Opinion
Case No. Cv-F-97-5044-LJO.
February 21, 2001
DECISION ON CRISPS' MOTIONS FOR DISMISSAL SUMMARY JUDGMENT AND/OR SUMMARY ADJUDICATION (Docs. 232 and 234.)
INTRODUCTION
In this consolidated action, Gilbert Mark Crisp, Rhonda Crisp and Wanda Jean Crisp (collectively the "Crisps") appear in propria persona and seek dismissal, or alternatively, summary judgment/adjudication as to the tax assessment, tax lien foreclosure, and fraudulent transfer claims of the United States of America ("Government") and as to their quiet title claims. Pursuant to 28 U.S.C. § 636 (c) and F.R.Civ.P. 73, the parties consented to proceed before a United States Magistrate Judge, and by a December 16, 1999 order, this action was assigned to United States Magistrate Judge Lawrence J. O'Neill for all further proceedings. After review of the parties' papers, this Court considered the Crisps' motions on the record and without the February 23, 2001 hearing or oral argument, pursuant to this Court's Local Rule 78-230(h).
Although the Crisps reference their papers as alternative motions to dismiss or for summary judgment/adjuidaction, the gist of the relief sought is summary judgment/adjudication due to the procedural status of the case, and their motions will be treated as summary judgment/adjudication motions, not motions to dismiss.
The Court notes it carefully reviewed and considered all the briefs, declarations, exhibits and other papers by the parties. Omission of reference to a paper, declaration or exhibit is not to be construed to the effect that the Court did not consider that paper, declaration or exhibit.
For the reasons discussed below, this Court DENIES the Crisps' respective motions.
BACKGROUND
This is a consolidated action of:
1. Sequoia Property and Equipment Limited Partnership v. United States of America, CV-F-975044 OWW LJO ("Case No. 5044");
2. Hyper-Jean Property and Equip. Ltd. v. United States of America, CV-F-98-5 113 OWW SMS ("Case No. 98-5113");
3. United States of America v. Wanda Jean Crisp, et at., CV-F-98-61 76 OWW LJO ("Case No. 98-6176");and
4. United States of America v. Gilbert Mark Crisp, et at., CV-F-98-6 188 OWW LJO ("Case No. 98-6188").
The Parties
Wanda Jean Crisp is the mother of Gilbert Mark Crisp. Gilbert Mark Crisp and Rhonda Crisp are married. In 1988-1989, Wanda Jean Crisp and Gilbert Mark Crisp operated Crisp Construction Company, Inc. ("Crisp Construction"). The Crisps filed their 1988 and 1989 tax returns on or about April 15, 1989 and April 15, 1990 respectively.
In 1991, the Internal Revenue Service ("IRS") by Revenue Agent Janet Appleton ("Agent Appleton") began simultaneous audits of the Crisps and Crisp Construction for tax years ending December 31, 1988 and December 31, 1989 and determined that Crisp Construction failed to report all gross income deposited to its accounts, failed to substantiate business expenses, and was either an alter ego or partnership of the Crisps and others. Gilbert Mark Crisp reported Crisp Construction as defunct but has not accounted for any of its assets.
By a grant deed recorded October 16, 1992, Wanda Jean Crisp transferred title to her residence for no consideration to her limited partnership Hyper-Jean Property and Equip. Ltd. ("Hyper-Jean Property"). By a grant deed recorded October 20, 1992, Gilbert Mark and Rhonda Crisp transferred title to their residence for no consideration to their limited partnership Sequoia Property and Equipment Limited Partnership ("Sequoia Property"). The beneficiaries of Hyper-Jean Property and Sequoia Property are Wanda Jean Crisp's grandchildren. Sequoia Property has neither filed tax returns nor reported income.
On April 6, 1995, the IRS mailed statutory notices of deficiency to the Crisps regarding tax year 1988. On August 28, 1995, the IRS assessed large tax liabilities against the Crisps, primarily relating to Crisp Construction, which is not a party here because it is nominally defunct and its property and ongoing business have not been located.
On January 16, 1996, the IRS filed its Notice of Federal Tax Lien with the Tulare County Recorder regarding its claims against Wanda Jean Crisp. On June 17, 1996, the IRS filed its Notice of Federal Tax Lien with the Tulare County Recorder regarding is claims against Gilbert Mark and Rhonda Crisp.
