U.S. v. McCombs
| Decision Date | 13 July 1994 |
| Docket Number | 479,Nos. 478,D,s. 478 |
| Citation | 30 F.3d 310 |
| Parties | -5408, 94-2 USTC P 50,363, Unempl.Ins.Rep. (CCH) P 14081B UNITED STATES of America, Appellee-Cross-Appellant, v. Kelly M. McCOMBS, Robert J. McCombs, Nancy Ellison, Mary McCombs, Defendants-Appellants-Cross-Appellees, Jon Ellison, Columbia Savings & Loan Association, State of New York, Defendants. ockets 93-6122, 93-6144. |
| Court | U.S. Court of Appeals — Second Circuit |
Arnold R. Petralia, Rochester, NY (Petralia, Webb & O'Connell, of counsel), for appellants.
Marion E.M. Erickson, Tax Div., Dept. of Justice, Washington, DC (Patrick H. Nemoyer, U.S. Atty., W.D. of New York, Rochester, NY, Michael L. Paup, Acting Asst. Atty. Gen., Gary R. Allen, Ann B. Durney, Tax Div., Dept. of Justice, Washington, DC, of counsel), for appellee.
Before: MESKILL, MAHONEY and WALKER, Circuit Judges.
This is an appeal from a judgment of the United States District Court for the Western District of New York, Fisher, M.J., imposing liability for unpaid withholding taxes under 26 U.S.C. Sec. 6672 on defendant-appellant Nancy McCombs-Ellison (Nancy), finding federal tax liens on Nancy's former property prior to the interests of defendants-appellants Kelly McCombs (Kelly), Mary McCombs (Mary), and Robert McCombs (Robert), and ordering that property foreclosed by sale pursuant to the tax liens. See United States v. McCombs-Ellison, 826 F.Supp. 1479 (W.D.N.Y.1993). For the reasons stated below, we affirm the part of the judgment imposing taxpayer liability on Nancy under 26 U.S.C. Sec. 6672 and upholding the validity of the 1982 federal tax lien thereunder; we vacate the judgment as to the setting aside of the conveyance of the property from Nancy to Mary and Kelly as fraudulent under N.Y. Debtor & Creditor Law Secs. 273 and 276 and the foreclosing of the 1982 and 1984 tax liens and remand for further proceedings consistent with this opinion; and we reverse the judgment determining that the federal tax liens are prior to the interests of Robert in the property.
In 1962, Robert and Nancy purchased property at 74 Meadow Creek Lane (Property) in Monroe County, New York. Nancy and Robert, who were legally married at the time, financed the Property by giving a $30,000 mortgage to Columbia Banking, Savings and Loan Association (Columbia Bank). After Nancy and Robert divorced, Robert conveyed his interest in the Property to Nancy by quitclaim deed dated May 5, 1978.
In 1979, Nancy entered into a restaurant business venture with Jon Ellison (Ellison). Ellison and Nancy incorporated Spinnaker Pole Corporation (Spinnaker Pole) with Nancy as president. In addition, Ellison and Nancy formed another business entity entitled The Port and Starboard (P & S). Nancy controlled 60 percent of both entities while Ellison owned the remaining 40 percent.
On May 14, 1979, Nancy and Ellison, through P & S, purchased the Edgewater Restaurant (Restaurant) for $235,000 from its owners (hereinafter referred to as the "sellers"). Under the terms of the purchase agreement, Nancy made a $50,000 down payment on the Restaurant and the balance of the purchase was then financed through a purchase money mortgage given to the sellers. Nancy obtained the down payment by granting Marine Midland Bank (Marine Midland) a second mortgage on her Property at Meadow Creek Lane. In turn, P & S leased the Restaurant to Spinnaker Pole in consideration of monthly rental payments of $2,724.75.
The Restaurant struggled. Eventually, P & S was unable to make its monthly mortgage payments to the sellers. On April 10, 1981, the sellers filed a foreclosure action. On April 24, 1981, P & S filed for Chapter 11 bankruptcy protection. In September of that year, Spinnaker Pole also filed for bankruptcy.
Spinnaker Pole failed to pay withholding and unemployment taxes of the Restaurant employees for the period October 1, 1979 through September 30, 1981. On June 14, 1982, the Internal Revenue Service (IRS) assessed tax liability of $26,925.79 (1982 assessment) for the unpaid taxes against Nancy and Ellison pursuant to 26 U.S.C. Sec. 6672.
