LiButti v. U.S., 309

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Writing for the CourtBLOCK
Citation107 F.3d 110
Parties-1240, 97-1 USTC P 50,235 Edith LiBUTTI, doing business as Lion Crest Stable, a sole proprietorship, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. ocket 95-6263.
Docket NumberD,No. 309,309
Decision Date21 February 1997

Page 110

107 F.3d 110
79 A.F.T.R.2d 97-1240, 97-1 USTC P 50,235
Edith LiBUTTI, doing business as Lion Crest Stable, a sole
proprietorship, Plaintiff-Appellee,
v.
UNITED STATES of America, Defendant-Appellant.
No. 309, Docket 95-6263.
United States Court of Appeals,
Second Circuit.
Argued Oct. 21, 1996.
Decided Feb. 21, 1997.

Page 112

George P. Eliopoulos, Washington, DC (Kenneth W. Rosenberg, William S. Estabrook, Thomas J. Clark, Gary R. Allen, U.S. Department of Justice, Washington, DC, of counsel), for Defendant-Appellant.

Paul T. Sheppard, Binghamton, NY (Hinman, Howard & Kattell, Binghamton, NY, Michael D. Meuser, Frank T. Becker, Miller, Griffin & Marks, Lexington, KY, of counsel), for Plaintiff-Appellee.

Before: MESKILL and CALABRESI, Circuit Judges, and BLOCK, District Judge. *

BLOCK, District Judge:

"Withdraw, my lord; I'll help you to a horse." 1

The United States appeals from a judgment of the District Court for the Northern District of New York (McAvoy, J.) vitiating a tax levy placed by the Internal Revenue Service ("IRS") on a race horse named Devil His Due as part of its ongoing effort to collect over four million dollars of unpaid income taxes from Robert LiButti ("Robert"). The district court found, after a bench trial, that Robert's daughter, Edith LiButti ("Edith"), "was the sole owner of Devil His Due at the time it was levied upon" and that the government failed to establish "a nexus between the taxpayer and the property at issue." LiButti v. United States, 894 F.Supp. 589, 592, 599 (N.D.N.Y.1995).

On appeal, the government contends that Devil His Due was an asset of Lion Crest Stable ("Lion Crest") and that "the district court erred by rejecting, as a matter of law, the possibility that by virtue of his financial and operational control over Lion Crest Stable, Robert LiButti had an ownership interest in all of the assets of the stable, including Devil His Due." In addition, the government argues that the district court erred by refusing to draw any adverse inferences from Robert's invocation of the Fifth Amendment's privilege against self-incrimination when questioned about his role in Lion Crest and, particularly, whether his funds were used to acquire Devil His Due.

Edith contends on appeal that Devil His Due is owned by her, not Lion Crest; that "[t]here is no actual entity, or even any proof that there was any 'going concern' under that name;" that "[t]he name 'Lion Crest Stable' is merely a fanciful name that [she] used to describe whatever horses she happens to own

Page 113

at the time;" and that "[t]he existence of Lion Crest Stable was not something greater than Edith LiButti." According to the district court's decision, Edith claimed at trial "to be the sole proprietor of Lion Crest Stable, the purported owner of Devil His Due," LiButti, 894 F.Supp. at 591, and indeed she has brought this lawsuit as "Edith LiButti, doing business as Lion Crest Stable, a sole proprietorship."

Because we conclude that the district court did not appropriately consider the nature of Edith and Robert's relationships with Lion Crest and Devil His Due, and further conclude that the district court did not properly consider the circumstances which give rise to the drawing of adverse inferences in a civil action when the Fifth Amendment is invoked, we vacate and remand.

BACKGROUND

In 1977 Robert was convicted of filing false and fraudulent tax returns. Thereafter, the IRS assessed unpaid federal income taxes against him for a number of pre- and post-1977 tax years. As of August 1994, the outstanding balance was $4,395,162.06. The IRS could not locate any assets in Robert's name that could be seized to satisfy this tax liability. It did, however, locate Devil His Due, a prized thoroughbred race horse which was in Saratoga, New York, preparing to run in the Whitney Handicap under Lion Crest's colors. Believing Robert, who had an obvious vested interest in secreting his assets, to be the effective owner of Lion Crest and Devil His Due, the IRS issued its levy against Lion Crest's titular owner, Edith, as her father's purported nominee, "to the extent of his interest" in Devil His Due. The next day, Edith and the IRS agreed to let the horse run in the Whitney Handicap, and to place any earnings in escrow. Devil His Due finished second, earning $77,000.

