgins v. I.R.S. [ 92-2 USTC ¶50,341], 967 F.2d 973 (4th Cir. 1992), the government filed a tax lien under the name "Hudgins Masonry, Inc.," even though the taxpayer, Michael Steven Hudgins, had failed to pay his corporate charter fees and the Commonwealth of Virginia had terminated his corporate charter. Hudgins continued to file federal tax returns under the corporate name. Id. at 975. The issue before the court was whether the federal tax lien filed under the corporate name was sufficient to give notice of the lien to a buyer of the taxpayer's personal property. Id. The court first decided that in the bankruptcy context, courts should look to whether the government's notice of tax lien provided constructive notice to the bona fide purchaser, and refused to adopt a bright-line test, adopted by only a few other courts, which requires that tax liens provide the taxpayer's name correctly or it is not granted priority. Id. at 976.

The court went on to agree with the district court's conclusion that the tax lien filed under the corporate name did provide constructive notice to buyers of the taxpayer's business-related assets because the county recording system listed liens against individuals and corporations in the same index, and all of the listings under "Hudgins" were on the same page. Id. at 977. As for the taxpayer's personal assets, the court reasoned that even if a searcher noticed the lien for his corporation, that purchaser would have reasonably assumed that the lien did not extend to personal assets because personal assets are generally shielded from corporate liability. Id. Thus, the Fourth Circuit focused on the particular filing system employed by the county and the method a searcher used when searching those records to determine whether a searcher should have had constructive notice of the mistakenly filed tax lien. See also Whiting-Turner/A.L. Johnson v. P.D.H. Development, Inc. [ 2000-1 USTC ¶50,342], 184 F.Supp.2d 1368 (M.D. Ga. 2000) (concluding that a tax lien for "PD HILL DEVELOPMENT INC," which incorrectly identified the taxpayer "PDH DEVELOPMENT INC," would have put a reasonable searcher on notice of the lien because the page from the county index lien showed that the erroneous federal lien appeared directly above a correctly filed lien under the taxpayer's correct name, and because the index was organized alphabetically, the two names are so similar, and the close proximity of the two names on the index page, a reasonable searcher would have noticed the federal tax lien and investigated further).

Turning to the present case, the government contends that the tax lien provided constructive notice to Crestmark because Crestmark knew that the debtor sometimes used the name as recited on the federal tax lien, knew that the debtor was liable for unpaid taxes, and also had copies of the debtor's tax returns wherein the debtor used the version of its name recited on the federal tax lien. (Adversary Proceeding Docket Item No. 21, Cole Decl. Ex.'s 3 and 4.)

Crestmark responds that because of the state lien recording system's search logic, and the revised UCC which requires strict compliance regarding the correct naming of debtors, it would not have been reasonable for the banks to search under variations of the debtor's name nor would any reasonable search have produced evidence of the tax lien. If the Court agrees with the government, the burden will be on future searchers to conduct separate searches under every version of a potential debtor's name of which it is aware or should be aware. While the new version of the UCC, i.e. state law, does not control the content of federal tax liens, it does shed light on what is reasonable behavior for searchers in today's environment. Crestmark points out that the a search of the Michigan Secretary of State's record for liens on personal property only disclose records that match exactly with the name designated in the request. The Secretary of State will not search variants of the name (as it did under the former version of Article 9 of the UCC), and the public has no independent access to search the index. ¹ It is not reasonable for searchers to conduct one search for liens that might include federal tax liens, and require them to conduct separate, multiple searches under the debtor's multiple possible names for a possible federal tax lien. The burden on the government to include corporate taxpayers' registered names seems slight by comparison.

The government responds that a ruling in its favor will not add a burden to lenders because most secured lenders require copies of borrower's tax returns and also require the borrower to execute documents allowing the creditor to contact the IRS to review the borrower's filing and payment history. While this may be true (no evidence was presented to support this statement), it seems only true at the point of the initial loan application. In this case, the problem arose when the IRS placed its lien on the debtor's property after the initial loans were made, but prior to subsequent loans and prior to Crestmark's routine checks of its borrower's records at the Secretary of State. While it might be usual practice for lenders to contact the IRS when initially making a loan, not even the government contends that lenders routinely contact the IRS to update their records before extending additional credit to current borrowers. Indeed, that would seem to defeat the purpose of the current system, which requires the IRS to file notice of liens in the same state office as other lien holders, allowing lenders to check one central location for IRS liens as well as other secured creditors.

The issue is essentially who should bear the burden of recording systems which use rigid computerized search logic. Gone are the days of large alphabetical books, where a reasonable searcher would likely find a misspelled (or mistakenly abbreviated) name because it would appear in close proximity to where a lien with a correctly spelled name would have appeared. Fairness to third parties dictates that in cases like this, where a reasonable searcher would not have notice of the federal tax lien, the IRS's liens should not have priority over other lenders.



IV. Conclusion

Being fully advised in the premises, having read the pleadings, and for the reasons set forth above, the Court hereby orders as follows:

The Bankruptcy Court's Order granting the IRS summary judgment is REVERSED. This adversary case is remanded to the Bankruptcy Court for proceedings consistent with this opinion.

¹ The system is different for liens on real property, which are maintained in a separate filing system, and is accessible to the public to search the records directly.

 

[2001-2 USTC ¶50,462] United States of America , Plaintiff v. Detsel Parkinson, et al., Defendants

U.S. District Court, Dist. Ida., CIV. 98-0340-E-BLW, 2/12/2001 , 2001 U.S. Dist. LEXIS 5983.

[Code Sec. 6321 ]

Tax liens: Fraudulent conveyances: Who is the taxpayer: Husband and wife, transfer of property: Default judgment.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance of real property from pro se married taxpayers to their son. After the government satisfied a portion of the couple's tax debt by foreclosing and selling their home, it foreclosed on a tract of farmland acquired by the couple's trust/partnership. However, prior to the government's issuance of its notice of federal tax lien on the farmland, the taxpayers conveyed the property to their son for no consideration; the transferee son secured a mortgage to repurchase the personal residence that had been lost in the tax sale. Thus, the son lacked a valid security interest in the property.

[Code Secs. 6321 and 6323 ]

Tax liens: Fraudulent conveyances: Husband and wife, transfer of property: Default judgment.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance from pro se married taxpayers to their son. The government was not required to provide notice of liens to third parties who also had an interest in the subject property. By operation of statute, a lien automatically arose against the taxpayer's property when the taxpayers failed to pay the tax after demand. Also, the creation of a federal tax lien did not require a filing of public notice and once created, was effective until the liability was satisfied.

[Code Sec. 7403 ]

Tax liens: Fraudulent conveyances: Husband and wife, transfer of property: Default judgment: Standing.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance from pro se married taxpayers to their son. The taxpayers lacked standing to contest the entry of default judgment against the trust. Their contention that the trust assigned to the husband all rights and claims in the litigation, but did not assign him any rights of ownership to the trust's assets, did not demonstrate that he was actual beneficial owner of the trust. Thus, he was not entitled to represent the trust pro se.

[Code Sec. 7403 ]

Tax liens: Fraudulent conveyances: Husband and wife, transfer of property: Default judgment.--The government was entitled to a default judgment against a trust/partnership in connection with a fraudulent conveyance from pro se married taxpayers to their son. The taxpayers failed to secure an attorney to timely file an answer to the government's motion that its tax liens attached to the farmland.

William T Murphy, Department of Justice, Washington , D.C. 20530 , for plaintiff. Detsel James Parkinson, Earlene Parkinson, Rexburg, Ida., pro se. Dale P Thomson, Thomwson Law Offices, Rexburg, Ida., for defendants.

ORDER

WINMILL, Chief District Court: The Court has before it a Report and Recommendation filed by the Chief United States Magistrate Judge. Defendants Detsel J Parkinson and Earlene Parkinson filed objections to the Report and Recommendation. The Court has examined the Report and Recommendation, in light of the objections, pursuant to 28 U.S.C. §636(b)(1) and finds that the Report and Recommendation accurately sets forth the facts and correctly applies the governing legal standards. Accordingly,

NOW THEREFORE IT IS HEREBY ORDERED, that the [*2] Report and Recommendation (Docket No. 85) shall be, and the same is hereby, ADOPTED as the decision of the District Court and incorporated fully herein by reference.

IT IS FURTHER ORDERED, that (1) the defendants' motion for sanctions (docket no. 61) is DENIED; (2) plaintiff's renewed motion for default judgment against Diversified Investments and Revenue Trust (docket no. 63) is GRANTED; (3) plaintiff's motion for judgment on the pleadings or in the alternative for summary judgment against Diversified Investments and Revenue Trust (docket no. 65) is DENIED; (4) plaintiff's motion for judgment on the pleadings (docket no. 65 part 1) is DENIED; (5) plaintiff's alternative motion for summary judgment against defendants Detsel and Earlene Parkinson (docket no. 65 part 2) is GRANTED; (6) defendants' motion to dismiss (docket no. 71) is DENIED; (7) Defendants' motion to strike (docket no. 78) is DENIED; (8) defendants' motion to strike or quash and to dismiss (docket no. 80) is DENIED.

ORDER, REPORT AND RECOMMENDATION

BOYLE, Chief Magistrate Judge:

Currently pending before the Court are the following motions: Defendants' ¹ motion for sanctions against Plaintiff and Plaintiff's counsel (Docket No. 61); Plaintiff's renewed motion for default judgment against Diversified Investments (Docket No. 63); Defendants' motions to reconsider Order of October 25, 2000 (Docket No. 69 and 75); Plaintiff's motion for judgment on the pleadings or, in the altenative, for summary judgment against Defendants (Docket No. 65); Defendants' motion to dismiss complaint (Docket No. 71); Defendants' motion to strike Plaintiff's motion for summary judgment and related pleadings (Docket No. 78); Defendants' motion to strike or quash Plaintiff's renewed motion for entry of default judgment, and to dismiss D.I.R.T. for lack of jurisdiction (Docket No. 80).

On December 18, 2000 , the Court heard oral argument on all pending motions. Plaintiff United States of America (USA) was represented by counsel William T. Murphy; Defendants Stephen and Donalyn Parkinson were represented by counsel Dale Thomson; Detsel Parkinson and Earlene Parkinson represented themselves; and no appearance was made on behalf of Diversified Investment and Revenues Trust (DIRT). Having reviewed the motions and the record in this matter, and having considered the arguments of the parties, the Court enters the following Order, Report and Recommendation pursuant to 28 U.S.C. §636(b).

I.

REPORT

A. Background

Plaintiff USA brings this suit against five defendants in an attempt to enforce its lien rights in certain property to facilitate collection of past federal income taxes assessed against Detsel Parkinson. The defendants are as follows: Detsel and Earlene Parkinson, husband and wife; Stephen and Donalyn Parkinson, son and daughter-in-law of Detsel and Earlene; and Diversified Investment and Revenues Trust (DIRT), which is either a trust or a partnership. The USA claims that DIRT is Detsel Parkinson's nominee.

