Some Nasty Bankruptcy Law and a Remedy

 

      For the last few years the number of bankruptcies against the taxing agencies has continually increased.  Some of the states have started to fight back.  The U.S. Supreme Court held in Seminole Tribe of Florida v. Florida, 116 S.Ct. 1114 (1996), that the Constitution bars Congress from restricting the sovereign immunity of the states.  Title 11 U.S.C. Section 106 as amended by the Bankruptcy Reform Act of 1994 purports to lift the states' sovereign immunity in all bankruptcy cases.  This ruling may effectively invalidate Section 106.  The 9th Circuit in the case of In Re Mitchell, 227 B.R. 877 (9th Cir. BAP 1998), has protected the states in the 9th Circuit.  However, the debtor can still sue states' officers and employees in the state court.  The U.S. Supreme Court opened the way to relief against an officer or employee of a state, in the case of Ex Parte Young, 209 U.S. 123, 28 S.Ct. 44 (1908). The Young doctrine has been applied in a recent case to allow injunctive relief against an officer of a state agency in Natural Resources Defense Council, et. al. v. Cal. Dept. of Transportation, 96 F.3d 420 (9th Cir. 1996).

 

The doctrine of Ex Parte Young is premised on the notion that a state can not authorize a state officer to violate the Constitution and the laws of the United States.  Thus, an action by a state officer that violates federal law is not considered an action of the state and, therefore, is not shielded from suit by the state's sovereign immunity...Therefore,  a plaintiff may bring suit in federal court against a state officer accused of violating federal law. (Natural Resources Defense Council. et al. v. Cal. Dept. of Transportation, 96 F.3d 420 (9th Cir. 1996).

 

      This doctrine has appeared in the bankruptcy case of Colon v. Royal Hart, Chief Clerk, City of Philadelphia, 114 B.R. 890 (Bkrtcy.E.D.Pa.1990) where the court held that the debtor could proceed in bankruptcy court against an officer of the City of Philadelphia. 

 

      Debtors who have failed to get justice in the bankruptcy courts may use the state court.  The court said in the case of In re Lazar, 200 B.R. 358, 357 (Bkrtcy.C.Cal. 1996):

 

Seminole, where it is applicable, does not altogether prevent a trustee or debtor in possession from bringing a lawsuit against a state or state agency.  Bankruptcy trustees and debtors in possession may sue states and state agencies in state court (as the trustee did in this case before removing it to this court), with no hindrance from the Eleventh Amendment.  See e.g., Hilton v. South Carolina Railways Commission, 502 U.S. 197, 204-5, 112 S. Ct. 560, 116 L Ed. 2d 560 (1991);  see generally, S. Elizabeth Gibson, Sovereign Immunity in Bankruptcy: The Next Chapter, 70 AM BANKR. L.J. 195, 203-08. (1996).State courts are required to enforce applicable federal law in suits before them.  In addition, states have generally waived sovereign immunity for most kinds of actions that a trustee may want to bring against them.  Under the Bankruptcy Act, a proceeding in state court was frequently required because bankruptcy courts were limited to summary jurisdiction. See 1 Collier on Bankruptcy p. 3.01(1)(b)(4) While one of the principal reforms of the Bankruptcy Code was to eliminate this balkanization of bankruptcy jurisdiction, the Seminole case may require a limited return to this practice, absent an appropriate waiver.

A Great Quiet Title Victory

 

 

            You can sue the individual who purchases your property from the IRS in a seizure sale and because the IRS makes so many mistakes, you might win.  Vern Holland, the excellent paralegal from Tulsa, Oklahoma has pioneered this approach and people all over the country are using his techniques.  The following action is a suit by Larry Bartel, in the United States District Court for the District of Kansas, Bartel, v. USA and Jost, NO. 96 1022 MLB.  The case was decided September 29, 1997.  The judge really blasted the IRS hard and the guy who bought the property from the IRS, lost.  If more people would challenge everything that the IRS does, it would be impossible for the IRS to continue its oppressive maneuvers. The entire court order is reprinted here because it is full of excellent comments and law about the IRS' procedures.  It can be used effectively to develop a case against the IRS and the purchaser of property because the IRS makes many mistakes.

           

 

MEMORANDUM AND ORDER

 

Pursuant to Fed. R. Civ. P. 72(b), the court reviews Magistrate Judge Reid s report and recommendation filed July 22,1997 (Doc. 49).  See D..Kan. Rule 72.1.4(b). Defendants timely filed written objections (Docs. 52 and 53), and the court thus reviews the Magistrate's report and recommendation de novo. Summers v. Utah, 927 F.2d 1165, 1167 (10th Cir. 1991).  In undertaking the Rule 72(b) review, the court has reviewed all the underlying motions and memoranda.

 

I. UNDISPUTED FACTS

 

By January 9, 1995, the IRS had found plaintiffs delinquent in their 1991 and 1992 federal income tax in the amount of $30,599.15 (Doc. 11, Ex. 3).  Plaintiffs received a copy of the Final Notice (Notice of Intent to Levy) by certified mail on or about January 11, 1995 (Doc. 46, Stipulation A). On April 1, 1995, plaintiffs received a copy of the Notice of Seizure by certified mail (Doc. 46, Stipulation B). The IRS made no attempt to personally serve the Notice of Seizure on plaintiffs nor did they leave the Notice of Seizure at plaintiff s residence or place of business (Doc. 49 at 2). On May 17, 1995, Officer Jane Bicknell sent a minimum bid worksheet to plaintiffs by registered mail which was delivered on May 18 and signed for by plaintiff Larry Bartel (Doc. 46, Stipulation C; Doc. 11, Ex. A.9 10). On June 27, 1995, Officer Bicknell attempted personal service of the Notice of Sale to plaintiffs at their residence (Doc. 49 at 2). Officer Bicknell did not attempt to leave the Notice of Sale at plaintiff s residence or place of business (Doc. 49 at 2). Instead, in June and July of 1995, she caused to be published Notices of Sale in the local newspapers (Doc. 11, A.ll). On or about July 5, 1995, plaintiffs learned about the pending sale from reading a local newspaper (Doc. 54, Ex. A and B). At public sale on July 18, 1995, the IRS sold plaintiffs' property to defendant Keith Jost (Doc. 49 at 2). Plaintiffs did not redeem their property within the one-hundred eighty (180) days provided by law, whereby the IRS issued a quitclaim deed to defendant Jost on January 17, 1995 (Doc. 11, Ex. A.l3).

On January 24, 1996, plaintiffs filed this civil suit, titled "Complaint to Quiet Title" (Doc. 1). Plaintiffs also filed an administrative claim with the IRS, as required by 26 U.S.C.  7433 (Doc. 11, Ex. C).

 

II. NATURE OF CASE

 

Plaintiffs base their suit to quiet title, brought under 28 U.S.C. 2410, on the failure of the IRS to comply strictly with the procedural requirements for notice of seizure and sale under 26 U.S.C. 6335(a) (b). Failure to comply, argue plaintiffs, invalidates the IRS tax sale of their property. Defendants contend, however, that the count lacks subject matter jurisdiction under 28 U.S.C. 24l0.  Specifically, defendants suggest that the government maintains no further interest in the property, and thus cannot be sued under section 2410, because the IRS (1) substantially complied with the code procedures regarding the property sale; (2) held no lien on the property as of the time plaintiffs filed this complaint; or (3) does not waive its immunity through the Declaratory Judgment Act or impliedly waive its immunity through notions of sovereign immunity. Plaintiffs counter that the IRS does maintain an interest in the property, and thus can be sued, by not conferring good title to defendant Jost under the statutory obligations of 26 U.S.C. 6339(b)(2).

 

III. SUMMARY JUDGMENT STANDARDS

 

Rule 56(c) of the Federal Rules of Civil Procedure directs the entry of summary judgment in favor of the party who "shows that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. p. 56(c). The usual and primary purpose "of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses . . . ." Celotex Corp. v. Cartrett, 477 U.S. 317, 323 24, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265, 274 (1986). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact by informing the court of the basis for its motion. Martin v. Nannie and the Newborns. Inc., 3 F.3d 1410, 1414 (10th Cir. 1993). The non-moving party must then "set forth specific facts showing that there is a genuine issue for trial." Muck v. United States, 3 F.3d 1378, 1380 (10th Cir. 1993). The rare case presents little or no dispute of the facts by the parties; the parties instead demand a clarification of the law as it applies to their situation. In this setting, where unresolved issues are merely legal rather than factual, summary judgment is particularly appropriate. In State Mint. Inc. v. Riedel Environmental Services. Inc., 29 F.3d 424, 426 (8th Cir. 1994). The case at hand fundamentally presents legal questions rather than factual ones. The parties request wholly different interpretations of the governing law while offering consistent, if not relatively harmonious, factual accounts of the dispute. In this light, the court accepts the challenge of sorting out and clarifying the following sections of code as they apply to the legal issues presented: 28 U.S.C. 2410 (1994 & Supp. 1997), 26 U.S.C. 6335(a) (b) (1989), and 26 U.S.C.  6339(b)(2) (1989).