Quiet Title Actions
On January 22, 1997, Sequoia Property filed Case No. 97-5044 against the Government to quiet title to the residence of Gilbert Mark and Rhonda Crisp in favor of Sequoia Property. On January 30, 1998, Hyper-Jean Property filed Case No. 98-5113 against the Government to quiet title to the residence of Wanda Jean Crisp in favor of Hyper-Jean Property. (Case Nos. 97-5044 and 98-5113 will be referred to collectively as the "quiet title actions.") The Government has defended both quiet title actions and contends Sequoia Property and Hyper-Jean Property are alter egos, nominees and fraudulent transferees of the Crisps.
The Government's Assessment Actions
The Government filed Case No. 98-6176 on October 14, 1998 against Wanda Jean Crisp and Hyper-Jean Property and filed Case No. 98-6188 on October 19, 1998 against Gilbert Mark and Rhonda Crisp and Sequoia Property to reduce the tax assessments against them to judgment. (Case Nos. 986176 and 98-6188 will be collectively referred to as the "assessment actions.") On August 13, 1999, the Government filed its amended complaints in the assessment actions against the Crisps, Sequoia Property and Hyper-Jean Property. With its amended complaints (the operative pleadings), the Government seeks to reduce its tax assessments to judgment, foreclose on tax liens, and set aside as fraudulent the transfers of the Crisps' residences.
On December 12, 2000, Gilbert Mark and Rhonda Crisp filed their first amended counterclaim to quiet title against the Government's tax liens as to their one percent interest in Sequoia Property. On that same date, Wanda Jean Crisp filed her first amended counterclaim to quiet title against the Government's tax liens as to her one percent interest in Hyper-Jean Property.
Related Action On Appeal
In 1996, Gilbert Mark and Rhonda Crisp filed an action entitled Gilbert Mark Crisp, et al.v. United States of America, Case No. CV-F-96-6308 OWW SMS ("Case No. 96-6308") to seek to quiet title to household items against IRS tax liens. After the parties filed cross-motions for summary judgment, this Court granted judgment in the Government's favor in Case No. 96-6308, which was not consolidated into this action. In October 1999, the Crisps filed their notice to appeal the judgment to the Ninth Circuit Court of Appeals, and the appeal is pending.
Consolidation of Actions And Filing Motions
With its August 6, 1999 order, this Court consolidated the quiet title and assessment actions. In January 2000, the parties stipulated to stay this action pending global settlement discussions, and the May 22, 2000 trial and other dates were taken off calendar. After the parties were unable to reach global settlement, this Court conducted status/scheduling conferences. This Court's November 27, 2000 order set a February 23, 2001 deadline for a hearing on the parties's motions. On January 22, 2000, Gilbert Mark and Rhonda Crisp filed their motion for summary judgment/adjudication on grounds:
1. The Govermnent lacks evidence to support its tax assessment claims;
2. The Government is unable to defeat the statute of limitations defense;
3. There is no proper authorization for the Government to pursue claims against Sequoia Property;
4. The statutory notice of deficiency was invalid due to lack of specificity;
5. Crisp Construction and Robin Crisp are missing as indispensable parties;
6. The Government's fraudulent transfer claims should be dismissed for lack of evidence of insolvency; and
7. Gilbert Mark and Rhonda Crisp are entitled to judgment on their counterclaims to quiet title.
Wanda Jean Crisp also filed her motion for summary judgment/adjudication on grounds: (1) there is no proper authorization to pursue claims against her or Hyper-Jean Property; (2) the fraudulent transfer claims should be dismissed for lack of evidence of insolvency; and (3) she is entitled to judgment on her counterclaim to quiet title. On these grounds, Wanda Jean Crisp asserts identical arguments as did Gilbert Mark and Rhonda Crisp.
On February 9, 2001, the Government filed papers to oppose only the motion of Gilbert Mark and Rhonda Crisp. The Government filed no separate papers to oppose Wanda Jean Crisp's motion, and its counsel informed the Court he had believed Wanda Jean Crisp had merely joined in the motion of Gilbert Mark and Rhonda Crisp. Although the Government's counsel offered to file papers to address Wanda Jean Crisp's motion, this Court finds there is no need for such further papers because Wanda Jean Crisp raises identical arguments and grounds for summary judgment/adjudication as did Gilbert Mark and Rhonda Crisp.
The grounds for Crisps' motions are discussed separately below.