On May 9, 1994 , a delegate of the Secretary of Treasury made assessments against Defendant Detsel Parkinson for unpaid federal income taxes for the tax years 1988 through 1991, in the amount of $92,691.82, plus accrued interest and penalties from the dates of assessment. On May 31, 1994 , the USA filed with the Madison County Recorder a Notice of Federal Tax Lien against all property and rights to property against Detsel Parkinson for the unpaid tax debt. On December 20, 1995 , the USA filed with the Fremont County Recorder a Notice of Federal Tax Lien against all property and rights to property of defendant Detsel Parkinson for the unpaid tax debt.

This Court previously recommended, and the District Court granted, partial summary judgment in favor of the USA , declaring that the amount of delinquent taxes owed by Detsel Parkinson was $92,691.82. (Docket Nos. 49 and 51.) The USA , through the Internal Revenue Service (IRS) earlier satisfied a portion of this debt by seizing and selling a home in which Detsel and Earlene Parkinson had resided, located at 251 Ricks Avenue , Rexburg, Madison County, Idaho ( Madison County residence). The deed to the Madison County residence had been recorded in the name of DIRT in 1979 and remained in DIRT's name at the time of seizure and sale. The USA contends that DIRT is Detsel Parkinson's nominee, alleging that Detsel and Earlene Parkinson have exercised control over the Madison County residence, have had the use and enjoyment of the property and have treated the property as their own.

At the IRS sale, a corporation, Pro Indiviso, Inc., (an entity unrelated to the Parkinsons) bought the Madison County residence for $40,100.00. Stephen Parkinson, worried that his mother, Earlene, would not have a place to live (at that time his father, Detsel, was in jail) purchased the property back from Pro Indiviso, Inc., for $55,000.00. See Deposition Transcript of Stephen Parkinson, attached as an Exhibit to Docket No. 72, "Defendants Parkinsons' Notice of Motion." He obtained the purchase money by mortgaging his own house and obtaining additional funds from savings and his siblings. Detsel and Earlene Parkinson currently reside at the Madison County residence. After sale of the Madison County residence, the USA represents that the tax debt due and owing is $53,555, plus accrued interest and penalties.

The same year DIRT acquired the Madison County residence, in 1979, DIRT also acquired a tract of farm land in Fremont County ( Fremont County property). The USA contends that DIRT is the nominee of Detsel Parkinson, alleging that Detsel and Earlene Parkinson have exercised control over the property, have had the use and enjoyment of the property and have treated the property as their own. On December 15, 1995 , five days before the USA filed its Notice of Federal Tax Lien against the Fremont County property, DIRT, through Earlene Parkinson its purported partner, conveyed an interest in the Fremont County property to Stephen and Donalyn Parkinson by recording a mortgage showing that Stephen and Donalyn paid $55,000 in consideration for the Fremont County property. In reality, Stephen and Donalyn had not paid $55,000 to DIRT for the Fremont County property. Rather, Stephen and Donalyn had paid $55,000 to Pro Indiviso, Inc., a corporation unrelated to the Parkinsons, for the Madison County residence. They retain title to the Madison County residence, allowing Detsel and Earlene Parkinson to live there rent-free. The mortgage purported to be security for a promissory noted executed by DIRT, through its partner Earlene Parkinson, for a $55,000.00 debt. The USA contends that Stephen and Donalyn Parkinson did not give value in exchange for the mortgage on the Fremont County property, and that, as a result, they do not have a valid security interest therein.

Consequently, in this suit, the USA seeks to have the District Court declare the following: (1) that the Fremont County property is held by Defendant DIRT as a nominee of Defendants Detsel and Earlene Parkinson; (2) that Stephen and Donalyn Parkinson do not have a valid security interest in the Fremont County property; (3) that the USA's federal tax liens against all property and rights to property of Defendant Detsel Parkinson attach to Detsel Parkinson's interest in the Fremont County property, including any community property interest Earlene Parkinson has in that property; and (4) that the liens have priority over all other parties' interests in the Fremont County property. Only issues (1) and (3) are pending before the Court in the parties' current motions.

B. Undisputed Material Facts

The USA has filed a statement of undisputed material facts in support of its motion for summary judgment. See Docket No. 67. Parkinsons dispute the USA 's statement of facts. See Docket No. 76. The Parkinsons also filed a cross-motion for summary judgment. In determining the undisputed material facts, the Court has considered the Parkinsons' objections in light of the standard set forth in Rule 56(g). Based upon the record before it, the Court finds that the following are undisputed facts material to the issues in the motions for summary judgment and the other pending motions.

1. Earlier in this action, the District Court granted partial summary judgment in favor of the USA , declaring that the amount of delinquent taxes owed by Detsel Parkinson for the years 1988-1991 was $92,691.82, plus accrued interest and penalties.

2. The original date of assessment of the tax debt was May 9, 1994 .

3. On or about May 2, 1979 , Grantor Steven Zundell, Dean Palmer and their spouses granted a warranty deed to the Fremont County property to "Diversified Investment and Revenues Trust of Grand Turk, Turks and Caicos Islands, British West Indies ."

4. On or about December 7, and December 15, 1995 , Earlene Parkinson signed a promissory note and a mortgage deed, identifying herself as "Partner" of Diversified Investments and Revenue Trust, and identifying Diversified Investments and Revenue Trust as an Idaho general partnership. ² The promissory note and mortgage deed (both recorded at the Fremont County Recorder) documented a purported transaction between DIRT and Stephen J. and Donalyn Parkinson, in which DIRT borrowed $55,000.00 from Stephen and Donalyn, payable at 10.25% interest, with 180 months of payments of $494.00, which debt was secured by a mortgage on the Fremont County property. ³

5. On December 19, 1995 , Notices of Federal Tax Lien were filed in Fremont County against Detsel Parkinson and Diversified Investments and. Revenues Trust, identifying the Fremont County property.

6. DIRT has not contested Earlene Parkinson's authority to enter into the promissory note and mortgage in its behalf.

7. In the course of this action, Detsel and Earlene Parkinson have represented that DIRT has assigned its rights and claims in this litigation to Detsel Parkinson. ⁴

8. In the course of this action, Detsel and Earlene Parkinson, on behalf of DIRT, requested an extension of time within which to file an answer.

9. The Parkinsons claim that they have "no interests, property holdings, etc., in said D.I.R.T. its corpus, rem or estate assets." Declaration of Detsel Parkinson, Docket No 77, at p. 2.

C. Plaintiff USA 's Renewed Motion for Default Judgment Against DIRT

At the start of this action, Detsel and Earlene Parkinson attempted to answer on behalf of DIRT. Thereafter, the USA contended that the Parkinsons, proceeding pro se, could not represent a trust or partnership, and requested default judgment against DIRT. The District Court denied the USA 's motion for entry of default against DIRT and granted DIRT thirty days to file an answer through counsel (Docket No. 51). The Parkinsons sought for DIRT an additional thirty days in which to file an answer, through July 7, 2000 . To date, DIRT has not filed an answer through counsel.

To obtain default judgment, the USA must show that it effected proper service upon DIRT. The USA served Earlene Parkinson as DIRT's partner, and Detsel Parkinson as DIRT's manager. See Docket Nos. 2 and 3, Summons and Return of Service executed by Bradley A. Heath. At oral argument, Earlene Parkinson and Detsel Parkinson clarified that they did not dispute that they had been served as DIRT's partner and DIRT's manager, respectively, but that they disputed whether the USA had served the right parties. They argue that service upon DIRT, a trust, should have been executed upon a Mr. Tremaine, DIRT's purported trustee.

Federal Rule of Civil Procedure 55 provides "that when a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend," that party may be defaulted. Federal Rule of Civil Procedure 4(h)(1) provides that service upon corporations, partnerships or other unincorporated associations "shall be effected . . . by delivering a copy of the summons and of the complaint to an officer, a managing or general agent. . . ." Rule 4 "is a flexible rule that should be liberally construed so long as a party receives sufficient notice of the complaint." United Food & Commercial Workers Union v. Alpha Beta Co., 736 F.2d 1371, 1382 (9th Cir. 1984).

In the Ninth Circuit, service under Rule 4(h)(1) may be made upon any individual " 'so integrated with the organization that he will know what to do with the papers' " and " 'who stands in such a position as to render it fair, reasonable and just to imply the authority on his part to receive service.' " Direct Mail Specialists, Inc. v. Eclat Computerized Technologies, Inc., 840 F.2d 685, 688 (9th Cir. 1988) (quoting Top Form Mills, Inc. v. Sociedad Nationale Industria Applicazioni Viscosa, 428 F.Supp. 1237, 1251 (S.D.N.Y. 1977)). In Direct Mail, the Ninth Circuit explained that "a recipient of process need not even be an employee of a company to be its managing agent, as long as the person demonstrates apparent authority." 840 F.2d at 688-89 (citing 2 J. Moore, J. Lucas, H. Fink & C. Thompson, Moore's Federal Practice P 4.22[2], at 4-201-04-202 n. 11). ⁵ The Ninth Circuit has also held that " 'substantial compliance' with the service requirements of Rule 4 is sufficient so long as the opposing party receives sufficient notice of the complaint." Straub v. A. P. Green, Inc., 38 F.3d 448, 453 (9th Cir. 1994) (relying upon Direct Mail, 840 F.2d at 688, and Chan v. Society Expeditions, Inc., 39 F.3d 1398, 1404 (9th Cir. 1994)).

The Parkinsons argue that service upon a trust is ineffective unless service is made upon the trustee. The Parkinsons cite to no case which so holds. The Parkinsons' reliance upon Dennett v. Kuenzli, 130 Idaho 21, 30-31, 936 P.2d 219, 229 ( Idaho 1997) in favor of this proposition is misplaced. Dennett does not even mention the concept of "service of process." Rather, it stands for the proposition that a trustee may effectively enter into contracts for the trust without disclosing that he is acting on behalf of the trust and he may bring legal actions in his own name regarding property or contract interests of the trust estate. These principles do not govern the issue here. Counsel for the USA asserts that he is aware of no case law which specifically requires service upon a trust to be made only upon the trustee. Neither has the Court found any such case in its own research of the issue. Rather, it appears proper to deem a trust an "unincorporated association" for purposes of service, as a trust is not otherwise specifically listed in Rule 4.

The following facts show that the Parkinsons each stand "in such a position as to render it fair, reasonable and just to imply the authority on [their] part to receive service." Earlene Parkinson has sufficient authority to cause DIRT to become indebted to a third party for $55,000, and has sufficient authority to encumber DIRT's real property with a mortgage. Most importantly, nothing in the record suggests that, in the five years since Earlene Parkinson entered into these transactions in 1995, DIRT has ever come forward to contest her authority to transact business for it.

In addition, the Parkinsons' assertions that DIRT has assigned its rights and claims in this litigation to Detsel Parkinson and that the Parkinsons requested an extension of time for DIRT to answer demonstrate that the Parkinsons occupy a position of importance with DIRT, if, in fact, it is an entity separate and apart from the Parkinsons.