 

IV. DISCUSSION

 

Both parties suggest entirely different conclusions about the application of 28 U.S.C. 15 2410, 26 U.S.C. 15 6335(a) (b), and 26 U.S.C.15 6339(b) (2) to the undisputed facts of this case. This requires a brief summary of the code sections and their relationship to one another. Also, in addition to providing an overview of the relevant code sections, the court offers an analytical framework for working through the issues of the case. Analysis and a resolution of these issues follow. Overview and Framework of Relevant Code and Issues A party may bring suit in district court, naming the United States as party, to quiet title to property on which the United States has or claims a mortgage or lien."  Schmidt v. King, 913 F.2d 837, 839 (10th Cir. 1990) (citing 28 U.S.C. 15 2410(a)). The text of section 2410(a) clearly allows for a waiver of the United States sovereign immunity, yet any consent language must "be construed strictly in favor of the sovereign and may not be extended beyond the explicit language of the statute." Fostvedt v. United States, 978 F.2d 1201, 1202 03 (10^th Cir. 1992) (citing Ruckelshaus v. Sierra Club, 463 U.S. 680, 685, 103 5. Ct. 3274, 3278, 77 L. Ed. 2d 938 (1983)). The Tenth Circuit has held that section 2410  "does waive sovereign immunity with respect to procedural violations arising from assessment, levy, and seizure." Guthrie v. Sawyer, 970 F.2d 733, 735, 735 n.3 (10th Circuit 1992) (reaching this conclusion,  in the context of a deficiency notice procedure pursuant to 26 U.S.C. 6213). The Guthrie holding obviously rests, however, on the firm understanding that "the United States has or claims a mortgage or lien" over the taxpayer s property. Unfortunately, the present case offers no such clear understanding of the present mortgage or lien situation. In fact, the overarching question confronting this court is whether the government continues to hold a lien over plaintiff's property. If the government does currently retain a lien over the property, the facts of the present case implicate the Guthrie holding, thus validating the section 2410 action and a waiver of sovereign immunity. If, however, the government does not still hold a lien (interest in the property), sovereign immunity protects it from a section 2410 action and the suit must fail for lack of subject matter jurisdiction. See, e.g., Powelson v. United States, 979 F.2d 141, 145 (9th Cir. 1992). To address the lien issue, the court must first consider 26 U.S.C. 6339(b) (2), which states:  If the proceedings of the Secretary as set forth have been substantially in accordance with the provisions of law, such deed shall be considered and operate as a conveyance of all the right, title, and interest the party delinquent had in and to the real property thus sold at the time the lien of the United States attached thereto. In order to pass good title by deed and extinguish the lien on seized property, the IRS must comply with section 6339(b) (2). The key to section 6339(b) (2) rests with the language "substantially in accordance with the provisions of the law" and a reasoned understanding of what government behavior satisfies the stated requisite standard. The argument follows that if the government proceedings have not "been substantially in accordance with the provisions of law," as defined and clarified below, then good title does not get passed to the purchaser, the government s lien on the property does not expire, and a taxpayer may bring a valid section 2410 action. The "provisions of law" with which the IRS must be "substantially in accordance" is a reference to 26 U.S.C.15 6335.  The IRS conducts a tax sale of seized property in accordance with 26 U.S.C. 6335. Section 6335, in its pertinent part, requires both notice of the seizure and sale of the property. 26 U.S.C. 6335(a) (b). Subsection (a), titled "Notice of seizure," states: As soon as practicable after seizure of property, notice in writing shall be given by the Secretary to the owner of the property (or, in the case of personal property, the possessor thereof), or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, in the case of personal property, an account of the property seized and, in the case of real property, a description with reasonable certainty of the property seized. Subsection (b), covering "Notice of sale," also requires "notice to the owner[] in the manner prescribed in subsection (a)." A failure to satisfy the notice elements required by section 6335 could well equate to a failure of the "substantially in accordance" standard of section 6339(b)(2). In the analysis below, the court addresses the, following sub issues provoked by section 6335(a) (b) and the interplay of sections 6335(a) (b) and 6339(b) (2): (1) whether the government failed to provide adequate notice to plaintiffs as demanded by section 6335(a) (b) and (2) whether a notice failure by the government necessarily means a breach of the "substantially in accordance" standard of section 6339(b) (2). The following statements summarize the overall logic and framework of the issues as the court sees them. If the government failed to comply with the notice requirement of section 6335, and, because of that failure, the proceedings do not meet the "substantially in accordance" standard of section 6339(b) (2), then good title does not get passed to the purchaser, the government s lien on the property does not expire, and plaintiff may bring a valid section 2410 action. If, however, any piece of the puzzle does not fit as the court works backwards from section 6335 to section 6339(b) (2) to section 2410, plaintiffs  claim will fail. Essentially, without the government's lien on the property, sovereign immunity protects the government from suit, and the 2410 action will be dismissed for want of subject matter jurisdiction. B. Analysis Notice Requirement of Section 6335 Notice requirements under section 6335 "are designed to protect the taxpayer by giving him an opportunity to be present at the tax sale and bid on the property." Reece v. Scoggins, 506 F.2d 967, 971 (5th Cir. 1975) (noting that Congress prescribes precise measures "[i]n recognition of the Damoclean nature" of a governmental seizure and sale of property). These notice provisions allow the taxpayer to protect his interest in the property and provide him with adequate due process. Verba v. Ohio Casualty Ins. Co., 851 F.2d 811, 816 (6th Cir. 1988). The "language and purpose" of section 6335(a) (b), demand "that the government be held accountable for failure to strictly comply with the procedures prescribed by the two provisions."  Powelson, 979 F.2d at 143 (quoting Goodwin v. United States, 935 F.2d 1061, 1065 (9th Cir. 1991)). Without "literal compliance" to the language of the section, "the government sale of land cannot stand."  Id. (citing Reece, 506 F.2d at 971). The Tenth Circuit supports the "literal compliance" approach to notice procedure. Both Colorado Property Acquisitions. Inc. v. United States, 894 F.2d 1173 (10th Cir. 1990), and Title Ins. Co. of Minnesota v. IRS of the United States, 963 F.2d 297 (10th Cir. 1992), present scenarios where the notice requirements are implicated in the context of 26 U.S.C.15 7425 rather than section 6335. Section 7425 covers generally the discharge of liens and contains specific mandates in its language (and the language of relevant regulations) for notice procedures. See 26 U.S.C. 7425(c) (1) (1989); 26 C.F.R.15 301.7425 4(b) (4) (ii) (1997). The court finds the purpose behind and clarity of the language in section 7425 significantly analogous to that of section 6335. Thus, the court concludes that Colorado Property and Title Insurance provide controlling authority on this issue.

 

In Colorado Property, a bank loaned a taxpayer money against his home and, one year later, the IRS recorded a Notice of Federal Tax Lien against the property. After the taxpayer failed to make required payments to the bank, the bank initiated nonjudicial foreclosure proceedings. The bank sent written notice of the foreclosure proceedings to the IRS via regular mail. The bank did not send notice by registered or certified mail, nor did it personally serve the IRS. The bank successfully bid on the property and subsequently assigned it to Colorado Property. Colorado Property brought suit to quiet title, arguing that the IRS should not be able to rely on "technical noncompliance with the notice requirement" to "stymie the normal foreclosure process" when the IRS did receive actual notice. The Tenth Circuit disagreed. The court looked carefully at the language of section 7425(c) (1), which states that "[n)otice of a sale . shall be given in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary." The court concluded that "[t]he statute uses clear and simple language," allowing "for no alternative to the specified methods of delivery." 894 F.2d at 1174. "Congress has the right to specify a particular method of delivery of notice," the court continued, "and when it does so the statutory requirement must be met in order to effect a valid notice."  Id. at 1175 (noting Botany Worsted Mills v. United States, 278 U.S. 282, 289, 49 S. Ct. 129, 132, 73 L. Ed. 379 (1929)). Such a firm stance allows, as is illustrated in Colorado Property, "the IRS to-receive actual notice, ... ignore the notice and still retain the right to levy upon the property." Id.  Without a doubt, the results can be harsh and unforgiving, but the Colorado Property court emphasized that "[t]he remedy .must come from Congress and not from the Courts."  Id. Title Insurance confirmed Colorado Property and "literal compliance" as the standard when a statute clearly specifies the method of notice delivery.  Again, actual notice did not suffice when the statute mandated other specific notice requirements. In Title Insurance, the IRS did not comply with 26 C.F.R. 301.7425-4(b) (4) (ii), and the court held that "the IRS's failure to strictly comply . . . invalidated its certificate of redemption." 963 F.2d at 302.  The Title Insurance court not only reiterated the rationale of Colorado Property in its decision, id. at 302 03, it also relied on an analogous section 6335 case for support.  Id. at 303 (highlighting Goodwin, 935 F.2d at 1061, which required that a taxpayer whose property had been seized be given notice by personal service, per the priority of the statute, rather than by certified mail).      Another example, in the section 6335 context, illustrates the stringency with which the statutorily mandated notice requirements must be followed.  Powelson, from the Ninth Circuit, provides a factual set of circumstances reasonably similar to the present case. In Powelson, the IRS attempted to personally serve a Notice of Sale at the taxpayer s residence.  Powelson, 979 F.2d at l43.  Upon finding the taxpayer absent, the IRS officers left without leaving notice at his residence. The IRS did not attempt personal service again. The IRS instead sent notice to the taxpayer by regular and certified mail, notice that the taxpayer received. The Ninth Circuit concluded that although section 6335(a) (b) may allow the IRS several options for giving notice to a property owner, "strict compliance with the statute is required."  Id.  The Powelson court also noted that "[i]f the IRS wishes to give notice by mail, it must satisfy the pre-conditions for doing so." Id. The lone attempt at personal service, coupled with a failure to leave notice at the taxpayer's residence, amounted to a clearly unacceptable effort at section 6335 compliance. The undisputed facts in the present case indicate that Officer Bicknell did not personally serve plaintiffs with either a Notice of Seizure or a Notice of Sale, nor did she leave these notices at plaintiffs  home or place of business (Doc. 49 at 2). Although Officer Bicknell did try to personally serve the Notice of Sale at plaintiffs  residence on one occasion, she neglected to attempt personal service again, and she never did try to personally serve the Notice of Seizure (Doc. 49 at 2). The court notes that section 6335, in contrast to section 6339, does not allow for substantial compliance by its terms. Even the dimmest bulb in the IRS officer ranks should be able to figure out that he or she cannot satisfy the statute by mailing notice unless the owner cannot be readily located. The facts do not demonstrate nor support any inference that plaintiffs could not be readily located. On the contrary, because Hillsboro is a small community and Officer Bicknell made no inquiries about where the plaintiffs work or otherwise could be found, the likely inference is that plaintiffs were readily locatable, and Officer Bicknell simply did not try to find them on her only trip to Hillsboro. Also, to the extent the government may rely on publication as adequate notice, it bears noting that the statute does not even mention publication as an alternative to the notice procedures. Clearly, publication is an additional requirement. The court finds that the IRS clearly did not comply with the pre conditions necessary before giving notice by mail. The court thus concludes that the government failed the notice requirements of section 6335(a) (b). Analysis  Section 6339 (2) (b) The court now turns to section 6339(2)(b). In the plain language of the section, "the deed shall be considered and operate as a conveyance of all right, title and interest" the taxpayer had in the property at the time the government s lien attached as long as the proceedings were carried out "substantially in accordance" with section 6335. In other words, assuming government compliance with section 6335, a purchaser takes the property subject to any encumbrances on the property occurring prior to the government's lien attaching. If no encumbrances existed prior to the government's lien, and the government complies with section 6335, a purchaser will take the property "free and clear"   the very hope of the gambling purchaser at a tax sale. A fair reading of the code suggests, however, that a failure of the "substantially in accordance" standard would result in "all right, title and interest" not passing with the deed of real property."  The implication is, of course, that the purchaser would be taking a deed clouded by the government s continued interest in the property. The government s interest continues regardless of whether or not it concludes the lien has now been satisfied by the sale of the property. Put another way, the government cannot possibly hope to satisfy its lien against property from the proceeds of an illegitimate sale of the same property. Thus, the government s interest in the property continues if the "substantially in accordance" standard is not met. The more specific issue now becomes whether a failure by the government to comply with section 6335 necessarily breaches the "substantially in accordance" standard of section 6339(b)(2). At first blush, the "substantially in accordance" standard appears to ask for very little. Yet, a possibility of great loss by the taxpayer exists.  As the Scoggin's court states: "The consequences of seizure and sale are often staggering and irreversible; this action not only deprives a taxpayer of a sometimes significant capital investment but also denies him a source of additional income."  Scoggins, 506 F.2d at 971. This court simply cannot ignore the larger context of sections 6335 and 6339 and the potential unfairness to the taxpayer that may result from lax government attempts at notice procedure. The notice requirement is perhaps the most vital ingredient of a legitimate tax seizure and sale. The court is unable to conjure a scenario where the government can stumble badly over the notice hurdle of section 6335, yet be, able to win in the tax sale race by claiming to be "substantially in accordance" with section 6339. Also, the government cites no persuasive, affirmative authority to support its substantial compliance argument.  The court thus concludes, under the facts of this case, that the IRS failure to strictly comply with the notice requirements of section 6335 translates to a failure to meet the "substantially in accordance" standard of section 6339. In the present case, the government failed the taxpayer under section 6335 and thus also does not pass this court's scrutiny under section 6339. The government did not pass "all right, title and interest" to defendant Jost, and retains its interest in the property in relation to plaintiffs.  Section 2410 (a) As stated above, if the government holds an interest in property, a party may bring a quiet title action under section 2410.  Even though the Powelson decision is not binding precedent, the court feels compelled to address further its apparent irreconcilability with the present case. Although the Powelson court found the notice given to a taxpayer to be inadequate, to have failed the section 6335 requirements, the court summarily denied jurisdiction under section 2410(a) by  stating the government had no interest in the property when the action was commenced.  Powelson, 979 F.2d at 145.  The Powelson court provided no explanation for this conclusion and did not discuss section 6339(b) (2) nor its impact on the government s interest in the property.  In fact, the Powelson court avoided the interest or lien issue entirely other than to conclude that "the government held no interest in the property when the quiet title action was filed."  Id. Again, the court finds Colorado Property and Title Insurance more persuasive in this area of law. The court particularly takes note of the firm stance taken by the Tenth Circuit in Colorado Property, where it held a lending institution to exacting notice standards for a sale.  Colorado Property, 894 F.2d at 1174-75. In Colorado Property, the government clearly benefitted by the Tenth Circuit's strict application of notice requirements.  Title Insurance, holding against the government under the Colorado Property reasoning, solidified the Tenth Circuit s consistent and rather strict understanding of notice procedures and the consequences of failing to meet them. The court finds these cases appropriate, controlling authority. Defendants argue that Powelson provides a bright line of sorts from which to measure section 2410 action legitimacy (Doc. 52 at 3).  The court agrees that bright line rules often help litigants and courts, particularly with procedural matters, but the line suggested here unfairly restricts a legitimate claim by the taxpayer. If defendants crave a bright line here for clarity, they should look to the beginning of the seizure and sale process.  As highlighted before, section 6335 demands very straightforward action by the IRS to serve notice on the taxpayer. Proper government action up front alleviates any concern for section 2410 type actions later. The court has every sympathy for defendant Jost, who unwittingly relied on the government s representation that it had complied with the law. Defendant Jost, reasonable expectation or not, likely trusted that he would take the property clear of any complications between the government and plaintiff. Unfortunately for defendant Jost, the court cannot sanction anything less than a stringent adherence to section 6335  notice requirements. Ultimately, the court must place greater value in safeguarding the procedural protections afforded taxpayers whose property has been seized than condoning what appears to be lazy, or perhaps just careless, government behavior.

