Nelson v. US

• Decision Date: 22 February 1993
• Docket Number: Civ. A. No. 91-438-4-MAC(DF).
• Parties: Jacqueline Drewery NELSON, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Middle District of Georgia

821 F. Supp. 1496

Jacqueline Drewery NELSON, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 91-438-4-MAC(DF).

United States District Court, M.D. Georgia, Macon Division.

February 22, 1993.

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Denmark Groover, Jr., Macon GA, for plaintiff.

Frank L. Butler, III, Macon, GA, Janice L. Feldman, Dept. of Justice, Washington, DC, for defendant.

ORDER

FITZPATRICK, District Judge.

This case was heard a by the court, sitting without a jury on December 21, 1992. Plaintiff seeks to overturn and to remove the Government's tax levy and lien that has been filed and attached on her house and property. The Government contends that Plaintiff holds the property as nominee for her father, Joseph Drewery, the person against whom the delinquent taxes have been levied. As alternative theories of recovery, the Government alleges a constructive trust, or a fraudulent transfer under O.C.G.A. § 18-2-22(2). The court is now prepared to render its decision in this case.

FINDINGS OF FACT

Plaintiff, Jacqueline Drewery Nelson, is the daughter of Joseph Drewery. Joseph Drewery is the taxpayer against whom the Government has levied for nonpayment of back taxes.

In 1982, Mr. Drewery purchased 4.57 acres of land from Mr. Booker W. Chambers. (Plaintiff's Exhibit 1). This land was located on Graham Road in Jones County, Georgia. Mr. Drewery paid $4,000 for the property. Shortly after the purchase of the land, he began building a house on that land. He built the house with his own labor and with the help of some friends.

In February 1983, Mr. Drewery gave the house to his daughter, the Plaintiff in this action. (Plaintiff's Exhibit 2). She moved there with her minor son shortly after this gift.

Just over a month after receiving the property, Plaintiff deeded the property to Ms. Gussie Matthews. (Plaintiff's Exhibit 3). Ms. Matthews dated Mr. Drewery at the time of this transfer and she had loaned Mr. Drewery approximately $15,000 toward the construction of the Graham Road house. Plaintiff took back a security deed on this transfer. The purchase price reflected in the security deed is $50,000. It also provides for a monthly payment of $476.17.

Ms. Matthews never made any of the monthly payments to Ms. Nelson. Just over three years later, in May 1986, Ms. Matthews quitclaimed her rights in the property to Ms. Nelson. (Plaintiff's Exhibit 5). This deed reflects that the transfer was in lieu of foreclosure. Both of these transactions (from Plaintiff to Ms. Matthews and back) were made at the direction of Mr. Drewery. He paid for the document preparation in both transactions and the filing of the deeds, and was present at the closing of the transactions.

During this entire period from 1983 to 1990, the utility accounts for the Graham Road property remained in Mr. Drewery's name. He stayed there periodically, using the larger of the bedrooms as his own. He also stored personal items at the house. He even helped his daughter with maintenance of the house.

Property and ad valorem taxes were charged to and paid by Plaintiff. (Plaintiff's Exhibits 6-9). She testified that she paid the utility bills, even though the accounts remained in her father's name. She admitted that her father helped her with the maintenance and upkeep of the house because he was handy with tools and had built the house.

The basis of the tax levy is the organized, illegal gambling operation supervised, controlled and managed by Joseph Drewery. Mr. Drewery owes the Government in excess of $1.4 million. (Gov't Exhibit 9). The Plaintiff does not challenge the legitimacy or accuracy of that levy because it is not relevant to this matter. It is presumed to be correct.

Mr. Drewery was convicted in the Superior Court for Bibb County, Georgia, on September 4, 1992, for state law RICO violations and multiple counts of running an illegal lottery. He was sentenced to ten years in prison as a recidivist not eligible for parole. (Gov't Exhibit 8-E). He is currently released from jail pending the appeal of his case in the state courts. He was also convicted in 1978 of conducting an illegal gambling operation. (Gov't Exhibit 8-B).