DISCUSSION Summary Judgment/Adjudication Standard
Summary judgment is appropriate when there exists no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. "If the party moving for summary judgment meets its initial burden of identifying for the court those portions of the material on file that it believes demonstrate the absence of any genuine issues of material fact," the burden of production shifts and the nonmoving party must set forth "specific facts showing that there is a genuine issue for trial." T. W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (quoting F.R.Civ.P. 56(e)).
On summary judgment, a court must decide whether there is a "genuine issue as to any material fact." F.R.Civ.P. 56(c); see Adickes v. S.H. Kress Co., 398 U.S. 144, 157, 90 S.Ct. 1598 (1970); Poller v. Columbia Broadcast System, 368 U.S. 464, 467, 82 S.Ct. 486 (1962); Loch v. Ventura County Community College Dist., 743 F.2d 1310, 1313 (9th Cir. 1984). The criteria of "genuineness" and "materiality" are distinct requirements. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505 (1986). The requirement that an issue be "genuine" relates to the quantum of evidence the party opposing summary judgment must produce to defeat summary judgment. There must be sufficient evidence "that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248. If the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-250.
"As to materiality, the substantive law will identify which facts are material." Anderson, 477 U.S. at 248. The opposing party must demonstrate that the fact in contention is material (i.e., a fact that might affect the outcome of the case under governing law). Anderson, 477 U.S. at 248; T.W. Elec. Serv., 809 F.2d at 630.
To attempt to establish a factual dispute, the opposing party may not rely on denials of its pleadings and is required to tender evidence of specific facts in the form of affidavits, or admissible discovery material, in support of its contention that the dispute exists. F.R.Civ.P. 56(e); Matasushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, n. 11, 106 S.Ct. 1348 (1986); First National Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289, 88 S.Ct. 1575 (1968); Strong v. France, 474 F.2d 747, 749 (9th Cir. 1973). The opposing party "must do more than simply show that there is some metaphysical doubt as to the material facts. . . . Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.'" Matsushita, 475 U.S. at 587 (citations omitted). The opposing party's evidence is to be believed and all reasonable inferences that may be drawn from the facts placed before the court must be drawn in favor of the opposing party. Anderson, 477 U.S. at 255; Matsushita, 475 U.S. at 587.
The purpose of summary judgment is to "pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Matsushita, 475 U.S. at 587; International Union of Bricklayers v. Martin Jaska, Inc., 752 F.2d 1401, 1405 (9th Cir. 1985).
As discussed below, the Government has raised genuine factual issues as to the Crisps' grounds for summary judgment/adjudication to establish a genuine need for trial, and the Crisps have failed to demonstrate they are entitled to judgment as a matter of law.
Evidence On The Government's Claims
Gilbert Mark and Rhonda Crisp contend the Government lacks evidence to support its tax collection claims because the Government relies chiefly on Agent Appleton's October 29, 1999 declaration with exhibits and her March 4, 1995 revenue agent's report, which outhnes her audit. The Crisps note the Government lost the Crisps' underlying documents for its claims. The Crisps argue Agent Appleton's declaration and report constitute her opinions and conclusions to render them irrelevant and inadmissible as evidence.
The Government contends Agent Appleton's declaration (and exhibits) and report should be admitted into evidence and considered by the Court. In her declaration, Agent Appleton noted:
Most of the original supporting documents, which included business records of Crisp Construction Company, Inc. (hereinafter "Crisp Construction") were returned to Wanda Jean Crisp and Gilbert Mark Crisp. Attached hereto as Exhibit A is a true and correct copy of the receipt I obtained from Wanda Jean Crisp when the documents were returned. The copies of the supporting documents which were retained by the IRS have been lost. I have inquired and searched for the supporting documents several times without success.
. . .
I concluded after a lengthy audit that Crisp Construction Company, Inc. failed to report all gross income deposited to certain bank accounts, failed to substantiate as non-taxable certain deposits to its bank accounts, and improperly deducted as business expenses payments to and for the benefit of the Crisp family. . . .
. . .
I concluded that Crisp Construction Company, Inc. was operated as an alter ego of among others, the taxpayers, or was operated as a partnership and not a corporation, with partners including the taxpayers. I concluded that additional taxable income should be reported by Gilbert Mark Crisp and Rhonda J. Crisp in the amounts set forth on the first page of the Revenue Agent's Report, which amounts exceed 25% of the gross income reported on the taxpayers' returns for 1988 and 1989.
