Opinion
No. C98-5432
January 31, 2001
ORDER GRANTING THE UNITED STATES MOTIONS TO AMEND COMPLAINT AND FOR SUMMARY JUDGMENT
This case is the result of the consolidation of two pre-existing cases. In USA v. Reid, C99-5565, the United States brought suit to reduce outstanding tax assessments to judgment and to foreclose its tax liens on the property of Albert C. Reid and Bodil Reid. In Albert C. Reid v. United States and C. Dudley; C98-5432, Mr. Reid brought suit against the United States for unlawful collection activities. The suits are now combined under the latter title and number and the court will refer to the parties by their roles in the titled suit. The court has jurisdiction over these actions pursuant to a number of statutory grants, 26 U.S.C. § 7402, 7403 and 28 U.S.C. § 1340, 1345.
Although the delinquent tax account is in the name of Mr. Reid, Mrs. Reid is a party to the suit by her status as his spouse and her community property interest in both the debts and the properties sought to satisfy such debts. The properties at issue here are the residence of the Reids, 22759 Jefferson Point Road, NE, Kingston, Washington, 98346 (the residence) and 3435 Longhorn Drive NW, Bremerton, Washington, 98312 (the lakefront property).
This matter comes before the court on cross motions for summary judgment and a motion by the United States to amend its complaint. Plaintiff, Albert C. Reid, moves for partial summary judgment asking the court to declare that the levy of Reid's military pension by the Internal Revenue Service (IRS) resulted in unlawful and unauthorized collection of exempt income. Plaintiff seeks to recover damages under 26 U.S.C. § 7433.
Defendant United States seeks leave to amend its complaint to add the "Truth in Life Society" as a defendant and to set aside the transfer of the lakefront property to the society as fraudulent. The "Truth in Life Society" is the transferee the lakefront property previously owned by Albert and Bodil Reid. This transfer was completed without consideration in 1996. after the collection efforts of the United States began. Defendant also seeks summary judgment on its claims described above and dismissal of Mr. Reid's complaint.
1. Summary Judgment Standard
Rule 56 of the Federal Rules of Civil Procedure governs summary judgment. Summary judgment is appropriate when there is no genuine issue of material fact. Tzung v. State Farm Fire Casualty Co. v, Martin, 872 F.2d 319, 320 (9th Cir. 1989). During the analysis of a summary judgment motion, the burden of proof will shift between the moving and defending parties. FRCP 56, Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548 (1986). Initially, the moving party bears the burden of coming forward and identifying "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any" which demonstrate the absence of a genuine issue of material fact. Id. At that point, the burden shifts to the non-moving party, who must go beyond the pleadings and designate "specific facts showing that there is a genuine issue for trial." Id.
2. The Plaintiff's Motion for Partial Summary Judgment
The Plaintiffs motion for partial summary judgment states that the issue for resolution is whether 26 U.S.C. § 6334(a)(9) applies equally to retirement benefits and wages salary or income. He argues that if the court agrees with this premise, then the Defendant is liable for unauthorized collection of his retirement benefits. Plaintiff relies on Arford v. United States, 934 F.2d 229 (1991). However, Arford is distinguishable from the case at bar. In Arford, the plaintiffs sued the government for quiet title to and recovery of retirement pay seized as a result of an IRS levy served on the Retirement Pay Division of the Air Force. Id. at 231. The Court of Appeals held that the Arfords had the right to challenge the procedural aspects of the lien, but not the underlying merit of the tax assessments which lead to the lien. Id (emphasis added).
Here, plaintiffs procedural challenge goes to whether or not he was entitled to any exemptions from the levied amount. Plaintiff claims that his "married, filing jointly" tax status and the age of Plaintiff and his spouse being over 65 create exemptions. However, in its response. the Defendant submits a copy of a Health Benefits Registration Form, received in response to a subpoena from Office of Personnel Management which shows that both the Plaintiff and his wife were born in 1934.
Adding 65 years to 1934 results in a total of 1999. During the period of time in question for this lawsuit, Plaintiff and his wife would not have been entitled to an exemption for being 65 years old, since they were not that age. The fact that each of them is over the age of 65 currently is irrelevant to this lawsuit.
To succeed in a claim for damages under 26 U.S.C. § 7433(a), the Plaintiff must demonstrate that his harm was a result of the reckless or intentional disregard of the internal Revenue Code, or any regulations promulgated under it, by an officer or employee of the Internal Revenue Service. See 26 U.S.C. § 7433(a) (1986). Plaintiff alleges that the IRS acted negligently in their levy of his retirement benefits, however, he does not support that allegation with any evidence, nor would simple negligence meet the standard required by the statute.
