Opinion
Case No. 1:99-cv-974-TSH (Hogan, M. J.).
November 19, 2008
ORDER
This matter is before the Court for a decision and order following a trial to the bench. The parties consented to the entry of final judgment by the undersigned United States Magistrate Judge. (Doc. 45). The Court's decision set fort below is based on the testimony and other evidence admitted following a three day bench trial, which commenced on July 18, 2005, and the parties' closing arguments, which were submitted in writing. (Docs. 81, 82).
PROCEDURAL HISTORY
This case was initiated in November 1999, with the filing of a complaint by the United States of America ("United States" or "government") under 26 U.S.C. §§ 7401, 7403 seeking to reduce to judgment unpaid federal tax assessments against defendant Ronald E. Smith ("Smith") and to foreclose on federal tax liens on two parcels of real property located at 4311 Tylersville Road, Hamilton, Butler County, Ohio. (Doc. 1). The government also sought to set aside an allegedly fraudulent conveyance of an interest in the property made by Smith to his parents, Barney Smith (now deceased) and Naoma Smith, and to declare that Naoma Smith and Gregory Smith, Smith's brother, hold interests in the property as nominees of Smith. The government also named Smith's alleged common law wife, as a party defendant on the ground that she may seek to claim an interest in the property in her own right. However, since the filing of this action, Ms. Schaller has died, (see Doc. 67, Notice/Suggestion of Death), and the parties have effectively abandoned their arguments with respect to her purported dower interest.
In March 2001, the parties filed cross-motions for summary judgment. (Docs. 13, 14). As this matter was still on referral to the undersigned by the District Court pursuant to 28 U.S.C. § 636, this Court issued a Report and Recommendation finding that defendants' summary judgment motion should be denied and plaintiff's motion for partial summary judgment should be granted in part and denied in part. The Court recommended that judgment be granted in favor of the Government against Ronald Smith for the taxes, interest, and penalties claimed in the complaint. However, the Court recommended denying the parties' summary judgment motions with respect to the Government's claims of fraudulent conveyance, actual fraud, constructive fraud, and the Government's prayer for relief with respect to tax liens on the Tylersville Road property by means of a forced judicial sale. The Court concluded that genuine issues of material fact existed to preclude summary judgment and that trial was warranted on the questions of (1) whether sufficient "badges of fraud" demonstrate that defendant Ronald Smith's conveyance of a one-half interest in the property to Barney and Naoma Smith was fraudulent; (2) whether the purchase price for Barney and Naoma Smith's one-half interest was reasonably equivalent to the value of the property at the time of the transfer, and whether the payment actually changed hands; and (3) whether the Government is entitled to a forced sale of the entire Tylersville Road property to satisfy its tax lien, or whether equitable discretion counsels in favor of a sale limited to defendant Ronald Smith's alleged partial interest in the property. (Doc. 21).
Following a de novo review of the case in light of the parties' objections to this Court's recommendations, the District Court adopted the undersigned's Report and Recommendations by Order dated March 13, 2003. (Doc. 26). In so doing, the Court reduced to judgment the federal tax assessments in the amount of $3,933,012.50 as of February 5, 2001, plus statutory interest and other additions accruing thereafter.
Subsequently, the parties consented to the entry of final judgment by the undersigned, and the case was referred for final disposition in August 2004. (Doc. 55). Trial commenced on July 18, 2005, as scheduled, and proceeded for two days. The trial was continued until September 1, 2005 for purposes of testimony by defendants' expert witness, Thomas Devitt.
Following testimony by defendants' expert witness on September 1, 2005, including cross-examination by plaintiff's counsel, the court determined that defendants' expert witness would be permitted to submit an additional "comparables" report reflecting the 1991 valuation of defendants' Tylersville Road property. (Doc. 60). There followed a series of telephonic status conferences with counsel for the parties at which time representations were made by counsel for defendants that Mr. Devitt was ill and therefore unable to participate in the trial of this matter on the dates proposed. The trial date was reset no less than three times in an effort to accommodate Mr. Devitt's alleged health problems.
