G. M. Leasing Corp. v. U.S., 74-1436

• Citation: 514 F.2d 935
• Decision Date: 01 May 1975
• Docket Number: No. 74-1436,74-1436
• Parties: 75-1 USTC P 9435 G. M. LEASING CORP., Plaintiff-Appellee, v. The UNITED STATES of America et al., Defendants-Appellants, George I. Norman, III, Intervenor.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 935

514 F.2d 935

75-1 USTC P 9435

G. M. LEASING CORP., Plaintiff-Appellee, v. The UNITED STATES of America et al., Defendants-Appellants, George I. Norman, III, Intervenor.

No. 74-1436.

United States Court of Appeals,

Tenth Circuit.

Submitted Jan. 24, 1975.

Decided May 1, 1975.

Murray S. Horwitz, Tax Div. (Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews and Murray S. Horwitz, Attys., Tax Div., Dept. of Justice), Washington, D. C., for defendants-appellants.

Richard J. Leedy, Salt Lake City, Utah, for plaintiff-appellee.

Before HILL, SETH and BARRETT, Circuit Judges.

HILL, Circuit Judge.

This appeal results from an allegedly wrongful levy and seizure by Internal Revenue Service agents of a corporation's assets to satisfy the income tax liability of an individual taxpayer.

Appellants are the United States, Department of the Treasury, Internal Revenue Service (IRS), and a district director and several agents of the IRS. Appellee G. M. Leasing Corp. is a Utah corporation allegedly engaged in a luxury car leasing business in Salt Lake City, Utah.

The controversy centers around the income tax liability of George I. Norman, Jr. (taxpayer), a fugitive from justice. ¹ He neglected to file a 1970 or a 1971 federal income tax return. Subsequently, in October, 1972, IRS agent Philip Clayton was assigned to investigate taxpayer's possible income tax liability. Clayton received no information or cooperation from taxpayer and necessarily had to base any income tax deficiency upon an examination of third party records. This investigation resulted in deficiency assessments against taxpayer and his wife on March 19, 1973, in the respective amounts of $951,409.93 and $154,138.54. Jeopardy assessments were issued the next day and IRS agents went to taxpayer's residence in Salt Lake City, Utah, to collect the tax. They informed taxpayer's wife of the jeopardy assessments and made a demand for the tax due. She refused and the agents left. Federal tax liens were filed and levies were placed on taxpayer's bank account.

While at taxpayer's residence the IRS agents had observed several automobiles in taxpayer's driveway. A subsequent check with the state motor vehicle department revealed that these automobiles were registered to appellee and another corporation organized and controlled by taxpayer, and that taxpayer owned no automobiles. After further investigation it was determined that appellee was taxpayer's alter ego or transferee and that its assets should be seized to satisfy taxpayer's tax liability.

On March 21, 1973, the IRS agents went to appellee's premises to seize assets. This was also the location of taxpayer's other offices and was owned by one of taxpayer's other corporations. Additionally, taxpayer's son, George I. Norman, III (intervenor), was using the premises as a personal residence. With the aid of locksmiths, the agents succeeded in gaining entry into the building. At this point intervenor arrived on the scene and asked what the agents were doing. They told him that they were contemplating seizing assets, and they entered the building. They left a short time later without seizing anything, being unsure as to whether the building was a personal residence or a business office.

The agents returned to appellee's premises on March 23, 1973, to seize assets and documents. They again used locksmiths to gain entry. They seized, inter alia, documents and placed them in boxes, which were loaded on a moving van. It was thought that the documents might be, or could indicate the location of, money and stock certificates. These documents were photocopied and the originals were subsequently returned to appellee. The agents also seized appellee's bank account and automobiles. Subsequently, they determined that intervenor was taxpayer's alter ego and seized 7,143 shares of Emdeko stock in intervenor's name.

On May 3, 1973, appellee filed suit against appellants in the United States District Court for the District of Utah. A second amended complaint, filed on October 17, 1973, alleged, inter alia, that the jeopardy assessments were arbitrary, capricious and without foundation; that the determination that appellee was taxpayer's alter ego was arbitrary and capricious; that IRS agents illegally entered appellee's office, thus violating appellee's and taxpayer's constitutional right of privacy; and, that IRS agents conducted an illegal search and seizure of appellee's premises.

