U.S. v. Novotny

• Citation: 184 F.Supp.2d 1071
• Decision Date: 14 September 2001
• Docket Number: No. 99-D-2196.,99-D-2196.
• Parties: UNITED STATES of America, Plaintiff, v. Edward G. NOVOTNY, in his individual capacity as Trustee of Midwest Limited and as Trustee of Sunrise Investments, Etta B. Novotny, and State of Colorado, Department of Revenue, Defendants.
• Court: U.S. District Court — District of Colorado

184 F.Supp.2d 1071

UNITED STATES of America, Plaintiff, v. Edward G. NOVOTNY, in his individual capacity as Trustee of Midwest Limited and as Trustee of Sunrise Investments, Etta B. Novotny, and State of Colorado, Department of Revenue, Defendants.

No. 99-D-2196.

United States District Court, D. Colorado.

September 14, 2001.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Philip Blondin, August A. Imholtz III, U.S. Department of Justice, Tax Division, Washington, DC, for plaintiff.

Edward G. Novotny, Cortez, CO, pro se.

Etta B. Novotny, Cortez, CO, pro se.

Neil Tillquist, Attorney General's Office, Robert D. Clark, Attorney General's Office, Denver, CO, William Allan Cohan, William A. Cohan, P.C., San Diego, CA, for defendants.

MEMORANDUM OPINION AND ORDER

COAN, United States Magistrate Judge.

This is an action by the United States to reduce outstanding federal tax assessments against Edward Novotny to judgment and to foreclose federal tax liens on certain real property, under 26 U.S.C. § 7401 and 7403. Jurisdiction exists under 26 U.S.C. § 7402 and 28 U.S.C. § 1340 and § 1345. The matters before the court are the United States Motion for Summary Judgment [originally filed on December 22, 2000],¹ and Defendants Midwest Limited and Sunrise Investments' Motion for Summary Judgment [filed September 28, 2000]. On June 11, 2001, the parties consented to final disposition of the motions by the undersigned magistrate judge under 28 U.S.C. 636(c). The court heard oral argument from the parties on June 11, 2001. The motions are ripe for disposition.

I.

The United States ("Government") seeks to reduce outstanding federal tax assessments against Edward Novotny to judgment and to foreclose federal tax liens on seven parcels of real property titled to defendants Midwest Limited and Sunrise Investments. The United States has moved for summary judgment on those claims. Defendants Midwest Limited and Sunrise Investments (collectively referred to as "Trust defendants" or "Trusts") have filed a counterclaim against the United States, and cross claims against the other defendants, to quiet title to the seven parcels of real property at issue. The Trust defendants move for summary judgment on their counterclaim. Defendant Etta Novotny is the wife of Edward Novotny and is named as a defendant because she may have an interest in the property at issue. Etta Novotny has filed a counterclaim against the United States to quiet title to her interest, if any, in the subject properties. Defendant Colorado Department of Revenue has filed cross claims against the defendants seeking to foreclose upon its tax liens against the seven parcels of property to satisfy a judgment entered in Montezuma County District Court, Case No. 99-CV-202, in favor of the State of Colorado and against Edward Novotny for unpaid 1989 and 1990 Colorado income taxes, penalties and interest. The following material facts are undisputed, unless otherwise noted.

A. Federal Tax Liens

Since 1957, defendant Edward Novotny ("Novotny") has operated a sole proprietorship, d/b/a Four Corners Auto Parts & Salvage, consisting of towing and auto mechanic services, and buying and selling used and wrecked vehicles and new and used auto parts in Cortez, Colorado. (Deposition of Edward Novotny ("Novotny Deposition"), pp. 28-29, 42-50; Etta Novotny Declaration, at PP1-2) In 1989, Novotny and his wife, Etta Novotny, decided that Novotny should scale back his business operation; they entered into an agreement with Copperstate Metals, Inc. to sell 2,600 vehicles as scrap metal. (Declaration of Etta Novotny, P 15)

Novotny did not file a federal income tax return or pay any federal income taxes in 1989, 1990 and 1991 and has not filed a tax return since 1980. (Novotny Deposition, pp. 201-202; Government's Exs. 11, 12, 13 and 15) Novotny does not believe he is required to pay federal income taxes. (Edward Novotny's Response to United States Interrogatories, Government's Ex. 17, at p. 5)

The IRS conducted an audit concerning Novotny's failure to pay federal taxes for the years 1989 through 1991 and sent Notices of Deficiency for those tax years to Novotny. (Edward Novotny Response to Requests for Admissions, Government's Ex. 19, PP4, 6) The Government's Certificates of Assessments and Payments for Edward G. Novotny for the 1989, 1990 and 1991 tax years reflect that Novotny owes the Government $100,684 in unpaid federal income taxes, $31,890 in assessed statutory penalties, and interest for those tax years.² (Government's Exs. 11, 12 and 13) The tax assessments against Novotny for the 1989 and 1990 tax years were made on May 17, 1993. (Compl., P17; Government's Exs. 11 and 12) The tax assessment against Novotny for the 1991 tax year was made on November 14, 1994. (Compl., P17; Government's Ex. 13)