In response, the Defendant produces evidence of a variety of income sources to the Reids', which the revenue officer in charge of collections on their account was aware of. See Declaration of Dana F. Pellman. Further, since levy exemptions are measured against total income, not each income source individually, there is not a clear showing that Mr. Reid would have been entitled to any exemption amount. See 26 C.F.R. § 301.6334-2 and -3.
Plaintiff bears the burden of proof on his motion for partial summary judgment, and the court must view the evidence presented in the light most favorable to the non-moving party. The United States has presented evidence, both documentary and testimonial, which tends to rebut the allegation that the collection actions of the IRS included any intentional or reckless disregard of the internal Revenue Code or regulations promulgated thereunder. Therefore, the motion for partial summary judgment by Mr. Reid must be DENIED.
3. The Defendant's Motion to Amend Complaint
The United States seeks the leave of the court to amend their complaint to add the "Truth in Life Society" as a defendant. The "Truth in Life Society" is the beneficiary of the transfer of certain real property previously owned by Mr. and Mrs. Reid. The Reids transferred title of the lakefront property by quitclaim deed, for no consideration to the "Truth in Life Society" on November 4, 1996. The "Truth in Life Society" is headquartered at the Reids' residence. Mrs. Reid admitted during her deposition that she and her husband were members, but did not put forward any other information about the society. Mr. Reid refused to answer any questions about the society on Fifth Amendment grounds.
The United States discovered the transfer of the lakefront property during a title search of Kitsap County records completed after the deposing the Reids. The United States brings this action under 26 U.S.C. § 7403 which is titled "Action to Enforce Lien of Subject Property to Payment of Tax." Subpart (b) of this section requires that "All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto." Thus, the "Truth in Life Society" must be made a party since it is recorded as holding an interest in the lakefront property.
FRCP 15(a) states that after a response to a pleading, the original pleading may only be amended by leave of court or written leave from the adverse party, further, that "leave shall be freely given when justice so requires." "[he Ninth Circuit interprets Rule 15(a) "with extreme liberality." DCD Programs v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). The Ninth Circuit reviews a decision granting leave to amend for abuse of discretion, in light of a policy which favors amendment. Plumeau v, School Dist. No. 40, 130 F.3d 432, 439 (9th Cir. 1997). Amendment is Favored even when the motion will add causes of action or parties. Acri v. International Ass'n. 0f Machinists, 781 F.2d 1393, 1398-99 (9th Cir.), cert. denied, ___ U.S. ___, 107 S.Ct. 73, 93 L.Ed.2d 29 (1989).
A motion to amend is evaluated according to four factors: bad faith, undue delay, prejudice, and futility. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). This amendment is not sought in bad faith (for example, to destroy jurisdiction in a diversity action as in Sorosky v. Burroughs Corp., 826 F.2d 794 (9TH Cir. 1987)). In this case, the "Truth in Life Society" will not be unduly prejudiced because it has had constructive notice and knowledge of this suit through two of its members (Mr. and Mrs. Reid). This amendment is clearly not futile, as the society holds an interest in the property that the United States seeks to foreclose upon.
The Reid's primary argument against granting this motion is an allegation of unjust delay on the part of the United States. However, as noted in the United States' motion, the Reids have not been forthcoming about the existence of the "Truth in Life Society" or their roles within the society, nor have they advanced any evidence to contradict the allegation that the society is merely an alter ego. The United States discovered that the "Truth in Life Society" held an interest in the lakefront property only a month before the motion to amend was filed — a month is not an undue delay.
The court reviewed the authority cited by the Reids in their opposition to this motion, however, each of those cases dealt with questions of joinder, which relates to a separate rule and standard under the rules of civil procedure.
In any event, the Ninth Circuit states that delay alone is not sufficient to justify a denial of motion to amend. DCD Programs, 826 F.2d at 187. In fact, some of the delay in this case results from the Reid's motion for an extension of time to reply to the United States' motion to amend complaint and for summary judgment.
In light of the Reid's failure to timely disclose the existence of the "Truth in Life Society"; its interest in the lake front property which is a subject of this action and the United States timely effort to add the newly discovered evidence to the complaint, the motion to amend is GRANTED.