The complaint requested, as relief, the return or destruction of the photocopies of the documents seized; return of the automobiles levied on and seized; suppression of evidence obtained from the seized documents and an order barring appellants from ever again obtaining such evidence by any means; suppression of the seizure of the automobiles as evidence and an order barring appellants from ever again seizing said automobiles; release of all levies filed by appellants against appellee's property; and, $525,000 damages for appellants' violation of appellee's constitutional rights.

Intervenor's motion for intervention was granted and he filed a complaint alleging that he was the owner of the Emdeko stock seized by the IRS agents. The complaint requested a determination that intervenor was not taxpayer's alter ego, return of the stock, and money damages in an undetermined amount.

Appellants answered on November 1, 1973, and also counterclaimed for foreclosure of its tax liens. After a nonjury trial the trial court entered findings of fact and conclusions of law, including the following: appellee was not taxpayer's alter ego; the seizure of appellee's assets and documents constituted an illegal search and seizure; appellant Clayton maliciously participated in the search and seizure of appellee's premises; the assessments against taxpayer and his wife for 1970 and 1971 were erroneous and they have no liability for federal income tax for those years; and intervenor was the owner of 7,000 shares of Emdeko stock but was taxpayer's alter ego with respect to 143 shares thereof.

The trial court entered judgment for appellee and intervenor on May 24, 1974. The judgment (1) gave appellee and intervenor money damages in an undetermined amount against the individual IRS agents; (2) gave appellee and intervenor punitive damages in an undetermined amount against appellant Clayton; (3) suppressed any use of the seized documents or photostats thereof; (4) dismissed appellants' counterclaim with prejudice; (5) ordered the return to appellee and intervenor of all seized assets; (6) ordered the return of 7,000 shares of Emdeko stock to intervenor and the return of 143 shares of Emdeko stock to taxpayer, his wife, "or any other rightful claimant"; (7) removed all levies and liens against said assets; and (8) gave appellee an undetermined amount of money damages for assets disposed of by appellants.

Appellants first challenge the trial court's finding that appellee was not taxpayer's alter ego. This finding is presumptively correct and must be left undisturbed on appeal unless it is clearly erroneous. Quarles v. Fuqua Industries, Inc., 504 F.2d 1358 (10th Cir. 1974). A finding is clearly erroneous when, although there is evidence to support it, the reviewing court is left with the definite and firm conviction that a mistake has been committed. See, e. g., Kelson v. United States, 503 F.2d 1291 (10th Cir. 1974); Clancy v. First Nat'l Bank, 408 F.2d 899 (10th Cir. 1969), cert. den'd, 396 U.S. 958, 90 S.Ct. 430, 24 L.Ed.2d 422.

We are convinced that the trial court's alter ego finding is, as appellants contend, clearly erroneous. The evidence overwhelmingly indicates that appellee had no separate or independent existence and that it was taxpayer's alter ego. Appellee was one of four corporations whose existence was initiated by taxpayer. He was not an incorporator, director or officer of appellee, but served only as its general manager. He nevertheless exerted substantial, if not exclusive, control over appellee.

Although appellee had three directors they were nothing more than figureheads. They made no business decisions, had no duties, attended no directors meetings, and were paid no salaries. One of the directors was taxpayer's part-time secretary. She became an incorporator-director at taxpayer's request but was not told what duties and responsibilities these positions would involve and was not informed of the nature of appellee's business. She did not participate in running the affairs of appellee except to write a check when told to do so by taxpayer. She continued to work as taxpayer's secretary while serving as a director and, although she is not presently associated with appellee, never officially terminated her position.

Another incorporator-director, the attorney who prepared the legal work for appellee's incorporation, testified that appellee was merely a shell or alter ego of taxpayer and that "it had no assets or property of its own." He also testified that certain people acted as officers of appellee in connection with one or two transactions but that appellee actually had no officers. A third director, who also was a director of taxpayer's other corporations, testified that taxpayer controlled the affairs of the corporation "along with discussion of other people."

Taxpayer's dealings with appellee's assets is another factor indicating appellee had no separate existence. Some of appellee's assets, luxury automobiles worth thousands of dollars each, were owned by taxpayer and transferred to appellee. There is no evidence in the record that these transfers were for consideration. The record does suggest that appellee did not have sufficient, if any, funds to acquire these assets. Moreover, the record discloses that these automobiles were not transferred to appellee until several months after its incorporation. One of taxpayer's employees, whose duties included such things as taking care of these luxury automobiles for taxpayer,...