 

V. CONCLUSION

 

After careful consideration, the court concludes the following: (1) the government failed to adhere to the clear notice procedures of section 6335(a) (b); (2) the government s failure does not meet the "substantially in accordance" standard of section 6339(b)(2); (3) the government retains an interest in the property; and (4) the government waives sovereign immunity for purposes of section 2410, thereby validating plaintiffs section 2410 action. Accordingly, the court grants plaintiffs summary judgment motion to the extent that the court orders the tax sale invalidated.  Also, the court denies defendant's  motion to dismiss. The court further orders the parties to prepare concise briefs on the appropriate reimbursement process, including the possibility of accumulated interest, for defendant Jost. If the following issues relate to a possible award of damages in this case, the court also orders their briefing: (1) whether Sharla Jost, wife of defendant Keith Jost, is an indispensable party to this suit, and whether the failure to join her to this suit influences these matters (See Pretrial Conference Order at 12); (2) whether plaintiffs conduct or negotiations with defendant Jost after the tax sale affects these matters (See Pretrial Conference Order at 12); (3) whether plaintiffs entering into or satisfying any agreement with the IRS to pay off other back taxes affects these matters (See Pretrial Conference Order at 12); (4) whether the readily located standard in section 6335 rises to the level of due diligence (See Pretrial Conference Order at 3); and (5) whether the failure of the IRS to serve plaintiffs personally the Notice of Sale was harmless error because plaintiffs saw the Notice of Sale published in the newspaper on July 5, 1995 and took no action (See Pretrial Conference Order at 4). The parties must submit their briefs no later than October 14, 1997. A motion for reconsideration is neither invited nor encouraged. Any motion for reconsideration must comply with Rule 7.3 of this court and standards set out in Comeau v. Rupp, 810 F.Supp. 1172, 1174 (D. Kan. 1992). They must be filed by October 14, 1997. The motion may not exceed four (4) pages in length, including supporting arguments and authorities, regardless of the number of points raised. All responses must be filed by October 28, 1997. Responses shall be limited to two (2) pages each. No replies may be filed. Motions for extension of these time periods will be viewed with disfavor. The filing of such a motion does not relieve the party of its obligation to meet the relevant deadline, even if the motion is not ruled upon prior to the expiration of the deadline.

 

This case is set for a one day bench trial on December 9, 1997, at 9:30 a.m.  IT IS SO ORDERED.

    Dated this 29th day of September 1997, at Wichita, Kansas.

 

 

                               Monti L. Belot

                               United States District Judge

 

 

 

The Little Guy Beats the Big Guy

 

Vern Holland, an excellent paralegal from Tulsa, Oklahoma has been instrumental in inspiring Freedom Fighters to save their property from the IRS.  In the following case, an unpublished case from the Northern District of Florida, United States of America vs. Wilford Simpson, Case NO. 3: 97-cv-242/LAC, the IRS sued Wilford Simpson to get his property.  Wilford fought back  and defeated the IRS.  The moral of this story is that if you live in a state that allows the ownership of property by tenancy by the entireties, the IRS is going to have problems stealing the property if they have a lien against only one of the owners. The actual text of the court decision follows.  Please take this as inspiration that the IRS can be defeated.

 

The Court said:

 

  Both Plaintiff and Defendants agree that the facts in the instant action are undisputed, and indeed both recite almost identical factual circumstances in the memoranda in support of their respective motions for summary judgment.

 

1.         On December 29, 1983 Defendants Wilford and Janet Simpson, as husband and wife, acquired as tenants by the entireties a parcel of property located in Walton County, Florida. That property, totaling approximately 27.77 acres, also includes buildings and an airplane runway.

2.         On October 12, 1984, Defendant Wilford Simpson transferred his interest in the property to Janet Simpson by quitclaim deed.

3.         On June 10, 1985 Plaintiff assessed it first tax liability against Defendant Wilford Simpson for the tax year 1981.

4.         On October 30, 1987 Plaintiff filed a notice of federal tax lien as to Defendant Wilford Simpson's 1981 tax liability.

5.         On December 17, 1987 Defendant Janet Simpson transferred her interest in the property by warranty deed to her children, Defendants Cynda, William, Warren, Whitney, and Wesley Simpson, but retained a life estate in the property.

6.         On April 22, 1988 the children transferred their interest in the property by warranty deed to only children Cynda and William Simpson, but still reserved a life estate for Janet Simpson.

7.         On June 24, 1988 the Defendants Cynda and William Simpson transferred their interest into the Earnest Mill Family Preservation Trust. Janet Simpson still retained a life estate in the property.

8.         Twelve additional tax liabilities were assessed by Plaintiff against Defendant Wilford Simpson in the years 1991, 1994, and 1995 for the tax years 1984-1992. The respective tax liens were subsequently filed in 1992, 1994, and 1995. The total unpaid balance of tax liability alleged by Plaintiff is $1,284,537.10.

 

9.         Civil penalties were also assessed against Defendant Wilford Simpson in 1992 and

1994 for tax years 1978-1981, totaling $2,696.66. Notice of Liens were filed as to these assessments in 1994.

10.       On April 29, 1992 and May 27, 1994 notices of federal tax lien were filed with the Clerk of the Circuit Court of Walton County against the Defendants Janet, Cynda, William, Warren, Whitney, and Wesley Simpson as nominees of Wilford A. Simpson.

11.       Defendant Wilford Simpson has not paid either the balance of tax liability or the civil penalties assessed in 1985 and thereafter.

 

 

On May 19, 1997 Plaintiff filed this civil action seeking a monetary judgment against Defendant Wilford A. Simpson for the unpaid balances and foreclosure of its liens against the 27.77 acres of property and structures located in Walton County (doc. 1). Default judgment was entered against Defendant Wilford Simpson in the amount of $1,284,537.10 for unpaid federal income taxes and $2,696.66 for unpaid civil penalties as of February 28, 1996 plus further interest and statutory additions as allowed by law (doc. 36).

 

The remaining Defendants, however, timely filed a responsive pleading and moved for summary judgment against Plaintiff (docs. 26, 27). After the Court took that motion under advisement, (doc. 30), Plaintiff filed a cross-motion for summary judgment, which also served as its response in opposition to Defendants' motion (doc. 31). The Court has taken that motion under advisement as well, (doc. 37), and is prepared to rule on both motions.

