Shades Ridge Holding Co., Inc. v. U.S., 88-7085

• Decision Date: 10 August 1989
• Docket Number: No. 88-7085,88-7085
• Parties: SHADES RIDGE HOLDING COMPANY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. UNITED STATES of America, Plaintiff-Appellee, v. Sam A. FIORELLA and Shades Ridge Holding Company, Inc., Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 725

888 F.2d 725

SHADES RIDGE HOLDING COMPANY, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

UNITED STATES of America, Plaintiff-Appellee, v. Sam A. FIORELLA and Shades Ridge Holding Company, Inc.,

Defendants-Appellants.

No. 88-7085.

United States Court of Appeals, Eleventh Circuit.

Aug. 10, 1989.

As Amended on Denial of Rehearing Sept. 29, 1989.

Vowell, Meelheim & McKay, PC, Richard A. Meelheim, Samuel R. McCord, Birmingham, Ala., for plaintiff-appellant.

Frank W. Donaldson, U.S. Atty., Caryl Privett, Asst. U.S. Atty., Birmingham, Ala., Gary R. Allen, Chief, Appellate Sec., William Rose, Jr., Joan Oppenheimer, William Estabrook, Asst. Attys. Gen., Appellate Section, U.S. Dept. of Justice, Washington, D.C., for U.S.

Appeal from the United States District Court for the Northern District of Alabama.

Before RONEY, Chief Judge, COX, Circuit Judge, and MORGAN, Senior Circuit Judge.

RONEY, Chief Judge:

This appeal arises from two consolidated cases: a quiet title action commenced by Shades Ridge Holding Company, Inc. (Shades Ridge) and a foreclosure action by the Government to foreclose tax liens and judgment liens relating to the tax liability of Sam Fiorella against property titled to Shades Ridge. The district court entered a decree of foreclosure against three parcels of real property, holding that Shades Ridge was the alter ego and fraudulent transferee of Sam Fiorella. The total amount foreclosed was approximately $1,600,000, comprised of a consolidated judgment against Fiorella in United States v. Fiorella, Nos. CV-64-391 and CV-65-7745 (N.D.Ala.1968), totalling approximately $1,000,000 for tax years 1956 through 1963, and a judgment entered in this case for approximately $590,000 for tax years 1969 through 1976.

Shades Ridge argues six points on appeal relating to the district court's failure to give proper effect to prior litigation, the insufficiency of the evidence to prove alter ego and fraudulent conveyance, and whether one of the prior judgments had been satisfied as a matter of law. This opinion will discuss the arguments seriatim, and detail facts as are necessary in the decision of each.

Briefly, the Government contends that since 1957, taxpayer has run a gambling operation offering his customers poker, sports betting, dice games, and blackjack. This gambling business has been so lucrative it has generated income resulting in taxpayer having more than $4 million in unpaid federal tax liabilities. Taxpayer and Shades Ridge have been litigating taxpayer's tax liability since 1964.

I. Res Judicata as to 1987 Tax Court Decisions

Appellants argue that a 1977 district court judgment precluded by res judicata the reduction to judgment of income tax liabilities determined in 1987 tax court decisions. Although the district court, after an evidentiary hearing, ruled the prior litigation did not involve the same causes of action and therefore was not res judicata, it also ruled that taxpayer waived his right to raise the affirmative defense of res judicata in subsequent proceedings when he failed to raise it in tax court, when the assessments were determined. We affirm the district court on this legal waiver ground, and need not discuss the details of the complex litigation.

The rule governing the pleading of affirmative defenses in tax court, requires that

A party shall set forth in his pleading any matter constituting an avoidance or affirmative defense, including res judicata, collateral estoppel, estoppel, waiver, duress, fraud, and the statute of limitations. A mere denial in a responsive pleading will not be sufficient to raise any such issue.

Rule 39, 6 I.R.C. foll. Sec. 7453.

The rule requires that affirmative defenses, such as res judicata must be raised initially in tax court. Brutsche v. Commissioner, 585 F.2d 436 (10th Cir.1978) (doctrine of election as affirmative defense). See also R. 34(b)(4) I.R.C. foll. Sec. 7453 (tax court petition must contain clear and concise assignments of every error allegedly committed by the Commissioner in his deficiency determination).

Fiorella petitioned the tax court for a redetermination of the tax deficiency, challenged the deficiency in several respects, but did not assert then that the assessments were precluded by res judicata. Taxpayer argues that even though the defense should have been raised in tax court, it is not waived because it was raised in district court when the Government sought to reduce the assessment to judgment. The gist of taxpayer's argument is that a final judgment was not entered in the case until the district court entered judgment; res judicata was raised in the district court; thus, it was timely raised. Taxpayer cited no case either in his briefs or during oral argument in support of this proposition nor has this court found any cases to support this argument.