. . .
. . . The Crisp Construction business continued to use sole proprietorship and/or partnership accounts on which Gilbert Mark Crisp could sign. Partnership bank accounts opened before 1988 for the Crisp Construction business listed as partners Wanda Jean Crisp, Gilbert Mark Crisp, and Robin Crisp. I determined that Crisp Construction continued to be operated as a partnership. The taxpayers reported no partnership or proprietorship income for 1988 and 1989. Because the Crisps did not veri fy their percent of ownership of the business, I allocated 100% of the income to the taxpayers.
The exhibits to her declaration include her notes, spread sheets and related documents to support her conclusions.
Since the Government lacks copies of the Crisps' underlying documents used by Agent Appleton, it seeks to use her declaration, exhibits and report as secondary evidence pursuant to F.R.Evid. 1004 which provides:
The original is not required, and other evidence of the contents of a writing. recording, or photograph is admissible if-
(1) Originals lost or destroyed. All originals are lost or have been destroyed, unless the proponent lost or destroyed them in bad faith; or
(2) Original not obtainable. No original can be obtained by any available judicial process or procedure; or
(3) Original in possession of opponent. At a time when an original was under the control of the party against whom offered, that party was put on notice, by the pleadings or otherwise, that the contents would be a subject of proof at the hearing, and that party does not produce the original at the hearing; or
(4) Collateral matters. The writing, recording, or photograph is not closely related to a controlling issue.
"Secondary proof is admissible when records unavoidably are lost." Andrew Crispo Gallery, Inc. v. Commissioner of Internal Revenue, 16 F.3d 1336, 1342 (2nd Cir. 1994). Where the original is unobtainable, any form of secondary evidence (oral testimony, transcripts, etc.) may be used to prove the contents of the original. United States v. Ross, 33 F.3d 1507, 1513 (11th Cir. 1994), cert. denied, 515 U.S. 1132, 115 S.Ct. 2558 (1995); In re Macmillian, Inc. 186 B.R. 35, 47 (S.D. N.Y. 1996); United States v. Billingsley, 160 F.3d 502, 505, n. 2 (8th Cir. 1998). Oral testimony is admissible to prove a writing's contents if the original has been destroyed or lost and no copy is available. See Vigano v. Wylain. Inc., 633 F.2d 522, 527 (8th Cir. 1980).
The Government also relies on F.R.Evid. 807's residual exception to the hearsay rule which provides in pertinent part:
A statement not specifically covered by Rule 803 or 804 but having equivalent circumstantial guarantees of trustworthiness, is not excluded by the hearsay rule, if the court determines that (A) the statement is offered as evidence of a material fact; (B) the statement is more probative on the point for which it is offered than any other evidence which the proponent can procure through reasonable efforts; and (C) the general purposes of these rules and the interests of justice will be served by admission of the statement into evidence.
Affidavits have been admissible under the residual exception. Herdman v. Smith, 707 F.2d 839, 841-842 (5th Cir. 1983); Furtado v. Bishop, 604 F.2d 80, 91 (1st Cir. 1979), cert. denied, 444 U.S. 1350, 100 S.Ct. 710 (1980).
Here, Gilbert Mark and Rhonda Crisp claim they are entitled to summary judgment because the Government's supporting evidence is limited to Agent Appleton's declaration, exhibits and report in light of the missing underlying documents. Gilbert Mark and Rhonda Crisp do not appear to attack use of the declaration, exhibits and report for summary judgment purposes. Their contentions address the Government's evidence in general.
The Government appears to seek to admit at trial Agent Appleton's declaration, exhibits and report in place of the lost underlying documents. Agent Appleton's declaration, exhibits and report do not recapture the contents of the lost supporting documents. Her declaration and report is a summary of her opinions and findings. The exhibits are her basis for her conclusions and opinions expressed in her declaration. The declaration, exhibits and report are not secondary proof of the contents of the missing documents.
