U.S. v. Marsh, Civ. 99-00355 SOM.

• Decision Date: 30 August 2000
• Docket Number: No. Civ. 99-00355 SOM.,Civ. 99-00355 SOM.
• Citation: 114 F.Supp.2d 1036
• Court: Hawaii Supreme Court
• Parties: UNITED STATES of America, Plaintiff, v. John W. MARSH, Sean Marsh & Heather Marsh as Trustees of the Marsh Trust, and Bank of Hawaii, Defendants.

114 F.Supp.2d 1036

UNITED STATES of America, Plaintiff, v. John W. MARSH, Sean Marsh & Heather Marsh as Trustees of the Marsh Trust, and Bank of Hawaii, Defendants.

No. Civ. 99-00355 SOM.

United States District Court, D. Hawai`i.

August 30, 2000.

Bernard J. Knight, Jr., U.S. Department of Justice, Washington, DC, for plaintiff.

Stephen P. Pingree, Richard P. McClellan, III, Honolulu, HI, for defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

MOLLWAY, District Judge.

This is an action by Plaintiff United States of America ("United States") against Defendants John Marsh, Sean Marsh and Heather Marsh, as trustees of the Marsh Trust, and Bank of Hawaii to reduce to judgment the unpaid federal employment and unemployment taxes assessed against John Marsh and to foreclose on federal tax liens on two parcels of real property conveyed by John Marsh to the Marsh Trust.

On July 22, 1999, John Marsh filed a Counterclaim against the United States for damages for unauthorized collection practices under 26 U.S.C. § 7433. John Marsh claimed that the IRS had acted improperly in attempting to collect the taxes it claims John Marsh owes. Because all of the allegations contained in the Counterclaim were either time-barred or not cognizable, the court dismissed the Counterclaim.

On June 13, 2000, the court granted summary judgment to the United States on Count I of the Complaint, reducing to judgment unpaid federal employment and unemployment taxes owed by John Marsh. This was done in the Order Denying Defendant John W. Marsh's Motion to Dismiss for Lack of Jurisdiction and Granting the United States' Motion for Partial Summary Judgment on Count I of the Complaint (Judgment for Unpaid tax Assessments). Consequently, the amount or calculation of the assessments made against John Marsh by the IRS is no longer at issue. The only issue for trial is whether the United States can foreclose its tax liens against two parcels of real property that John Marsh transferred to the Marsh Trust in 1994 under one or more of three theories: 1) that Marsh fraudulently conveyed the real properties to the Marsh Trust, 2) that the Marsh Trust holds title to the real properties as the nominee of John Marsh, or 3) that the Marsh Trust is a sham.

The parties have stipulated that any interest Bank of Hawaii has in the properties is to be addressed by post-trial motion. A nonjury trial was held on August 29, 2000. The trial was conducted pursuant to this court's civil nonjury trial procedures. Those procedures provide for direct examination to be presented by way of written declaration, and for witnesses to be available for live cross-examination and live redirect examination unless written crossand/or redirect examinations are agreed to. Four witnesses were presented at trial by the government in its case-in-chief. They were Defendants John Marsh, Sean Marsh, and Heather Manuel, and John Marsh's attorney, Hayden Burgess. The Defendants put on no additional witnesses.

For the reasons set forth below, this court orders that the two properties in issue be foreclosed on the ground that they are held by the Marsh Trust as John Marsh's nominee.

FINDINGS OF FACT

1. By "deed" dated March 6, 1967, a copy of which was received in evidence

as Exhibit 2, John W. Marsh and his wife, Carol Lee Marsh ("Carol Marsh"), acquired the residential property located at 2472 Komo Mai Drive, Pearl City, Hawaii, "as tenants by the entirety with full right of survivorship." This Pearl City property is referred to in these findings as the "Residential Property." Declaration of John Marsh ¶¶ 1, 8 ("J. Marsh Dec."); Exhibit 2.

2. John Marsh and Carol Marsh have two children, Sean Marsh ("Sean Marsh") and Heather Marsh (now Heather Manuel) ("Heather Manuel"). J. Marsh Dec. ¶ 2; Testimony of John Marsh. Sean was born in 1965, and is married to Bernadine Marsh, with whom he has two daughters, ages 9 and 5. Testimony of Sean Marsh. Sean is a lineman with a telephone company and has worked in the past with building contractors. Heather was born in 1971. She has a bachelor's degree in liberal arts and is married. Heather's husband is a plumber, and Heather is a flight attendant. Testimony of Heather Manuel.

3. In 1965, John Marsh joined the Honolulu Police Department. He progressed to the rank of Sergeant and received commendations for, among other things, foiling an attempted rape at a public housing project in urban Honolulu. He continued to work with HPD until his retirement in 1992. Testimony of John Marsh.

4. While still with HPD, John Marsh started a masonry contracting business, named S & H Masonry. Id.

5. In approximately 1985, John Marsh and Carol Marsh were audited by the Internal Revenue Service ("IRS"). Initially, the IRS asserted that, for the tax years 1981 through 1984, they owed approximately $114,000 in personal taxes. After John Marsh and Carol Marsh retained an accountant to represent them in the audit, the IRS conceded that the amount due was approximately $15,000. Id.