                                                                 

Summary judgment is appropriate where the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits, if any, show that no genuine issue of material fact exists and that the party moving is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed. 2d 265 (1986). The substantive law will identify which facts are material and which are irrelevant. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248, 106 S.Ct. 2505,2510,91 L.Ed. 2d202(1986). An issue of fact is material if it is a legal element of the claim under the applicable substantive law which might affect the outcome of the case. Id.

 

At the summary judgment stage, a court's function is not to weigh the evidence to determine the truth of the matter, but to determine whether a genuine issue of fact exists for trial. Anderson, 477 U.S. at 249, 106 S.Ct. at 2510. A genuine issue exists only if sufficient evidence is presented favoring the nonmoving party for a jury to return a verdict for that party. Id. "If reasonable minds could differ on the inferences arising from undisputed facts, then a court should deny summary judgment." Miranda v. B & B Cash Grocery Store. Inc., 975 IF.2d 1518, 1534 (11th Cir. 1992) (citing Mercantile Bank & Trust Co. v. Fidelity and Deposit Co., 750 F.2d 838, 841 (11th Cir. 1985)).

 

When assessing the sufficiency of the evidence in favor of the nonmoving party, the court must view all the evidence, and all factual inferences reasonably drawn from the evidence, in the light most favorable to the nonmoving party. Hairston v. Gainesville Sun Publ'g Co., 9 F.3d 913, 918 (1lth Cir. 1993). The court is not obliged, however, to deny summary judgment for the moving party when the evidence favoring the nonmoving party is merely colorable or is not significantly probative. Anderson, 477 U.S. at 249, 106 S.Ct. at 2510. A mere scintilla of evidence in support of the nonmoving party's position will not suffice to demonstrate a material issue of genuine fact that precludes summary judgment. Walker v. Darbv, 911 F.2d 1573, 1577 (11th Cir. 1990).

 

Under Florida law, property held as a tenancy by the entireties cannot be charged with the individual debts of either spouse, in the absence of fraud. United States v. Gurlev 415 F.2d 144, 149 (5th Cir. 1969) (citing Meyer v. Faust, 83 So. 2d 847 (Fla. 195 5)).  "Because of the unique nature of a tenancy by the entireties under Florida law, a judgment lien cannot attach to real property held in such an estate... , and since property held by the entireties is not subject to levy and sale under execution, an ‘Execution Lien' cannot attach thereto." Id.

 

It is undisputed that Defendants Wilford and Janet Simpson took title to the property at issue as tenants by the entireties, and Plaintiff readily concedes that "[t]here is no evidence before this Court that the Simpsons acquired the real property as tenants by the entireties in order to defeat Mr. Simpson's creditors" (doc. 31, memorandum at 9). Therefore, Defendant Wilford Simpson's interest in the property was unreachable by Plaintiff or any other creditor while held as a tenancy by the entireties.

 

A similar circumstance was at issue before the Fifth Circuit in Gurlev:

 

[I]f the property here involved was then held by the Gurleys in a tenancy by the entirety, the filing of this federal tax assessment with the Clerk of the Circuit Court of Duval County would not have created a United States tax lien against said property because in matters involving the creation and enforcement of federal tax liens the Federal Courts respect those laws of a state which establish and regulate property rights within a state, 415 F.2d at 150 (citing Folsom v. United States, 306 F.2d 361 (5th Cir. 1962); United States v. American Nat'l Bank, 255 F.2d 504 (5th Cir. 1958)).

 

That court ultimately concluded that if the property was in fact held as an estate by the entireties, it could only be reached by creditors once the spouses' interests converted to a tenancy in common, where each spouse's separate interests in such property become liable for his or her individual debts. Id. If on remand the district court determined that the Gurleys were tenants by the entireties, then the tenancy would be destroyed only upon the divorce of the husband and wife, thus creating a tenancy in common and simultaneously allowing the United States tax lien to attach to each spouses' interests. Id. at 149-50.

 

In the instant case, there simply was no opportunity for Plaintiff to reach the individual interest of Defendant Wilford Simpson. As a tenant by the entireties under the laws of Florida, his interest was unreachable by any creditor. United States v. 15621 S.W. 209th Avenue, 894 F.2d 1511, 15 14-15(11th Cir. 1990). Moreover, because the property was then conveyed to only Janet Simpson in fee simple, Wilford Simpson had absolutely no interest at the time the tenancy by the entireties was destroyed:

 

No persons except husband and wife have a present interest in an estate by the entireties when such estate is unencumbered by any lien existing prior to the creation of such estate and is unencumbered by any lien created jointly by the husband and wife after the estate by entireties came into being. It is not subject to execution for the debt of the husband. It is not subject to partition; it is not subject to devise by will; neither it is subject to the laws of descent and distribution. It is, therefore, an estate over which the husband and wife have absolute disposition and as to which each, in the fiction of the law, holds the entire estate as one person. Therefore, there appears to be no plausible reason why the law should not recognize as valid any formal agreement executed according to law whereby one spouse would be divested of his or her interest in such estate and the other be invested with the unqualified fee-simple title.

 

Hunt v. Covington, 200 So. 76 (Fla. 1941).

 

Plaintiff now argues that the subsequent transfers to Janet Simpson, then to her children, and ultimately to the Mills Family Preservation Trust were fraudulent, as those grantees were effectively nominees of Wilford Simpson, and that it is entitled to foreclose its liens against the property (doc. 31, memorandum at 8-14). However, a large component of this argument becomes moot when considered in light of the safeguards afforded property held by tenants by the entireties. If, arguendo, the transfer to Janet Simpson was not fraudulent, then clearly she holds the property in fee simple and is free to dispose of it as she wishes. On the other hand, if that conveyance was fraudulent, Janet Simpson would not have fee simple title to the property, but rather the property would still be held by Wilford and Janet Simpson as tenants by the entireties. In either case, the subsequent transfers to the children and trust become irrelevant, as they too are either entirely valid or entirely void depending on the validity of the initial transfer to Janet.

 

Furthermore, it is also unnecessary to address whether the conveyance from Wilford and Janet Simpson to only Janet was fraudulent. As discussed immediately above, if the conveyance to Janet was fraudulent, the property remained a tenancy by the entireties and was unreachable by creditors of only Wilford Simpson. If the conveyance was valid, then Janet Simpson held the property in fee simple and Wilford had no interest at all. While there is a possibility that by divorce or some other reason the tenancy by the entireties could be destroyed, thus creating a tenancy in common and making the validity of subsequent conveyances of utmost importance, that day has not yet arrived. As such, the Court declines to make those determinations today.

 

The facts of this case mandate an unusual result. Frequently, a debtor will attempt to convey his own property to a third party or into a tenancy by the entireties as an attempt to hinder or obstruct his creditors. Without discerning the motives behind their decision, the Court notes that Defendants did exactly the opposite, destroying the tenancy by the entireties in favor of a fee simple held by Janet Simpson alone. While this conveyance, if valid, would have placed the property beyond the reach of Wilford's individual creditors, the tenancy by the entireties already afforded that protection. Nonetheless, because it is undisputed that Wilford and Janet Simpson acquired the 27.77 acre parcel as tenants by the entireties without intention to defraud or avoid creditors, the Plaintiff is simply unable to enforce a lien against Mr. Simpson's interests in the property as it is held today, regardless of subsequent conveyances. Therefore, summary judgment in favor of Defendants is warranted.

 

Defendants also move for Rule 11 sanctions against Plaintiff and allege that the Government's motion for summary judgment is "frivolous, not ‘substantially justified,' and is not ‘warranted -by existing law or by a nonfrivolous argument for the extension, modification, or reversal or existing law'" (doc. 34:1). However, the Court finds Defendants' argument unpersuasive. By filing their own motion for summary judgment, Defendants invited a response in opposition from the Plaintiff. Indeed, the non-movant is required in this district to file a responsive memorandum to a motion for summary judgment and failure to do so "may be sufficient cause to grant the motion." N.D. FLA. Loc.R. 7.1(C)(1).

 

The language of Rule 11 "stresses the need for some prefiling inquiry into both the facts and the law to satisfy the affirmative duty imposed by the rule." FED. R. CIV. P. 11 advisory committee's note. The rule, as amended in 1983, is intended to "reduce frivolous claims, defenses or motions" and to deter "costly meritless maneuvers," thus avoiding unnecessary delay and expense in litigation. Donaldson v. Clark, 819 F.2d 1551, 1556 (11th Cir. 1987) (citations omitted). The standard for testing conduct under Rule 11 is "reasonableness under the circumstances," a standard more stringent than the original good faith requirement required under the rule. Id. Where there is some legal and factual basis for the argument, sanctions are inappropriate. See. e.g., Davis v. Carl, 906 F.2d 533, 536-37 (11th Cir. 1990).

 

In the instant case, Plaintiff's arguments are well-grounded in Eleventh Circuit jurisprudence. Although they now fail because of their inapplicability to the unusual factual posture of this case, the significance of those arguments may come to bear in the future. Simply because the Court finds those arguments unavailing today does not mean they are without merit, nor does it compel this Court to resort to Rule 11 sanctions. Moreover, as Plaintiff was required to respond to Defendants' motion, it's cross-motion for summary judgment did not impose any additional expenses upon the Court or the parties than if it had been titled only as a responsive memorandum. For these reasons, the Court finds that sanctions are not proper.

                                                                 

1.         Defendants JANET, CYNDA, WILLIAM, WARREN, WHITNEY, AND WESLEY SIMPSON's motion for summary judgment (doc. 26) is GRANTED and summary judgment is hereby entered in favor of those Defendants. Plaintiff takes nothing by this action from said Defendants who shall go without day.

 

2.         Plaintiff's cross-motion for summary judgment (doc. 31) is DENIED.

 

3.         Defendants' motion for Rule 11 sanctions is DENIED.

 

ORDERED on this 24^th day of June 1998.

 

 

         Lacey A. Collier

United States District Judge

 

 

Dear Willie:

 

The IRS has seized my business equipment and I cannot function.  If they sell it, I am dead meat.  What do I do?

 

Sincerely, Distressed

 

---------

 

Dear Distressed:

 

Great to hear from you.  Quit worrying.  You need to go down and file a Chapter 11 Petition right away.  You can then call the IRS and ask your Revenue Officer to return the property.  He will probably be a jerk and refuse to to do it. Then you can file a motion to return the property.  Use the sample text that follows in your motion.  Good Luck. Remember you have to file all past returns.  Chapter 11 can keep them at bay a long time.  You will have to make current tax payments so you don't get kicked out for bad faith. 