In addition, DIRT undoubtedly had actual notice of this lawsuit in time to file a proper answer. For example, DIRT could not have assigned its interest in this lawsuit to Detsel Parkinson without first having notice of the lawsuit. Further, there is nothing in the record to suggest that Detsel and Earlene Parkinson requested for, and then did not notify, DIRT of an extension of time to file an answer granted by Judge Winmill.

In summary, the record reflects sufficient factual bases upon which this Court can find and conclude that Detsel Parkinson and Earlene Parkinson have held themselves out to be persons "so integrated with [DIRT] that [they would] know what to do with the papers" and that they are persons " 'who stand[] in such a position as to render it fair, reasonable and just to imply the authority on [their] part to receive service' " for DIRT. Neither DIRT nor its purported trustee has come forward to assert that Detsel and Earlene Parkinson are not qualified to be served on behalf of DIRT. In addition, the Court finds, and therefore concludes, that DIRT's assignment of its interests in this lawsuit to Detsel Parkinson and the Parkinsons' request for an extension of time within which DIRT might answer are both indications that DIRT had actual notice of the lawsuit in time to file a proper answer through counsel. Accordingly, the USA 's service upon Detsel and Earlene Parkinson on behalf of DIRT was proper and effective. DIRT's failure to file an answer within the time allowed by Judge Winmill, or at all, renders it subject to default judgment.

The Parkinsons continue to argue that they should be permitted to appear on behalf of DIRT without attorney representation. The Parkinsons cite Fobbs v. Holy Cross Health System Corp., 29 F.3d 1439 (9th Cir. 1994), to support their position that they are entitled to assert the claims of DIRT. Their reliance on this case is misplaced. There, the Court held that, "[w]here a physician seeks declaratory or injunctive relief, [he] has standing to bring [an] action on behalf of patients who are members of a protected class for conspiracy to deprive the patients of equal protection of laws and equal privileges and immunities of national citizenship." 29 F.3d at 1450. However, nothing in the case suggests that Dr. Fobbs was acting pro se. Rather, the notes following the heading of the case show that at least two attorneys were representing Dr. Fobbs.

The USA argues that the Parkinsons have no standing to contest entry of default judgment against DIRT. Several cases support the USA 's position. In C.E. Pope Equity Trust v. United States, 818 F.2d 696 (9th Cir. 1987), a trustee attempted to bring suit, pro se, on behalf of two trusts. The court held that the trustee had no authority to appear as an attorney for anyone other than himself. The court also examined whether the trustee was the "actual beneficial owner of the claims being asserted by the Trusts," which would have made him the "real party in interest," and would have allowed him to proceed pro se with the Trusts' claims. 818 F.2d at 697-98. The court determined that the trustee's status was fiduciary, as the record did not identify the trust beneficiaries and, as a result, it determined that the trustee could not be viewed as a party conducting "his own case personally." Id.

Similarly, here, Detsel Parkinson claims that DIRT, the trust, has assigned him all of its "rights and claims in the litigation," but that DIRT has not assigned him any rights of ownership to the trust assets, res, or corpus. Such an "assignment" is a hollow gesture which does not satisfy the Pope standard that Parkinson be the actual beneficial owner of the trust in order to represent the trust. Rather, it is merely an attempt by Parkinson to subterfuge Pope's proscription against pro se representation of a trust.

The Parkinsons' lack of standing to represent the trust is further supported by Allied/Royal Parking v. United States [99-1 USTC ¶50,229], 166 F.3d 1000 (9th Cir. 1999). In Allied/Royal Parking, the court held that a party cannot bring a claim for wrongful levy if he does not own the property subject to the wrongful levy, because he has no standing under 26 U.S.C. §7433. The Allied court relied upon Maisano v. Welcher [91-2 USTC ¶50,478], 940 F.2d 499 (9th Cir. 1991). In Maisano, the IRS seized a truck that it believed belonged to the plaintiffs to satisfy the plaintiffs' tax debt. The plaintiffs sued the IRS for violating their constitutional rights by seizure of the truck. They claimed that the truck belonged to a trust, rather than to them. The court stated that it was unclear whether the plaintiffs or the trust actually owned the truck, but that it did not matter. In either case, the court determined, the plaintiffs would lose. "If the [truck] belongs to the trust, the [plaintiffs] have no standing to sue and their case must be dismissed. If the [truck] actually belongs to the [plaintiffs], they lose their argument that the IRS seized property belonging to the wrongful party." [91-2 USTC ¶50,478], 940 F.2d at 501. The Allied court noted that, while Maisano was not brought under §7433, the same reasoning regarding standing applied.

The Allied court also relied upon Warth v. Seldin, 422 U.S. 490, 499, 95 S.Ct. 2197 (1975), wherein the Supreme Court held that a "plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties" and Northern Plains Resource Council v. Lujan, 874 F.2d 661, 667 (9th Cir. 1989), wherein the Ninth Circuit held that a plaintiff lacked standing to challenge the validity of a land patent unless the plaintiff asserted a legal property interest in the land. All of these cases stand for the general principle that standing to assert a property right requires that a person first show that he has an interest or right in the property at issue. This, the Parkinsons have not done. In fact, as set forth above, the Parkinsons specifically disclaim any concrete interest in the trust itself, and therefore they cannot represent it and cannot save it from default.

In this matter, a default judgment against DIRT is fair and just under the circumstances. If DIRT is simply the alter ego of the Parkinsons, then, obviously, no one else is going to come forward to assert the interests of DIRT, and default judgment rightly has the effect of allowing the USA to seize the Fremont County property as the Parkinsons' asset. ⁶ If DIRT is not simply the alter ego of the Parkinsons, then it obviously does not disagree with the allegations in, and relief requested by, the USA's complaint; otherwise, DIRT's trustee or other interested party would have come forward through counsel to assert its interests rather than simply attempting to assign its rights in the lawsuit to the Parkinsons, despite the Court's warnings that such representation is improper and would not be permitted.

Accordingly, the USA is entitled to entry of default judgment against DIRT for failure to respond to the summons and complaint in this matter. Because the Parkinsons continue to assert that they have no interest in the trust, they have no right to represent the trust, and any portion of the Parkinsons' answer which purports to answer on behalf of DIRT should be stricken. In addition, the Parkinsons have no standing to attempt to assert various claims on behalf of DIRT, including a motion to dismiss for lack of jurisdiction and a motion to strike or quash Plaintiff's renewed motion for entry of default judgment against DIRT.

D. Plaintiff's Motion for Judgment on the Pleadings and Alternative Motions for Summary Judgment

The USA requests that the District Court enter judgment on the pleadings against DIRT and Detsel and Earlene Parkinson. As to DIRT, the Court has concluded that default judgment is warranted. The USA has not provided any legal authority to show that, in such an instance, entry of judgment on the pleadings would also be proper under the circumstances. Rather, where a defendant in a civil proceeding fails to answer, a motion for default judgment, rather than motion for judgment on the pleadings, is proper. Coca-Cola Bottling Co. v. Local Union 1035, 973 F.Supp. 270 (D. Conn. 1997); Fed. R. Civ. P. 12(c) (a motion for judgment on the pleadings is to be filed "at the close of the pleadings"); Fed. R. Civ. P. 55 (a motion for default judgment is appropriate when a party "has failed to plead or otherwise defend"); Therefore, a judgment on the pleadings or summary judgment against DIRT is improper.

The USA also claims that it is entitled to summary judgment against the Parkinsons on the issue that the Parkinsons' nominee is DIRT. The Parkinsons deny that DIRT is their nominee. At oral argument the USA admitted that it relied only upon the promissory note and mortgage document to show that DIRT was the Parkinsons' nominee, and that it had not brought forward other evidence to develop its nominee theory because of the anticipated default judgment against DIRT, which holds the title to the Fremont County property.

Inasmuch as the USA relies upon documents beyond the pleadings (the promissory note and mortgage document attached to James Mason's declaration) for its nominee theory, it is not entitled to judgment on the pleadings against the Parkinsons. Further, as a result of the USA 's failure to provide any other evidence that DIRT is the Parkinsons' nominee, it is not entitled to summary judgment against the Parkinsons on the nominee theory.

The government may collect the tax debts of a taxpayer from assets of the taxpayer's nominee, instrumentality, or "alter ego." See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 429 U.S. 338, 350-51, 97 S.Ct. 619 (1977). In determining the economic reality of a transaction, courts must analyze the substance of a transaction and are not restricted by its form. See, e.g., Gregory v. Helvering [35-1 USTC ¶9043], 293 U.S. 465, 469-70, 55 S.Ct. 266, 79 L.Ed. 596 (1935). While taxpayers are permitted to reduce their tax burden by any lawful means available, they are not permitted "to construct paper entities to avoid taxation when those entities are without economic substance." United States v. Scherping [99-2 USTC ¶50,758], 187 F.3d 796 (8th Cir. 1999) (citing Chase v. Commissioner [CCH Dec. 46,495(M)], 59 T.C.M. (CCH) 261, 264, 1990 WL 33360 (U.S. Tax Ct. 1990), aff'd [91-1 USTC ¶50,090], 926 F.2d 737 (8th Cir. 1991)); see also United States v. Ladum [98-1 USTC ¶50,345], 141 F.3d 1328 (9th Cir. 1998). ⁷

Here, the USA has not provided the Court with sufficient factual information for the Court to perform an analysis to determine whether DIRT is the nominee or alter ego of the Parkinsons. For example, the Court does not know whether the Parkinsons have exclusively controlled and had exclusive use and enjoyment of the Fremont County property, whether they have personally paid for repairs and utilities, whether DIRT has its own bank accounts and records separate from the Parkinsons, whether the Parkinsons have siphoned funds from DIRT or treated its assets as their own, or other facts which might show that the existence of DIRT is merely a facade for the Parkinsons. See Scherping [99-2 USTC ¶50,758], 187 F.3d at 801-03. As a result, the USA 's motion for summary judgment cannot be granted upon the nominee theory for lack of admissible evidence in the record.

However, because the Parkinsons have disclaimed all concrete interest in DIRT and in its property, the USA is entitled to summary judgment on the theory (and the admission) that Detsel and Earlene Parkinson have no interest in the Fremont County property. Alternatively, any "assigned" interest held by the Parkinsons in the Fremont County property is subject to the lien under 25 U.S.C. §6321, and the USA is entitled to summary judgment as to such an interest.

E. Parkinsons' Motion for Sanctions Against The USA and its Counsel

Parkinsons argue that Plaintiff USA and its representatives and counsel have proffered false evidence and testimony. They cite United States v. LaPage, 231 F.3d 488, 2000 WL 1638956 (9th Cir. 2000), which held that a prosecutor's knowing use of false testimony in a criminal trial violated the defendant's right to due process. At oral argument, Detsel Parkinson clarified that he based this allegation, in part, on the fact that the USA has offered the promissory note and mortgage documents as evidence that Earlene Parkinson is a partner of DIRT. He also clarified that he did not believe that the copies of the documents submitted by the USA were false, but that the documents were "a fraud upon [him]," because he "never co-signed them." As Parkinson is not disputing the authenticity of the documents but only their legal effect, and as the USA has not improperly provided the documents to the Court, the motion for sanctions is groundless and should be denied.