This same procedure was followed by a taxpayer and rejected in United States v. Wynshaw, 516 F.Supp. 785 (S.D.N.Y.1981), aff'd on other grounds, 697 F.2d 85 (2d Cir.), cert. denied, 464 U.S. 822, 104 S.Ct. 87, 78 L.Ed.2d 96 (1983). In Wynshaw, the Government sought to reduce to judgment income tax assessments against taxpayer. Taxpayer raised a defense in district court that she had not raised in the prior tax court proceeding. The court granted the Government's summary judgment motion, finding that taxpayer was "attempting to litigate an issue which is without doubt a matter that could have been offered to challenge the assessment in Tax Court." Id. at 789.

Taxpayer's rationale that the tax court decision is not a final judgment is equally without merit. A tax court decision is considered final upon the affirmance or dismissal after a notice of appeal or the expiration of that time. I.R.C. Sec. 7481(a)(1).

Taxpayer may be attempting to assert that the district court has authority to hear taxpayer's defense in the first instance pursuant to I.R.C. section 7403, which provides that

[t]he court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property....

I.R.C. Sec. 7403(c). The cases holding that the taxpayer "may challenge the underlying merits of the assessment" in district court, however, do not involve prior Tax Court action, and are cases where the litigants' first opportunity to challenge the assessment in any court did not occur until the district court foreclosure action. United States v. Lease, 346 F.2d 696, 698 (2d Cir.1965); United States v. Connor, 291 F.2d 520, 527 (2d Cir.1961); United States v. Mauro, 243 F.Supp. 413 (S.D.N.Y.1965); United States v. Camejo, 666 F.Supp. 1542 (S.D.Fla.1987).

II. 1982 Tax Court Decisions

Taxpayer contends that the 1982 tax court decisions in Shades Ridge v. Commissioner, Nos. 7284-77 and 12290-78 (T.C. Nov. 8, 1982) are res judicata as to the Government's present attempt to collect Fiorella's tax liability from Shades Ridge's assets by an alter ego and fraudulent conveyance or use cause of action. Essentially, Fiorella argues that the cause of action the Government now asserts against Shades Ridge was asserted in the 1982 tax court cases against Shades Ridge. Taxpayer asserts that the Government was required to pursue its claims against Shades Ridge as Fiorella's transferee at the same time it brought an action to establish Shades Ridge's tax liability.

The district court in its Memorandum Opinion entered November 12, 1987, correctly held that the 1982 Tax Court judgments are not a bar to the nominee or transferee claim proceeding in this case against Shades Ridge. Shades Ridge Holding Co. v. United States, No. CV85-PT-2526-S (N.D.Ala. Nov. 12, 1987). It is not necessary to repeat that carefully reasoned opinion.

III. Nominee/Fraudulent Transferee Claims

Fiorella contends that the Government failed to offer sufficient evidence to support the district court's decision that Shades Ridge was the alter ego/nominee of Fiorella.

The district court applied the correct principles of law. Property of the nominee or alter ego of a taxpayer is subject to the collection of the taxpayer's tax liability. G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-51, 97 S.Ct. 619, 627-28, 50 L.Ed.2d 530 (1977). Although the district court found it unclear as to whether state or federal law governs this issue, the standards are so similar that the distinction is of little moment. See United States v. Jon-T Chemicals, Inc., 768 F.2d 686, 690 n. 5 (5th Cir.1985), cert. denied, 475 U.S. 1014, 106 S.Ct. 1194, 89 L.Ed.2d 309 (1986). The issue under either state or federal law depends upon who has "active" or "substantial" control. Valley Finance, Inc. v. United States, 629 F.2d 162, 172 (D.C.Cir.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).

Whether a corporation is a taxpayer's nominee turns on: (1) the control taxpayer exercises over the nominee and its assets; (2) the use of corporate funds to pay taxpayer's personal expenses; and (3) the family relationship, if any, between the taxpayer and the corporate officers. Valley Finance, Inc. v. United States, 629 F.2d at 171-72; Loving Saviour Church v. United States, 728 F.2d 1085, 1086 (8th Cir.1984).

Applying these factors to the instant case, the district court in its 42-page Findings of Fact and Conclusions of Law extensively outlined the history of the relationship between Fiorella and his family members with Shades Ridge. Shades Ridge Holding Co. v. United States, No. CV85-PT-2526-S (N.D.Ala. Dec. 17, 1987). The court found that Fiorella "was ever present and ever involved in the business decisions of Shades Ridge and moved his family members in and out of control at will" and that there "is no family member, other than Fiorella, who truly controlled Shades Ridge at any time." The district court's findings are not clearly...