 

 

 

           

Sample Motion

 

Comes the petitioner in the above-entitled action and requests that this honorable Court order the IRS to return the following items:

 

 

            List items here with serial numbers etc.

 

           

            11 USC Section 542 (a) states as follows:

 

            "...an entity, other than a custodian, in possession, custody, or control, during the case of property that the trustee may use, sell or lease...shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate."

 

 

            In United States v. Whiting Pools, Inc., 462 US 198; the Supreme Court issued a sweeping opinion which seems to encompass virtually all property of consequential value to the estate.  The Court held that 11 USC Section 542 extends even to secured property.

 

            Since it is impossible for the petitioner to reorganize and pay his debts without the equipment the IRS has taken, the debtor respectfully requests that this honorable Court order the IRS to return the seized property.

 

(type this in motion form.  Be sure to give the property forms to the IRS.  Serve the United States Attorney for your region, the civil division and also serve the district director and the collection officer.  You can do it by certified mail.  Then get to work on the returns.

DUPLICITY AND IRC SECTION 7201

 

           

   Within Section 7201 there are two distinct crimes.  There are (A) Evasion of assessment (concealing income) and (B) Evasion of payment (concealing assets).

 

           The wording of the standard form of indictment for tax evasion contains elements of both A and B.  This is duplicity (Duplicity is defined as the joining in one count of two or more offenses.  See 1 Wright, Federal Practice an Procedure, Section 142 (2nd Ed. 1982); Moore's Federal Practice, Section 8.03 (2d Ed. 1984).) and at least three circuit courts have agreed.  Certain affirmative acts will support A but not B and vice versa.  An affirmative act is necessary for a fraud conviction.

 

           Title 26 U.S. C. Section 7201 provides, in pertinent part that, "any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony...."; the United States Supreme Court has recognized that this statute defines two distinct crimes: the willful attempt to evade or defeat the assessment of the tax; and the willful attempt to evade or defeat the payment of that tax.  Sansone v. United States, 380 U.S. 343 (1980).  See also United States v. Dack, 747 F.2d 1172, 1174 (7th Cir. 1984); United States v. Voorhies, 658 F.2d 710, 713 (9th Cir. 1981).

 

           Each count of the Indictment charges the defendant with violating both of the distinct crimes which come under the ambit of Title 26 , U.S.C. 7201.  Each count charges the defendant with evading assessment by stating that he violated Section 7201 "by failing to make an income tax return."  Each count charges the defendant with evading assessment by stating that he violated Section 7201 “by failing to make an income tax return."  Each count charges the defendant with evading payment in stating that he violated Section 7201 "by failing to pay to the Internal Revenue Service the said income tax."  The counts do not specify which of these offenses the defendant committed; accordingly, one can only assume that each count charges the defendant with both offenses.

 

           If the government wishes to charge two or more offenses in the same indictment, they must be charged in a separate count for each offense.  Duplicity impinges on the accused's Constitutional rights.  If a defendant is acquitted on a duplicitous indictment, there is a risk of double jeopardy because the court cannot know which crime, if any, he was acquitted of.  If a defendant is convicted on a duplicitious indictment, it is possible that he was convicted without a unanimous jury verdict on any individual crime within the court, thus violating the Defendant's Sixth Amendment right to know the charges against him.  See United States v. Murray, 618 F.2d 892, 896 (2nd cir. 1980);  United States v. Starks, 515 F.2d 112, 116 (3rd Cir. 1975);  United States v. Pavlovski, 574 F.2d 933 (7th Cir. 1978);  United States v. Orzechowski, 547 F.2d 978.  986 (7th Cir. 1976);  United States v. Geberding, 471 F.2d 55, 59 (8th Cir. 1973);  United States v. Aquilar, 756 F.2d 1418.  n.2 (9th Cir. 1985).

 

          In the present case, as has been determined by the Supreme Court, Title 26 Section 7201 describes two distinct offenses. Each count of the Indictment charges the defendant with both offenses.  As such, the Indictment is improperly duplicitous.  Such duplicity if allowed to go uncorrected would violate the defendant's constitutional rights under both the Fifth and Sixth Amendments of the United States Constitution.

 

          As you can see, it could be very important to raise this argument if your receive an indictment under Section 7201 of the Internal Revenue Code.

 

The Department of Justice

 

            The Department of Justice is the branch of our government that is responsible for prosecuting individuals the IRS accuses of tax crimes.  The DOJ is presided over by the Attorney General and he represents the United States in legal matters generally and furnishes advice and opinions on legal matters to the President and the Cabinet.

 

            The Tax Division is one division of the Department of Justice.  It is supervised by an Assistant Attorney General. Currently there are over 400 attorneys who are involved in civil litigation, criminal litigation and appellate litigation.  There are three Deputy Assistant Attorneys General. One is responsible for civil trial litigation; one is responsible for civil appeal litigation and another is responsible for criminal litigation including criminal appeals.

 

            The Department of Justice except for Tax Court Litigation conducts all Federal Tax Litigation. (See 28 C.F.R. 220.70(a).

 

            The civil division is organized into six sections.  Five sections handle civil litigation, including bankruptcy litigation in different parts of the country, specifically: Northern, Eastern, Southern, Central and Western.  The sixth section conducts litigation in the United States Claims Court.

 

            The United States Attorneys generally play a supporting position in civil tax litigation.  However, there are three United States Attorney's Offices that do handle some civil tax cases.  These are: The Central District of California, The Northern District of California, and The Southern District of New York.

 

            The Tax Division is also responsible for supervising all the criminal proceedings that arise under the Internal Revenue Laws, 28 C.F.R. Section 0.70(b).

 

            Criminal tax investigations and prosecutions are generally controlled by the local United States Attorney's office.  However, the Tax Division in Washington sometimes helps out on more complicated criminal cases.  The Tax Division in Washington must authorize the prosecution of an individual on tax charges.  The Tax Division must also approve indictments on Federal tax charges.

 

            The Tax Division also is responsible for the appellate proceedings that come out of the civil district Court cases. The Appellate Section handles the civil appeals and the criminal appeals are handled by the Criminal Appeals and Tax Enforcement Policy Section.  There is also an Office of Review, which reviews offers in settlement and concessions in major civil tax litigation.

 

            If you are on the front lines of the Freedom Movement, you are likely to come into contact at some point in time with the Department of Justice.  Let's hope that you are on the plaintiff end of the lawsuit!

Divorce and the IRS Lien

 

 

The IRS may lose it's lien priority once a divorce petition is filed.

 

            The laws of the state that you live in may protect marital assets from an IRS lien after a divorce petition is filed, according to a recent Federal District court case. The decision could help divorcing couples regardless of whether the divorce is amicable or contested.

 

            A Kansas woman filed for a divorce in April of 1986. Most of the property which she and her husband had acquired during their marriage (so-called "marital property") was owned by her husband. In her divorce action she sought to obtain almost all of it. Her husband, it turned out, owed the IRS considerable back taxes (apparently the couple had filed separate returns) and in September of 1986, the IRS filed a lien against the husband's property. The divorce court eventually awarded virtually all of the marital property to the woman, who then brought an action against the IRS to force the removal of its lien.

 

            The IRS has first rights to property if it files its lien while the taxpayer owns the property (and before any other judgment or lien creditors file), and it argued that, since its lien was filed before the divorce court ordered the property transferred to the woman, it had the right to take the property.

 

            The Court reasoned, however, that the question of who owned the property at the time that the lien was filed was a question of state law, and under the law of Kansas (as in many other states), upon the filing of a divorce petition involving marital assets the assets become jointly-owned property until the divorce court determines who gets them.

 

            Therefore, the court said, when the IRS filed its lien, the ownership of the marital assets was undetermined, and the husband did not own any assets that the IRS could file a lien against. Since the divorce court eventually awarded all the marital assets to the woman, the IRS's lien against her husband was never valid. The Court ordered the IRS to remove its liens.

 

            This case is of interest not only to couples involved in an unfriendly divorce, but also to couples who, though intending to get divorced, for one reason or another, wish to preserve their assets for one another or for their children or for anyone besides the IRS.

 

            When only one spouse faces a tax liability (because separate returns were filed or the tax is from a pre-marriage year or it is an employment tax imposed on only one spouse), it may be advisable to file a divorce petition earlier than anticipated. If doing so potentially puts the IRS in second place, the divorce court may feel inclined to dispose of the assets in a manner which protects the family at the expense of the IRS.  (See Terryl A. Gardner, Civ. No. 90-1570-FGT, USCD District of Kansas).

Soverign Immunity for the State in Bankrtupcy Court?

 

      In the case of In Re Burke, No. 97-8917 in the Eleventh Circuit Court of Appeals, the court ruled against the State of Georgia Department of Revenue's contention that the state had immunity against the bankrupting of taxes. The state moved to dismiss the Burkes' adversary proceeding, relying on Seminole Tribe of Florida v. Florida, 517 U.S.44, 116 S.Ct. 1114, 134 L.Ed2d 252 (1996), by arguing that the relief sought by the Burkes was barred by the Eleventh Amendment. 

 

      The Eleventh Amendment states:

The Judicial power of the Untied States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by citizens or Subjects of any Foreign State.

 

      The Eleventh Circuit determined that the State of Georgia waived its sovereign immunity by filing a proof of claim in the debtors' respective bankruptcy proceedings.   The Court cited Gardner, 329 U.S. at 574,67 S. Ct. 472 in support of its conclusion.  If your state claims that it has sovereign immunity and that the taxes are not dischargeable, then raise this issue with the court.  If the state did not file a proof of claim, then you may need to re-open your bankruptcy to file a proof of claim for the state.  Isn't it amazing the ends that the government will go to in order to take rights away from the people!

 

Spouse's liability and the Civil Fraud Penalty

 

      The civil fraud penalty for underpayment of a tax does not apply to a spouse filing a joint return unless the IRS can show that some part of the underpayment is due to fraud of that spouse.  See Neil, Richard (1982) TC Memo 1982-228.  In Parker v US, 36 AFTR 2d 75-5028, a husband was liable for the full amount of the fraud penalty even though he resided in a community property state.  However, in a community property state, the fraud penalty may be paid out of community funds even though the wife was not involved in the fraud.  A wife has been liable for the fraud penalty when she admitted knowing that her husband had additional sources of income but failed to give the information to the return preparer and signed the joint returns knowing that the IRS didn't have the additional information.  (Bolton, Donald Sr. (1975) TC Memo 1975-373. A husband was not guilty of the fraud penalty when his wife omitted income while keeping the books. (Keene, James (1979) TC Memo 1979, 121. A husband was deemed to be liable for the fraud penalty where he had some involvement in the bookkeeping of his wife's business.  Taylor, Emma (1995) TC Memo 1995-269. However in Coleman (1988) TC Memo 1988-538, a wife was not charged a fraud penalty for her husband's activity even though she did some bookkeeping for his business. 

