U.S. v. Mazzeo

• Decision Date: 23 February 2004
• Docket Number: No. CIV.A. 98-3060-WGY.,CIV.A. 98-3060-WGY.
• Citation: 306 F.Supp.2d 294
• Parties: UNITED STATES of America, Plaintiff, v. Mary Ellen Margaret MAZZEO a/k/a Melony Mazzeo, Long Island Savings Bank, New York State Department of Taxation & Finance, and Richard L. Stern, as Chapter 7 Trustee in the case of Salvatore J. Mazzeo, Case No. 896-87418 (Bankr.E.D.N.Y.) Defendants.
• Court: U.S. District Court — Eastern District of New York

Page 294

306 F.Supp.2d 294

UNITED STATES of America, Plaintiff, v. Mary Ellen Margaret MAZZEO a/k/a Melony Mazzeo, Long Island Savings Bank, New York State Department of Taxation & Finance, and Richard L. Stern, as Chapter 7 Trustee in the case of Salvatore J. Mazzeo, Case No. 896-87418 (Bankr.E.D.N.Y.) Defendants.

No. CIV.A. 98-3060-WGY.

United States District Court, E.D. New York.

February 23, 2004.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Bartholomew Cirenza, U.S. Department of Justice, Trial Attorney, Tax Division, Bonni J. Perlin, United States Department of Justice, Trial Attorney, Tax Division, Washington, DC, for United States of America, Plaintiff.

Joseph J. Haspel, Goshen, Joseph J. Haspel, Joseph J. Haspel, PLLC, for Mary Ellen Margaret Mazzeo, Defendant.

MEMORANDUM AND ORDER

YOUNG, District Judge.¹

In this case equity and common sense war against the needs of the IRS, in a largely voluntary tax system, ruthlessly to grind down tax cheats. So it is that the IRS, by manipulating penalty and interest payments, can use a decades old tax debt (the principal of which has been fully paid and then some) to evict an innocent widow and her son from the family home.

This case concerns the conveyances by a husband, Salvatore J. Mazzeo ("Mazzeo"), to his wife, Mary Ellen Margaret Mazzeo ("Mrs. Mazzeo"), of a home, of money used for substantial construction on that home, and of other money, all while Mazzeo owed substantial tax liabilities to the United States government ("United States"). The United States charges that the initial transfer of the home, the construction and improvements, and the other transfers were part of an intentional scheme to defraud the United States as a creditor, and should be set aside as fraudulent conveyances.

I. BACKGROUND AND FACTS

A. Causes of Action and the Relevant Statutes

On April 22, 1998, the United States, pursuant to 26 U.S.C. §§ 7401 and 7403, brought an action in this Court, seeking a declaration that Mazzeo's transfer of the home to Mrs. Mazzeo was null and void as against the United States, and to foreclose tax liens allegedly attaching to that property. Compl. [Doc. No. 1]. In Count I of the United States' Amended Complaint [Doc. No. 90], the United States seeks to set aside the December 11, 1985 conveyance of the home in East Williston from Mazzeo to Mrs. Mazzeo as constructively and actually fraudulent under New York State Debtor and Creditor Law §§ 273 and 276.² The United States contends that because this transfer rendered Mazzeo insolvent, or because he was insolvent when he made it, and because it was made with the actual intent to hinder, delay, or defraud the United States, his creditor, it should be set aside under Sections 273 and 276. The United States thus asks this Court to declare this transfer null and void as against the United States.

In Count II, the United States seeks to declare null and void as against the United States as a creditor of Mazzeo the transfers by Mazzeo, through nominee corporations that he controlled, to Mrs. Mazzeo of funds to improve the subject real property. The United States specifically seeks to set aside numerous distinct transactions with different subcontractors regarding all the construction work done at the home in East Williston from 1994 to 1997. The United States contends that all of these transactions were payments by Mazzeo that, while ostensibly done to improve the home, were actually an attempt to avoid paying these monies to his creditors, and can all be traced into the home. In addition, the United States seeks to void transactions in which Mazzeo paid for personalty that is currently located at the property (elephant tusks, an antique shield, etc.), again arguing that these transfers were constructively and actually fraudulent. The United States therefore seeks a judgment from this Court impressing a lien against the house for the total amount of these transactions.

Lastly, in Count III, the United States seeks to declare null and void under Sections 273 and 276 certain transfers of funds by Mazzeo, through nominee corporations that he controlled, to and for the personal benefit of Mrs. Mazzeo, including but not limited to: the transfers of funds to Long Island Savings Bank and its successor, the Astoria Federal Savings and Loan Association ("Astoria Savings and Loan"), for the payment of the mortgage loan obligations of Mrs. Mazzeo; the transfer of funds to various life insurance companies for the payment of life insurance premiums insuring Mazzeo's life; and transfers of funds directly to Mrs. Mazzeo. In doing so, the United States seeks to set aside numerous distinct transactions and seeks a money judgment or equivalent for the total amount of these transactions.

The United States seeks to declare all the subject conveyances "null and void," and is proceeding under Section 278(1)(b)'s election of remedies to levy execution directly on the property.

