Sumpter v. U.S.

• Decision Date: 05 February 2004
• Docket Number: No. 01-10214-BC.,01-10214-BC.
• Citation: 302 F.Supp.2d 707
• Parties: J.L. SUMPTER and Shaundra Sumpter, Plaintiffs and Counter-defendants, v. UNITED STATES of America, Defendant and Counter-plaintiff.
• Court: U.S. District Court — Eastern District of Michigan

302 F.Supp.2d 707

J.L. SUMPTER and Shaundra Sumpter, Plaintiffs and Counter-defendants, v. UNITED STATES of America, Defendant and Counter-plaintiff.

No. 01-10214-BC.

United States District Court, E.D. Michigan, Northern Division.

February 5, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Joseph Falcone, Joseph Falcone Assoc., Southfield, MI, for plaintiff/counter-defendant.

Michael W. Davis, Washington, DC, for defendant/counter-claimant.

OPINION

LAWSON, District Judge.

Jerry Sumpter was an author and attorney practicing law in Northern Michigan who incurred a liability for unpaid federal income taxes beginning with the 1981 tax year. The government now claims that Sumpter, whose present whereabouts are unknown, owes the government over $500,000. The plaintiffs in this case are the adult children of Jerry and Santina Sumpter and are beneficiaries of a Trust that their parents created in 1979. From time to time, the Sumpters conveyed real estate to the Trust, which eventually passed on to their children when the children attained 18 years of age and the Trust was dissolved. The government filed liens against these properties based on the twin theories that the transfers of the property to the Trust constituted fraudulent conveyances and that the Trust was merely the nominee or alter ego for Jerry Sumpter. The plaintiffs have filed a complaint to quiet title seeking to extinguish these tax liens. The government counter-claimed and asserted the same two theories as the basis of its effort to foreclose the liens. The case came on for trial and the Court heard testimony from nine witnesses in open court and received 49 exhibits. The parties filed post-trial briefs and proposed findings. The following constitutes the Court's findings of fact under Fed.R.Civ.P. 52, followed by its application of the governing law.

I.

On or about May 1, 1979, Jerry Sumpter and his wife, Santina, created an irrevocable trust in the name of their children called the J.L. & Shaundra Sumpter Trust ("the Trust"). The Trust document provided that the trustee was to have exclusive control over the Trust. See Joint Ex. 1. The Trust document also restricted the authority of the trustee to make loans to the settlors, Jerry and Santina Sumpter, but did not prevent loans to Jerry Sumpter's law practice. In fact, multiple loans were made to Sumpter & Perry, P.C. over the years amounting to several hundred thousand dollars. The loans were documented and always repaid.

Santina Sumpter, one of the settlors, acknowledged that she signed the Trust document with the understanding that the Trust was set up for the two children and that the Trust would be funded by rent from the real estate on which Jerry Sumpter's law office property was located. She testified that the Trust was "run" by Jerry Sumpter and the trustees. Santina's signature was witnessed by Judy Arnold and Mildred Fulmer, now Mildred Burris, both of whom testified that they were employed as legal secretaries in Jerry Sumpter's office in 1979. Judy Arnold testified that she worked as a secretary in Sumpter's law office from 1975 through May 1979 and then again in 1983; and Burris testified that she worked for Sumpter from 1972 to 1982.

The Trust assets consisted primarily of several parcels of real estate that were conveyed to the Trust from time to time, and the accumulated rents that some of these properties generated. The real estate, described in more detail below, can be categorized into three groups. The first group was comprised of the office building at 11118 Straits Highway, Cheboygan, Michigan in which Jerry Sumpter conducted his law practice. Jerry Sumpter transferred this parcel to the Trust in 1979 pursuant to a schedule attached to the Trust agreement, but the paperwork was not recorded until after Jerry Sumpter began having his tax problems in 1986. The ownership of this property, defined by a metes-and-bounds description set forth in Count I, Paragraph 4 of the complaint (and in the Trust schedule, see Joint Ex. 1), was disputed, but that dispute was resolved in favor of the Trust and the plaintiffs here in a Judgment filed in the Cheboygan County Circuit Court on April 14, 1999. See Pls.' Ex A1 & A2.

The second group consists of six lots: two parcels in Inverness Township, Cheboygan County; three parcels in Benton Township, Cheboygan County; and one parcel in Bangor Township, Bay County. These lots were mortgaged to the Trust to secure a loan to Jerry and Santina Sumpter in the amount of $90,000 on January 11, 1988. The land was conveyed to the Trust to repay the loan and satisfy the mortgage on April 21, 1988. The property was owned equally by Jerry and Santina Sumpter before it was conveyed to the Trust.