 

      In Robin Jenkins (1995), TC Memo 1995-563, the husband was found to have many badges of fraudulent intent and his wife's testimony was not credible.  The IRS produced no evidence that the wife was responsible for understating income or maintaining her husband's books, or that she was involved in claiming unsubstantiated deductions.  The tax court refused to presume fraud and found that the wife was not liable for the fraud penalty. 

 

      The burden of proof is on the IRS, not on the spouse.  This applies only to the civil fraud penalty, not to the tax deficiency.  Therefore a wife has been held liable for the tax deficiency even though she was not liable for the fraud penalty.  Hicks Co. (1971) 56 TC Memo 1991-284.

 

      The innocent spouse rule applies when a joint return is filed and only one spouse may have had knowledge of the understatement of tax on the return.  Partial innocent spouse relief can also be allowed when a spouse can show that she was innocent as to part of the understatement. When that showing is made, the spouse is entitled to relief from liability for tax, interest, and addition to tax attributable to a substantial understatement with respect to the specific item or items of income or deduction related to the innocent spouse status.  Bell, Amille (1989), TC Memo 1989-107.

 

 

Spouse's liability and the Civil Fraud Penalty

 

      The civil fraud penalty for underpayment of a tax does not apply to a spouse filing a joint return unless the IRS can show that some part of the underpayment is due to fraud of that spouse.  See Neil, Richard (1982) TC Memo 1982-228.  In Parker v US, 36 AFTR 2d 75-5028, a husband was liable for the full amount of the fraud penalty even though he resided in a community property state.  However, in a community property state, the fraud penalty may be paid out of community funds even though the wife was not involved in the fraud.  A wife has been liable for the fraud penalty when she admitted knowing that her husband had additional sources of income but failed to give the information to the return preparer and signed the joint returns knowing that the IRS didn't have the additional information.  (Bolton, Donald Sr. (1975) TC Memo 1975-373. A husband was not guilty of the fraud penalty when his wife omitted income while keeping the books. (Keene, James (1979) TC Memo 1979, 121. A husband was deemed to be liable for the fraud penalty where he had some involvement in the bookkeeping of his wife's business.  Taylor, Emma (1995) TC Memo 1995-269. However in Coleman (1988) TC Memo 1988-538, a wife was not charged a fraud penalty for her husband's activity even though she did some bookkeeping for his business. 

 

      In Robin Jenkins (1995), TC Memo 1995-563, the husband was found to have many badges of fraudulent intent and his wife's testimony was not credible.  The IRS produced no evidence that the wife was responsible for understating income or maintaining her husband's books, or that she was involved in claiming unsubstantiated deductions.  The tax court refused to presume fraud and found that the wife was not liable for the fraud penalty. 

 

      The burden of proof is on the IRS, not on the spouse.  This applies only to the civil fraud penalty, not to the tax deficiency.  Therefore a wife has been held liable for the tax deficiency even though she was not liable for the fraud penalty.  Hicks Co. (1971) 56 TC Memo 1991-284.

 

      The innocent spouse rule applies when a joint return is filed and only one spouse may have had knowledge of the understatement of tax on the return.  Partial innocent spouse relief can also be allowed when a spouse can show that she was innocent as to part of the understatement. When that showing is made, the spouse is entitled to relief from liability for tax, interest, and addition to tax attributable to a substantial understatement with respect to the specific item or items of income or deduction related to the innocent spouse status.  Bell, Amille (1989), TC Memo 1989-107.

 

 

DIRECT EXAMINATION IN COURT

 

(THE PRO SE VS THE IRS)

 

 

            If you end up in a criminal trial, a Tax Court trial, or a District Court action against the IRS; you will have to understand something about the direct examination of witnesses.

            Be sure to make your questions as simple as possible so that the witness will understand the subject and the jury will understand the question.  Remember that the jurors are there to see and hear what the witness has to say.  If you intrude on the witness, you will diminish the effectiveness of the witness' presentation.

 

            You are not allowed to ask leading questions. (A leading question is a question that suggests the answer to the witness).  If you do ask a leading question, the government attorney will probably object. Remember that some courts take the position that any question that can be answered "yes" or "no" is a leading question.  If you don't want to be interrupted by objections, try to ask questions that do not call for "yes" or "no" answers.

 

            There are times when you can ask leading questions. Federal Rule of Evidence 611(c) states as follows:

 

                 The rule continues the traditional view that the suggestive powers of the leading question are as a general proposition undesirable. Within this tradition, However, numerous exceptions have achieved recognition: The witness who is hostile, unwilling, or biased; the child witness or the adult with communication problems; the witness whose recollection is exhausted; and undisputed preliminary matters. 3 Wigmore Section 744- 778.  An almost total unwillingness to reverse for infractions has been manifested by appellate courts. See cases cited in 3 Wigmore Section 770. The matter clearly falls within the area of control by the judge over the mode and order of interrogation and presentation and accordingly is phrased in words of suggestion rather than command.

 

            Therefore, when you cross examine you can ask questions that introduce material that is not in dispute; that refresh the recollection of a witness when he can't remember; to assist an individual who doesn't understand like a child or an illiterate person; or to impeach the credibility of a hostile witness.

            You may also need to introduce exhibits into your direct examination.  Here is what to do:

 

            1.  Produce the exhibit in court.

             2.  Ask the court for permission to have the exhibit marked with an exhibit number.

            3.  Show the exhibit to the                          government attorney.

            4.  Show the exhibit to the witness and ask the following:

                       a.  Do you recognize this                                         exhibit?

                       b.  What is it?

               5.  The exhibit can be offered into evidence when the foundation has been laid. (You must make sure that a foundation has been laid to establish the admissibility of the exhibit.  See Federal Rule of Evidence 104).

 

     6.  You may wish to ask the judge if the jury may be permitted to see the exhibit; and be sure to refer to it by number in future comments.

 

            Generally witnesses are not allowed to remain the courtroom during the trial (Fed R. Evid. 615); however your trial judge may not require that the witnesses remain sequestered.

            In order to avoid leading questions, you might consider starting your questions with the following words:  Who; What; When; Where; How; and Why?  Also, do your best not to start questions with the words Do; Did; Didn't; Is; Are; Were, Etc. because you may ask a leading question.

 

            If you make a mistake and the objection is sustained; you might consider the following remedy:

 

            For example:

            Did you get in the car?  (leading question)

            Who got in the car?  (permissible question)

 

            When you put your witness on the stand; you should first get the general background from the witness.  You may wish to ask questions such as:

 

            Where do you live?

            What type of residence is that?

            How long have you lived there?

            How many children do you have?

            What do you do for a living?

            Etc.

           

            During the testimony of the witness, you may with to stop a witness or prod him to continue.  You may wish to use phrases such as: "Thank you, now let me ask..." or "Go on..."

            You must remain in control of the examination.  You must be the leader in the courtroom and that means you must know something about the rules of evidence.

           

            Be sure that you do not present irrelevant evidence and don't be intimidated by objections.  Know your proof and don't forget to introduce it.  Don't repeat or comment on the answers the witness gives to your questions.  Remember that the government attorney will probably cross-examine the witness.

 

            In summary, evidence may be introduced by stipulation, judicial notice, self-authenticating exhibits or the testimony of a witness.  If you stipulate to enter evidence that means that you and the government agree on the evidence. The judge may take notice of a particular fact without the need to present evidence to prove the fact.  The principal manner, however, for the introduction of evidence, is introduction through a witness.

 

              Good luck and relax; it takes practice to learn these skills well; but you are capable of learning more than you think.

 

What is a Deficiency?

 

      A deficiency arises when the IRS or the individual makes an assessment and the tax is not paid.  An individual may make a self-assessment by filing a tax return or the government may make an assessment by filing a return for him.   The issue can get very technical.  For example in Koch, 561 F2d 1115, 77-2 USTC: 9595,40 AFTR2d 77-5545 (4th Cir. 1977), an individual filed a return reporting tax but did not pay the full amount. He was afraid that the IRS would garnish his wages so he filed an amended return showing a "zero" amount owed to create a deficiency so that the IRS would have to issue a notice of deficiency in order to assess.  The court ruled in favor of the IRS.  The court noted that a deficiency is defined as the amount by which the tax assessed by the IRS exceeds the amount shown on the return.  By filing an amended return with no tax shown, the individual was merely trying to create a "deficiency." 

      An amended return cannot serve as the substitute for the original return, upon which no deficiency arose.  The court also noted that the Internal Revenue Code does not expressly authorize amended returns and the IRS uses them for administrative convenience.  Therefore the IRS had no discretion to treat the amended return as controlling whether the deficiency existed within the statutory meaning of the term.

      Beware of the fact that the IRS can make an adjustment to income without asserting a deficiency and if you do not ask them to abate the tax within thirty days, they do not have to issue a Statutory Notice of Deficiency.  The court held in Martz, 77 TC 749 (1981), that the notice sent by the IRS did not constitute a deficiency within the meaning of Section 6211 and the tax court did not have jurisdiction,

      If a deficiency is not due to a mathematical error, the IRS must issue a deficiency notice to make an assessment.  A W-2 Form filed by the individual's employer showed a salary payment to him and the tax withheld thereon.  Although the individual contended that the salary check was not released to him during the taxable year.  He excluded the amount from his return so that the return did not agree with the W-2 statement.  The IRS assessed a deficiency without notice under the procedure for mathematical errors.  The court ruled that the assessment was improper.  There was no mathematical error but a disagreement as to the fact of receipt. See Farley, 64-1 USTC 9371, 13 AFTR2d 932 (EDNY 1964).  The IRS does not have to follow its procedural rules requiring appellate division hearings in order for a notice of deficiency to be valid.  In Cataldo, 60 TC 522 (1973), aff'd, 499 F2d 550, 74-2 USTC 9533, 34 AFTR 2d 74-5329 (2d Cir. 1974), the court ruled that a notice of deficiency is not defective merely because the IRS does not follow its own procedural rules in according a taxpayer an administrative hearing for the year involved.

