United States v. Frankie L. Sanders & Ill. Dep't of Revenue

Decision Date20 October 2016
Docket NumberCase No. 11-CV-912-NJR-DGW
PartiesUNITED STATES OF AMERICA, Plaintiff, v. FRANKIE L. SANDERS and STATE OF ILLINOIS DEPARTMENT OF REVENUE, Defendants.
CourtUnited States District Courts. 7th Circuit. Southern District of Illinois

UNITED STATES OF AMERICA, Plaintiff,
v.
FRANKIE L. SANDERS and STATE OF ILLINOIS
DEPARTMENT OF REVENUE, Defendants.

Case No. 11-CV-912-NJR-DGW

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF ILLINOIS

October 20, 2016


AMENDED MEMORANDUM AND ORDER1

ROSENSTENGEL, District Judge:

Defendant Frankie Sanders is a self-employed farmer. He has not, however, filed a federal income tax return or paid federal income taxes since at least 1991. In fact, it is unclear if he has ever done so. He is a "tax defier" and believes that he has no obligation to pay income taxes. As many tax protestors before him have learned, adherence to this belief, no matter how sincerely held, is unwise and can be costly.2 That is the case here. The Government filed this collection lawsuit seeking to satisfy, or at least partially

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satisfy, Mr. Sanders's tax debt by selling the two farms on which three generations of his family have earned their livelihood.

This matter is currently before the Court on the motion for summary judgment filed by the Government on March 7, 2015 (Doc. 87). The Government seeks a judgment that, for the tax years 1991 through 1997, Mr. Sanders is liable for $441,845.75 in unpaid federal income taxes, penalties, and interest through January 31, 2015 (Doc. 87). The Government further seeks additional interest and statutory additions accruing from February 1, 2015, to the present (Doc. 87). The Government also seeks a judgment declaring that Mr. Sanders's tax liabilities constitute a valid lien on all property belonging to him—including a farm in Fayette County, Illinois, and a farm in Montgomery County, Illinois—and permitting the Government to enforce those liens by foreclosing on and selling the properties (Doc. 87).

FACTUAL BACKGROUND

A. The Audit and Assessments

As mentioned above, Frankie Sanders has not filed a tax return since at least 1991. The Internal Revenue Service ("IRS") eventually caught up with him, and, in 1998, the IRS began an audit of Mr. Sanders's financial dealings during the calendar years 1991 through 1997 (Docs. 87-3; 87-4). Mr. Sanders refused to respond to any of the agents' phone calls or letters or otherwise cooperate with them (Doc. 87-3). Without the documents needed to determine his tax liability, the agents attempted to reconstruct Mr. Sanders's income and tax liabilities using information obtained from public records and the records of private businesses with whom Mr. Sanders conducted business (Doc. 87-3; see also Doc. 87-6, ¶3 and pp. 5-50; Doc. 87-7; Doc. 87-8, pp. 1-20). In particular, the

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IRS agents consulted records from the United States Department of Agriculture and its Farm Services Agencies, from which they learned that Frankie Sanders operated a farm in Fayette County, Illinois (the "Fayette farm"), which was owned by his mother Genevieve Sanders (Doc. 87-6, pp. 43-50; Doc. 87-7, pp. 1-6). The Fayette farm was purchased by Mr. Sanders's parents, Milton and Genevieve, in 1951 when Mr. Sanders was a child (Doc. 87-1, ¶2; Doc. 87-10, pp. 178, 184).3 Mr. Sanders grew up on the Fayette farm, raised his sons there,4 and continues to live there to this day (Doc. 87-1, ¶¶1, 3; Doc. 87-4, pp. 34-36; Doc. 87-10, p. 90).

The IRS also learned that Frankie Sanders owned and operated a second farm in Montgomery County, Illinois (the "Montgomery farm") (Doc. 87-6, pp. 43-50; Doc. 87-7, pp. 1-6). The Montgomery farm was purchased by Mr. Sanders in 1977 with a loan from the seller pursuant to a land contract (Doc. 87-1, ¶¶6, 9; Doc. 87-10, pp. 124-25, 207-251). Mr. Sanders made installment payments from 1977 to 1996 that totaled approximately $412,500 (Doc. 87-1, ¶10; Doc. 87-6, pp. 37, 38). On November 21, 1996, a warranty deed transferring title of the property to Mr. Sanders was recorded in Montgomery County, Illinois (Doc. 87-6, p. 38; Doc. 87-10, p. 218).5 Six days later, Mr.

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Sanders gifted about five and a half acres of the Montgomery farm to his son, Eric, and Eric's wife, Karen (Doc. 87-10, pp. 111, 219-20).6

From plat maps and land records maintained by the Recorder of Deeds in Fayette County and in Montgomery County, the agents determined the size and location of the Fayette farm and the Montgomery farm (Doc. 87-6, pp. 37-50; Doc. 87-7, pp. 1-5). The agents then canvassed local grain elevators, livestock dealers, and hauling companies, and, while they were able to identify some of Mr. Sanders's crop revenues, they could not assemble a reasonably complete set of business records for his farm operations (Doc. 87-1, ¶¶ 34, 35; Doc. 87-6, p. 18. See also, e.g., Doc. 87-7, p. 19).

Left with no other option, the agents calculated Mr. Sanders's tax liability by estimating his gross income, deductions, and exemptions (Doc. 87-1, ¶36). In particular, audit reports submitted by the Government demonstrate that agents estimated grain sales based on the number of acres Mr. Sanders operated and statistical data showing the average grain yields and prices for the general area of Montgomery and Fayette Counties (see Doc. 87-6, pp. 20-22; Doc. 87-7, pp. 19-33).7 Because the agents did not

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know the financial arrangement between Mr. Sanders and his mother regarding compensation for operating the Fayette farm, all income estimated from that farm was determined to be compensation paid to Mr. Sanders (Doc. 87-7, pp. 19-33). All income estimated from the Montgomery farm was also attributed to Mr. Sanders (see id.).8 Also factored into his income were the dividends that Mr. Sanders earned from the Nokomis Equity elevator and the Rosamond Cooperative (Doc. 87-7, pp. 34-35).