On February 7, 2006, the parties again requested an informal telephonic conference concerning Mr. Devitt's additional report and trial testimony to be offered thereon. (Doc. 65). Counsel for Defendants advised the Court that Mr. Devitt was unavailable for trial and orally moved for permission to submit into evidence the October 2005 discovery deposition taken after Mr. Devitt gave his initial trial testimony, and in conjunction with his revised "comparables" report. Plaintiff opposed the admission of the discovery deposition on various grounds, including the contention that it was unable to fully cross-examine Mr. Devitt, and that while Mr. Devitt might be "unwilling" to testify, he was not "unavailable." In an order issued on that same date, the Court declined to grant defendants' motion based solely on representations by defendants' counsel that Mr. Devitt was "unavailable" for trial. (Doc. 66). The Court directed defendants to either secure Mr. Devitt's attendance at trial by subpoena, if necessary, or provide record evidence from which it could be determined that Mr. Devitt was otherwise "unavailable," pursuant to Fed.R.Evid. 804. (Id.).
On March 14, 2006, defendants filed a "Motion to Determine Unavailability of Witness" seeking a determination that Mr. Devitt was unavailable to testify at trial pursuant to Fed.R.Civ.P. 804. (Doc. 69). The Court denied the motion, determined that no more testimony or other evidence would be offered at trial, and ordered the parties to submit their closing arguments in writing. (Doc. 74). The case is now before the Court for a decision and Order on plaintiff's remaining claims.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
On December 1, 1986, defendant Ronald E. Smith acquired property at 4311 Tylersville Road, also known as 4311 R.E. Smith Drive, (referred to herein and at trial as "the farm"), by general warranty deed. (Joint Exhibit (JE) J1). Smith purchased the property for $135,000.000. (Trial Transcript (Tr.) pp. 180, 419). The purchase price included a $95,000.00 mortgage back to the sellers. (Defendants' Exhibit (Def. Ex.) D6).
On April 12, 1990, Smith was indicted on three counts of willfully attempting to evade and defeat income tax due and owing by him to the United States by failing to file tax returns for the years 1983, 1984, and 1985, and by failing to pay the Internal Revenue Service for such tax liabilities and for concealing or attempting to conceal from the Government his true and correct income, in violation of 26 U.S.C. § 7201.
On January 23, 1991, Smith pleaded guilty before United States District Court Judge Herman J. Weber to charges of wilful failure to file income tax returns for tax years 1983, 1984, and 1985. Pursuant to the plea agreement, Smith agreed to file true, correct and accurate and tax returns for calendar years 1982-89. (Plaintiff's Exhibit (P1. Ex) P15). The plea agreement also stated that it did not address or compromise in anyway any tax liability of Smith for the tax years 1982-1989. (Id.). Smith subsequently submitted "nonresident returns," tax forms 1040NR, for the years 1983 through 1990, reporting zero income for those tax years. As part of his plea agreement, Smith acknowledged that by pleading guilty he was subject to a maximum penalty of three years imprisonment, $225,000.00 fine and $75.00 in special assessments. (Id.).
On or about May 22, 1991, Smith transferred an undivided one-half interest in the farm property to his parents, Barney Smith and Naoma Smith. (JE J3). A General Warranty Deed was executed in conjunction with the transfer of ownership and filed with the Butler County Recorder's Office on May 24, 1991. (Id.).
On October 3, 1991, Judge Weber sentenced Smith to two months in custody of the Bureau of Prisons and fined him $100,000.
On January 24, 1995, Smith was assessed federal income tax liabilities for tax years 1982-88 and 1990-91. On February 15, 1995, Smith was assessed federal tax liability for tax year 1989. Notices of the assessments were filed with the Butler County Recorder's Office on June 16, 1995 and June 11, 1996.