Edith has brought this wrongful levy action against the government pursuant to 26 U.S.C. § 7426 to enjoin the IRS from enforcing its levy against Devil His Due, and for the release of its Whitney Handicap race winnings. The district court stated in its decision that under this statute the initial burden of proof rests with the plaintiff to prove title to or ownership interest in the levied property; the burden then shifts to the government to prove by substantial evidence that there is a nexus between the property and the taxpayer; however, "[i]t is the plaintiff's ultimate burden ... to prove that the levy is wrongful and should be overturned." LiButti, 894 F.Supp. at 591.

The district court traced Edith's ownership of Devil His Due from her testimony and various exhibits, "including bills of sale and check stubs from Lion Crest Stable's checking account." Id. It rejected a number of liability theories advanced by the government in its effort to establish the requisite nexus between Robert and the levied property: nominee, fraudulent conveyance, alter ego, constructive trust. The government's nominee theory was rejected because "[m]ost importantly, the government did not provide any proof that there was a transfer of Devil His Due from Robert to Edith LiButti." Id. This finding also compelled the district court to reject the government's fraudulent conveyance theory. Id. at 598 ("[S]ince none of the proof at trial supported that Devil His Due was conveyed from Robert to Edith LiButti, any argument of this theory is meritless."). In respect to its alter ego theory, the government contended that "the proof at trial shows that Robert LiButti is the alter ego of Lion Crest Stable, and thus, since Devil His Due is purportedly owned by Lion Crest, the horse is the property of Robert LiButti." Id. The district court rejected this theory because it could not find any "New Jersey legal authority for the proposition that a sole proprietorship may be subject to the alter ego doctrine." Id. 2 The district

Page 114

court rejected the government's constructive trust theory since it believed that it was tied to the rejected alter ego theory. Id. at 599. Indeed, there was no proof of an actual transfer of the horse from father to daughter. Moreover, there was no direct proof that the monies Edith used to purchase and, subsequently, repurchase Devil His Due came from her father. The record is replete, however, with evidence of Robert's use of his daughter and Lion Crest for secreting his assets and as the conduits for his horse dealings, and the use of Lion Crest to support the affluent lifestyle to which he had become unaccountably accustomed. The record is also replete with questions pointedly posed to Robert about these matters and the funding of the purchases of Devil His Due, which triggered his invocation of the Fifth Amendment.

A. The District Court's Findings

1. Edith's Ownership of Devil His Due

The district court found that Edith purchased Devil His Due in November 1989 from a disinterested party for $25,000, and that she sold it shortly thereafter, on February 26, 1990, to her ex-husband, George Najemian ("Najemian"), for $45,000. On that same date, Najemian sold a 10 percent interest to Robert McGirr ("McGirr"). He sold a 25 percent interest on the following day to Edward Darella ("Darella"), and another 25 percent interest on the next day to George and Richard Greeley ("the Greeleys"). Najemian retained the remaining 40 percent interest.

As further explained by the district court, Edith reacquired title to Devil His Due during 1992-93 by (1) trading her interest in a colt of "Turkoman" and "Solicitous" for the 40 percent interest her ex-husband had retained; (2) trading her interest in a horse named "Litigation Rex" for Darella's 25 percent interest; (3) trading her ownership of a horse named "Easy Magic" to McGirr for his 10 percent interest; and (4) paying the Greeleys $100,000 for their 25 percent interest.

The district court found that Edith purchased her interests in the Turkoman/Solicitous colt and Easy Magic for $20,000 and $50,000, respectively; that she used her mother as a conduit to purchase Litigation Rex for her with monies which Edith loaned to her mother; and that the $100,000 Edith paid to the Greeleys was borrowed from a friend, who she repaid after Devil His Due won a major race. Notably, the district court made no findings as to the underlying source of funds for the equine interests which Edith conveyed as partial consideration for her reacquisition of Devil His Due; nor did the district court make any findings as to the source of the $25,000 for the initial purchase of Devil His Due.

In all of these sales and purchases, title to the horses, including Devil His Due, was set forth in the underlying documents either in the name of "Edith LiButti (Lion Crest Stable)" or "Lion Crest Stable (Edith LiButti)."

2. The Absence of Proof of Robert's Interest In Devil His Due

In contrast to the details of the various purchase and sales transactions which Edith produced in support of her ownership claim to Devil His Due, the district court concluded that the government produced only scant, inconclusive evidence of any direct ownership interest by Robert in the horse. This came from a gratuitous witness, Stewart Welch ("Welch"), who testified to certain telephone conversations he purportedly had with Edith because he was desirous of purchasing an interest in Devil His Due. As he recalled, Edith told him that she, Robert, and a Bob Fox ("Fox") had ownership interests in Devil His Due; that a 25% interest was for sale for...

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