On summary judgment, the Government's burden is not to prove its case. The Government as a party opposing summary judgment need not "persuade the court that [its] case is convincing, [it] need only come forward with appropriate evidence demonstrating that there is a pending dispute of material fact." Waldridge v. American Hoechst Corp., 24 F.3d 918, 921 (7th Cir. 1994). The Crisps rely on conclusory claims that the Government Jacks evidence to support its claims. "It is not enough to move for summary judgment . . . with a conclusory assertion that the [opposing party] has no evidence to prove his case." Celotex Corp. v. Catrett, 477 U.S. 317, 326, 106 S.Ct. 2548, 2555 (1986) (J. White, concur. opinion). A party may present testimony of its own witnesses by declarations to oppose summary judgment. Celotex, 477 U.S. at 324, 106 S.Ct. at 2553; Curnow v. Ridgecrest Police, 952 F.2d 321, 324 (9th Cir. 1991), cert. denied, 506 U.S. 972, 113 S.Ct. 460 (1992). The evidence to oppose summary judgment must be sufficiently probative to permit a reasonable trier of fact to find in favor of the opposing party. Anderson, 477 U.S. at 249-250, 106 S.Ct. at 2512.
Agent Appleton's declaration, exhibits and report raise issues whether Gilbert Mark and Rhonda Crisp under reported their income. Presumably, Agent Appleton will testify at trial and attempt to provide, by her testimony, secondary evidence of the missing documents. This Court is not in the position at this point to determine if her declaration, exhibits and report will be admitted into evidence at trial. The Court's function at summary judgment is to determine if the declaration, exhibits and report may be used to raise factual issues. In the absence of particularized objections to the declaration, exhibits and report, their use is suitable for summary judgment purposes.
Statute of Limitations Defense
The Government relies on the six-year limitation period of 26 U.S.C. § 6501 (e)(1) which provides in pertinent part:
If the taxpayer omits from gross income an amount properly includible there in which is in excess of 25 percent of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 6 years after the return was filed.
Gilbert Mark and Rhonda Crisp note the Government asserts an exception to the general three year assessment limitation period and argue that to use the six-year limitation period under 26 U.S.C. § 6501 (e)(1), the Government must show the allegedly omitted amount was properly includible in the gross estate or income and an amount in excess of 25 percent of the gross income was omitted from the return.
The Government contends it can meet its burden to go forward with evidence to show applicability of the six-year statute of limitations based on Agent Appleton's determination that bank deposits to Crisp Construction, received from contract work, were taxable income to Crisp Construction and the Crisps because the corporation is disregarded after deleting deposits she determined to be nontaxable, such as account transfers. The Government notes Randall Reim, a Crisp Construction bookkeeper, testified that numerous personal transactions were run through Crisp Construction's books.
The Government refers to Agent Appleton's declaration where she noted Crisp Construction books showed payments to Gilbert Mark Crisp of weekly per diem payments of $300 which were excluded in his reported wages and not reported on his tax return. Crisp Construction deducted the payments as business expenses. For 1998, Gilbert Mark and Rhonda Crisp's reported gross income of $23,625,25 percent of which is $5,906.25. For 1989, Gilbert Mark and Rhonda Crisp reported gross income of $24,818.65, 25 percent of which is $6,204.67. The Government asserts the per diem alone of $300 per week ($15,000 per year) shows the Government properly applied and met the six-year limitations period.
"[T]he running of a statute of limitations is an affirmative defense that must be pleaded and proved by a taxpayer." United States v. McGee, 993 F.2d 184, 187 (9th Cir. 1993). If the IRS issues a notice of deficiency after expiration of the three-year limitation period, the IRS has the burden to establish that the alternative six-year limitations period applies. Estate of Dillingham v. Commissioner of Internal Revenue Service, 903 F.2d 760, 762 (10th Cir. 1990).
In a ease such as this one, where the taxpayer makes a showing that the statutory notice was issued beyond the normally applicable statute of limitations, the taxpayer has established a prima facie case. At that point, the burden of going forward with the evidence shifts to the IRS which has the burden to introduce evidence to show that the bar of the limitations period is inapplicable. When the IRS makes such a showing, the burden of going forward with the evidence shifts to the taxpayer to show that the alleged exception is invalid or otherwise inapplicable. "The burden of proof, i.e., the burden of ultimate persuasion, however, never shifts from the party who pleads the bar of the statute of limitations." Adler v. Commissioner of Internal Revenue Service, 85 T.C. 535, 540 (1985).