On April 3, 1995, Barney Smith and Naoma Smith transferred an undivided one-fourth interest in the farm property to Gregory Smith by Quit Claim Deed. (JE J4). The Quit claim Deed was subsequently filed with the Butler County, Ohio, Recorder's Office on May 19, 1995. (Id.). Gregory Smith concedes that he did not pay any consideration for his interest in the property; rather, it was a gift from his parents before his father's death. (Tr. pp. 339-40). Barney Smith died on May 20, 1995. Smith continues to reside at the Tylersville Road address; Naoma Smith resides in Cincinnati, Ohio; and Gregory Smith resides in Maineville, Ohio.
On March 13, 2003, the District Court adopted the undersigned's August 23, 2002 Report and Recommendation in toto. (Doc. 26). Consequently, the Court granted in part the Government's summary judgment motion, and thereby reduced to judgment the federal tax assessments in the amount of 3,933,012.50 as of February 5, 2001, plus statutory interest accruing thereafter until final judgment in this case. (Id.).
Fraudulent Conveyance
Where a taxpayer is alleged to have fraudulently disposed of his property prior to the existence of federal tax liens, the United States may seek relief under the applicable fraudulent conveyance laws of the particular state in which the property is located. Commissioner v. Stern, 357 U.S. 39, 45 (1958); Citizens Bank of Clearwater v. Hunt, 927 F.2d 707, 710 (2d Cir. 1991); United States v. Fernon, 640 F.2d 609, 611-12 (5th Cir. 1981). Because the property which is the subject of this dispute is located in Ohio, Ohio law applies. The government seeks judgment on its claim of fraudulent transfer under the Ohio Uniform Fraudulent Transfer Act ("OUFTA"), Ohio Rev. Code §§ 1336.01- 1336.11, et. seq.
Under OUFTA, a transfer made by a debtor is fraudulent as to a creditor, whether the claim arose before or after the transfer was made, if the debtor made the transfer in either of the following ways:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer . . . and if either of the following applies: (a) the debtor was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (b) the debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
Ohio Rev. Code § 1336.04(A). The government argues that the facts support judgment in its favor under both the actual fraud theory of § 1336.04(A)(1) and the constructive fraud theory of § 1336.04(A)(2).
The Evidence Supports a Finding of Actual Fraud Under Ohio Rev. Code § 1336.04(A)(1)
A transfer made with actual intent to hinder, delay, or defraud any creditor is fraudulent as to the creditor and may be set aside. Ohio Rev. Code Ann. § 1336.04(A)(1). "No effort to hinder or delay creditors is more severely condemned by the law than an attempt by a debtor to place his property where he can still enjoy it and at the same time require his creditors to remain unsatisfied." United States v. Leggett, 292 F.2d 423, 426 (6th Cir. 1961) (internal quotations omitted). The burden of proof in a fraud case rests with the party asserting the fraud, McKinley Fed. Savings Loan v. Pizzuro Enterprises, Inc., 585 N.E.2d 496 (Ohio Ct.App. 1990), in this case, the government. The fraud must be proven by clear and convincing evidence. Cardiovascular Thoracic Surgery of Canton, Inc. v. DiMazzio, 37 Ohio App.3d 162, 166, 524 N.E.2d 915, 918 (Ohio Ct.App. 1987). However, direct evidence of a party's fraudulent intent is not necessary. Leggett, 292 F.2d at 426. Because it is impossible to look into a defendant's mind for the purpose of ascertaining his intent, the trier of fact must consider the circumstances surrounding the transaction and determine intent from what a party does or fails to do. Id. at 426-27.
The issue of fraud is commonly determined by certain recognized indicia, denominated `badges of fraud,' which are circumstances so frequently attending fraudulent transfers that an inference of fraud arises from them. Long Development, Inc. v. Oak Park Village Limited Partnership, 117 F.3d 1420, (unpubl.) 1997 WL 377055, at * ___ (July 2, 1997) (citing Leggett, supra). Ohio Rev. Code Ann. § 1336.04(B) lists several statutory factors, or the so-called "badges of fraud," that a court considers to determine if an inference of fraud exists. The relevant factors include, but are not limited to, the following:
(1) Whether the transfer or obligation was to an insider;
(2) Whether the debtor retained possession or control of the property transferred after the transfer;
(3) Whether the transfer or obligation was disclosed or concealed;
(4) Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
(5) Whether the transfer was of substantially all of the assets of the debtor;
(6) Whether the debtor absconded;
(7) Whether the debtor removed or concealed assets;
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred;
(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor.