As a result of these illegal gambling operations, agents from the Internal Revenue Service ("IRS") calculated Mr. Drewery's delinquent tax obligation. On April 11, 1990, the IRS calculated Mr. Drewery's liability for back taxes based on the extent of and income from his illegal gambling operation in 1990 (as evidenced by the indictment that year). As a result of that assessment, Mr. Drewery became delinquent on a tax bill of over $1.4 million. The IRS then levied this sum against the house that now belongs to Plaintiff and sought to sell it at foreclosure sale to recoup part of the delinquent tax debt. Prior to the foreclosure sale, Plaintiff and the Government agreed that the house would not be sold pending final determination of this suit by this court.

CONCLUSIONS OF LAW

The Government's Federal Law Theory

The Government contends it should be permitted to go forward with its foreclosure sale because Plaintiff holds the subject property as the taxpayer's nominee. This theory of recovery is based solely on Federal Law and civil actions filed under 26 U.S.C. § 7426. That section provides,

"If a levy has been made on property ... any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States.

Plaintiff, therefore, has the burden of showing that she has an interest in the property, and that the IRS levy on that property is wrongful. Dixon v. United States, 687 F.Supp. 598, 599 (M.D.Ga.1988) aff'd, 872 F.2d 435 (11th Cir.1989). The levy is wrongful if the property levied upon does not belong, in whole or in part, to the taxpayer against whom the levy was made. Id. (quoting Arth v. United States, 735 F.2d 1190, 1193 (9th Cir.1984)). Once Plaintiff has demonstrated her interest, the burden switches to the Government to prove a nexus between the taxpayer and the property by substantial evidence. Morris v. United States, 813 F.2d 343, 345 (11th Cir.1987). The ultimate burden remains with the Plaintiff, however, to convince the court that the levy should be overturned. Id.

Plaintiff easily established her ownership interest in the property the Government has seized. She is the last recorded owner of the property. There are no encumbrances shown in the evidence, other than the Government's tax lien. The court concludes Plaintiff has standing to bring this action.

The Government must prove a nexus, or connection, between the taxpayer and the property by "substantial evidence." Morris, 813 F.2d at 345. The Government argues, with no authority, that this requires more than a scintilla but less than a preponderance of the evidence. The court disagrees.¹

A review of the case law shows that where "substantial evidence" is required, it is because the right or property interest being infringed is deemed extraordinary or unique in some way.² In fact, the Eleventh Circuit in Morris quoted with approval the language of the district court's order, which said, "In a post-levy proceeding, the IRS `must justify its extraordinary action in connecting a third party's property to the particular delinquent taxpayer.'" Morris, 813 F.2d at 345 (quoting Valley Finance, Inc. v. United States, 629 F.2d 162, 171 n. 19 (D.D.C.1980) cert. denied sub nom. Pacific Development Inc. v. United States, 451 U.S. 1018, 101 S.Ct. 3007, 69 L.Ed.2d 389 (1981)) (emphasis added). Since the action by the Government of seizing a seemingly innocent person's property to satisfy the tax liability of another person is extraordinary, the burden of proof on the Government ought to be greater than a mere preponderance. Since the Eleventh Circuit did not require "clear and convincing" evidence, this court concludes that "substantial evidence" is considerably more than a preponderance but less than clear and convincing proof.

In attempting to prevail in its burden, the Government points to the following facts to show the required nexus. First, the utility accounts remained in the taxpayer's name. He occupied the larger of the bedrooms when he stayed in the house and stored personal items there. He assisted with the maintenance and upkeep of the house. And he suggested, or directed the transfer from Plaintiff to Ms. Matthews while he was dating Ms. Matthews.

The court finds these facts unpersuasive to support a finding of a nexus by substantial evidence. Most of these facts can be discounted as the normal relations and burdens of family members in small southern towns. Staying at the house, storing personal property there, and the "visiting" parent using the larger bedroom are all fairly normal incidents of a family relationship in the south. Even leaving the utility accounts in her father's name more nearly demonstrates a desire by Plaintiff to pay no more additional deposits than a subterfuge to defraud the Government.

The only evidence asserted by the Government that might tend to convince the court of the nexus between the taxpayer and the property is the transaction between Ms. Matthews and Plaintiff. However, the Government does not show that Plaintiff had to comply with her father's wishes. There was no legal obligation on her part to convey the house and property to Ms. Matthews. She did transfer the property as he requested. The court finds this decision by Plaintiff to have been motivated by filial duty to her father, rather than by any understanding that the house is really his. The Government has simply failed in its burden to show the required nexus by substantial evidence.

Even if the Government carried its burden, Plaintiff has satisfied her ultimate burden of showing that the levy should be set...