Here, the Government acknowledges the August 28, 1995 assessment for 1988 is more than six years from the Crisps' filing of their 1988 tax returns on or about April 15, 1989. However, under 26 U.S.C. § 6503 (a), the limitations period is suspended for the time an assessment is prohibited "and for 60 days thereafter." A restriction is placed on assessment under 26 U.S.C. § 6213 which provides within 90 days after the notice of deficiency is mailed, a taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Pursuant to 26 U.S.C. § 6213, "no assessment of a deficiency in respect of any tax imposed . . . shall be made, begun or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day period . . ." Based on 26 U.S.C. § 6213 and 6503(a), the limitations period was suspended for 150 days from April 5, 1995 (when the notice of deficiency was mailed) to render the August 28, 1995 assessment within the extended period.
At a minimum, the Government has raised factual issues as to the statute of limitations defense. There are factual issues regarding omission of income in excess of25 percent of gross income stated in the Gilbert Mark and Rhonda Crisp's returns. The Crisp Construction bookkeeper noted personal transactions were run through Crisp Construction, although as noted by Gilbert Mark and Rhonda Crisp, his testimony addressed 1992. There are factual issues as to Gilbert Mark Crisp's per diem payments. Such factual issues prevent summary judgment in favor of the Crisps on their statute of limitations defense. The Government presented evidence for application of the six-year limitation period of 26 U.S.C. § 6501 (e)(1).
IRS Authorization As To Sequoia Property And Hyper-jean Property
Authorization to pursue collection actions is addressed by 26 U.S.C. § 7401, which provides: No civil action for the collection or recovery of taxes, or of any fine, penalty, or forfeiture, shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced.26 U.S.C. § 7403 (b) requires all persons having liens upon or claiming an interest in property to be made a party to an action to enforce a tax lien.
According to the Crisps, the Government's claims against Sequoia Property and Hyper-Jean Property are barred by 26 U.S.C. § 7401 because the purported authorization document authorizes suit against the Crisps individually but does not mention another party or entity to render this Court without jurisdiction over claims against Sequoia Property and Hyper-Jean Property. The Crisps assert that since "proceedings" as used in 26 U.S.C. § 7401 is plural, the statute contemplates more than one possible cause of action, such as, in this case claims for taxes and setting aside fraudulent conveyances. The Crisps contend the fraudulent transfer, alter ego and nominee claims should be dismissed in the absence of authorization for them under 26 U.S.C. § 7401.
The Government confirms the authorization letter authorizes suit against the Crisps. The Government argues 26 U.S.C. § 7401 does not require an exhaustive listing of all potential defendants in an authorization letter.
In the assessment actions, the Government pursues tax claims against the Crisps, and Sequoia Property and Hyper-Jean Property are defendants as transferees of the Crisps' residences. Consequently, his Court finds Sequoia Property and Hyper-Jean Property were properly named as defendants based on their potential interests in the Crisps' residences. The Crisps offer no legal authority for their novel application of "proceedings" in 26 U.S.C. § 7401. Moreover, the Crisps, not Sequoia Property and Hyper-Jean Property, seek to preclude claims against Sequoia Property and Hyper-Jean Property, which are separate parties represented by counsel. The Crisps lack standing to pursue claims for Sequoia Property and Hyper-Jean Property.
Validity of Deficiency Notices
Gilbert Mark and Rhonda Crisp contend the Government's claims are barred due to invalidity of the deficiency determination and notice. They argue the Government's deficiency notice to the Gilbert Mark and Rhonda Crisp for 1988 and 1989 claims the alleged tax deficiency is unreported income attributed to Crisp Construction, and the Government provided no notice under 26 U.S.C. § 482 as to allocation of income and deductions among taxpayers. According to the Crisps, the Government may not proceed under a reallocation theory when such theory has not been cited in its notice of deficiency. Gilbert Mark and Rhonda Crisp argue that attribution of 100 percent of the income to Crisp Construction and 100 percent of the income to the Crisps is not an actual deficiency determination.
The Government responds the Crisps incorrectly argue that no legal theory pennits taxing of corporate receipts to individuals. The Government contends Crisp Construction was operated as the alter ego of the Crisps, or a partnership or sole proprietorship. Much of the same income is taxed to Gilbert Mark and Rhonda Crisp and to Wanda Jean Crisp to prevent a whipsaw to the Government.
As noted above, 26 U.S.C. § 6213 places a 90-day restriction on assessment after the notice of deficiency is mailed to allow a taxpayer to file a petition with the Tax Court for a redetermination of the deficiency. Gilbert Mark and Rhonda Crisp present no evidence that the Government failed to comply with 26 U.S.C. § 6213.