Ohio Rev. Code Ann. § 1336.04(B).
"Although `badges of fraud' are not conclusive and are more or less strong or weak according to their nature and the number occurring in the same case, a concurrence of several badges will always make out a strong case." Long Development, Inc., 1997 WL 377055, at * 6 (citing Leggett, supra). If the party alleging fraud is able to demonstrate a sufficient number of badges, the burden of proof then shifts to defendants to prove that the transfer was not fraudulent. Baker Sons Equipment Co. v. GSO Leasing, Inc., 87 Ohio App.3d 644, 650, 622 N.E.2d 1113, (Ohio Ct.App. 1993) (citing Cardiovascular Thoracic Surgery, supra).
The evidence relevant to the badges of fraud establishes the following:
(1) It is undisputed that the transfer was made to insiders, i.e., Smith's parents.
(2) Since the transfer, Smith has retained possession and control of the property. The trial testimony confirms that Smith did not consult with his parents or his brother concerning improvements to the property or the uses thereof. The farm house was, is, and continues to be his primary residence. He alone pays the property taxes, utility bills and related property expenses. There was credible testimony that Smith's brother had used the property for livestock and equipment storage, including the construction of a pole barn. In addition, there was testimony that his brother had resided on the property for short periods of time. However, this testimony is not at odds with the conclusion that Smith has retained control over the property. Gregory Smith testified that he had considered constructing a guest house or residence for himself and his mother but that this lawsuit has precluded him from doing so because of the possibility that an investment in any improvements would be lost in a forced judicial sale. (Tr. pp. 349-51, 358-60). Other than Gregory Smith's use of the property as described above, there is no evidence that the transferees sought to exercise any possessory interest in the farm. The clear weight of the evidence supports the conclusion that Smith has used the property as if he were the sole and exclusive owner notwithstanding the transfers.
To the extent hat Gregory Smith testified at trial that he has twice paid a portion of the real estate taxes, the Court finds this testimony, which conflicts wit his deposition testimony, to be less than credible. See Tr. pp. 340-45.
(3) The transfer to Smith's parents in 1991 and the transfer to Gregory Smith were both filed was filed with the Butler County, Ohio Recorder's Office. Thus, neither transfer was concealed.
(4) Smith made the May 1991 transfer to his parents knowing that pursuant to his plea agreement in the criminal case he was liable for up to $225,000.00 in criminal fines, and knowing that he was subject to potential civil tax liability for tax years 1982 through 1989.
(5) The subject property represented substantially all of Smith's known assets at the time of the transfer. To the extent that Smith may have had other assets at the time of the transfer, at trial he invoked his Fifth Amendment rights and refused to answer any questions regarding his possession of cash, gold bars, or silver at the time immediately preceding the May 1991 transfer. In this case, Smith's invocation of the Fifth Amendment gives rise to an adverse inference that while he likely had significant taxable assets which he did not wish to disclose to the government, the only significant asset he had for purposes of paying the criminal fine was the Tylersville Road property.
(6) Smith did not abscond.
(7) As discussed above, Smith invoked the Fifth Amendment and refused to answer certain questions at trial concerning his assets. The inference the Court draws from this testimony is that Smith had significant taxable assets which he did not want to disclose to the government. In addition, there was credible testimony that Smith concealed assets from the government by hiding large sums of cash in and around his house and hiding silver bars and gold in his house and basement workshop. The evidence also demonstrates that Smith sought to avoid any financial transactions which could result in a report of income or assets to the government. Thus, he has not maintained any bank accounts since approximately 1981, and routinely endorsed his paychecks to suppliers and other business associates in exchange for equipment already purchased or to maintain a credit toward future purchases. The credible testimony demonstrates that Smith routinely sought to avoid having cash transactions reported to the Secretary of the Treasury by presenting his paychecks to the issuing bank and requesting multiple cashier's checks or money orders in denominations of less than ten thousand dollars each in return. (Tr. 152-56). This evidence supports the conclusion that Smith routinely sought to conceal his assets for purposes of avoiding payment of federal income taxes.