Parkinson's further assert that the USA 's counsel is intentionally delaying mail to the Parkinsons. They cite a letter mailed from Washington , D.C. on November 7, 2000 , which did not arrive in Rexburg , Idaho , until November 13, 2000 . A mere glance at the calendar shows that November 7 was a Tuesday. Friday, November 10 was a legal holiday. November 12 was a Sunday. Considering the distance the correspondence had to travel, with two days of post office closure in between, delivery on November 13 does not in itself show any intentional delay.

F. Parkinsons' Motion to Reconsider Order of October 25, 2000 , Denying their Request to Consolidate this Matter with CV00-211-S-EJL

Defendants have requested that the Court reconsider its Order of October 25, 2000 , denying their request to consolidate this matter with CV00-211-S-EJL. In that matter, the Parkinsons have sued the USA , IRS, Judge Winmill, this Court, and all of the attorneys' involved in this case, among other defendants.

Parkinsons now newly assert that the claims in CV00-211-S-EJL are compulsory counterclaims in this action. However, they provide no specifics showing how or why they are compulsory counterclaims. Nor do they explain why they brought the claims separately in a different action rather than asserting the claims in this instant action. The main reason not to consolidate these two actions is that the CV00-211-S-EJL action is very complex, alleging conspiracies and other larger issues than the Court is presented with in this case, where the issues are very narrow. The second reason is that trial is already set in this matter, and any consolidation would severely delay completion of this case and, as a result, would unduly prejudice the other parties to this litigation.

The Parkinsons seek to further confuse matters by attempting to show that this Court is biased toward them because the Court is related by marriage to Ray W. Rigby, a Defendant in the CV00-211-S-EJL suit. This allegation appears to be nothing more than a disguised motion for recusal, which is unwarranted. See United States v. Studley [86-1 USTC ¶9390], 783 F.2d 934, 939-40 (9th Cir. 1986) ("A judge is not disqualified by a litigant's suit or threatened suit against him"). As Judge Winmill stated in his previous order, denying Defendants' request that the Court recuse itself from the matter, to "bow out of a case involving Detsel Parkinson because Parkinson has sued it," . . . "would be to sanction a method by which parties could essentially select their preferred judge by instituting frivolous suits against other available judges." Likewise, merely because these Defendants have sued a person to whom the Court is related by marriage is even further removed from the fray than the fact that Defendants have sued the Court. If removal is not required by a personal suit against the Court, then surely the fact that Defendants have sued the presiding judge's father-in-law is not a basis for removal. Accordingly, the allegation of bias on this basis is unfounded. Because the Parkinsons have provided no adequate reasons why consolidation would serve the interests of the parties or the Court in this matter, the Court declines to grant the motion to reconsider.

G. Parkinsons' Motion to Dismiss Complaint, Motion to Strike Plaintiff's Motion for Summary Judgment, Motion to Strike or Quash Motion for Default Judgment, and Motion to Dismiss DIRT for Lack of Jurisdiction

These motions are the responsive counterparts to the USA 's motions, addressed hereinabove. As set forth above, Defendants have no standing to assert claims or motions on behalf of DIRT, and therefore the motion to strike or quash the motion for default judgment and the motion to dismiss DIRT for lack of jurisdiction should be denied.

Defendants argue that the USA's liens are invalid because the USA has not complied with 26 U.S.C. §6323, ⁸ which requires the USA to give notice of liens to any third party who also has an interest in the debtors' property. However, by operation of statute, a lien automatically arises against the debtors' property when a "person liable to pay any tax neglects or refuses to pay the same after demand" and an assessment of the delinquent tax is made. 26 U.S.C. §§6321-22. Further, "[t]he creation of a tax lien does not require a filing of public notice, and, once created, the tax lien is effective as against the taxpayer until 'the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.' " TKB International, Inc. v. United States [93-1 USTC ¶50,346], 995 F.2d 1460 (9th Cir. 1993) (quoting 26 U.S.C. §6322). Therefore, section 6323 is inapplicable to the Parkinsons because they are the debtors; it is also inapplicable because they claim no interest in the Fremont County property. Not having any interest in the property, they would not be entitled to notice under §6323. Finally, as set forth herein above, the Parkinsons have no standing to assert that DIRT did not receive proper notice under §6323.

II.

RECOMMENDATION

Based on the foregoing, it is hereby recommended that the District Court enter an order as follows:

1. Defendants' motion for sanctions against Plaintiff and Plaintiff's counsel (Docket No. 61) should be DENIED.

2. Plaintiff's renewed motion for default judgment against Diversified Investments and Revenue Trust (Docket No. 63) should be GRANTED.

3. Plaintiff's motion for judgment on the pleadings, or in the alternative for summary judgment against Diversified Investments and Revenue Trust (Docket No. 65) should be DENIED.

4. Plaintiff's motion for judgment on the pleadings against Defendants Detsel and Earlene Parkinson (Docket No. 65) should be DENIED, but Plaintiff's alternative motion for summary judgment (Docket No. 65) should be GRANTED.

5. Defendants' motion to dismiss complaint (Docket No. 71) should be DENIED.

6. Defendants' motion to strike Plaintiff's motion for summary judgment and related pleadings (Docket No. 78) should be DENIED.

7. Defendants' motion to strike or quash Plaintiff's renewed motion for entry of default judgment, and to dismiss D.I.R.T. for lack of jurisdiction (Docket No. 80) should be DENIED.

Written objections to this Report and Recommendation must be filed within ten (10) days, pursuant to 28 U.S.C. §636(b)(1) and Local Rule 72.1, or as a result that party may waive the right to raise factual and/or legal objections in the Ninth Circuit Court of Appeals. The parties are advised that this report and recommendation is not a final, appealable order, and thus no appeal can be taken from this report and recommendation.

III.

ORDER

NOW THEREFORE IT IS HEREBY ORDERED that Defendants' motions to reconsider Order of October 25, 2000 (Docket Nos. 69 and 75) are DENIED.

¹ Hereinafter the term "Defendants" or "the Parkinsons" refers to Detsel Parkinson and Earlene Parkinson only, unless otherwise specified. The interests of Stephen and Donalyn Parkinson are not at issue in these motions.

² At oral argument, Detsel Parkinson stated that he did not dispute that the copies of the promissory note and mortgage deed in the Court's record (Exhibit 1 and 3 to Docket No. 68, First Declaration of James L. Mason) were copies of the documents actually recorded at the Fremont County Recorder, which renders his admissibility objection meritless. He clarified that he disputes the legal effect of the documents, arguing that "it was a fraud upon me," because "I never co-signed them." However, an argument that he had a right to co-sign a document which indebted DIRT to third parties and which encumbered DIRT's property must be based upon the premise that Detsel Parkinson either (1) actually owns an interest in DIRT, (2) owns an interest in the Fremont County property, or (3) has a management role in DIRT, any of which support the USA's position in these motions. Because DIRT has not come forward to dispute Earlene Parkinson's authority to make such a transaction, the Court deems these facts undisputed.

³ At oral argument, counsel for Stephen and Donalyn Parkinson clarified that it was their position that DIRT was not a valid trust but was "an Idaho general partnership by default under Idaho law." Nothing in the portion of Stephen's deposition, provided by Detsel Parkinson, contradicts the position asserted at oral argument. Whether DIRT is a partnership or trust, it is undisputed that Earlene Parkinson signed the promissory note and mortgage documents on behalf of DIRT, and that DIRT has not disputed her authority to do so.

⁴ The Parkinsons clarified in later briefs that the assignment of DIRT's "rights and claims" in the litigation does not include an assignment of the underlying assets, res or corpus of DIRT, either legally, equitably or otherwise. See Undisputed Material Fact No. 9.

⁵ In Direct Mail, service was made upon a secretary, who claimed that she was not even an employee of Defendant Eclat but of a sister company which shared an office with Eclat. The Ninth Circuit found that service upon Eclat was nevertheless effected by service upon this secretary based upon the following facts. "The company was a rather small one by Eclat's own admission. Presumably, the role played by the receptionist was commensurately large in the structure of the company. She appears to have been the only employee in the office when the process server arrived, demonstrating that more than minimal responsibility was assigned to her. . . . This evidence of actual receipt of process was bolstered by several statements of fact in the appellant's reply brief indicating that Eclat had actual knowledge no later than the day after service of process." 840 F.2d at 688-89.

⁶ As against the Parkinsons, the USA correctly alternatively argues that, as in Maisano, if Parkinsons show that they have a property interest in DIRT, then they lose their case not by default, but on the merits, as the USA 's lien attaches to all property in which they have an interest. 26 U.S.C. §6321.

⁷ In Ladum, Rob ert Ladum opened and operated seven second-hand stores in Portland , Oregon . However, the court found that he concealed his ownership interests in these stores so he could avoid paying taxes on their income by using nominees who held themselves out as owners of the stores. The nominees would pretend to be the store owners by placing the title documents, business paperwork, and federal firearms licenses in their names. Nonetheless, Ladum would retain control of the nominee and the business. [98-1 USTC ¶50,345], 141 F.3d at 1333.

⁸ 26 U.S.C. §6323 provides, in pertinent part, "The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary."

 

 

[97-2 USTC ¶50,822] United States of America , Plaintiff v. Gerald J. Landsberger, et al., Defendants

U.S. District Court, Dist. Ariz. , CIV 94-0883-PHX-SMM, 9/30/97

[Code Sec. 6321 ]

Property subject to lien: Trusts: Nominee or alter ego: Economic realty: Sham transactions.--The IRS was entitled to foreclose on residential property that was held in a married couple's nominee or alter ego trust. The nominee or alter ego theory applied because the creation of the trust did not coincide with economic realty and the trust was, in effect, a sham. The husband admitted that the trust was set up as a shell for the purpose of keeping his property at arm's length from potential creditors, including the IRS, and the undisputed facts established that he maintained active and substantial control over the trust. Since the trust was the nominee or alter ego of the couple, the timing of its creation was irrelevant.

[Code Sec. 6323 ]

Validity of lien: Priority over third-party interests: Bona fide purchaser.--Pursuant to both federal and state ( Arizona ) law, federal tax liens on residential property took priority over any interest held by alleged bona fide purchasers who took title with full knowledge of the tax liens.

ORDER

I. INTRODUCTION

MCNAMEE, District Judge:

On September 29, 1995 , this Court entered an Order holding that the United States ' tax assessments against Defendants Gerald and Betty Landsberger for the years of 1979, 1980, 1981 and 1982 could be reduced to judgment. Additionally, the Court held that the United States could foreclose its tax liens on the Landsberger's residential property related to the assessments made against them for the years of 1979 and 1980. However, subsequent to the entry of judgment, the United States moved to enter default judgment against Defendants Nancy Fieldman and Jeffrey Fadden as trustees of the trust that held the residential property. The Court denied the motion for default judgment and order and decree of foreclosure with respect to the property, and set discovery deadlines for this action to proceed forward on the issue of foreclosure of the property.

