Carr Enterprises, Inc. v. United States, Civ. No. 80-3063.

• Decision Date: 20 May 1982
• Docket Number: Civ. No. 80-3063.
• Citation: 539 F. Supp. 528
• Parties: CARR ENTERPRISES, INC., a Corporation, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of South Dakota

539 F. Supp. 528

CARR ENTERPRISES, INC., a Corporation, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 80-3063.

United States District Court, D. South Dakota, C. D.

May 20, 1982.

J. W. Grieves, Grieves & Rahn, Winner, S. D., for plaintiff.

Lawrence E. Meuwissen, Trial Atty., Tax Division, Dept. of Justice, Washington, D. C., Dawn Bowen, Asst. U. S. Atty., Pierre, S. D., for defendant.

MEMORANDUM OPINION

DONALD J. PORTER, District Judge.

CASE SUMMARY

Plaintiff, a South Dakota corporation, brought this case¹ as a quiet title action, contending that the federal tax liens on property owned by plaintiff were invalid because the liens — based on tax assessments against plaintiff's principal stockholders — were created after its stockholders had transferred the property to plaintiff. Defendant United States asserted a counterclaim, seeking to have the transfer of the property to plaintiff by its stockholders declared a fraudulent conveyance under South Dakota law. Having considered the evidence presented at trial, and the briefs of the parties, the Court must rule that the filing of the lien did not deprive the stockholders of due process of law, that the transfer of the property to plaintiff was a fraudulent conveyance, and that the federal tax liens on the property are valid.

FACTS

In September 1975, Gene and Frances Carr purchased the Buffalo Trail Motel, the property here in dispute, in Winner, South Dakota, on a contract for deed. At the same time, the Carrs formed Carr Enterprises, Inc. under South Dakota laws, ostensibly to avoid the South Dakota usury law limiting the interest rate on loans to individuals. The Carrs were soon thereafter involved in disputes with the Federal Government over the Carrs' income tax liabilities for 1972, 1973, 1974 and 1975. Gene Carr litigated his 1972 and 1973 tax liability in Tax Court. A deficiency was assessed for taxable year 1973 against Frances Carr, (who had not participated in the Tax Court Action) in February 1977. Internal Revenue Service personnel attempted on a number of occasions beginning in late 1976 and continuing into June 1978 to examine the Carrs' financial records for 1974 and 1975, but with no real success. Deficiencies were assessed against Gene Carr in October, 1978 for the taxable years 1972 and 1973, following a May 25, 1978 Tax Court ruling adverse to Carr. Further deficiencies were assessed against both Carrs in March, 1979 for the taxable years 1974 and 1975.²

On May 29, 1978 the Carrs transferred their interest in the Buffalo Trail Motel, as well as their personal residence, to Carr Enterprises. At the same time, the motor vehicles owned by the Carrs were transferred to another corporation, D. C. Services Corporation, owned by the Carrs. The only consideration for these transfers was an issuance of stock by the corporations to the Carrs. On May 29, 1978, Gene Carr also transferred his majority stock in the two corporations to a church known as the Life Science Church, which appears to have been formed no earlier than May 25, 1978. Also on May 29, 1978, Gene Carr signed a printed form "vow of poverty" in connection with the formation of this church.³ The three church "trustees", who signed an acceptance of the church charter on May 29, 1978, were Gene Carr, Frances Carr and a Donna J. Hiles. Gene Carr was ordained as a minister of this church on May 25, 1978, although he testified that both before and after this occurrence he was a practicing Roman Catholic.

The Government filed the tax liens here in question against the Carrs on July 2, 1979 (for the liabilities of both Carrs for taxable years 1974 and 1975) and on July 29, 1980 (for the liability of Frances Carr for taxable year 1973) in the office of the Tripp County Register of Deeds (the county in which the realty involved is situate).

DISCUSSION

The first issue plaintiff raised is whether the assessment of tax deficiencies for 1974 and 1975 violated Gene and Frances Carrs' due process rights. Assuming without deciding that plaintiff has standing to urge this contention, it is evident that this argument is without merit. In plaintiff's amended complaint, it was contended that the Government had failed to make demand for deficiency "prior to the assessment and filing of the lien." See 26 U.S.C. § 6321: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount ... shall be a lien in favor of the United States upon all property ... belonging to such person." While it is not entirely clear from the amended complaint which deficiency plaintiff challenges on this ground, it must be observed that Gene Carr testified at trial that several months after June 1978, he received a deficiency notice that disallowed all his deductions for 1974 and 1975. In view of this, it can hardly be contended that the Carrs did not receive a proper demand for the deficiencies for 1974 and 1975, and from the lack of argument on this point in plaintiff's post-trial brief, it must be assumed that plaintiff has conceded this point.

Plaintiff instead now argues that the conduct of the IRS agent assigned to audit the Carrs' records constituted a due process violation. It would serve no useful purpose here to trace the repeated attempts made by the IRS to examine the Carrs' records and Gene Carr's varied excuses why the records would not be made available, ultimately culminating in a minor confrontation between Gene Carr and an IRS agent on June 8, 1978 in Carr's office in Winner.⁴ The burden was on Carr to show that he was entitled to the deductions he claimed, Interstate Transit Lines v. Commissioner, 319 U.S. 590, 63 S.Ct. 1279, 87 L.Ed. 1607 (1943), and he was required under 26 U.S.C. §§ 6001, 7602 and relevant regulations, e.g. 26 C.F.R. § 1.6001-1(a), to maintain records and to make them available to the Government so that his tax liability could be determined. From the evidence presented at trial, the Court must find that Carr failed to properly make his records available, and that the Government's decision to assess deficiencies on this basis was therefore not arbitrary or lacking in due process.

Since plaintiff's argument that the federal tax liens were ineffective against the Buffalo Trail Motel is dependent on whether the Carrs' transfer of that property to plaintiff was a fraudulent conveyance, the Court will next address that question. SDCL 54-8-1 provides that "every transfer of property ... made ... with intent to delay or defraud any creditor or other person of his demands is void against all creditors of the debtor." The question of fraudulent intent is, of course, one of fact, SDCL 54-8-4, and "may be established by circumstantial evidence." First National Bank of Beresford v. Anderson, 291 N.W.2d 444, 446 (S.D.1980). There is but one reasonable inference to be drawn from all the evidence presented at trial: that Gene...