4. The Defendant's Motion for Summary Judgment
The United States asks for summary judgment on its claims: (1) to avoid the 1996 transfer of the lakefront property to the "Truth in Life Society" as fraudulent, to establish and foreclose its tax liens on the property; (2) to reduce tax assessments from 1987 and 1992 through 1995 to judgment; and (3) to foreclose tax liens against the real property of Albert Reid.
a. Transfer of Property
In 1996 the Reids transferred their interest in the lakefront property via a Quit Claim Deed to the "Truth in Life Society." The "Truth in Life Society" is headquartered at the same address as the Reids residence. This transfer was made for no consideration. The United States asks the court to set aside this transfer as fraudulent, under the Uniform Fraudulent Transfer Act (UFTA) as adopted by Washington State at RCW 19.40.011, et seq.
The UFTA, at section 19.40.041, provides in pertinent part:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) With actual intent to hinder, delay or defraud any creditor of the debtor.
A fraudulent transfer can be defined as "a transaction by means of which the owner of [real or personal] property has sought to place the [land or goods] beyond the reach of his or her creditors . . ." Freitag v. McGhie, 133 Wn.2d 816, 821-22, 947 P.2d 1186 (1997). Under the UFTA, the burden of proof rests upon the party alleging the fraudulent transfer. Sedwick v. Gwinn, 73 Wn. App. 879, 885, 873 P.2d 528 (1994). Proof of actual intent to hinder, delay or defraud must be shown by clear and satisfactory proof. Clearwater v. Skyline Construction Co., Inc., 67 Wn. App. 305, 321, 835 P.2d 257 (1992), review denied, 121 Wn.2d 1005, 848 P.2d 1263 (1993). The burden is on the party alleging a fraudulent transfer, but the burden shifts to the defendant to prove good faith when the consideration for the transfer is shown to be grossly inadequate. Workman v. Bryce, 50 Wn.2d 185, 189, 310 P.2d 228 (1957). Any transfer made by a debtor with the intent to delay or defraud a creditor is subject to being set aside. Rainier Nat'l Bank v. McCracken, 26 Wn. App. 498, 506, 615, 615 P.2d 469 (1980), review denied, 95 Wn.2d 1005 (1981).
The UFTA lists a number of badges of fraud for the court's consideration in determining whether a debtor acted with actual intent to delay or defraud at RCW 19.40.041(b). The United States argues that the actual intent of the Reids to delay or defraud is demonstrated by a number of these badges, including: (1) transfer to an insider, (2) debtor retains possession or control after transfer, (3) transfer concealed. (4) prior to transfer, debtor subject forced collection action, (5) transfer occurred shortly before or after substantial debts were incurred, and (6) transfer made for no consideration.
In support of its contention, the United States submitted the following evidence. In her deposition, Mrs. Reid admitted that she and her husband were members of the "Truth in Life Society", but declined to name any other members or to describe the nature and purpose of the society. Mr. Reid refused to answer any questions about the society during his deposition on Fifth Amendment grounds. The Quit Claim Deed filed with the Kitsap County Auditor's office shows the society's address to be the same as the Reids residence. Mrs. Reid stated in her deposition that she and her husband owned the lakefront property, while the Answer to the United States' complaint denies ownership. Mr. Reid was aware of the collection activities on his account prior to the date of the transfer, as evidenced by his letter to the Kitsap County Auditor dated June 8, 1995. The transfer was executed before Mr. Reid filed his tax returns for years 1992-1995. The Quit Claim Deed states that the transfer was made "without consideration".
The Reids have not put forward any evidence to counter the allegations or proof of the United States, even though the lack of consideration on this transfer was enough to shift the burden of proof to them. See Workman, supra. Therefore, the court finds that the transfer of the lakefront property was made with the intent to delay or defraud; that the United States may avoid this transfer as fraudulent and proceed to establish and foreclose its tax liens on the property.
b. Tax Assessments
The United States submits copies of Forms 4340 Certificates of Assessments and Payments. Generated under seal and signed by an authorized delegate of the Secretary' of the Treasury, Forms 4340 are admissible in to evidence as self-authenticating official records of the United States carrying a presumption of correctness. Hughes v. United States, 953 F.2d 531 (9th Cir. 1992), Rossi v. United States, 755 F. Supp. 314, 318 (D. Or. 1990).
Mr. Reid argues that the presumption of correctness does not apply in cases of unreported income. He relies primarily upon United States v. Janis, 428 U.S. 433, 96 S.Ct. 3021 (1976) and Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979). In Janis, police acting on a warrant seized various records from the Plaintiff which contained the "gross volume" of his gambling activities for a 77 day period during which he had not filed a tax return. Janis, supra. The IRS used the seized information as the basis for a civil collection suit. Id. In spite of the fact that the warrant and seizure was eventually held to be invalid, the Supreme Court held that the IRS could use the evidence in a civil suit. Id. This is clearly distinguishable from the case at bar. Contrary to the manner that Mr. Reid presents it, Janis states that the assessment against the plaintiff was valid, even though it relied on improperly seized information.