On September 15, 1982, eight days after an IRS agent allegedly left a "calling card" at her house, Nancy conveyed the Property at 74 Meadow Creek Lane to her daughters, Mary and Kelly, by warranty deed. The deed, which was recorded on September 16, 1982, provided that Kelly and Mary "hereby assume and agree to pay, as part of the consideration for this conveyance" the unpaid principal with interest on both the Columbia Bank and Marine Midland mortgages remaining on the Property. (emphasis added). At the time of the conveyance, the outstanding balances on the Columbia Bank and Marine Midland mortgages were $10,469.29 and $47,328.65, respectively.
On September 22, 1982, the government filed notice of and recorded in the Monroe County Clerk's Office a federal tax lien on the Property for the amount of unpaid taxes set forth in the 1982 assessment. On April 16, 1984, moreover, the IRS issued a second tax assessment pursuant to section 6672 imposing tax liability for $3,091.28 (1984 assessment) against Nancy and Ellison for additional unpaid withholding and unemployment taxes incurred by Spinnaker Pole from October 1, 1981 through June 30, 1982. Notice of a federal tax lien on the Property for liabilities arising from the 1984 assessment was filed and recorded on June 21, 1984 in the Monroe County Clerk's Office.
In November 1984, Kelly and Mary borrowed $53,000 from their father, Robert. In return, Kelly and Mary gave Robert a mortgage on the Property for the corresponding amount of $53,000 which was recorded on January 24, 1985. The daughters used the funds in part to pay off in full the outstanding balance of the second mortgage on the Property held by Marine Midland. As of July 10, 1985, moreover, the outstanding balance on the first mortgage held by Columbia Bank had been paid down by the daughters to approximately $6,000.
On November 24, 1987, the government filed this action against Nancy, Mary, Kelly and Robert (collectively "appellants"), as well as Ellison, Columbia Bank, and the State of New York seeking to reduce the federal tax liens to judgment and foreclose on the property. Specifically, the government sought a judgment (1) against Nancy, pursuant to section 6672 for 100 percent of the unpaid tax liability incurred by Spinnaker Pole, (2) setting aside the conveyance of the Property from Nancy to her daughters as fraudulent, and (3) ordering that the federal tax liens be foreclosed and that the property be sold free and clear of any interests held by any of the appellants.
The parties consented to try the case before a United States magistrate judge pursuant to 28 U.S.C. Sec. 636(c). At a trial presided over by Magistrate Judge Fisher, the government's case consisted of an opening statement and 23 pieces of documentary evidence. As to the theory of its case, the government argued in its opening statement:
The one final distinction that I would make, Your Honor, is that we attempt to foreclose our tax liens on two separate theories. The fraudulent conveyance theory really only applies to the second assessment, which was approximately a $3700 assessment in 1984.... With respect to the first assessment, which was in June of 1982 for approximately $27,000, we take the position, since that assessment preceded the conveyance, that our tax liens were on the property at the time of the conveyance.... * [N]o fraudulent conveyance theory is necessary to prevail on foreclosing our tax liens with respect to the first assessment. We only need to establish that the daughters, Mary and Kelly, were not bonafide purchasers under 26 U.S.C. 6323A [sic]. So it's pretty much the same elements of the fair consideration under the fraudulent conveyance analysis but the insolvency analysis does not apply in a straight foreclosure of tax lien theory.
(emphasis added).
Appellants, moreover, did not object to the admission of the government's documents into evidence, with one exception not relevant here, but instead reserved their right to impeach the validity of the documents' contents through cross-examination of the witnesses who prepared the documents. The magistrate judge, apparently also under the impression that the government would be calling witnesses, received 22 of the documents into evidence "subject to the testimony that may develop later at trial and any objections to admission developed by that testimony would have to be developed at the initiative of the person or the party that objects." Appellants, however, were unable to implement their strategy of impeaching the validity of the documents because, much to their surprise, as well as to the surprise of the court, the government called no witnesses and immediately rested its case-in-chief on the submission of the documents.
Following the close of the government's case, appellants immediately moved for summary judgment or in the alternative to dismiss the complaint on the ground that the government had failed to establish a prima facie case of tax liability against Nancy or the fraudulent conveyance claim. The magistrate judge reserved decision on those motions.
For their part, appellants called only one witness, Nancy. Nancy testified extensively about her involvement and responsibilities at Spinnaker Pole. At the conclusion of Nancy's testimony, appellants rested and renewed their claim that the government had failed to establish a prima facie case at trial on any of its claims and moved for a judgment as a matter of law. Again, the magistrate judge reserved decision, preferring that the parties file post-trial briefs.
Following the submission of memoranda and post-trial oral argument, the magistrate judge rendered a verdict in favor of the government ordering foreclosure of the liens at a judicial sale. In an opinion and order, see 826 F.Supp. 1479, the...
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