Currently pending before this Court is Plaintiff's Renewed Motion for Summary Judgment on a different theory again seeking an Order that would allow the United States to foreclose on the tax liens arising from the 1979 and 1980 income tax assessments. ¹

II. RELEVANT FACTS

The following facts are undisputed. In October of 1961, Defendants Gerald and Betty Landsberger took title to property at 1677 West County Road F in St. Paul , Minnesota ("St. Paul Property"), and lived in the property until March of 1982. In January of 1981, the Landsbergers transferred the St. Paul property to the G. J. Landsberger Family Trust 2-372 ("Trust #2-372") for "$1.00 and other good and valuable consideration"). See Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of Gerald J. Landsberger ("Depo. G. Landsberger"), at p. 19 at ll. 2-4, p. 23 at ll. 6-23, and Exh. 2. The St. Paul property was worth in excess of $100,000 at the time of the transfer. See id. at p. 25, ll. 4-7. Gerald Landsberger was the trustee of Trust #2-372 and directed the activities of the trust. See id. at p. 24, ll. 2-4, and p. 3, ll. 6-20.

Mr. Landsberger has maintained and espoused tax protester-type beliefs since the late 1970's. See id. at p. 20, ll. 1-15, p. 21, ll. 7-21, p. 22, ll. 8-17, p. 52, ll. 1-7, p. 53, ll. 7-23, and Exhs. 13-15; see also United States v. Gerald Landsberger [82-1 USTC ¶9171], 534 F.Supp. 142 (D. Minn. 1981). Mr. Landsberger had many trusts set up in 1977, the purpose of which was to keep himself an "arms length" from any transaction related to the subjects of the trust, in order to protect the properties from potential creditors including the IRS. See Depo. of G. Landsberger, at p. 49, l. 9-p. 51, l. 25. Mr. Landsberger did not at that time have any tax deficiency assessments against him. See id. at p. 51, ll. 1-2.

Shortly after the transfer of the St. Paul property to Trust #2-372, the trust sold the property to an unrelated third party for a cash down payment of approximately $37,000, plus monthly payments and assumption of the mortgage. See id. at p. 29, ll. 23-25, p.30, ll. 1-20, and Exh. 3. After the sale of the property, the proceeds and all future payments for the property were transferred to Gerald Landsberger Investments, a Trust under Trust #2-988 (Trust #2-988), with the beneficiary being Constitutional Trust #1-988. Second Declaration of Gerald J. Landsberger ("Sec. Decl. G. Landsberger"), at ¶4; see also, Depo. G. Landsberger, at p. 30, ll.21-25, p. 31, ll. 1-25, p. 32 ll. 1-25, and p. 34, ll. 6-18. Mr. Landsberger was also the trustee of Trust #2-988, and directed the trust's activities. See id. at p. 32, ll. 12-14, p. 33, ll. 21-25, p. 34, ll. 1-2 and 19-25, and p. 35, ll. 1-4.

Sometime in 1981 or 1982, Trust #2-988 used the proceeds of the sale of the St. Paul property to purchase the residential real property at 4502 Cortez in Phoenix Arizona , also referred to as Lot No. 127, Village Fairways ("Cortez property"). See id. at p. 34, ll. 6-18, and Exh. 4. The Landsbergers resided at the Cortez property. See id. at p. 6, ll. 10-21; Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of Nancy (Landsberger) Fieldman ("Depo. N. Fieldman"), at p. 6, ll. 11-24.

On or around November 21, 1984, Mr. Landsberger received a Notice of Deficiency from the IRS pertaining to the tax years of 1979 and 1980. See Depo. G. Landsberger, at p. 16, ll. 13-25, p. 17, ll. 1-17, and Exhs. 14 & 15. On January 4, 1985, Trust #2-988 transferred the Cortez property to Esther, a Trust under Trust #2-1703 (the "Esther trust"). See id. at p. 37, ll. 1-10, and Exh. 17; Sec. Decl. of G. Landsberger, at ¶5.

Nancy Fieldman, the Landsberger's daughter, and Jeffrey Fadden were co-trustees of the Esther trust. Depo. G. Landsberger, at p. 38, ll. 5-7. Fieldman never had a communication with Fadden, and knew of him only by her father's mention of him. See Depo. N. Fieldman, at p. 12, ll. 1-10. Fieldman became a co-trustee of the Esther trust at the behest of her father. See id. at p. 10, ll. 10-25.

In July of 1985, Fieldman signed a "Joint Tenancy Deed" as trustee of the Esther trust conveying the Cortez property to an unrelated third party. In June of 1986, the Esther trust used the proceeds of the Cortez property sale to purchase the residential real property located at 11815 North 91st Place , Scottsdale , Arizona (" 91st Place "). Sec. Decl. G. Landsberger, at ¶6; see also, Depo. N. Fieldman, at p. 17, ll. 23-25, p. 18, ll. 1-11, and Exh. 5. The Landsbergers then moved into the 91st Place property where they continue to reside today. See Sec. Decl. G. Landsberger, at ¶5; Depo. G. Landsberger, at p. 5, ll. 18-25, p. 6, ll. 1-2.

The Landsbergers do not pay rent to live on the 91st Place property. See Depo. G. Landsberger, at p. 56, ll. 21-23; Depo. J. Wilde, at p. 55, ll. 2-25, and p. 56, ll. 18-24. The Landsbergers pay all the utilities and maintenance costs of the property as they did with the Cortez property. See Depo. G. Landsberger, at p. 56, ll. 24-25, and p. 57, ll. 1-10; Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of John Wilde ("Depo. J. Wilde"), at p. 56, ll. 1-20.

On June 16, 1988 , Nancy Fieldman signed her resignation as trustee of the Esther trust. See Depo. N. Fieldman, at p. 29, ll. 2-10, and Exh. 27. She was replaced by Jimmy C. Chisum. Sec. Decl. G. Landsberger, at ¶9.

On September 29, 1988 , the Arizona Tax Court upheld the deficiency determination for the tax years of 1979 and 1980, and found Betty and Gerald Landsberger liable for deficiencies of $13,554.00 for the taxable year of 1979 and $55,631.00 for the taxable year of 1980, with a fraud addition of $34,593.00. See Court's Order of Sept. 29, 1995 , at p. 3. On February 13, 1989 , the IRS assessed Gerald and Betty Landsberger's deficiency for 1979 and 1980, plus interest, and sent a demand for payment to the Landsbergers. Id.

In November of 1995, the title to the 91st Place property was transferred to John Wilde and Eileen Lipari for "ten dollars and other valuable considerations." See Depo. J. Wilde, at p. 10, ll. 3-9, p. 59, ll. 9-25, p. 62, ll. 17-21, and Exhs. 10 & 11. John Wilde is a "very good friend" of Mr. Landsberger who also assists Mr. Landsberger in this litigation although he is not a lawyer. See Depo. J. Wilde, at p. 13, ll. 17-25, and p. 14, ll. 1-13. Mr. Wilde decided that the property should be transferred to him, and his friend Eileen Lipari, as a litigation tactic to so that they could join in this action as defendants and proceed pro se as the owners of the property. See id. at p. 59, l. 9-p. 60, l. 18. At the time of the transfer the property was worth in excess of $100,000. See id. J. Wilde, at p. 65, ll. 12-18.

Around October of 1995, the Arizona Tax Court ordered Mr. Landsberger incarcerated for failure to comply with the court's order compelling him to comply with a subpoena for tax records. Declaration of James A. Susa ("Susa Decl."), at ¶3. In an attempt to comply with the subpoena and to have him released from jail, in December of 1995, Mr. Landsberger's attorney submitted a document to James M. Susa, an Assistant Attorney General for the State of Arizona . Id. at ¶4. The document, signed under penalty of perjury on, lists the 91st Place property under Real Estate assets of Mr. Landsberger, and states that he is the one half owner of the property. See id., Exh. A. ²

III. STANDARD OF REVIEW

A court must construe a pro se litigant's pleadings and papers liberally. McGuckin v. Smith, 974 F.2d 1050, 1055 (9th Cir. 1992). Nevertheless, a pro se litigant is held to the same legal standard in determining whether summary judgment should be granted. See King v. Atiyeh, 814 F.2d 565, 567 (9th Cir. 1987). Where a motion to dismiss contains matters outside the pleadings, a court must construe the motion as a motion for summary judgment and give the parties "reasonable opportunity" to present all material pertinent to a motion for summary judgment. Fed. R. Civ. P. 12(b) (1995).

A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the nonmoving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c) (1995); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Jesinger v. Nevada Federal Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law determines which facts are material. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); see also Jesinger, 24 F.3d at 1130. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. The dispute must also be genuine, that is, "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.; see also Jesinger, 24 F.3d at 1130.

A principal purpose of summary judgment is "to isolate and dispose of factually unsupported claims." Celotex, 477 U.S. at 323-24. Summary judgment is appropriate against a party who "fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Id. at 322; see also Citadel Holding Corp. v. Roven, 26 F.3d 960, 964 (9th Cir. 1994). The moving party need not disprove matters on which the opponent has the burden of proof at trial. Celotex, 477 U.S. at 317. The party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see also Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 585-88 (1986); Brinson v. Linda Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995).

IV. DISCUSSION

Plaintiffs are attempting to foreclose on the tax lien on the 91st Place property for the tax assessments made on Defendants for the tax years of 1979 and 1980 reduced to judgment on February 13, 1989 . Section 6321 of Title 26 of the United States Code reads:

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

26 U.S.C. §6321. Defendants in this action allege that the 91st Place property belonged to another since before the time of the assessment through today, and that accordingly, the government cannot foreclose on the lien on the property.

The United States seeks to foreclose on the tax lien on the 91st Place property under three alternative theories. The government first argues that the Esther Trust was the nominee of the Landsbergers who held equitable title to the property on the date that the tax assessments were made. Accordingly, under 26 U.S.C. §6321, the government may foreclose on the property. Alternatively, Plaintiff argues that the transfer of the Cortez property from Trust #2-998 was fraudulent, and should be set aside under the Arizona Uniform Fraudulent Transfer Act, A.R.S. §44-1001, et seq. Finally, Plaintiff argues that any interest held in the property by John Wilde and Eileen Lipari is inferior to the Federal tax liens under 26 U.S.C. §6323(a) and Arizona property law.

Defendant makes three counter arguments. First, Defendant argues that Plaintiff impermissibly amends its Complaint in this action without leave of Court by including its claim under the Arizona Fraudulent Transfer Act. Secondly, Plaintiff argues that under Arizona law the "nominee/alter ego theory" can only arise against a corporation. In any event, the theory is not available where the transfer took place before the tax assessment. Finally, Plaintiff argues that assuming arguendo that either the nominee/alter ego theory or the fraudulent transfer theory can be raised, genuine issues of material fact exist precluding summary judgment.

