U.S. v. Smith, 3:94-CV-188RM.

• Decision Date: 08 October 1996
• Docket Number: No. 3:94-CV-188RM.,3:94-CV-188RM.
• Citation: 950 F.Supp. 1394
• Parties: UNITED STATES of America, Plaintiff, v. William E. SMITH, et al., Defendants.
• Court: U.S. District Court — Northern District of Indiana

950 F.Supp. 1394

UNITED STATES of America, Plaintiff, v. William E. SMITH, et al., Defendants.

No. 3:94-CV-188RM.

United States District Court, N.D. Indiana, South Bend Division.

October 8, 1996.

COPYRIGHT MATERIAL OMITTED

Clifford D. Johnson, Office of the United States Attorney, South Bend, IN, Douglas W. Snoeyenbos, U.S. Department of Justice, Washington, DC, for U.S.

Stephen L. Eslinger, Ralph A. Caruso, II, Botkin Leone and Eslinger, South Bend, IN, for William E. Smith, Beverly K. Smith.

Brian E. Smith, Monterey, IN, pro se.

Belinda K. Smith, Monterey, IN, pro se.

Jeffrey A. Dickstein, Tulsa, OK, for William E. Smith Trust.

MEMORANDUM AND ORDER

MILLER, District Judge.

This cause comes before the court on three¹ related motions: plaintiff United States's motion for summary judgment, defendant William E. Smith's cross-motion for partial summary judgment and defendant William E. Smith Trust's cross-motion for summary judgment.

William E. and Beverly K. Smith, who are husband and wife, acquired a plot of land by warranty deed from Agnes Hartman ("Hartman property") on August 23, 1974. Several years later, on March 22, 1977, Mr. Smith established the William E. Smith Family Trust naming Mrs. Smith and Marvin Kornblith as trustees. The stated purpose of the trust is "to accept rights, title and interest in and to real and personal properties" conveyed by the grantor, "so that William E. Smith [grantor] can maximize his lifetime efforts through the utilization of his Constitutional Rights; for the protection of his family in the pursuit of his happiness through his desire to promote the general welfare." The Declaration of Trust further provides that "[t]he purport of [the] instrument is to convey property to Trustees ... to provide for a prudent and economical administration by natural persons acting in a fiduciary capacity...." Both Mr. and Mrs. Smith have indicated through affidavits that the Trust was established to accomplish their estate planning goals. On the same day that Mr. Smith created the Family Trust, Mrs. Smith transferred her interest in the Hartman property for ten dollars to Mr. Smith by quit-claim deed, and indicated in a separate document that she was executing the deed solely to accomplish the transfer of the Hartman property to the Family Trust; accordingly, Mrs. Smith executed an affidavit in which she expressed this intention. Mr. Smith's understanding was that Mrs. Smith transferred the property in trust only, with the explicit understanding that he was required to transfer the Hartman property to the Family Trust. Three days later, on March 25, 1977, Mr. Smith transferred the Hartman property by warranty deed to the Family Trust for ten dollars' consideration and gave Mrs. Smith 50 units of beneficial interest in the Trust.

Four years later, on December 16, 1981, the Family Trust was modified. The Order of Modification provides, among other things, that the trust is now named the William E. Smith Trust and its purpose is to "convey certain properties to the Trustees, to constitute a Trust, and to provide for a prudent and economical administration by natural persons acting in a fiduciary capacity for the benefit of the beneficiaries." The Order of Modification was signed by William E. Smith, grantor, and Beverly K. Smith and Darrel R. Gudeman, trustees.

Despite, or perhaps because of, Mr. Smith's attempts to manage his financial affairs "prudently and economically", he did not pay part or all of his federal income taxes from 1982-1986, thus drawing the attention of the Internal Revenue Service. A delegate of the Secretary of the Treasury made the following assessments against Mr. Smith: on March 9, 1987, an assessment totaling $19,420.95 for unpaid income taxes for the year 1982; on March 16, 1987, an assessment totaling $17,942.84 for unpaid income tax for 1983; and on January 6, 1992, an assessment totaling $278,242.89 for unpaid income tax for the years 1983 through and including 1986. The United States brought this suit to reduce the assessments against Mr. Smith to judgment, seeking a lien on all of Mr. Smith's assets, including the Hartman property. The United States seeks foreclosure on the Hartman property, alleging that the Trust is invalid and that the conveyance of the Hartman property to the Trust was fraudulent. Accordingly, the Trust was made party to this suit. Mrs. Smith intervened, asserting that if the Trust is deemed void, her interest in the Hartman property should subsist.² The arguments of all of the parties, whether in motions, cross-motions, or supplemental briefs, have been considered by the court.³

I. Summary Judgment Standard

A party seeking summary judgment must demonstrate that no genuine issue of fact exists for trial and that the movant is entitled to judgment as a matter of law. If that showing is made and the motion's opponent would bear the burden at trial on the matter that forms the basis of the motion, the opponent must come forth with evidence to show what facts are in actual dispute. A genuine factual issue exists only when there is sufficient evidence for a jury to return a verdict for the motion's opponent. Summary judgment should be granted if no reasonable jury could return a verdict for the motion's opponent.