(8) The value of the consideration allegedly received for his parents' one-half interest was not reasonably equivalent to the value of the transferred property. Even if the Court were to accept Smith's assertion that the sale of the property to his parents was made for $85,000.00 cash and an assumption by Barney and Naoma Smith of one-half of the then-remaining mortgage, the aggregate $110,000 price for an undivided one-half interest in the property was not reasonably equivalent to the value of a half interest in the farm at the time of the transfer.
In the wake of this Court's rulings with respect to Mr. Devitt's testimony, the defendant has failed to offer any credible expert testimony regarding the valuation of his property at or about the time of the transfer to his parents. When Mr. Devitt originally appeared to testify in this matter, plaintiff successfully impeached his testimony. Upon cross-examination, Mr. Devitt conceded at trial that the report he issued on valuation of the farm was not accurate given that one of the three comparable sales he relied upon to reach his estimated value was made to an insider and not an arm's length transaction. The Court then, over the objection of the government, permitted defendants to continue the presentation of their case and was prepared to accept an amended expert report and corresponding testimony from Mr. Devitt based on a revised comparables analysis. However, as detailed above and in this Court's prior ruling, Mr. Devitt has failed to provide an amended report and has failed to appear to give further testimony on behalf of defendants. As Mr. Devitt has not been deemed unavailable, and as his original testimony was unquestionably impeached, the Court shall not consider his opinion on this issue.
This leaves the Court with only two sources of evidence regarding the value of the farm at the time of the transfer: (1) Smith's testimony as to the value of the farm based on the original purchase price and his layman's assessment of the reasonable expected increase in value for the subject property; and (2) the testimony and documentary evidence presented by the plaintiff, including the records from the Butler County, Ohio, Auditor's Office which demonstrates that the total market value of the farm at or about the time of the transfer was approximately $588,500.00. (Pl. Ex. P13). Testimony presented in this case indicates that this value was subject to review and reconsideration by both the Butler County Auditor and Smith. No method of predicting estimated sale value is one hundred percent accurate. After all, common sense dictates that an estimated value is just that, an estimate. However, the Court finds the valuation offered by the plaintiff based on the Butler County Auditor's assessment to be a more reliable and credible estimate of market value at the time in question when compared to Smith's valuation which is premised almost exclusively on his assertion that the value was what he says it was.
(9) There is insufficient evidence from which to conclude that Smith was insolvent either at the time of the transfer or shortly thereafter. As discussed above, the evidence demonstrates that Smith routinely sought to conceal his assets. Thus the only known and salable asset at the time of the transfer was his house. However, having transferred only a one-half interest, Smith retained a fifty percent interest in the property. Smith has argued that the property was valued at $220,000.00 at the time of the transfer, based on the alleged sale price of his one-half interest to his parents. As set forth above, the Court has found that the property's value at the time of the transfer was approximately $588,500.00. In either case, the one-half interest retained by Smith was more than the $100.000.00 criminal fine assessed against Smith at his sentencing. Moreover, the tax liens which have been reduced to judgment in this case were not assessed until approximately four and a half years after the property transfer. Consequently, to the extent that a debt in excess of three million dollars has subsequently rendered Smith insolvent, it is not evidence that Smith was insolvent at the time of the property transfer to his parents in 1991.
(10) The transfer by Smith to his parents occurred roughly four months after his guilty plea at which time he acknowledged he was subject to a maximum penalty of three years imprisonment and a fine of up to $225,000.00. Roughly four and a half months after the transfer to his parents, Smith was sentenced by Judge Weber and subjected to a $100,000.00 fine. Thus, the transfer was made shortly before Smith incurred a substantial debt, and Smith knew prior to the transfer that such a debt would be incurred. In addition, while the federal tax assessments were not made until 1995, Smith knew at the time of his sentencing that he was under investigation by the IRS and that he would likely incur substantial debt in connection with the tax returns he was required to file under the terms of his plea agreement.