      The Tax Court ruled that it did not have jurisdiction when a notice of deficiency does not meet the statutory requirements.  In DuMais, 40 TC 269 (1963), nonacq. 1966-1 CB 4, a husband and wife filed joint returns.  During the audit, the agent received a waver of restriction on assessment Form 870, from the husband.  The wife refused to sign the waiver.  The IRS assessed a deficiency against the husband but could not collect the tax.  The IRS then issued a notice of deficiency to the wife and assessed her for the amount previously assessed to the husband. The IRS did not send a copy of the notice of deficiency to the husband.  It was neither a single joint notice of deficiency nor a duplicate original of a joint notice of deficiency.  Section 6212 requires that such a notice must be sent to each spouse if they filed a joint return and they have separate residences.  The court ruled that the notice did not meet the statutory requirements and since its jurisdiction is based on a valid notice deficiency, it did not have jurisdiction.

 

      The courts presume that a notice of deficiency is correct.  In Mitchell, 58 TCM 1106, 90,001 P-H Memo. TC (1990), the IRS mailed a notice of deficiency for two years in which the individual did not file.  The individual filed a petition with the Tax Court on the same day that second notices were mailed out abating the first notice of deficiency.  The IRS used the wrong forms for the abatement notices.  The individual argued that the deficiency notice was invalid because the IRS abatement forms were presumed correct and the Tax Court ruled against him taking the position that the deficiency notice has the assumption of correctness.

      In McCarthy, 57 TCM 1569, 89, 479 P-H Memo. TC (1989), the court ruled that compliance with Section 6020(b) is not a jurisdictional prerequisite to the issuance of a valid deficiency notice.  Section 6020(b) is the Internal Revenue Code Section that gives the IRS the power to file returns for individuals who do not file returns.

 

THE DECLINE OF AMERICA

 

 

              (This article was written 15 years ago, it is reprinted here to show its continuing validity). Our country is in debt at an incredible level. Uncle Sam has billions of dollars of contingent liabilities. The problem has grown and grown because the politicians are not willing to deal with it.  We have two choices to get out of trouble.  One choice is to create heavier taxes, the other is to repudiate the debt. If we repudiate the debt, that is the end of our credit system.  The creditworthiness of the Federal government is the foundation of the credit system in America.

 

              We are currently headed for a long and total depression.  This depression will be much worse than the one in the 1930s.  The American Government in the 30s was financially liquid.  We had hoards of gold.  Today we are buried in debt and we do not have gold backing.  This depression may happen before the year 2005 as the Feds find it increasingly more difficult.  How did we get in this mess, anyway?

 

              About 1500, when capitalism started, Western Europe was static.  There was no wealth to manipulate.  Public banking was unknown and private banks were in short supply.  There was not enough food to go around.  Then suddenly, Europe was buried in riches from the discovery of the New World.  Capitalism was made possible only by the discovery of rich lands, resources  and people for exploitation.

 

              The Europeans plundered these lands and they continued to do so until about 1960.  We were caught up in this flash flood of new wealth.  The white peoples of Europe created a good standard living by stealing the land and resources of the red people and exploiting the labor of the black people.  The United States through its covert operations in third world countries has attempted through political assassinations, and wars to keep the third world subjugated.  Over 20 million people have died in the covert wars of the CIA in countries like El Salvador, Panama, Viet Nam, Angola, Guatemala and others since the Second World War.

 

              However, the boom is over.  There is no more free land for millions of pioneers to homestead.  There are no more buffalo herds to slaughter. There are no more black people to bring from Africa on slave ships to work the cotton farms.  There is no more unclaimed wealth.  Yes, the boom is over, and we are living at the time that everything is coming to a head.  Capitalism is on the decline as it depended on the continual expansion of the economic system.  The prosperity enjoyed by the United States until 1960 was due entirely to the wealth gained by the plundering of the New World.   We are going to get poor, very poor.  Many people think that the government can do something, but it cannot.  The government has done everything it can to avoid facing the music. In the 60s we went off the gold standard completely in an effort to create wealth thorough the use of paper money. Everything is going to change soon.

 

              The next depression will be worse than any previous depression and it will deeply effect the middle class.  Many middle class people will become unemployed, and they will finally wake up and demand change. Sometime around 2005 or so, the unemployment will grow to an incredible level.   Our old solutions such as asking the government to create jobs will not work, because, this time around, the government is bankrupt.

 

              The situation will get so bad that our government will fall apart, people will not have faith in a government that has allowed such an incredible mess.  We may live through a period of anarchy.  The old Order will be in total chaos.  The scary thing is that a dictator may rule us and we may turn toward total fascism in an attempt to solve the problem. Let us hope that in the trying times to come, that democracy does not slip into the hands of a tyrant.

 

              Paper money is the government's solution to our problems.  The Chinese tried paper money over 1,000 years ago with disastrous results.  In the 20th century, the American Politicians rediscovered its use as the economic situation stated to decline.  Our politicians want to get re-elected, so they keep making money and in so doing they have created a period of false prosperity based on debt.  You see, the only real money that ever existed is gold and silver.  Governments cannot create real money.  Remember when the Continental Congress made Continental Notes.  Have you ever heard the expression: "Not worth a Continental!"?

 

              Our government, by using monetized debt to create wealth, has brought on the greatest Depression in history.  Hold on to your seats!

 

              Money is not wealth.  Wealth is the production of goods and services, money is the result of wealth. We have, however, defined money as wealth and since our money is made of paper, we are in for a very rude awakening in the near future.

 

              Our country does not create wealth through the creation of goods, it creates wealth by juggling money; the problem is that we are headed toward National Bankruptcy.  Corporate and individual bankruptcies are up.  The American standard of living is falling.  Currently over half of the income of each middle class family is consumed in mortgage and installment debts, the rest is eaten up in taxes.  America has been in a long decline that will soon result in a financial collapse and yet the people don't notice it.  They prefer to keep their heads in the sand, to do their jobs each day and let someone else run the world.  Our infrastructure is falling apart.  Soon a process of change will take place that will transform the entire world.  Our culture, our politics, our social structure and our forms of money must change, they will be forced to change.

 

              Our free resources since 1492 are almost exhausted, our industry is destroying the environment, the air and the water.  Our massive debts are larger than any public debts of any nation in recorded history. The interest is compounding at such a high rate that soon the entire amount of money collected by the federal government in taxes will not even pay the interest.

 

              The government cannot continue to raise taxes because the income loss from the middle class takes the money they need to pay their own $3 trillion in debts.  So Congress must continually expand the national debt base because national prosperity is based on debt expansion.  The government has no choice but to borrow. Even if the government reduces spending, its revenues must increase because of the interest rates it must pay on the debt.

 

              All domestic credit rests on the credit of the federal government.  The collateral for our current domestic money system is Treasury Bonds; therefore the collateral for our money is debt.  This spells major problems in the near future.  The more a borrower borrows, the less chance there is that the money will ever be repaid.  We now have growing federal deficits that can never be paid back. We are on the road to national bankruptcy.

 

              Once the world realizes that we are bankrupt, foreign holders of U.S. dollars will sell them. Eventually the debts will have to be settled by default. By the year 2000, there is no doubt that all the tax money collected by the Federal Government will be used just to pay the interest on the national debt.  The government can currently only continue to operate by borrowing money.

 

              As you can see, the situation has grown from bad to worse.  It will soon get to a point that will be the final explosion of our current economic system.  The final hour may come before the year 2000, but even if we make it that long, our system is doomed, for we cannot continue to live on monetized debt forever and that is exactly the situation we find ourselves in today.  if you are forewarned you can be forearmed to help you survive the situation. So think about it and get prepared for the future, if you are prepared, you can certainly do a better job than your neighbor of surviving the hard times.

 

CUSTOMERS OF THE IRS

 

 

            The IRS refers to individuals in this country as "customers."  For example, Lawrence Gibbs, in a past communication to the public stated:

 

                 I pledge my personal effort and that of the IRS to search for new and better ways to reduce the burden placed on you, our valued customers.  I also pledge that we at the IRS will continue to improve the quality of the service we are providing to you.

 

 

            It is rather strange that the IRS refers to individuals as "customers."  What does that mean?  Well, just take a look in the dictionary.  If you will look in your unabridged dictionary, you will see that a customer is a patron.

 

            A patron is defined as a person who supports with money, gifts, efforts or endorsement an artist, writer, museum, charity, institution, or the like: a patron of scholars; art patrons.

 

            Well, what do you think of that?  A patron supports an institution (The IRS).  Of course the implication in the words customer and patron is the concept that individuals who are characterized by these words partake voluntarily in their charitable efforts.  Of course, that is why the IRS says that individuals voluntarily file returns.  Filing must be voluntary when patrons are supporting an institution.

 

            See how honest the IRS is.  They are entirely consistent.  They consistently imply filing returns is voluntary and they characterize "taxpayers" as a class of individual that clearly volunteers his support of an institution.  Do you think the IRS is telling the truth or not?

A Quiet Title Case

      In Johnson, 990 F2d 41, 93-1 USTC; 5t0,201,71 AFTR2d 93-1456 (2d Cir. 1993), the court ruled that an assessment was invalid because it was made before the Tax Court decision became final.  The Tax Court determined that the taxpayer was liable for income tax deficiencies for the years 1980 through 1984.   Three days after the ruling, the IRS assessed the taxpayer for the deficiencies.  The taxpayer filed a quiet title action under Section 2410(a) of the Internal Revenue Code and he claimed that the assessment was invalid because it was made before the Tax Court decision became final.  The government lost their case. 

 

Privacy, Miranda and the IRS

 

      Many of you have heard of the famous Miranda case, which resulted, in the "Miranda warning" used by law enforcement agencies.  In the case of Beckith, 425 US 431, 96 S. Ct. 1612, 76-1 USTC: 9352, 37 AFTR2d 76-1232 (1976), the court ruled that Miranda warning does not have to be given unless the taxpayer is in custody.  That means that if a criminal investigation agent starts to ask you questions, he is not required to tell you that the information can be used against you.  Please don't  talk to the criminal investigation division!

     

      In the case of Baker, 451 F2d 352, 72-1 USTC; 9128,28 AFTR2d 71-6041 (6th Cir. 1971): the court ruled that a taxpayer waived his right to challenge the reexamination of books by voluntarily furnishing them. 