B. Factual and Procedural Background

On June 28, 1985, Mazzeo purchased a home valued at $335,000 at 41 Post Avenue, East Williston, New York, ("the home") with a down payment of $100,000, and he took a mortgage from the Dime Savings Bank. Pl.'s Ex. 2 & 5. Mazzeo was then working at Creative Securities, a brokerage firm owned by his father, Fred Mazzeo. Two months later, in August 1985, this brokerage firm imploded and Mazzeo was out of a job. Nevertheless, on September 22 of that year, he married Mrs. Mazzeo. In December 1985, Mazzeo transferred the home, by deed, to his wife. Pl.'s Ex. 3. At the time of this transfer, Mazzeo owed a considerable amount of federal income tax to the United States for the tax year 1984 — approximately $57,000 in assessed taxes, not including accrued interest and late penalties. See Pl.'s Ex. 31 & 33.

Regarding the state of his business affairs at the time he conveyed the home to his wife, Mazzeo testified in a deposition taken during his later bankruptcy proceedings that: the value of Creative Securities capital went from $28 million to $0 in three days, Pl.'s Ex. 39, at 25; after Creative Securities went out of business, almost all of his personal stock, purchased on margin, was worthless and he was forced to write off his losses in these stocks, but remained liable for the margin calls, id. at 41; and from the end of 1985 he was "blackballed" from the securities industry, and in the second half of 1985 he earned only $11,000 working for Shelter Rock Securities, id. at 26-27; Pl.'s Ex. 50-51. Mazzeo's personal income tax returns for the years 1985 and 1986 support these assertions, as he reported a "total income" of negative $6,993 in 1985 and negative $57,832 in 1986. Pl.'s Ex. 50-51.

As for his assets at the time of the transfer, Mazzeo's deposition testimony shows that he had partnership interests in four limited partnerships: 1) Immunomedics, 2) Higgins-Rosemont, 3) Thornhill, and 4) 100 Randall Associates, and the Court infers from that testimony that the value of these interests in December 1985 was approximately $320,000. See Pl.'s Ex. 39, at 44-48. Mazzeo testified further that in December 1985, he owned a fully furnished condominium in Florida, which he had purchased roughly three years before for $107,000, subject to a five-year $90,000 note. See id. at 18. The Court finds that $40,000 is a reasonable estimate for the equity that Mazzeo had in the condominium as of December 1985. The Court also credits Mazzeo's testimony that as of December 1985 he owned a new boat with a purchase price of $50,000. See id. at 17. The Court also finds that Mazzeo owned an Audi at that time, and was owed an indeterminate but substantial sum of money by Creative Securities. See id. at 14, 40, 64, 71.

Mrs. Mazzeo refinanced the original mortgage on the home on July 16, 1987, through Long Island Savings Bank, whose successor in interest by merger is Astoria Savings and Loan, and obtained new mortgage financing totaling $261,800. Pursuant to Judge Seybert's April 27, 2001 Stipulation and Order [Doc. No. 107] in this case, Astoria Savings and Loan still has a valid first mortgage lien on the home. Mrs. Mazzeo took a second mortgage on the home on February 12, 1988, in the amount of $58,000, from Capital Homeowner Services Corporation, who later assigned its interest to Marine Midland Bank. Pl.'s Ex. 6. This mortgage has been satisfied.

On October 5, 1987, Mazzeo filed his 1984 U.S. Individual Tax return with the Internal Revenue Service, reporting a total tax liability of $57,377, plus $3,725 in penalties for failure to pay. Pl.'s Ex. 33. Mazzeo paid $10,000 to the IRS on this date, leaving an unpaid balance due of $51,102, not including interest and penalties. Pl.'s Ex. 31. On November 9, 1987, a delegate of the Secretary of the Treasury made assessments against Mazzeo and demanded payment in the amount of $101,161.99 for the 1984 taxable year, comprising $57,377 in 1984 income tax, $3,607.34 in Estimated Tax Penalty (I.R.C. § 6654), $12,909.83 in Late Filing Penalties (I.R.C. § 6651(a)(1)), $8,843.43 in Failure to Pay Tax Penalties (I.R.C. § 6651(a)(2) & (3)), and $19,424.39 in interest (I.R.C. § 6601). Id. Payments of this debt have been made in the amount of $136,904.03, culminating in a payment of $50,000 on December 6, 2000, and the unpaid assessed balance of Mazzeo's 1984 tax liability is now $0. Id. The United States still claims that it is owed $134,551.57 in accrued interest on this debt as of June 30, 2002, see Pl.'s Prop. Findings of Fact [Doc. No. 156] ¶ 7, a claim that is of real significance in this case, as will be discussed below.

Beginning in June 1994, the house and garage on the property in East Williston were razed and rebuilt. From June 1994 to July 1997, various other improvements were made on the property as well. The primary general contractors who did most of this work were the firm Curto & Curto, pursuant to a contract between themselves and Mazzeo, made in April 1995, Pl.'s Ex. 8...