United States v. Beresford

• Docket Number: C21-5345-JCC-SKV
• Decision Date: 26 July 2023
• Parties: UNITED STATES OF AMERICA, Plaintiff, v. STEVEN M. BERESFORD, et al., Defendants.
• Court: U.S. District Court — Western District of Washington

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UNITED STATES OF AMERICA, Plaintiff, v. STEVEN M. BERESFORD, et al., Defendants.

No. C21-5345-JCC-SKV

United States District Court, W.D. Washington, Seattle

July 26, 2023

REPORT AND RECOMMENDATION

S KATE VAUGHAN, United States Magistrate Judge.

INTRODUCTION

Plaintiff United States of America filed a Motion for Summary Judgment pursuant to ederal Rule of Civil Procedure 56. Dkt. 85. Plaintiff seeks to determine that Defendant Steven eresford's federal income taxes for the years 2003-2006 are excepted from discharge pursuant 11 U.S.C. § 523(a)(1)(B)(i), and to reduce those tax assessments to judgment and enforce its x liens on real property jointly owned by Beresford and his former spouse, Defendant Diana cKnight. Id. Plaintiff also, pursuant to Rule 55(b) moves for default judgment against efendant Capital One Bank (USA), N.A. (“Capital One”). Id. Defendants Beresford and McKnight oppose Plaintiff's motion. Dkts. 88, 90. Beresford also filed a Motion for Summary Judgment, Dkt. 86, a motion opposed by Plaintiff, Dkt. 89.

The Court has now considered the pending motions, responses, all documents submitted in support and opposition, and the remainder of the record. For the reasons set forth below, the Court herein recommends that Plaintiff's Motion for Summary Judgment and Motion for Default Judgment, Dkt. 85, be GRANTED, and Defendant Beresford's Motion for Summary Judgment, Dkt. 86, be DENIED.

BACKGROUND

Beresford holds a Ph.D. in chemical physics. Dkt. 85-1 (Beresford Dep Excerpts) at 20:16-21:1.^[1]In or around 1996, Beresford and a group of optometrists and vision scientists wrote “Improve Your Vision”, a book that was published by Simon and Schuster and translated into eight languages. Id. at 23:1-16, 25:2-9, 28:22-29:6. Beresford received royalty payments for the sale of that book through at least 2020. Id. at 24:24-26:6, 28:18-29:17. He also, sometime between 1999 and 2006, worked with a company called Vision Improvement Technology to sell a second, self-published book called “See Clearly Method.” Id. at 23:8-24:5, 28:5-13. He received a portion of royalties for sales of that book through American Vision Institute (AVI), a company he owned and operated. Id. at 110:1-12, 114:10-115:23. During at least 2002 through 2006, Beresford received regular checks from AVI for his share of royalties. Id. at 52:16-23.

Beresford has a long history with the Internal Revenue Service (IRS). For example, for at least six years between 1985 and 2002, Beresford failed to file income taxes and, for at least an additional eight years in that same period, filed returns multiple years late. Dkt. 85-20 (Decl. of Aspen Cruise), ¶6; Dkt. 85-21; Dkt. 85-22.

In 2000, Beresford sued the IRS in the United States District Court for the District of Oregon. Dkt. 85-2 (Beresford v. IRS, C00-0293, Compl. (D. Or. Feb. 28, 2000)). He alleged “that the American income tax system is based upon voluntary compliance[,] . . . that he cannot be legally compelled to obey any law that is voluntary,” and that “he therefore has no legal obligation to file or pay income taxes.” Id., ¶1. He sought a refund of $14,610.00, the amount withheld from a sale of his property as a result of a tax lien, as well as a permanent injunction forbidding the IRS “from contacting him against his wishes and from directly or indirectly interfering in any other aspect of his life.” Id., ¶6 and at 12. The District Court dismissed Beresford's suit, stating the contention the federal tax system is based on voluntary compliance “has been held to be ‘completely lacking in legal merit and patently frivolous.'” Dkt. 85-3 (Beresford, C00-0293, Op. and Order at 4 (D. Or. Jul. 13, 2000) (quoted and cited sources omitted). Beresford read the opinion when it was issued, but disagreed with the decision. Dkt. 85-1 at 65:23-67:25. The Ninth Circuit, on appeal, affirmed the decision. Dkt. 85-4 (Beresford v. IRS, No. 00-35650, Mem. Opin (9th Cir. Feb. 12, 2001)). Again, Beresford read, but disagreed with the decision. Dkt. 85-1 at 68:24-71:4. The United States Supreme Court subsequently denied Beresford's petition for a writ of certiorari. Dkts. 85-5 & 85-6.