(11) The question of whether the debtor transferred business assets is inapplicable to the present case.
The evidence clearly demonstrates that no less than seven of ten badges of fraud relevant to this case weigh in favor of the government's position, thereby raising the inference that the 1991 transfer of a one-half interest in Smith's property was in all actuality a fraudulent transfer. Smith has failed to satisfy his burden of proof and has not presented evidence sufficient to demonstrate that the transaction was not fraudulent. The Court notes that the evidence from trial, including testimony by Naoma and Gregory Smith, demonstrate that neither Naoma, Barney, nor Gregory Smith intended to defraud the government by means of their involvement in the Tylersville Road property transfers. However, the question before this Court is whether defendant Smith himself effectuated the transfers with an intent to hinder, delay, or altogether avoid payment of monies owed to the United States. Unfortunately for defendant's family members, the clear and convincing evidence in this case demonstrates that such was defendant Smith's intent. As a consequence, the transfer of a one-half property interest which the Court finds was made with actual intent to defraud may be set aside. Ohio Rev. Code § 1336.04(a)(1).
Evidence Supports a Finding of Constructive Fraud Under Ohio Rev. Code § 1336.04(A)(2)
Pursuant to Ohio Rev. Code § 1336.04(a)(2)(B), a transfer is fraudulent if a debtor transfers property without receiving a reasonably equivalent value in exchange for the transfer, and the debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due. The evidence clearly demonstrates that Smith's transfer of a one-half interest in the property was constructively fraudulent with respect to the United States. As set forth above, the evidence clearly demonstrates that defendant Smith did not receive a reasonably equivalent value for his one-half property interest purportedly transferred to his parents in 1991. Assuming, without deciding, that plaintiff's parents paid him roughly $110,000 for their interest in the Tylersville Road property, the evidence demonstrates, and this Court finds, that the value of the property at the time of the transfer was approximately $588,500.00. Thus, the purchase price allegedly paid by Smith's parent's for their one half interest is not reasonably equivalent to the value of half the property transferred. In addition, the evidence demonstrates that in the wake of his plea agreement, Smith knew or should have known that he was liable for a maximum criminal fine of $225,050.00 and that he would be subject to civil tax liabilities for at least 8 years of unpaid taxes.
Liens and Foreclosure
26 U.S.C. § 6321 provides:
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 or personal, belonging to such person.
A federal income tax lien imposed by § 6321 arises at the time the tax assessment is made. 26 U.S.C. § 6322. The § 6321 lien attaches to all of a taxpayer's property. See United States v. Big Value Supermarkets, Inc., 898 F.2d 493, 496 (6th Cir. 1990). The evidence in this case establishes that Smith was assessed federal income tax liabilities for tax years 1982-88 and 1990-91 on January 24, 1995, and subsequently assessed federal tax liability for tax year 1989 on February 15, 1995. Thus, a tax lien was automatically imposed upon any property or right to property owned by defendant Smith as of these dates. Notices of the assessments were filed with the Butler County Recorder's Office on June 16, 1995 and June 11, 1996. Because tax liens are not self-executing, the government may enforce the collection of unpaid federal income taxes through one of two actions: a line-foreclosure action or an administrative levy. In this case, the government seeks to enforce its liens on Smith's property through this lien-foreclosure action. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 720 (1985).
Pursuant to 26 U.S.C. § 7403(a), the government is authorized to file suit in the United States district courts in order to enforce a tax lien. See Bank of Fraser v. United States, 861 F.2d 954, 958 (6th Cir. 1988). The statutory language authorizing the tax lien "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have. National Bank of Commerce, 472 U.S. at 719-720. "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Bank of Fraser, 861 F.2d at 958 (citing Glass City Bank v. United States, 326 U.S. 265, 267 (1945)).