The third group is made up of two lots: Lot 19, Beaugrand Estates, Cheboygan County (commonly known as 1444 Nicolet, Cheboygan, Michigan), purchased in the name of the Trust on July 31, 1990, and 10841 Moonlight Bay, Cheboygan, Michigan (which includes adjacent vacant lots 46, 47, and 48) conveyed via deed to the Trust on January 22, 1993. The Moonlight Bay property was purchased on a land contract by Jerry and Santina Sumpter on August 31, 1978, and their equitable interest was conveyed to the trust on April 21, 1988.

The tax delinquencies in this case first came to Jerry Sumpter's attention in 1986. In August of that year, the Internal Revenue Service (IRS) notified Jerry Sumpter that it proposed to assess additional income taxes against him for taxable years 1985 and 1986. The IRS also notified Jerry and Santina Sumpter that there was a delinquency on their 1984 income tax return (Form 1040), and on December 8, 1986 a representative from the Secretary of the Treasury made an assessment of $45,874.79. In 1987, the IRS notified Jerry Sumpter that it proposed to assess additional income taxes against him for taxable years 1981 and 1982, and on July 27, 1987 a decision was filed by the United States Tax Court establishing that Jerry Sumpter had an additional income tax deficiency for those years. On August 19, 1987, assessments were made in the amount of $222,131.30 for the 1981 return and $78,321.13 for the 1982 return.

In December 1987, Jerry Sumpter received a notice of tax delinquency from the IRS for the years in question. Sumpter did not pay the tax. However, two weeks after he received a notice of tax delinquency, Jerry Sumpter and Santina Sumpter borrowed $90,000 from the Trust, despite the prohibition against loaning money to the settlors. The money was used to pay debts incurred by Jerry Sumpter's law firm. As collateral for the loan from the Trust, Jerry and Santina Sumpter gave the Trust a mortgage on the six parcels of real estate previously referenced. The legal descriptions of the properties as conveyed by the mortgages are as follows:

(a) Land in the Township of Inverness, County of Cheboygan, States of Michigan, described as follows:

Commencing at South 1/4 corner Section 6, thence South 86 degrees 2 minutes 40 seconds Est along South line 1,596.40 feet to Easterly right of way line of M-27; thence Northerly along arc of curve right-of-way line with chord bearing North 18 degrees 20 minutes West 113.80 feet to point of beginning; thence Northerly along arc of curved right-of-way line with chord bearing North 14 degrees 35 minutes 40 seconds West 168.75 feet; thence South 86 degrees 2 minutes 40 seconds East 305.78 feet; thence South 1 degree 37 minutes 40 seconds East 154.41 feet; thence North 87 degrees 23 minutes 30 seconds West 268.14 feet to point of beginning being part of Government lot 4, Section 6, Town 37 North, Range 1 West.

and

Par 1, West 332 Feet of West 1/4 of the Northwest 1/4, Section 9, Town 37 North, Range 2 West.

(b) Land in the Township of Benton, County of Cheboygan, State of Michigan, described as follows:

Commencing at the Southeast corner Section 3; thence West 330 feet; thence North 264 feet; thence East 330 feet; thence South 264 feet; to point of beginning; Section 3, Town 37 North, Range 1 West.

and

Commencing at intersection of South line, Government Lot 4 and East bank of Cheboygan River; thence North along bank 50 feet for point of beginning; thence East par to South line 150 feet more or less to road; thence North along road 100 feet; thence West 150 feet more or less to river bank; thence South along East bank of river 1200 feet to point of beginning, part of Government Lot 4, Section 8 Town 37 North, Range 1 West.

and

Lots 46, 47, 48, and 3/57 of Lot 58 of GLENN C. MOUNTJOY SUBDIVISION to the extent of vendee's equitable interest thereon.

(c) Land in the Township of Bangor, County of Bay, State of Michigan, described as follows:

Lots 15 and 16, Block 3, THE WEST LAWN PLATS.

Countercl. at ¶ 13.

On April 7, 1988, the IRS sent Jerry Sumpter a "Final Notice (Notice of Intent to Levy)" informing him that the IRS had sent notices to him to pay his unpaid federal tax liabilities for tax years 1981, 1982, and 1985 (1984 was not included), which at that time was $184,931.58, but that he had failed to do so. The IRS also informed him that it planned on taking collection action against him and his assets. IRS Revenue Officer Kenneth Neumann testified that he met with Jerry Sumpter on April 21, 1988 and told him that the IRS was about to commence collection proceedings against him, including the filing of a notice of a federal tax lien against his property. A final notice had been signed by Neumann on April 7, 1988 but no payment was made against the tax liability. Neumann did not file the tax liens immediately because Sumpter submitted an offer and compromise, which suspended all collection activities while a decision to accept or reject was pending.

Several hours after the meeting between Neumann and Sumpter on April 21, 1988, Jerry and Santina Sumpter transferred their interests in the six parcels of land to the Trust. In addition, on April 26, 1988 the Trust document was recorded...