As related to the current matter, Beresford failed to timely file tax returns with the IRS for the tax years 2003-2006. Dkt. 85-1 at 73:21-74:6. He based his decision to not file the returns on the theory that filing and paying taxes is voluntary. Id. The IRS conducted an audit of Beresford for the tax years at issue. Dkt. 85-20, ¶7. In January 2007, Beresford submitted Form 1040-EZ returns to the IRS for the years 2003-2006. Dkts. 85-14 - 85-17. These so-called “zero returns” did not report any income, and instead included “$0.00” for every entry on the return and reported “$0.00” in tax liability. Id.; Dkt. 85-1 at 125:23-126:7. Beresford also submitted “corrected” Form 1099's reporting AVI paid him “$0.00” in income for the years 2005-2006. Dkts. 85-10 & 85-13. Original Form 1099s filed by AVI report $150,631.00 in income for Beresford in 2005 and $128,545.00 in income in 2006. Dkts. 85-11 & 85-12. Beresford additionally submitted an “Affidavit of Material Facts”, in which he asserted the domestic income of United States residents is exempt from taxation, that he had not received any “lawfully taxable” income for the years 2003-2005, was not liable for any federal income tax and “did not derive any gross income from a taxable source” for those years, and had never received any lawfully taxable income from AVI. Dkt. 85-14 at 4-7.

In his deposition, Beresford testified he does not believe he ever inaccurately reported his income, explaining:

It was my understanding that I did not have any tax liability, based on the voluntary compliance thing. So the returns that I filed probably mark that as a zero return based on my sincere belief that I did not have a requirement, a legal obligation to comply with the tax rules. I notified the IRS that that was my position.

Dkt. 85-1 at 125:23-126:7. When asked whether his decision to not inform the IRS of the amount of money he had made was because of his desire to not pay taxes, Beresford responded: “Yeah. That would be basically the case[.]” Id. at 227:12-22 (“It was my understanding that the voluntary compliance thing applied to the assessment and payment of taxes as stated in the Internal Revenue manual. So there's no necessity to comply with the IRS, the tax laws.”) He explained his decision to file the “corrected” Form 1099's as based on his belief he did “not have a legal obligation to comply with the tax laws.” Id. at 129:3-131:12, 133:20-139:25.

At the conclusion of the audit, the IRS assessed taxes and penalties for the 2003-2006 tax years. See Dkt. 85 at 8; Dkt. 85-1, ¶¶7-12; Dkts. 85-23 - 85-25. As of May 31, 2023, the balance of tax liabilities not including penalties or interest on penalties totaled $518,673.92, and, including penalties and interest on penalties, totaled $1,017,207.88. Id. The balance including penalties reflects the current amount owed on 2003-2006 income tax liabilities accounting for accrued interest, late-payment penalties under 26 U.S.C. § 6651(a)(3), penalties for not paying estimated income taxes under § 6654, fraudulent failure to file penalties under § 6651(f) for the 2003-2004 years, and fraud penalties under § 6663 for the 2005-2006 years. Dkt. 85 at 8; Dkt. 85-23. The IRS calculated Beresford's income during these years based on an analysis of bank deposits, including payments from AVI. See Dkt. 85-20, ¶13; Dkt. 85-26 at 6-29. It based the fraud determination on Beresford having received notice of the obligation to file returns and pay taxes in the lawsuit he filed in 2000, his history with respect to the filing of returns, failure to cooperate in the audit, and relative sophistication, and the fact he submitted loan documentation showing significant income despite a failure to timely file tax returns. Dkt. 85-26 at 30-37. The IRS also assessed penalties pursuant to § 6702 for submitting frivolous returns and other documents for the tax years 2002-2006 and 2009, in an amount totaling $69,523.91. See Dkt. 85 at 9; Dkt. 85-20, ¶11; Dkt. 85-21.

Plaintiff now seeks to enforce tax liens against Beresford and McKnight's joint marital property. Beresford and McKnight married in or around 1999. Dkt. 85-1 at 98:2-9. During their marriage, they maintained separate businesses and filed separate tax returns. Dkt. 85-18 (McKnight Dep. Excerpts) at 51:6-15. However, on February 19, 2004, Beresford and McKnight acquired real property - located at 19300 NE 6th Street, in Camus, Washington (the “Camas Property”) - as husband and wife through a statutory warranty deed. Dkt. 85-7.

Between 2004 and 2015, Beresford and McKnight lived together at the Camas Property as husband and wife, and jointly shared in the expenses and upkeep of the property, as well as other expenses such as groceries, credit card payments, and vacations. Dkt. 85-18 at 6:23-7:5, 20:1023:16, 33:5-35:9.

Beresford and McKnight divorced in December 2015. Dkt. 85-19. Beresford testified that they divorced with the hope that the lien on the Camas Property would be lifted. Dkt. 85-1 at 99:14-101:1. McKnight testified that they divorced about a year or two after she learned about Beresford's tax issues, because she was “overwhelmed” by those issues and because of differences in how they “viewed the world.” Dkt. 85-18 at 41:21-51:5. Both allege that the decision to divorce was made on the advice of an IRS agent. Dkt. 85-1 at 9:25-101:1; Dkt. 86 at 13 (“Affidavit of Diana McKnight”) (“In 2015, in response to my enquiry on how to address the tax issue, the IRS agent advised me to divorce Steven, which I did later that year after 16 years of marriage. She said she would reassess the lien when the 10...