The audit reports further describe how the agents estimated Mr. Sanders's deductible business expenses by using statistical data to estimate his grain production costs (Doc. 87-7, pp. 45-51; Doc. 87-8, pp. 1-15). The agents also included the self-employment tax deduction (Doc. 87-7, pp. 36-41); the standard deduction (Id. at pp. 42-44); and the personal exemption for each respective year (Doc. 87-8, pp. 16-18). Based on Mr. Sanders's estimated adjusted gross income, the agents calculated Mr. Sanders's tax liabilities and penalties for the years 1991 through 1997 (Doc. 87-1, ¶36; Doc. 87-8, pp. 55-60).

The IRS then served Mr. Sanders with a statutory Notice of Deficiency dated May 9, 2001, for tax years 1991 through 1997, demanding payment of $130,908 in back

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taxes and penalties plus an undisclosed amount in interest (Doc. 87-1, ¶37; Doc. 87-6, ¶4; see Doc. 87-8, pp. 21-83).9 Mr. Sanders did not challenge the IRS's deficiency determination (Doc. 87-1, ¶38; Doc. 87-6, ¶4). Consequently, on October 15, 2001, Mr. Sanders was assessed with the income tax liabilities, penalties, and interest that had accrued to date (Doc. 87-1, ¶39; Doc. 87-6, ¶5; Doc. 87-8, pp. 85, 97, 103, 109, 115, 122, 227; Doc. 87-9).10 Years later, in March 2006, Mr. Sanders was assessed with additional penalties (Doc. 87-1,¶39; Doc. 87-6, ¶5; Doc. 87-8, pp. 85, 97, 103, 109, 115, 122, 227; Doc. 87-9). The Government claims that a notice of the assessment and a demand for payment was mailed to Mr. Sanders on the same day of (or shortly after) each assessment (Doc. 87-1, ¶40; Doc. 87-9). All assessments are contained in the following table:

Tax
Year
Assessment
Date
Assessment Type
Assessment
Amount
1991
Oct. 15, 2001
Tax by examination
$9,890.00
1991
Oct. 15, 2001
IRC §6651(a)(1) failure to file penalty
$2,472.50
1991
Oct. 15, 2001
IRC §6654 estimated tax penalty
$565.22
1991
Oct. 15, 2001
Interest to assessment date
$14,659.07
1991
March 27, 2006
IRC § 6651(a)(2)-(3) failure to pay penalty
$2,472.50
1992
Oct. 15, 2001
Tax by examination
$13,997.00
1992
Oct. 15, 2001
IRC §6651(a)(1) failure to file penalty
$3,499.25
1992
Oct. 15, 2001
IRC §6654 estimated tax penalty
$610.49
1992
Oct. 15, 2001
Interest to assessment date
$18,002.90
1992
March 27, 2006
IRC § 6651(a)(2)-(3) failure to pay penalty
$3,499.25
1993
Oct. 15, 2001
Tax by examination
$18,939.00
1993
Oct. 15, 2001
IRC §6651(a)(1) failure to file penalty
$4,734.75

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Tax
Year
Assessment
Date
Assessment Type
Assessment
Amount
1993
Oct. 15, 2001
IRC §6654 estimated tax penalty
$793.53
1993
Oct. 15, 2001
Interest to assessment date
$21,112.20
1993
March 27, 2006
IRC § 6651(a)(2)-(3) failure to pay penalty
$4,734.75
1994
Oct. 15, 2001
Tax by examination
$11,924.00
1994
Oct. 15, 2001
IRC §6651(a)(1) failure to file penalty
$2,981.00
1994
Oct. 15, 2001
IRC §6654 estimated tax penalty
$618.78
1994
Oct. 15, 2001
Interest to assessment date
$11,027.80
1994
March 27, 2006
IRC § 6651(a)(2)-(3) failure to pay penalty
$2,981.00
1995
Oct. 15, 2001
Tax by examination
$15,027.00
1995
Oct. 15, 2001
IRC §6651(a)(1) failure to file penalty
$3,756.75
1995
Oct. 15, 2001
IRC §6654 estimated tax penalty
$814.82
1995
Oct. 15, 2001
Interest to assessment date
$11,029.95
1995
March 27, 2006
IRC § 6651(a)(2)-(3) failure to pay penalty
$3,756.75
1996
Oct. 15, 2001
Tax by examination
$16,268.00
1996
Oct. 15, 2001
IRC §6651(a)(1) failure to file penalty
$3,660.30
1996
Oct. 15, 2001
IRC §6654 estimated tax penalty
$865.87
1996
Oct. 15, 2001
IRC § 6651(a)(2)-(3) failure to pay penalty
$4,067.00
1996
Oct. 15, 2001
Interest to assessment date
$9,045.11
1997
Oct. 15, 2001
Tax by examination
$10,594.00
1997
Oct. 15, 2001
IRC §6651(a)(1) failure to file penalty
$2,383.65
1997
Oct. 15, 2001
IRC §6654 estimated tax penalty
$566.80
1997
Oct. 15, 2001
IRC § 6651(a)(2)-(3) failure to pay penalty
$2,224.74
1997
Oct. 15, 2001
Interest to assessment date
$4,273.67

B. Transfer of Property

By late 2009, despite multiple notices and demands for payment, Mr....

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