In Weimerskirch, the plaintiff contested a tax assessment based on unreported income. Weimerskirch, 596 F.2d 358 (9th Cir. 1979). The Commissioner based the assessment on information that plaintiff sold heroin, but failed to produce the evidence at trial which linked plaintiff with the sale of heroin, so the assessment was held to be invalid. Id. The situation in Weimerskirch is clearly distinguishable from this case. This is not a case of "illegal" unreported income. Here, the assessments were based on the reports of those entities who paid wages or interest to Mr. Reid. He disputes his status as an employee at any time relevant to the assessments in this case, however, he puts forward no evidence which rebuts his receipt of the reported amounts.
The United States' submission of Forms 4340 is sufficient to establish the validity of the assessments against Mr. Reid. Therefore, Mr. Reid is liable for the assessed tax liabilities, statutory interest, penalties and additions, minus any credits as calculated by the United States as of the date of this order.
c. Foreclosure of Tax Liens
By statute, when a person refuses to pay a tax debt on demand, the amount due (plus penalties and costs as they accrue) becomes a lien upon all the person's property. 26 U.S.C. § 6321. These tax liens arise when the assessment is made and continue until the liability is satisfied. 26 U.S.C. § 6322. In this case, notice of the tax lien was recorded in the Kitsap County Auditor's office on October 2, 1992, in compliance with 26 U.S.C. § 6323 (f).
The United States has submitted proof of the assessments and outstanding tax debt of Albert C. Reid. in the Forms 4340. Mr. Reid has not paid these assessments after notice and demand, thus the statutory liens created at the time of assessment remain in effect. Mr. Reid has not submitted any evidence which creates a question of fact about the validity of these underlying assessments. See Arford, supra.
The two properties at issue here are marital community property under RCW 26.16.030 since the Reids acquired them after marriage. Mr. Reid's tax liabilities arc presumed to be community debts since they were incurred after marriage. Beyers v. Moore, 45 Wn.2d 68, 70, 272 P.2d 626 (1954) The burden of proving otherwise rests on the community. Id. This presumption may only be overcome by clear and convincing evidence. Id. Where a husband had acquired federal tax debt before marriage, the United States could enforce its lien against his interest in community property. United States v. Overman, 424 F.2d 1142 (1970). In this case, where the debt was acquired by the community, the community will be held liable. Mr. Reid has not submitted any evidence which controverts the liability of the community for these debts.
The district court is specifically vested with jurisdiction over actions to enforce the internal revenue laws, pursuant to 26 U.S.C. § 7402. The court is further authorized to order a sale and distribution of the proceeds to the United States and other parties, according to the findings of the court. 26 U.S.C. § 7403.
Therefore, the court finds that the community properties at issue here shall be sold to satisfy the tax debt of Albert C. Reid. The property shall be sold at auction by the U.S. Marshals Service, with proceeds distributed (1) to the U.S. Marshal for allowed costs of sale, (2) to Kitsap County for any real property tax or special assessment liens having priority on either of the properties under 26 U.S.C. § 6323(b)(6), (3) to defendant GMAC Mortgage Corp. to satisfy the balance of the mortgage on the residence and (4) to the United States, to be applied to the unpaid tax liabilities of Albert C. Reid.
THEREFORE IT IS HEREBY ORDERED:
(1) The plaintiffs' motion for partial summary judgment (docket #32) is DENTED.
(2) The defendant's motion to amend its complaint (docket #35) is GRANTED.
(a) The complaint is deemed amended as of the date of the United States motion for summary judgment, without service to the "Truth in Life Society".
(3) The defendant's motion for summary judgment (docket #35) is GRANTED.
(a) The court finds that the transfer of the lakefront property was made with the intent to delay or defraud; that the United States may avoid this transfer as fraudulent and proceed to establish and foreclose its tax liens on the property.
(b) Mr. Reid is liable for the assessed tax liabilities, statutory interest, penalties and additions, minus any credits as calculated by the United States as of the date of this order.
(c) The court finds that the community properties at issue here shall be sold to satisfy the tax debt of Albert C. Reid. The property shall be sold at auction by the U.S. Marshals Service, with proceeds distributed to (1) the U.S. Marshal, (2) Kitsap County, (3) defendant GMAC Mortgage Corp. and (4) the United States.