Section 7403 provides in full as follows:
(a) Filing. — In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary [of the Treasury], may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, [of] whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability. For purposes of the preceding sentence, any acceleration of payment under section 6166(g) or 6166A(h) shall be treated as a neglect to pay tax. (b) Parties. — All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto. (c) Adjudication and decree. — The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States. If the property is sold to satisfy a first lien held by the United States, the United States may bid at the sale such sum, not exceeding the amount of such lien with expenses of sale, as the Secretary directs. (d) Receivership. — In any such proceeding, at the instance of the United States, the court may appoint a receiver to enforce the lien, or, upon certification by the Secretary during the pendency of such proceedings that it is in the public interest, may appoint a receiver with all the powers of a receiver in equity.
The Supreme Court has clearly held that courts may order the judicial sale of an entire property, not just a delinquent taxpayer's interest in the property, to satisfy the taxpayer's tax indebtedness. United States v. Rodgers, 461 U.S. 677, 693-97 (1982). However, Section 7403 protects those third parties with vested interests in the property and ensures that the government receives no more from the proceeds of the sale than that to which it is entitled. Id. at 699. See also Kingman v. United States, 2000 WL 1566280, at * 3 (S.D. Ohio Sept. 13, 2000) (Beckwith, J.) ("There is no controversy over the power of this Court to require a sale of the [. . .] properties due to [defendant's] federal tax indebtedness. . . . This is so even though [defendant's wife] also has a one-half interest in the [. . .] properties."). Thus, the Court's power to require a judicial sale may be "limited to some degree by equitable discretion." Rodgers, 461 U.S. at 680; Kingman, 2000 WL 1566280 at *3.
Because the federal government has a paramount interest in the "prompt and certain" collection of delinquent taxes, the Court's exercise of its discretion not to order a sale must be applied "rigorously and sparingly." Rodgers, 461 U.S. at 711. There are "virtually no circumstances, for example, in which it would be permissible to refuse to authorize a sale simply to protect the interests of the delinquent taxpayer himself or herself." Rodgers, 461 U.S. at 709. Yet, when a third party has an interest in property that may be subject to a judicial sale, the Court must evaluate the following equitable considerations: (1) the extent of prejudice to the Government's financial interest if the Court orders a sale of only the delinquent taxpayer's interest; (2) whether the interested third parties would, under normal circumstances, hold a legally recognizable expectation that their interests would not be sold by the delinquent taxpayer or his creditors; (3) what, if any, prejudice the third parties will incur "both in personal dislocation costs and in undercompensation from the forced sale. . . . "; and (4) the differences between the interests held by the delinquent taxpayer and the third parties, and whether any differences weigh against a compelled sale. Kingman, 2000 WL 1566280 at * 3-4 (citing Rodgers, 461 U.S. at 710-11).
The government asserts that the federal tax liens on the Tylersville Road property should be foreclosed by means of a forced judicial sale. Plaintiff asserts that the government is entitled to one hundred percent of the proceeds from such a sale because the transfer to Smith's parents was fraudulent and must be set aside. The Court agrees that Smith's transfer to his parents was fraudulent under Ohio law and should be set aside. Consequently, the government is entitled to foreclose on the Tylersville Road property and have the sale proceeds applied to defendant Smith's income tax liability.
In the alternative, the government maintains that Naoma and Gregory Smith are merely nominal owners of an interest in the property and therefore have no interest in the property which would preclude a judicial sale and distribution of the proceeds to satisfy the government's tax liens against the Tylersville Road property. Finally, plaintiff further argues that even if the Court were to find in favor of defendants Naoma and Gregory Smith that the transfer was not fraudulent, or that they are not mere nominee property owners, the government is still entitled to foreclose. According to the government, under 26 U.S.C. § 7403(c), it would simply distribute the proceeds of the sale to those third parties found to have a legally enforceable interest, proportionally according to each parties' interest.
Nominee Status of Naoma and Gregory Smith
Assuming arguendo that defendant Smith's initial transfer of a one-half property interest to Barney and Naoma Smith was not fraudulent and therefore would not be set aside under Ohio law, the government would nevertheless be entitled to foreclose on the property in satisfaction of its federal tax liens.