The IRS has the right to make inconsistent assessments to protect the fisc and insure against a potential "whipsaw" effect. Estate of Goodall v. Commissioner, 391 F.2d 775 (8th Cir.), cert. denied, 393 U.S. 775, 89 S.Ct. 96 (1968); Malat v. Commissioner of Internal Revenue, 302 F.2d 700 (9th Cir.), cert. denied, 372 U.S. 934, 83 S.Ct. 308 (1962). A whipsaw situation arises when different taxpayers take positions regarding a particular transaction and which are so inconsistent that only one should logically succeed and yet because of jurisdictional or procedural reasons, first one and then the other prevails against the Government. Cannon v. Commissioner of Internal Revenue, 533 F.2d 959, 962, n. 1 (5th Cir. 1976) (Clark, J., dissenting).
Gilbert Mark and Rhonda Crisp fail to cite pertinent legal authority to demonstrate they were entitled to special deficiency notice under 26 U.S.C. § 482, which addresses allocation of income and deductions in the case of "two or more organizations, trades, or businesses." Moreover, the IRS was entitled to make inconsistent assessments to protect against the approach taken by the Crisps. The Ninth Circuit Court of Appeals has commented:
It is, of course, not only the prerogative but the duty of the Commissioner and the Tax Court to carefully examine the transaction behind its formal facade to be certain that it is what it purports to be and that substance of the transaction is within the governing statute. This particularly applies to advance of funds or property to a corporation by those possessing an ownership interest in it. Gilbert v. Commissioner of Internal Revenue, 262 F.2d 512 (2nd Cir. 1959); Lundgren v. Commissioner of Internal Revenue, 376 F.2d 623, 626 (9th Cir. 1967).Hollenbeck v. Commissioner of Internal Revenue, 422 F.2d 2, 4 (9th Cir. 1970). The substance, not the form, of the transaction is controlling. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266 (1935); Commissioner v. Internal Revenue v. Court Holding Ca, 324 U.S. 331, 65 S.Ct. 707 (1945). Gilbert Mark and Rhonda Crisp point to neither legal nor factual authority to undermine the validity of deficiency notices based on the Government's characterization of the transactions.
Indispensable Parties
Gilbert Mark and Rhonda Crisp assert the Government has neither named Crisp Construction nor Robin Crisp as additional, indispensable parties nor explained why it has not. Robin Crisp is the son of Wanda Jean Crisp and brother of Gilbert Mark Crisp. Gilbert Mark and Rhonda Crisp contend Robin Crisp is an indispensable party because the Government asserted the same claims against him as it does against the Crisps.
The Government notes it believes Robin Crisp resolved his personal liability, if any, in his personal bankruptcy action. According to the Government, Crisp Construction ceased operating in corporate form during the IRS audit and its assets have not been located to render futile naming the defunct Crisp Construction as a party.
F.R.Civ.P. 19(a) address compulsory joinder of parties and provides in pertinent part:
A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if(1) in the person's absence complete relief cannot be accorded among those already parties or (2) the person claims an interest relating to the subject of the action in the person's absence may (i) as a practical matter impair or impede the person's ability to protect the interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the claimed interest. If the person has not been so joined, the court shall order that the person be made a party.
Gilbert Mark and Rhonda Crisp fail to demonstrate Crisp Construction and Robin Crisp are necessary parties. They make no attempt to demonstrate or argue that complete relief cannot be provided in the absence of Crisp Construction and Robin Crisp or that Crisp Construction and Robin Crisp claim an interest in the matters subject to this action. The absence of Crisp Construction and Robin Crisp presents no danger of substantial risk or inconsistent obligations. Gilbert Mark and Rhonda Crisp present neither meaningful facts nor arguments for their position.
Fraudulent Transfer Claims
As noted by the Crisps, the Government pursues fraudulent transfer claims based on Gilbert Mark and Rhonda Crisps' transfer of their residence to Sequoia Property and Wanda Jean Crisp's transfer of her residence to Hyper-Jean Property. The Crisps contend that a necessary element of fraudulent transfer claims is that the conveyances rendered the Crisps insolvent and there is no evidence that transfer of the residences rendered the Crisps insolvent.