6. In the spring of 1986, John Marsh applied for and obtained a personal line of credit from Bank of Hawaii, secured by a first mortgage on the Residential Property. The credit limit was $40,000. J. Marsh Dec. ¶ 16; Exhibit 8.

7. S & H Masonry did not always have full-time work and had periods without any jobs or with only small jobs. Testimony of John Marsh.

8. In 1990, the IRS was examining whether S & H Masonry had failed to pay employment taxes for persons who performed S & H Masonry work. In a letter dated July 12, 1990, Marsh told the IRS that he was aware of the "`Employment Tax issue' existing for 1985 through 1988." Exhibit 11; J. Marsh Dec. ¶ 19. In the letter, Marsh stated that he was not a "TAXPAYER" for purposes of the Internal Revenue Code and therefore "NOT SUBJECT TO YOUR JURISDICTION." Exhibit 11.

9. In 1990 or 1991, John Marsh and his accountant met with three IRS representatives to discuss S & H Masonry tax issues. John Marsh took the position that, under the IRS' 20-point test to determine whether a person was an employee or an independent contractor, S & H Masonry workers were independent contractors and therefore S & H Masonry was not liable for employee-related taxes. John Marsh said that, at the end of the meeting, he believed that the IRS was satisfied with his explanation and was abandoning its inquiry into the status of S & H Masonry workers' tax status. Testimony of John Marsh.

10. By "warranty deed" dated June 27, 1991, John Marsh and Carol Marsh acquired a vacant lot on the Big Island of Hawaii ("Vacant Lot") as tenants by the entirety. A copy of the warranty deed to the Vacant Lot was received in evidence as Exhibit 4. This deed resulted from John and Carol Marshes' purchase of the Vacant Lot in the 1970s by an agreement of sale. They made periodic payments until 1991, when, having paid in full, they received the warranty deed. They purchased the Vacant Lot so that they would have a second piece of real estate, and each of their two children could then be assured of ultimately owning real estate, with the children to decide which child would take which parcel. Testimony of John Marsh.

11. In a letter dated May 29, 1992, John Marsh wrote to the IRS stating that he was aware of an IRS criminal investigation against him for the years 1986 through 1989. Exhibit 12; J. Marsh Dec. ¶ 20. John Marsh said in the letter that he was not a "TAXPAYER" for purposes of the Internal Revenue Code and that the IRS had no jurisdiction over him. Id.

12. In May 1992, John Marsh was aware that the IRS was conducting a criminal tax investigation of him. J. Marsh Dec. ¶ 20.

13. John Marsh has always believed that he is not required nor obligated to pay taxes to the United States because the United States has no jurisdiction to collect taxes from him. J. Marsh Dec. ¶ 21.

14. In 1994, John Marsh was indicted for tax evasion relating to his personal income tax returns. John Marsh was acquitted on all counts. Testimony of John Marsh.

15. On November 22, 1994, Carol Marsh died. J. Marsh Dec. ¶ 3.

16. Carol Marsh's death was unexpected. Testimony of John Marsh, Heather Manuel. Carol Marsh had been diagnosed with cancer a year before her death, but was in remission. Testimony of John Marsh. Carol Marsh died days after a mistaken emergency room diagnosis. Id.

17. Before Carol Marsh died, she asked John Marsh to take care of their children and to remember what they had discussed in the past. Id. John Marsh believed that Carol Marsh was referring to discussions he had had with Carol Marsh about the disposition of their property. Each had expressed a desire to have their property go to their children at their deaths. Id. John Marsh had considered the possibility that, as a police officer, he might die before his wife, and that his wife might remarry. He had had the wish that his property go to his children even if Carol remarried. Id.

18. Even before their mother died, Sean Marsh and Heather Manuel had been aware that their father, John Marsh, was having problems with the IRS. S. Marsh Dec. ¶ 4; H. Manuel Dec. ¶ 4.

19. On December 9, 1994, less than three weeks after Carol Marsh's death, John Marsh executed trust documents creating the Marsh Trust. John Marsh had consulted with Hayden Burgess, an attorney licensed in Hawaii, who drafted the necessary legal documents for John Marsh to establish a trust. Declaration of Hayden Burgess ("Burgess Dec.") ¶¶ 3, 7; Exhibit 1. John Marsh suggested a trust as the best vehicle to preserve his assets. Burgess Dec. ¶ 9; Testimony of Hayden Burgess. Burgess knew from John Marsh that the IRS was asserting that John Marsh owed unpaid taxes. Burgess Dec. ¶ 4. When the trust was created, Burgess also knew that John Marsh was being investigated by the IRS for criminal tax violations. Id. ¶ 5.

20. John Marsh was the settlor of the Marsh Trust, and Sean Marsh and Heather Manuel were its sole trustees and beneficiaries. Under the...