In the application of § 6321, "state law controls in determining the nature of the legal interest which the taxpayer had in the property." United States v. Nat'l Bank of Commerce, 472 U.S. 713, 722 (1985). When legal title to property is held in the name of a third party for the benefit of the taxpayer, the courts consider that the property is held in a nominal or representative capacity for the taxpayer. The property is therefore subject to the taxpayers liability. Nantucket Village Dev. Co. v. United States, 2001 WL 169316, * 8, (N.D. Ohio Jan. 9, 2001). The government may collect a taxpayer's unpaid taxes from the taxpayer's nominee. United States v. Billheimer, 197 F. Supp.2d 1051 (S.D. Ohio 2002); LeMasters v. United States, 891 F.2d 115 (6th Cir. 1989); United States v. Prather, 2002 WL 31934326, *2 (S.D. Ohio Nov. 19, 2002) (Beckwith, C.J.), aff'd, 79 Fed. Appx. 790, 2003 WL 22442943 (6th Cir. Oct. 27, 2003).
To the extent that Ohio law does not explicitly recognize the nominee theory of ownership, it does recognize "equitable ownership" which is akin to the nominee theory. Spotts v. United States, 429 F.3d 248, 253 at n. 2 (6th Cir. 2005); United States v. Gaumer, 2007 WL 4365399, * 3 (N.D. Ohio Dec. 10, 2007). See also Nantucket Village dev. Co., 2007 WL 169316 at * 8-9. Thus, the inquiry into whether title to property is held by nominal owner for another party or whether a party has an equitable or beneficial interest in property despite a lack of legal title should ultimately focus on consideration of all the facts and circumstances, including, but not limited to: (1) whether inadequate or no consideration was paid by the nominee; (2) whether the property was placed in the nominee's name in anticipation of a lawsuit or other liability while the transferor remains in control of the property; (3) whether there is a close relationship between the nominee and transferor; (4) whether they failed to record the conveyance; (5) whether the transferor retained possession; and (6) whether the transferor continues to enjoy the benefits of the transferred property. Spotts, 429 F.3d at n2.
As set forth above in conjunction with the fraudulent conveyance claims, the evidence in this case establishes that Naoma and Barney Smith are not the true beneficial owners of an interest in the Tylersville Road property; rather, they are nominees of defendant Smith. The Court has previously found from the evidence at trial that Naoma and Barney Smith did not pay adequate consideration for their one-half interest in the property. Gregory smith received his title to one-quarter of the property as a gift from his father, Barney Smith and thus paid no consideration. The property transfer was to Barney and Naoma made in 1991 when Smith knew that he was facing a significant criminal fine and substantial income tax liability for the years assessed. All the while, Smith retained virtually total control of the property. There is undisputedly a close relationship between Smith and the transferees, Smith retained possession of the property, and continues to enjoy the benefits attendant to exclusive ownership. Thus, the Court finds that Naoma and Gregory Smith retain nothing more than bare legal title to one-half of the property as mere nominees of defendant Smith. Because Smith is the beneficial or equitable owner of the property and because the government has tax liens against the property, the plaintiff is entitled to judgment in its favor, requiring that the property be sold and one hundred percent of the sale proceeds be applied against defendant's income tax liability.
IT IS THEREFORE ORDERED THAT:
Judgment be GRANTED in favor of plaintiff and the Tylersville Road property be foreclosed and sold pursuant to 26 U.S.C. § 7403 to satisfy the federal tax liens assessed against defendant Smith for tax years 1982-88 and 1990-91.
The parties are DIRECTED to contact the Court by telephone no later than ten days from the date of this Order to set a date for a conference to address the procedure for sale of the property. See 28 U.S.C. § 2001. To the extent that a sale of the property on the open market may more closely approximate fair market value of the property than a judicial sale by auction, and thereby generate more funds from which to satisfy defendant's tax liability, (an amount, including plus penalties and interest, in excess of $5.4 million as of August 2006), the government may wish to consider appointment of a Receiver pursuant to § 7403(d). See United States v. Barr, 2008 WL 4104507, * 3-4 (E.D. Mich. Sept. 2, 2008); United States v. Kerner, 2003 WL 22905202, * 1-2 (E.D. Mich. Oct. 24, 2003).