A. Nominee/Alter Ego Theory

The "nominee/alter" ego theory is clearly viable in this instance even though the assets are held by a trust, and not a corporation. See e.g., F.P.P. Enterprises and D & S Trust v. United States [87-2 USTC ¶9536], 830 F.2d 114 (8th Cir. 1987); Neely v. United States [85-2 USTC ¶9791], 775 F.2d 1092 (9th Cir. 1985). The underlying principle is the "sham" nature of the arrangement. See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 117 ("A transaction will not be given effect according to its form if that form does not coincide with the economic reality and is, in effect, a sham."); Neely [85-2 USTC ¶9791], 775 F.2d at 1094 (sham transaction will not be recognized for tax purposes).

In addition, there is no requisite that the nominee/alter ego arrangement come into existence after the assessment of the tax liability. If the Court finds that the Esther trust was the alter ego of the Defendant existing at the time of the assessment simply to avoid creditors, then the timing of its creation has no import. See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 97 S.Ct. 619, 627 (1977) (under §6321 assets of alter ego are properly levied as assets to satisfy tax liability of tax payer) (F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 118 (property held by alter ego trusts not held by "separate persons" apart from taxpayer, and therefore, my be levied). The timing of the trust arrangement, may however, be a factor for the Court to consider in determining whether the trust is actually a nominee or alter ego.

"Property held in the name of an entity which is the alter ego of the taxpayer may be levied on to satisfy the tax liabilities of the taxpayer." F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.3d at 118; See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 97 S.Ct. 619, 627-28 (1977); Shades Ridge Holding Co, Inc. v. United States [89-2 USTC ¶9472], 888 F.2d 725, 728 (11th Cir. 1989). The Court may find that an entity is the alter ego of the taxpayer where:

(1) the taxpayer treats the property as it belongs to him, See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116, Shades Ridge Holding Co., Inc. [89-2 USTC ¶9472], 888 F.2d at 729;

(2) minimal or no consideration is paid by the entity in consideration for the property, see e.g., F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116;

(3) the taxpayer has expressed the intent to shelter the asset via the trust mechanisms, see, F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116,

(4) the taxpayer maintains "active" or "substantial" control over the operations and decisions of the property, see Valley Finance, Inc. v. United States [80-2 USTC ¶9554], 629 F.2d 162, 172 (1980), Shades Ridge Holding Co. [89-2 USTC ¶9472], 888 F.2d at 728 (11th Cir. 1989);

(5) a family or close relationship exists between the taxpayer and the holding entity, see Shades Ridge Holding Co. [89-2 USTC ¶9472], 888 F.2d at 729.

There is substantial evidence in this action that the Esther trust, as well as the many other Landsberger trusts, existed as the alter ego or nominee of Mr. Landsberger. He specifically states that the trusts were set up as "shells" for the purpose of keeping his property at an "arms length" to shelter them from potential creditors including the IRS. Nor has he attempted to argue any other reason for the existence of his trusts. Under these facts alone it is difficult to see how any court could find a question of fact with respect to the alter ego/nominee status of the Landsbergers' trusts.

Further, the Landsbergers continued to treat the property as their own at all times. See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 117. Despite living in the 91st Place property for over 10 years, they never paid rent, and they paid all the utilities, upkeep, and maintenance costs of the property. See Depo. G. Landsberger, at p. 56.

The main issue Defendants raise as a genuine issue of material fact is in relation to the contradicting testimony of Mr. Landsberger and his daughter, Nancy Fieldman, regarding her role as a trustee. Fieldman testifies that she became trustee at the request of her father, that she felt obligated to do so because she was living in their home, that she believed he chose her because she was family which allowed him to maintain control over the trust. Mr. Landsberger does not dispute any of these facts.

However, in addition, Fieldman testified that she performed no duties as trustee other than signing her name as trustee wherever and whenever her father requested, that she never had control over the trust or made any decisions regarding the transactions of the trust, that her father made all decisions regarding the trust including the decision to sell the Cortez property and purchase the 91st Place property. See Depo. Fieldman, at p. 12, ll. 11-18, pp. 13-15, pp. 17-25. She testifies that she never had any checks for the Trust account, and that she never saw nor had control over the $100,000 used by the trust as a downpayment on the 91st Place property. Id. at 23-25. Additionally, she testifies that Mr. Landsberger signed her signature on at least two documents conducting trust business without her knowledge or permission. See Depo. p. 27, ll. 23-25; p. 28, ll. 11-17; Exhs. 24 & 25.

Mr. Landsberger admits that he signed his daughter's signature on several occasions, but testifies that he did so to help her out and with her permission. He testifies that because she was inexperienced in her knowledge and duties as trustee, that she relied heavily on his advise and guidance as she carried out her duties. He also testifies that he drafted the majority of the trust documents in the record. Ultimately, however, Mr. Landsberger states that his daughter had control over the trust and could do whatever she wanted. Depo. G. Landsberger, at p. 43.

With respect to the Cortez property, Mr. Landsberger testifies that he had nothing to do with the transfer of the property, and that Mr. Fadden and his daughter, as co-trustees handled the transfer. The deed transferring the Cortez property to the third party, however, bears only the signature of Nancy Landsberger (Fieldman). Mrs. Fieldman testifies that she never had a conversation with Mr. Fadden. Plaintiff provides no evidence to support Mr. Fadden's involvement or otherwise controvert Mrs. Fieldman's statements that she never spoke with Mr. Fadden. From the evidence, the Court must conclude the no reasonable jury could find that Mr. Fadden was involved in the transaction where the relevant trust transaction documents bear only the signature of Nancy Landsberger as co-trustee, and avers that she never had a conversation with Mr. Fadden.

Nonetheless, accepting as true Mr. Landsberger's testimony, the remaining undisputed facts show that he maintained active and substantial control over the trust through his involvement. Moreover, the degree of control Mr. Landsberger maintained is not dispositive. There are a multitude of undisputed facts in this litigation supporting the conclusion that the Esther trust, and others, were alter egos of Mr. Landsberger. Mr. Landsberger's own admission as to his purpose and intent for creating and operating the trust is the most probative of all. Nowhere does Mr. Landsberger provide controverting evidence establishing any legitimate purpose for the trust. Accordingly, Plaintiff is entitled to summary judgment in its favor on the theory that the Esther trust was a mere nominee/alter ego of the Landsbergers at the time the tax was assessed in February of 1989.

B. John Wilde and Eileen Lipari's Interest

The Internal Revenue Code provides that a federal tax lien takes priority over an interest held by an alleged bonafide purchaser when the purchaser acquired the property with notice of the lien. 26 U.S.C. §6323(a). Arizona law on judgments is consistent with this principle. See Warren v. Whithall Income Fund, 823 P.2d 689 (Ariz. App. 1991); Hatch Companies contracting Inc. v. Arizona Bank, 826 P.2d 1179 (Ariz. App. 1991).

The property was conveyed to Wilde and Lipari for "ten dollars and other valuable considerations." See Depo. J. Wilde, at p. 10, ll. 3-9, p. 59, ll. 9-25, p. 62, ll. 17-21, and Exhs. 10 & 11. It is undisputed that Mr. Wilde and Ms. Lipari took title to the 91st Place property with full knowledge that the property was subject to the federal tax liens. See Depo. J. Wilde, at p. 59, l. 9-p. 60, l. 18. Accordingly, any interest these third parties may have in the property is clearly subordinate.

V. CONCLUSION

There is no genuine issue of material fact in dispute that precludes summary judgment in Plaintiff's favor on the issue of the trust functioning as the alter ego or nominee of Gerald Landsberger. In addition, there is no dispute that any interest in the 91st Place property the current title holders may have is subordinate to the federal tax liens. ³ Accordingly, Plaintiff is entitled summary judgment as a matter of law, and may foreclose on the 91st Place property accordingly. For the foregoing reasons,

IT IS THEREFORE ORDERED Defendant's Renewed Motion for Summary Judgment filed on September 3, 1996 is GRANTED. [doc. #106].

IT IS FURTHER ORDERED the United States shall lodge and serve a copy upon all Defendants, a Proposed Order and Decree of Foreclosure pursuant to 28 U.S.C. §2001 no later than October 31, 1997.

IT IS FURTHER ORDERED the Clerk of the Court shall MAIL copies of the Order to each Defendant and to all counsel of record.

¹ This motion was stayed pending resolution of a series of motions that may ultimately have affected its resolution. See Order of August 19, 1997 . The previous issues now resolved, the Court lifts the stay as to Defendant's renewed motion for summary judgment.

² Mr. Landsberger disputes the accuracy of this document on the grounds that the information was provided by his wife, and that she does not understand how the Trusts operate. See Depo. G. Landsberger, at pp. 85-88.

³ Because it is unnecessary to the resolution of this action, the Court declines to determine the remaining issues raised by the parties pleadings.

 

 

[98-1 USTC ¶50,350] Frank Krueger, Petitioner v. Sharon Kennedy, Chippewa County Register of Deeds, Michael Hayes Dettmer, United States Attorney, for the Western District of Michigan, and Oksana Xenos, District Counsel for the Internal Revenue Service, Respondents

U.S. District Court, West. Dist. Mich. , No. Div., 2:96-CV-109, 3/20/98, Adopting and remanding the Magistrate Judge's Report and Recommendation at 98-1 USTC ¶50,349

[Code Secs. 6321 and 6323 ]

Lien for taxes, validity of: Creation of lien: Priority: Conflicts of law.--An individual's claim that notices of federal tax liens recorded against his property were invalid under state (Michigan) law was dismissed because federal law governed the form and content of the notices. The notices were properly certified in accordance with federal law because they were filed on Form 668 and signed by facsimile signature of a revenue officer. Even if the notices had not been properly certified, the taxpayer lacked standing to challenge the certification because he did not qualify as a member of one of the classes protected under Code Sec. 6323(a) . Union Central Life Insurance Co., SCt (62-1 USTC ¶9103) , followed.

[Code Sec. 6323 ]

Lien for taxes, validity of: Notice of lien.--An individual's allegation that he did not receive a tax assessment or a notice and demand for payment was remanded to the Magistrate for further consideration of postdecision papers filed by the government. Those documents included an affidavit and exhibits demonstrating that notice and demand for payment had been sent to the taxpayer.

Frank Krueger, pro se.

OPINION ADOPTING IN PART MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION

QUIST, District Judge:

The Court has before it Petitioner Frank Krueger's ("Krueger") Response To Magistrate's Decision and Respondent United States' Objection To Report And Recommendation, in which the parties each object to certain portions of Magistrate Judge Timothy P. Greeley's report and recommendation in this matter. In this case, Krueger, acting pro se, filed a petition for writ of mandamus asking that Respondent Sharon Kennedy ("Kennedy"), Register of Deeds for Chippewa County , be ordered to remove several federal tax liens recorded against Krueger's property. Krueger's asserted ground for removal of the liens was that they failed to comply with M.C.L. §211.664. The Magistrate Judge found that Krueger's claim regarding the invalidity of the notices of lien should be dismissed because the notices complied with federal law and Krueger did not have standing to challenge the form of notice. However, the Magistrate Judge found that the case should not be dismissed because an issue remained regarding whether Krueger receive a tax assessment or notice and demand for payment.