On June 23, 1993, acting under the authority of the Commissioner of Revenue, Internal Revenue Service ("IRS") agents recorded Notices of Federal Tax Liens in the Montezuma County, Colorado, Clerk and Recorder's Office, listing tax assessments made against Novotny for the 1989 and 1990 tax years, and naming several entities, including the defendants Sunrise Investments and Midwest Limited, as nominees, alter egos or transferees of Novotny with respect to the assessments against Novotny. (Compl., PP21-22 and Exs. 1 and 2; admitted, Trusts' Answer, PP21-22) On March 1, 1995, the IRS recorded a Notice of Federal Tax Lien in the Clerk and Recorder's Office of Montezuma County, Colorado, listing assessments made against Novotny for the 1991 tax year, and naming several entities, including the Trusts, as nominees, alter egos or transferees of Novotny with respect to the assessments against Novotny. (Compl., PP23-24 and Exs. 3 and 4; admitted, Trusts' Answer, PP23-24)

B. Transfers of Real Property to the Trusts

The Novotnys purchased a package of domestic trusts from Wyoming promoter Lowell Anderson and created the Trusts on June 1, 1979. (Novotny Deposition, pp. 197-200, 469; Declaration of Etta Novotny, PP4-5) The Novotnys formed the Trusts for estate planning purposes to preserve assets for their children. (Novotny Deposition, pp. 197-200, 469; Deposition of Etta Novotny, p. 16; Declaration of Etta Novotny, P4) Each Trust was organized under the laws of Wyoming and contains the following provisions: the trustees have discretion to distribute any Trust income or proceeds; the trustees have discretion to pay all officers, agents and employees of the Trust; the Trust exists for twenty-five years unless the trustees unanimously change the date; when the Trust terminates, the Trust assets are liquidated and distributed to the existing certificate holders; the Trust property is held in fee simple by the trustees for the benefit of the certificate holders; and, the trustees, officers, agents or employees possess only such authority as awarded them in the Trust documents. (Contract and Declaration of Trust for Midwest Limited and for Sunrise Investments, attached to the defendant Trusts' Answer as Exhibits 2 and 3, at PP4, 5, 17, 24, 27, 29)

At the time the Trusts were created, each Trust issued 100 Trust Certificate Units ("TCUs"). (Etta Novotny Declaration, P6) On June 1, 1979, the Novotnys transferred title to the seven parcels of real property to the defendant Trusts in exchange for $10.00 consideration for each parcel and fifty TCUs each. (Etta Novotny Declaration, PP6-7; Novotny Deposition, pp. 411-412) Parcels 1, 2, 4, 5, and 6 were conveyed to defendant Midwest Limited. (Compl. at PP26, 28, 32, 34 and 36 and Exs. 6, 8, 12, 14, and 16; admitted, Trusts' Answer, PP26, 28, 32, 34 and 36) Parcels 3 and 7 were conveyed to defendant Sunrise Investments. (Compl. at PP30, 38 and Exs. 10, 12, and 18; admitted, Trusts' Answer, PP30, 38) The deeds transferring the properties to the Trusts were recorded in the Montezuma County Clerk and Recorder's Office on August 3, 1979. (Compl., Exs. 6, 8, 10, 12, 14, 16 and 18)

Parcel 1, legally described in paragraph ten of the Complaint, consists of two vacant lots on the corner of Empire and Broadway in Cortez, Colorado. (Novotny Deposition, pp. 263-266). Title to Parcel 1 was conveyed to the Novotnys on February 3, 1977 for the stated consideration of $10. (Compl., P25 and Ex. 5; admitted, Trusts' Answer, P25) The documentary fee stamp applied when the deed was recorded indicates that the purchase price was $17,000. (Id.)

Parcel 2, legally described in paragraph eleven of the Complaint, consists of two commercial buildings located at 483 and 485 N. Broadway in Cortez, Colorado. (Novotny Deposition, p. 274) Title to Parcel 2 was conveyed to the Novotnys on November 18, 1977 for the stated consideration of $10. (Compl. P27 and Ex. 7; admitted, Trusts' Answer, P27) The documentary fee stamp applied when the deed was recorded indicates that the purchase price was $58,000. (Id.)

Parcel 3, legally described in paragraph twelve of the Complaint, consists of sixty-two acres of land located at 13106 U.S. Highway 666, Cortez, Colorado and contains the Novotnys' residence. (Novotny Deposition, p. 323) Title to Parcel 3 was conveyed to the Novotnys on September 15, 1956 for the stated consideration of $10. (Compl., P29 and Ex. 9; admitted, Trusts' Answer, P29)

Parcel 4, legally described in paragraph thirteen of the Complaint, is located at 23400 Road N, Cortez, Colorado and consists of seventeen acres of land. (Novotny Deposition, p. 337) Title to Parcel 4 was conveyed to the Novotnys on August 7, 1978 for the stated consideration of $10.00. (Compl., P31 and Ex. 11; admitted, Trusts' Answer, P31) The documentary fee stamp indicates that the purchase price was $16,000. (Id.)

Parcel 5, legally described in paragraph fourteen of the complaint, is located at 112 North Street E., Cortez, Colorado and consists of a 900-square foot house. (Novotny Deposition, pp. 342-43). Title to Parcel 5 was conveyed to the Novotnys on March 2, 1978 for the stated...