The Government contends the Crisps are insolvent because:
1. The IRS searched for the Crisps' assets and found none except those held by nominees;
2. Their debts (including tax debts) exceed the value of their assets (including the nominee assets); and
3. The Crisps did not pay their tax debts as they became due and are presumed insolvent. California Civil Code sections 3439-3439.12 comprise the California Fraudulent Transfer Act.
Section 3439.02 addresses insolvency and provides in pertinent part:
(a) A debtor is insolvent if, at fair valuations, the sum of the debtor's debts is greater than all of the debtor's assets.
(c) A debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.
. . .
(d) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this chapter.
As noted by the Government, section 3439.04 does not require insolvency and applies to transfers as to present and future creditors and made with "actual intent to hinder, delay, or defraud any creditor of the debtor." Section 3439.05 addresses transfers made when the debtor was insolvent or when "the debtor became insolvent as a result of the transfer or obligation."
The Crisps' arguments lack merit. At a minimum, their failure to pay their tax debts raises a factual issue as to their insolvency. In his declaration, Revenue Officer Dennis Stiffler notes he conducted a search of the Gilbert Mark and Rhonda Crisps' assets and found them to be substantially less than their 1988 and 1989 tax liabilities. The mere fact they have not filed bankruptcy is not conclusive as to their insolvent status. The key is that there are factual issues whether the Crisps attempted to place theirproperty beyond the reach ofcreditors. The Crisps present insufficient evidence to entitle them to judgment as a matter of law regarding the Government's fraudulent transfer claims.
The Crisps' Quiet Title Counterclaims
Gilbert Mark and Rhonda Crisp filed amended counterclaims seeking to quiet title to their one percent interest in Sequoia Property. Wanda Jean Crisp filed an amended counterclaim seeking to quiet title to her one percent interest in Hyper-Jean Property. The Crisps contend they are entitled to summary judgment as to their counterclaims for the same reasons they are entitled to summary judgment as to the Government's claims against them, i.e., the Government's claims are time-barred and not supported by evidence.
The Government notes that if the Crisps prevail as to the Government's assessment claims, the Government's tax liens will be released. If the Government prevails on its assessment claims, the Crisps will not be entitled to quiet title as their interests in Sequoia Property and Hyper-Jean Property will be encumbered by the Government's tax lien. The Government contends there is no jurisdiction for the Crisps' counterclaims under 28 U.S.C. § 2410 (quiet title actions) because the counterclaim attacks the merits of the assessment.
Under 28 U.S.C. § 2410 (a), the Government may be named as a party in a civil action in district court to quiet title to real or personal property on which the Government claims a lien. 28 U.S.C. § 2410 (a) waives sovereign immunity and vests a district court with jurisdiction to consider matters falling within the scope of the statute. Hughes v. United States, 953 F.2d 531, 538 (9th Cir. 1992). The Ninth Circuit Court of Appeals has narrowly limited the reach and application of 28 U.S.C. § 2410:
Under 28 U.S.C. § 2410, the United States may be joined as a party to a quiet title action affecting property upon which it claims a lien. A taxpayer may not use a section 2410 action to collaterally attack the merits of an assessment. Rather, the taxpayer may only contest the procedural validity of a tax lien.Elias v. Connett, 908 F.2d 521, 527 (9th Cir. 1990); Hughes, 953 F.2d at 538; see also Arford v. United States, 934 F.2d 229, 232 (9th Cir. 1991).
"Actions commencedpursuant to section 2410 have limited scope, providing only for a taxpayer's challenge to the procedural validity of a tax lien. A taxpayer may not challenge or attack the merits of the assessments." United States v. Stepard, 75 A.F.T.R.2d 95-2199, 95-2206, 1995 WL 422507 (D. Az. 1995) see also PCCE, Inc. v. United States, 159 F.3d 425, 428 (9th Cir. 1998) ("Although taxpayer's claim arguably may be conceived as a procedural challenge, it is unmistakably an attack on the government's assessments, rather than its liens.")
The Government has raised issues as to the propriety of the Crisps' counterclaims as a matter of law. The counterclaims are designed to challenge the Government's assessment, not the procedural validity of the Government's liens. In light of their questionable nature, the Crisps are not entitled to summary judgment as to their counterclaims. Moreover, the Crisps pursue no meaningful legal arguments in support of their dubious contentions.
ORDER
For the reasons discussed above, this Court DENIES the summary judgment/adjudication motions of Gilbert Mark and Rhonda Crisp and Wanda Jean Crisp. IT IS SO ORDERED.