The Court has conducted a de novo review as required by 28 U.S.C. §636(b)(1) and concludes that the Magistrate Judge correctly found that Krueger's claim regarding the invalidity of the notices of lien under Michigan law should be dismissed because federal law governs the form and content of the notice. See United States v. Union Central Life Ins Co. [62-1 USTC ¶9103], 368 U.S. 291, 294, 82 S.Ct. 349, 351 (1961). With regard to the Magistrate Judge's conclusion that dismissal was not proper, the Court notes that the Government has addressed Krueger's allegation that he did not receive an assessment or notice and demand for payment in its objection to the Report and Recommendation. In addition, the Government has also submitted the affidavit of John Lindquist, which includes several exhibits that show notice and demand for payment was sent to Krueger. The Magistrate Judge did not have the benefit of these documents at the time he issued his Report and Recommendation. Therefore, the Court will remand this matter to the Magistrate Judge for consideration of the post-decision papers filed by the Government.

For the foregoing reasons, the Court will adopt the Magistrate Judge's Report and Recommendation in part on Krueger's claim that the notices of lien failed to comply with M.C.L. §211.664. The Court will remand the case to the Magistrate Judge for further consideration of whether Krueger's claim that he did not receive a tax assessment or notice and a demand for payment should be dismissed, in light the Government's post-decision filings.

An Order consistent with this Opinion will be entered.

 

 

[94-2 USTC ¶50,363] United States of America , Appellee-Cross-Appellant v. Kelly M. McCombs, Rob ert J. McCombs, Nancy Ellison, Mary McCombs, Defendants-Appellants-Cross-Appellees, Jon Ellison, Columbia Savings & Loan Association, State of New York , Defendants

(CA-2), U.S. Court of Appeals, 2nd Circuit, 93-6122, 93-6144, 7/13/94, 30 F3d 310, Affirming, vacating, remanding and reversing an unreported District Court decision

[Code Sec. 6672 ]

Trust fund recovery penalty: Burden of proof.--The lower court did not err when it found one of the two shareholders in a restaurant corporation liable for the trust fund recovery penalty even though the government presented no evidence other than the tax assessment. The magistrate judge properly accorded the assessment the presumption of correctness, and then shifted the burden of persuasion to the taxpayer to prove by a preponderance of the evidence that the assessment (including the elements of liability) was incorrect. Because the judge found the taxpayer's testimony "incredible" on the issue of responsibility and supportive of the government's case on the issue of willfulness, the judge properly concluded that the taxpayer failed to carry her burden of persuasion on either of the elements underlying liability for the trust fund recovery penalty. The taxpayer has the burdens of production and persuasion whether he or she challenges the penalty by seeking a refund of partial payment or in a collection action where the taxpayer is the defendant.

[Code Sec. 6672 ]

Trust fund recovery penalty: Responsible person: Willfulness.--The lower court did not err when it found one of two shareholders in a restaurant corporation liable for the trust fund recovery penalty. The taxpayer was properly found to be a responsible person because she had signatory authority for the corporation; owned 60% of its stock; testified in a deposition, contradicted at trial, that she was the corporation's bookkeeper; testified at trial that she made "sure that everyone got paid;" and could not avoid her responsibility by delegating it to others. Similarly, the magistrate judge's finding of willfulness was not in error. Although the taxpayer claimed ignorance of financial affairs, she was one of only two corporate officers, acknowledged that she paid employees, occasionally signed checks, admit ted that she knew that the withholding taxes had not been paid and took no action to further investigate nonpayment.

[Code Sec. 6323 ]

Tax liens: Purchaser.--The lower court erred when it determined that a delinquent taxpayer had fraudulently transferred property under state ( New York ) law to her children and set aside the conveyance. Although the lower court's finding that the children were "purchasers" under state law (i.e., paid adequate consideration) was "helpful," it should have applied federal law and determined whether the children were federally protected "purchasers" under Code Sec. 6323(a) . The judgment of foreclosure on a subsequent tax lien was also vacated and held in abeyance until the fraudulent issue was resolved on remand.

[Code Sec. 6323 ]

Tax lien: Notice or knowledge of lien.--The lower court erred when it determined that the government's federal tax lien was superior to the interest of a divorced father who had lent his daughters money to purchase property from their mother in exchange for a mortgage on the property. The father was entitled to invoke the protection of Code Sec. 6323(a) because he did not have record notice of the tax lien assessed against the property before the transfer from the mother to the daughters; record notice, rather than actual notice, of the tax lien was required to deprive a person of the protection of Code Sec. 6323(a) . Although the father recorded his mortgage after the government recorded the lien, the lien was recorded outside the chain of title and ran afoul of the Code Sec. 6323(f)(4) notice requirements, thereby triggering Code Sec. 6323(a) protection.

Patrick H. Nemoyer, United States Attorney, Rochester, N.Y., Michael L. Paup, Acting Assistant Attorney General, Marion E.M. Erikson, Gary R. Allen, Ann Belanger Durney, Department of Justice, Washington, D.C. 20530, for U.S. Arnold R. Petralia, Petralia, Webb & O'Connell, P.C., 240 Raynolds Arcade, Rochester, N.Y., for defendants-appellants.

Before: MESKILL, MAHONEY and WALKER, Circuit Judges.

MESKILL, Circuit Judge:

This is an appeal from a judgment of the United States District Court for the Western District of New York, Fisher, M.J., imposing liability for unpaid withholding taxes under 26 U.S.C. §6672 on defendant-appellant Nancy McCombs-Ellison (Nancy), finding federal tax liens on Nancy's former property prior to the interests of defendants-appellants Kelly McCombs (Kelly), Mary McCombs (Mary), and Rob ert McCombs ( Rob ert), and ordering that property foreclosed by sale pursuant to the tax liens. See United States v. McCombs-Ellison, 826 F.Supp. 1479 (W.D.N.Y. 1993). For the reasons stated below, we affirm the part of the judgment imposing taxpayer liability on Nancy under 26 U.S.C. §6672 and upholding the validity of the 1982 federal tax lien thereunder; we vacate the judgment as to the setting aside of the conveyance of the property from Nancy to Mary and Kelly as fraudulent under N.Y. Debtor & Creditor Law §§273 and 276 and the foreclosing of the 1982 and 1984 tax and remand for further proceedings consistent with this opinion; and we reverse the judgment determining that the federal tax liens are prior to the interests of Rob ert in the property.

BACKGROUND

In 1962, Rob ert and Nancy purchased property at 74 Meadow Creek Lane (Property) in Monroe County , New York . Nancy and Rob ert, who were legally married at the time, financed the Property by giving a $30,000 mortgage to Columbia Banking, Savings and Loan Association (Columbia Bank). After Nancy and Rob ert divorced, Rob ert conveyed his interest in the Property to Nancy by quitclaim deed dated May 5, 1978 .

In 1979, Nancy entered into a restaurant business venture with Jon Ellison (Ellison). Ellison and Nancy incorporated Spinnaker Pole Corporation (Spinnaker Pole) with Nancy as president. In addition, Ellison and Nancy formed another business entity entitled The Port and Starboard (P&S). Nancy controlled 60 percent of both entities while Ellison owned the remaining 40 percent.

On May 14, 1979 , Nancy and Ellison, through P&S, purchased the Edgewater Restaurant (Restaurant) for $235,000 from its owners (hereinafter referred to as the "sellers"). Under the terms of the purchase agreement, Nancy made a $50,000 down payment on the Restaurant and the balance of the purchase was then financed through a purchase money mortgage given to the sellers. Nancy obtained the down payment by granting Marine Midland Bank (Marine Midland) a second mortgage on her Property at Meadow Creek Lane . In turn, P&S leased the Restaurant to Spinnaker Pole in consideration of monthly rental payments of $2,724.75.

The Restaurant struggled. Eventually, P&S was unable to make its monthly mortgage payments to the sellers. On April 10, 1981 , the sellers filed a foreclosure action. On April 24, 1981 , P&S filed for Chapter 11 bankruptcy protection. In September of that year, Spinnaker Pole also filed for bankruptcy.

Spinnaker Pole failed to pay withholding and unemployment taxes of the Restaurant employees for the period October 1, 1979 through September 30, 1981 . On June 14, 1982 , the Internal Revenue Service (IRS) assessed tax liability of $26,925.79 (1982 assessment) for the unpaid taxes against Nancy and Ellison pursuant to 26 U.S.C. §6672 .

On September 15, 1982 , eight days after an IRS agent allegedly left a "calling card" at her house, Nancy conveyed the Property at 74 Meadow Creek Lane to her daughters, Mary and Kelly, by warranty deed. The deed, which was recorded on September 16, 1982, provided that Kelly and Mary "hereby assume and agree to pay, as part of the consideration for this conveyance" the unpaid principal with interest on both the Columbia Bank and Marine Midland mortgages remaining on the Property. (emphasis added). At the time of the conveyance, the outstanding balances on the Columbia Bank and Marine Midland mortgages were $10,469.29 and $47,328.65, respectively.

On September 22, 1982 , the government filed notice of and recorded in the Monroe County Clerk's Office a federal tax lien on the Property for the amount of unpaid taxes set forth in the 1982 assessment. On April 16, 1984 , moreover, the IRS issued a second tax assessment pursuant to section 6672 imposing tax liability for $3,091.28 (1984 assessment) against Nancy and Ellison for additional unpaid withholding and unemployment taxes incurred by Spinnaker Pole from October 1, 1981 through June 30, 1982 . Notice of a federal tax lien on the Property for liabilities arising from the 1984 assessment was filed and recorded on June 21, 1984 in the Monroe County Clerk's Office.

In November 1984, Kelly and Mary borrowed $53,000 from their father, Rob ert. In return, Kelly and Mary gave Rob ert a mortgage on the Property for the corresponding amount of $53,000 which was recorded on January 24, 1985 . The daughters used the funds in part to pay off in full the outstanding balance of the second mortgage on the Property held by Marine Midland. As of July 10, 1985 , moreover, the outstanding balance on the first mortgage held by Columbia Bank had been paid down by the daughters to approximately $6,000.

On November 24, 1987, the government filed this action against Nancy, Mary, Kelly and Rob ert (collectively "appellants"), as well as Ellison, Columbia Bank, and the State of New York seeking to reduce the federal tax liens to judgment and foreclose on the property. Specifically, the government sought a judgment (1) against Nancy, pursuant to section 6672 for 100 percent of the unpaid tax liability incurred by Spinnaker Pole, (2) setting aside the conveyance of the Property from Nancy to her daughters as fraudulent, and (3) ordering that the federal tax liens be foreclosed and that the property be sold free and clear of any interests held by any of the appellants.