The Joint Filing Issue

 

      Joint filing is a huge problem.  Every time that you file a joint return, you make both you and your spouse liable for the taxes of each personally.  All of the assets of the couple can be attacked by the IRS for any alleged tax liability.  After divorce or separation, the IRS can pursue one or both spouses. Joint filing was adopted in 1948 as part of a large post-World War II peace dividend spending package designed to encourage women to return to their homes.  Before that, each American was taxed as an individual based on his or her earnings.  Joint filing gave traditional families a big tax break by giving the sole earner a "zero bracket" income.  Joint filing is not only not fair, it also creates huge problems for married couples with the collection division of the IRS.  Most of the other countries have dropped joint filing.  Italy dropped it in 1977 and England dropped it in 1990.  The marriage tax elimination movement has gotten nowhere.  The democrats think that the reform would lose the Treasury too much in taxes and the Republicans want to give more tax benefits to families with stay-at-home wives.  The two-earner families need to rebel against the tax system. 

 

Reliance on Counsel

 

      Here are some interesting cases on the reliance issue.          

 

      In Compton, 47 TCM 158, 83,647 P-H Memo, TC (1983) the court ruled that the taxpayer's reliance on his bookkeeper undermined the fraud charge determined by the IRS. In Williams, 35 TCM 919, 76,212 P-H Memo, TC (1976), the court determined that the taxpayers carelessness in relying on a bookkeeper did not amount to fraud.  In Camden Wall Paper Company, 26 TCM 254, 67,052 P-H Memo. TC (1967), the court ruled that the omissions were merely inadvertent oversights on the part of the CPA and were not intent on the taxpayer's part to defraud.  Since there was no fraud, the statute of limitations barred assessments for some of the earlier years.

 

      In Pelham, 66 TCM 820, RIA TC Memo: 93,441 (1993), the court took the position that reliance on an investment advisor excused negligence.  The taxpayers invested in a tax shelter that the IRS determined to be abusive several years later.  They claimed that they relied on the advice of their investment advisor who was a promoter of the shelter.  The court ruled that the taxpayers were not responsible for the penalty, as they were unsophisticated in financial matters. 

THE REAL ECONOMIC CRISIS

 

            The reason that the current crisis is so devastating is that it is superimposed on a very serious overall economic situation.  Twenty five percent of all tax moneys collected are now wasted on interest payments on loans the federal government owes the banks.  The debts of the states, cities and people are growing.  Last year over two million more people fell below the official poverty level.

 

            The standard of living of Americans has been on a steady decline since the beginning of the 1970's and there are millions of Americans that are homeless.  Americans are becoming immune to the sight of hungry children and their mothers on the freezing sidewalks of the cities.

 

            The quality of life for the majority of the working families is slipping because of the big shift in the wealth.  The shift in income from the poorest 60 million to the richest five million has been $150 billion per year for the past 15 years. The richest five million have a combined income of one trillion dollars, In per capita income, the richest have 50 times the income of the poorest. Gross corporate profits reached almost two trillion dollars last year, which means that the average income for corporate executives is about $300,000.

 

            Because of the unfair loopholes in the tax laws, corporations pay 22 percent of the total taxes, while the working people pay over 52 percent of the taxes.  The tax rates for the low-income groups have gone up to more than 20 percent, while rates for the top 1 percent have declined by over 20 percent.

 

            The combined income of the top one percent now exceeds the combined income of all the production workers in the country who are the main creators of material value.

 

            Since 1973, real wages have declined.  The official unemployment count is over 8.5 million but there are about 5.5 million working part-time and another million who have given up. That means that the official unemployment right now is probably over 13 percent.  The wealth is shifting upwards to the top one percent and the middle class is

turning into the lower class. If the trend continues, there will be millions of poor, no middle class, and a few rich individuals.

 

            It is impossible to say how long this downward trend will last, but it is this author's opinion that things are going to get much worse in this country before they get better.  The rich corporations really have no incentive to pay very much attention to this situation; and they are the ones who have the power to change it; as long as they control the means of production.  Our current political system supports the demise and impoverishment of the middle and lower classes.  Until they wake up and achieve a degree of consciousness about the problem, the situation will go from bad to worse.  A new depression worse than the bust of 1929 could very easily take place.

 

More Bankruptcy Stuff

 

      It is very important to know the history of your tax situation if you are considering a bankruptcy of taxes.  The most useful tax transcripts to order from the IRS are the MFTRA-X and the MFT-30.  When you examine the MFTRA-X, you will need to be careful.  The IRS transaction Code 150 means that a tax return has been filed but it does not distinguish between a 6020(b) return filed by the government and a return filed voluntarily by the individual.  Generally a return filed by the IRS will not suffice to satisfy the two-year rule.  There is some case law that stands for the fact that returns must be filed at the appropriate service center.  If the returns are simply handed to a revenue officer or mailed to the wrong IRS office, they may not be deemed filed.  See In re Savage, 218 B.R. 126 (10th Cir. BAP 1998). 

 

      Some states require that an amended return be filed following an assessment by the IRS of additional tax.  The filing of the new return might trigger a new 2-year or 3-year rule.  See In re Blutter, 177 B.R. 209 (Bkrtcy. S.D.N.Y. 1995); but also see In re Jerault 208 B.R. 183 (9th Cir. BAP 1997 for a contrary position).  Remember also, that a prior bankruptcy or an offer in compromise might stay the time periods for the time that the BK or OIC  is pending plus an extra six months.  See In re West, 5 F3d 423 (9th Cir. 1993).  Also, an extension of time to file the return delays the start of the three year period for the time of the extension.

 

      In some states, an extension to file a federal return, extends the state period for the same or more months automatically.  In California, a three-month extension at the federal level extends the time for the state to six months.  Be very careful in a situation like this or you may not bankrupt state taxes even though your federal taxes are dischargeable.  Be aware also that sometimes the IRS files its lien in the wrong county.  If the IRS has not filed a lien in the county in which the individual owns property, then the IRS does not have a secured lien. 

 

      An important tidbit to remember is that if the IRS does not file a proof of claim in a Chapter 13 Bankruptcy in a no asset or unsecured situation, the IRS is out of luck.  They have 180 days from the date the bankruptcy was filed to file a proof of claim.  All time periods are tolled during the time that a bankruptcy is pending.  You cannot wait out the two and three year time periods in a Chapter 13.  If the IRS assessment is not valid, the 240-day time period from the date of assessment may not have run.

 

      The Bankruptcy Code requires that a tax return be filed for at least two years before the bankruptcy filing date. (11 U.S.C.Section 523(a)(1)(B).  The IRS may file returns for individuals who do not file; however, the courts are likely to rule that the IRS' return is not sufficient for purposes of the two year rule.  Courts have also ruled that "frivolous" tax returns are not valid for purposes of the bankruptcy statutes.  See In re Thompson 207 B.R. 7 (Bkrtcy.M.D.Fla. 1997): Campbell v. U.S. 140 B.R. 571 (W.D.Okla 1992). 

 

      Interpretations of Section 523 of the Bankruptcy Code have defined a return:  "A return must have sufficient data to calculate a tax liability.  The document must purport to be a return.  There must be an honest and reasonable attempt to satisfy the tax laws.  The individual must sign the return under the penalty of perjury.  See In re Hatton, 216 B.R. 278, 282 (9th Cir. BAP 1997).

     

      There are some cases, however, that do allow information provided by the individual to serve as a return for purposes of Section 523.  The court ruled in In re Hatton, 216 B.R. 278 (9th Cir. BAP 1997), that a SFR followed by a signed voluntary payment agreement and 433-D constitutes a return for purposes of the two year rule under Section 523.  A SFR prepared with the taxpayer's cooperation can constitute a return: See In re Parker 199 B.R. 792 (Bkrtcy.M.D.Fla 1996).  Also IRC Section 6020(a) says that a return signed by a taxpayer "may be received by the Secretary as a return of such person."  In Berard v. U.S. 181 B.R. 653 (Bkrtcy.M.D.Fla 1995), the court ruled that a Form 4549 relating to income tax examination changes may be considered a tax return for purposes of dischargeability.  Testifying in a court under the penalty of perjury may constitute the equivalent of a filed tax return.  See  In re Elmore 165 B.R. 35 (Bkrtcy S.D. Ind. 1994);  and an individual signing a form that contains the same information that is in a return may constitute a tax return for purposes of bankrupty: In re Lowrie 162 B.R. 864 (Bkrtcy.D.Nev. 1994).

     

      The IRS is trying to argue in Bankruptcy Court that if a return is filed late, it is not a return for purposes of the Bankruptcy Code. However, the debtors are still winning quite a bit on this issue.  See In re Savage 218 BR 126 (10th Cir. BAP 1998).  Also see In re McGrath, 217 B.R. 389 (Bkrtcy. N.D.N.Y. 1997).  And see In re Pierchoski 220 B.R.20 (Bkrtcy W.D.Pa. 1998).

     

      Also note the following cases with important related issues:  The time during which an offer in compromise was on appeal tolled the running of the 240 day periods.  In re Genung 220 B.R. 505 (Bkrtcy.N.D.N.Y. 1998).  The IRS violated the automatic stay when it sold some of the debtor-equipment lessor's equipment in auction to pay other taxpayer's claims, Hanna Coal Co. Inc. v. IRS 218 B.R. 825 (W.D.Va. 1997).  A prior bankruptcy did not toll the 240-day period for purposes of discharge of tax in second bankruptcy. In re Little, 216 B.R. 769    (Bkrtcy E.D.N.C. 1997). 

A Great Summons Enforcement Case

 

      The case of Marvin D. Miller v United States of America, 97-3981, Decided July 23, 1998 in the Seventh Circuit Cout of Appeals.  It is incredible how arrogant the IRS can act.  The Miller case shows that the IRS can lose on a summons enforcement case. 

 

      Internal Revenue Code Section 26 USC 7602 grants the IRS broad power to issue summonses to investigate violations of the tax code.  To obtain enforcement of a tax summons, the government must show only that the IRS complied with the four requirements imposed by the Supreme Court in United States v. Powell, 379 US 48, (1964): that the investigation has a proper purpose, the information sought may be relevant to that purpose, the IRS does not already have the information and the IRS has followed the statutory requirement for issuing a summons. In Miller, supra, the government did not meet the Powell standards because it did not provide an affidavit in its petition for enforcement.  Since the government did not provide the affidavit, it lost.  The government can file new summonses and proceed correctly in the future, of course, but they sure spent a lot of time and money fighting this one.