The parties cannot rest on mere allegations in the pleadings, or upon conclusory allegations in affidavits. The court must construe the facts as favorably to the non-moving party as the record will permit, and draw any permissible inferences from the materials before it in favor of the non-moving party, as long as the inferences are reasonable. The non-moving party must show that the disputed fact is material, or outcome-determinative, under applicable law.

Conery v. Bath Associates, 803 F.Supp. 1388, 1392-1393 (N.D.Ind.1992) (citations omitted).

II.

A. Jurisdiction

In its cross-motion for summary judgment, the William E. Smith Trust asserts that because the United States did not comply strictly with 26 U.S.C. §§ 7401 and 7403, the court lacks subject matter jurisdiction over this action. Sections 7401 and 7403 require authorization and request by the Secretary of the Treasury and the direction of the Attorney General before commencement of a civil tax collection action such as this. The Trust attached to its summary judgment motion the authorization of the Secretary of the Treasury and the direction of a delegate of the Attorney General to commence this action against Mr. and Mrs. Smith. The Trust argues that because the United States can produce no evidence that this action was authorized as against the Trust, the court cannot assert jurisdiction over the entire action. The Trust demands more of the United States than §§ 7401 and 7403 require.

26 U.S.C. § 7401 makes clear that "[n]o civil action for the collection or recovery of taxes ... shall be commenced unless the Secretary authorizes or sanctions the proceedings and the Attorney General or his delegate directs that the action be commenced." Once the action is commenced, however, 26 U.S.C. § 7403(b) requires that "[a]ll persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto." The Trust asserts that these sections require that the United States acquire specific authorization to proceed against the Trust. This action is against Mr. Smith for the collection of unpaid taxes; the Trust was made a party to the suit because it holds title to property that the United States alleges was fraudulently conveyed by Mr. Smith. Thus, the documentation authorizing and directing a suit against Mr. Smith, but not naming the Trust, is sufficient to comply with §§ 7401 and 7403, and the Trust's motion for partial summary judgment is denied.

B. Certificates of Assessment

The United States asks the court to enter judgment as a matter of law on the tax assessments made against Mr. Smith for the years 1982-1986. The United States argues that it has established, through the corresponding Certificates of Assessments, that income tax assessments were made against Mr. Smith, and that the assessments are presumptively correct. Mr. Smith contends that the United States is not entitled to the presumption of correctness because the bases of the assessments are that Mr. Smith received unreported income.

Assessments generally are entitled to a "presumption of correctness" that imposes upon the taxpayer the burden of proving that the assessment is erroneous. Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933); Lerch v. Commissioner, 877 F.2d 624, 631 (7th Cir.1989); Pfluger v. Commissioner, 840 F.2d 1379, 1382 (7th Cir.1988). In certain situations, however, the court will not recognize the presumption if the assessment is shown to be "without rational foundation" or is "arbitrary and erroneous." Zuhone v. Commissioner, 883 F.2d 1317, 1325 (7th Cir.1989) (quoting Ruth v. United States, 823 F.2d 1091, 1094 (7th Cir.1987)). In Zuhone, the Seventh Circuit noted that "[t]he arbitrary and excessive doctrine is a challenge to the deficiency assessment itself on the basis that it bears no factual relationship to the taxpayer's liability, not a challenge to any proof offered by the Commissioner...." 883 F.2d at 1325. Accordingly, the court does not review "the commissioner's motives or administrative policy or procedure in making the determination." Zuhone v. Commissioner, 883 F.2d at 1325. Further, the court "will not look behind an assessment to evaluate the procedure and evidence used in making the assessment.... Rather, courts conduct a de novo review of the correctness of the assessment, imposing the risk of nonpersuasion on the taxpayer." Ruth v. United States, 823 F.2d at 1094 (citations omitted).

When the assessment is based on the taxpayer's receipt of unreported income, however, the court must find some evidence that linked the taxpayer with the tax-generating activity. Zuhone v. Commissioner, 883 F.2d 1317,...