The parties consented to try the case before a United States magistrate judge pursuant to 28 U.S.C. §636(c) . At a trial presided over by Magistrate Judge Fisher, the government's case consisted of an opening statement and 23 pieces of documentary evidence. As to the theory of its case, the government argued in its opening statement:

The one final distinction that I would make, Your Honor, is that we attempt to foreclose our tax liens on two separate theories. The fraudulent conveyance theory really only applies to the second assessment, which was approximately a $3700 assessment in 1984. . . . With respect to the first assessment, which was in June of 1982 for approximately $27,000, we take the position, since that assessment preceded the conveyance, that our tax liens were on the property at the time of the conveyance. ... [N]o fraudulent conveyance theory is necessary to prevail on foreclosing our tax liens with respect to the first assessment. We only need to establish that the daughters, Mary and Kelly, were not bonafide purchasers under 26 U.S.C. 6323A [sic]. So it's pretty much the same elements of the fair consideration under the fraudulent conveyance analysis but the insolvency analysis does not apply in a straight foreclosure of tax lien theory.

(emphasis added).

Appellants, moreover, did not object to the admission of the government's documents into evidence, with one exception not relevant here, but instead reserved their right to impeach the validity of the documents' contents through cross-examination of the witnesses who prepared the documents. The magistrate judge, apparently also under the impression that the government would be calling witnesses, received 22 of the documents into evidence "subject to the testimony that may develop later at trial and any objections to admission developed by that testimony would have to be developed at the initiative of the person or the party that objects." Appellants, however, were unable to implement their strategy of impeaching the validity of the documents because, much to their surprise, as well as to the surprise of the court, the government called no witnesses and immediately rested its case-in-chief on the submission of the documents.

Following the close of the government's case, appellants immediately moved for summary judgment or in the alternative to dismiss the complaint on the ground that the government had failed to establish a prima facie case of tax liability against Nancy or the fraudulent conveyance claim. The magistrate judge reserved decision on those motions.

For their part, appellants called only one witness, Nancy. Nancy testified extensively about her involvement and responsibilities at Spinnaker Pole. At the conclusion of Nancy 's testimony, the appellants rested and renewed their claim that the government had failed to establish a prima facie case at trial on any of its claims and moved for a judgment as a matter of law. Again, the magistrate judge reserved decision, preferring that the parties file post-trial briefs.

Following the submission of memoranda and post-trial oral argument, the magistrate judge rendered a verdict in favor of the government ordering foreclosure of the liens at a judicial sale. In an opinion and order, see 826 F.Supp. 1479, the magistrate judge found that (1) Nancy was liable for unpaid taxes under section 6672 , (2) the federal tax liens were prior to any of the interests held by appellants in the Property because the conveyance of the Property from Nancy to her daughters, although recorded prior to the recording of the 1982 federal tax lien, was, nevertheless, fraudulent under New York law and as such should be set aside, and (3) Rob ert was not entitled to recover his interests in the Property under any legal or equitable theory. This appeal followed.

DISCUSSION

This appeal requires us to sort through a maze of issues governed by a hybrid of state and federal law. In its simplest terms, this appeal challenges a judgment of foreclosure by sale on property pursuant to federal tax liens arising out of an assessment against the former property owner for personal tax liability under section 6672 . Appellants attack not only the finding of the underlying tax liability and validity of tax liens arising thereunder but also the district court's determination of the priority of the federal tax liens on the Property. The case is further complicated by the government's reliance on different theories of foreclosure with respect to each of the two tax liens at issue. Accordingly, we begin with the issue of liability itself under section 6672 and proceed from there to examine the myriad of other issues raised as becomes necessary.

I. Standard of Review

As a preliminary matter, the scope of our review of a bench trial is governed by a number of competing considerations. While we review issues of law de novo, our review of a district court's "[f]indings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous." Fed. R. Civ. P. 52(a); see also 9 Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure §2587 (1994 Supp.) (noting that the deference to be given to inferences drawn by a trial court from undisputed documentary evidence is now settled as clearly erroneous) (Wright & Miller). In a bench trial, however, "where the functions of fact-finding and exposition of law are performed by the same person, the line between the functions is not always distinct." American Soc'y of Composers, Authors and Publishers v. Showtime/The Movie Channel, 912 F.2d 563, 569 (2d Cir. 1990). We are cognizant, moreover, of the continuing disagreement among the federal courts as to Rule 52(a)'s operation on those issues categorized as mixed questions of law and fact, see generally 9 Wright & Miller, §2589 (and cases cited therein). But cf. American Soc'y, 912 F.2d at 569 n.11 (preferring "to consider issues either as matters of fact or of law" and thus, to avoid "the unhelpful category of 'mixed question of law and fact'"). Suffice it to say, therefore, that the degree to which Rule 52(a) governs our review on this appeal is `[a]n area over which "law" and "fact" have battled for over a century.'" In re Hygrade Envelope Corp., 366 F.2d 584, 588 (2d Cir. 1966) (alteration in original) (quoting Ellerman Lines, Ltd. v. THE PRESIDENT HARDING, 288 F.2d 288, 292 (2d Cir. 1961)).

In any event, our cases make clear that "the factual component of the issue before the [trial court in the context of a bench trial] does not render all aspects of [its] decision-making subject to review under the 'clearly erroneous' standard." American Soc'y, 912 F.2d at 569; see also United States Fidelity & Guar. Co. v. Royal Nat'l Bank, 545 F.2d 1330, 1333 (2d Cir. 1976); In re Hygrade Envelope, 366 F.2d at 587-88. This is so because findings made in the context of a bench trial might be derived from legally impermissible factors, the failure to consider legally relevant factors, the application of incorrect legal standards, or the misapplication of correct legal standards. American Soc'y, 912 F.2d at 569. While it is certainly possible for these types of issues to arise in the context of a jury trial, "such matters are normally resolved by rulings on admissibility of evidence and by jury instructions." Id. Thus, "the degree of appellate abnegation toward the application of law to fact differs according to the identity of the fact finder." In re Hygrade Envelope, 366 F.2d at 588.

Finally, any review of a trial court's findings made in the context of a bench trial requires us to "comport with good sense and institutional allocations of power." Id. To that end, we "must respect findings of the trial judge as to what in fact happened and in addition . . . give due weight to his superior opportunity to acquire the true feel of the case." Id. At the same time, "when the issue is [the trial court's] application of a legal standard to facts undisputed or reasonably found" our review is not limited by the clearly erroneous standard and we will not shy away from plenary review where, as here, we are concerned "that the result does not jibe with the applicable rule of law." Id.

II. Taxpayer Liability Under Section 6672

We turn first to the finding of Nancy 's tax liability under section 6672 , the liability disputed by appellants but relied on by the government to encumber the Property.

Section 6672(a) provides, in pertinent part:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall ... be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

26 U.S.C. §6672(a) . The statute requires, therefore, that two elements be established before personal liability for unpaid withholding taxes attaches: "[F]irst, the individual must be a person responsible for the collection and payment of withholding taxes, i.e., he must have the authority to direct the payment of corporate funds; second, the individual's failure to comply with the statute must be willful." Hochstein v. United States [90-1 USTC ¶50,205 ], 900 F.2d 543, 546 (2d Cir. 1990).

Appellants contend that the evidence at trial was insufficient to support a finding of liability under section 6672 . Although they do not attack the assessment itself, they contend that the evidence was insufficient to support a finding that Nancy was a "responsible person" and/or that she acted "willfully" within the meaning of the statute. Specifically, they argue that Nancy 's testimony at trial was sufficient to rebut the presumption of correctness accorded the government's prima facie case for section 6672 liability set forth in its tax assessment. Appellants insist, therefore, that, by virtue of Nancy's testimony at trial that she had no responsibility for paying Spinnaker Pole's employee withholding taxes and was unaware that those taxes had not been paid, the government should have been required, at the very least, to come forward with additional proof beyond the assessment itself to support its claim for tax liability.

In concluding that the government established liability under section 6672 against Nancy, the magistrate judge relied primarily on the evidentiary weight accorded the tax assessment itself. Applying the settled rule that a tax assessment is accorded a presumption of correctness, the court followed a plethora of case law which places the burden of production as well as the burden of persuasion on the individual assessed the tax to prove by a preponderance of the evidence that the assessment is incorrect. 826 F.Supp. at 1486. Because the magistrate judge found Nancy 's testimony to be "incredible" on the issue of responsibility and supportive of the government's case on the issue of willfulness, the magistrate judge concluded that Nancy failed to carry her burden of persuasion on either of the elements underlying section 6672 liability. Id. at 1486-90. The magistrate judge determined, therefore, that the government was not required to go forward with evidence beyond the tax assessment itself to establish Nancy 's liability for the unpaid taxes as a matter of law. We agree.

A. Allocation of Burden of Proof

In general, a government tax assessment is entitled to a presumption of correctness. See United States v. Janis [76-2 USTC ¶16,229 ], 428 U.S. 433, 440 (1976); Bull v. United States [35-1 USTC ¶9346 ], 295 U.S. 247, 259-60 (1935). A taxpayer who wishes to challenge the validity of the assessment, moreover, "bears the burdens both of production and of persuasion." Ruth v. United States [87-2 USTC ¶9408 ], 823 F.2d 1091, 1093 (7th Cir. 1987) (citing Janis [76-2 USTC ¶16,229 ], 428 U.S. at 440); see also Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159-60 (3d Cir. 1971).

In the context of section 6672 , however, courts have extended the presumption of correctness not merely to the amount of the assessment itself but also to the existence of the two elements, responsibility and willfulness, that underlie the imposition of this type of tax liability. Hochstein [90-1 USTC ¶50,205 ], 900 F.2d at 546; see also Honey v. United States [92-1 USTC ¶50,253 ], 963 F.2d 1083, 1087 (8th Cir.), cert. denied, 113 S.Ct. 676 (1992); Ruth [87-2 USTC ¶9408 ], 823 F.2d at 1093; Calderone v. United States, 799 F.2d 254, 258 (6th Cir. 1986); Psaty [71-1 USTC ¶9346 ], 442 F.2d at 1160.

In United States v. Lease [65-2 USTC ¶9478 ], 346 F.2d 696, 701 (2d Cir. 1965), we set forth the manner by which the presumption operates:

[O]verall, the Government has the burden of coming forward and persuading the trier that the taxpayer has or had a tax liability. If not challenged the assessment establishes that liability. A taxpayer's challenge must persuade the trier by a preponderance of the evidence that the assessment is erroneous. The Government then [once the taxpayer meets her burden] must still persuade the trier that on the basis of all the evidence there was tax liability--perhaps in a different amount than initially asserted--for which the taxpayer was responsible.

We recently simplified the operation of that presumption in the section 6672 context to one in which a taxpayer "bears the burden of proving by a preponderance of the evidence that one or both of these elements [willfulness and responsibility] [are] not present" in order to defeat tax liability under section 6672 . Hochstein [90-1 USTC ¶50,205 ], 900 F.2d at 546 (emphasis added).