REPORT AND RECOMMENDATIONS ON RESTITUTION This criminal case is before the Court on remand from the United States Court of Appeals for the Sixth Circuit. United States v. Musgrave, Case No. 15-3388, 664 Fed. Appx. 540 (6th Cir. Nov. 30, 2016)(unpublished; copy at ECF No. 238).
The appellate court ordered this Court to "hold an evidentiary hearing to determine which assets the United States can reach to enforce the order of restitution." Id. at *540. After remand, District Judge Black referred the matter to the undersigned, pursuant to Fed. R. Crim. P. 59, to conduct the required evidentiary hearing and file a report and recommendations with proposed findings of fact and conclusions of law (ECF No. 240). Reference of this matter to a Magistrate Judge for proposed findings of fact and recommended disposition, subject to de novo determination by a District Judge, is expressly authorized by 18 U.S.C. § 3664(d)(6).
Subsequent to the referral, Barbara Musgrave, Defendant's spouse, was granted leave to intervene to defend her interests in the assets in question (ECF Nos. 244-45). The Magistrate Judge took testimony on May 12-15, 2017, which has been transcribed (ECF Nos. 263, 264). Briefing was completed August 14, 2017, and the remanded matter is therefore ripe for decision.
The Sixth Circuit set forth the legal standard to be applied to the question on remand:
The Mandatory Victim Restitution Act (MVRA) mandates restitution for offenses "committed by fraud or deceit," such as Musgrave's. 18 U.S.C. § 3663A(c)(1)(A)(ii). A restitution order under the MVRA "is a lien in favor of the United States on all property and rights to property of the person fined as if the liability of the person fined were a liability for a tax assessed under the Internal Revenue Code of 1986." 18 U.S.C. § 3613(c); see also 26 U.S.C. § 6321 (Internal Revenue Code section stating that nonpayment of any tax demand "shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person"). To determine the reach of the MVRA, therefore, we look to how courts have applied the federal tax lien statute.
The Supreme Court has instructed that, because property rights depend on state law, courts apply the federal tax lien statute in two steps: "We look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as 'property' or 'rights to property' within the compass of the federal tax lien legislation." Drye v. United States, 528 U.S. 49, 58, 120 S. Ct. 474, 145 L. Ed. 2d 466 (1999); cf. Morgan v. Comm'r, 309 U.S. 78, 80, 60 S. Ct. 424, 84 L. Ed. 585 (1940) ("State law creates legal interests and rights. The federal revenue acts designate which interests or rights, so created, shall be taxed.").
The first step of the Drye analysis asks how much effective control over the property in question state law provides to the person owing payment. "[I]n determining whether a federal taxpayer's state-law rights constitute 'property' or 'rights to property,' '[t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property.'" Drye, 528 U.S. at 61 (quoting Morgan, 309 U.S. at 83). This state-law analysis is functional, not formalistic; it considers "the realities" of the defendant's interestand "the substance of the rights state law provides, not merely the labels the State gives these rights or the conclusions it draws from them." United States v. Craft, 535 U.S. 274, 279, 122 S. Ct. 1414, 152 L. Ed. 2d 437 (2002).
In Craft, the Supreme Court considered whether a federal tax lien could attach to a spouse's interest in a tenancy by the entirety, Michigan's form of joint property ownership between spouses. Id. at 283. To determine the taxpayer's effective control of the property under state law, the Court identified which specific rights Michigan law granted to the taxpayer with respect to the property. The Court identified these rights with considerable granularity, finding that the taxpayer had:
[T]he right to use the property, the right to exclude third parties from it, the right to a share of income produced from it, the right of survivorship, the right to become a tenant in common with equal shares upon divorce, the right to sell the property with the [spouse]'s consent and to receive half the proceeds from such a sale, the right to place an encumbrance on the property with the [spouse]'s consent, and the right to block [his spouse] from selling or encumbering the property unilaterally.
Id. at 282.
After identifying the person's state-law property rights, courts must next determine whether those rights qualify as "property" or "rights to property" under the federal tax lien statute (and thus under the MVRA). This inquiry is governed by federal law, which may override state-law exemptions or legal fictions and is not bound by determinations of the state courts on similar questions. Id. at 288-89. The language of the federal tax lien statute "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." Id. at 283 (quoting United States v. Nat'l Bank of Commerce, 472 U.S. 713, 719-20, 105 S. Ct. 2919, 86 L. Ed. 2d 565 (1985)).
The Supreme Court's decisions provide guidance as to which state-law rights qualify as "property" or "rights to property" under thebroad language of the federal tax lien statute. Craft suggested that the rights to use property, receive income produced by it, and exclude others from it may be sufficient by themselves to qualify, even without the right of unilateral alienation. Id. at 283-84. Combined with the right to alienate with a spouse's consent and the right of survivorship, Craft held that the rights granted by Michigan's tenancy by the entirety did qualify, permitting federal tax liens to reach property that Michigan law did not permit state creditors to reach. Id. at 283-85, 288. Drye held that an heir's interest in his mother's estate qualified for attachment despite his disclaimer of interest permitted under Arkansas law. Drye, 528 U.S. at 60, 120 S.Ct. 474. Similarly, a state law permitting retroactive renunciation of a marital interest does not foreclose federal tax liability. Id. at 59, 120 S.Ct. 474. The Court has also held that a right to withdraw all the proceeds from a joint bank account and a right to compel an insurer to pay the cash value of a life insurance policy both qualified for federal tax liens, even though state law shielded those rights from other creditors' liens. Id. at 58-59, 120 S.Ct. 474. By contrast, a federal tax lien cannot attach to proceeds unavailable to a taxpayer in his lifetime. Id. These federal-law precedents govern the reach of the MVRA.
United States v. Musgrave, 664 Fed. Appx. 540, 542-43 (6th Cir. 2016).
Recommended Findings of Fact The Magistrate Judge recommends the Court adopt the following findings of fact which are proven by a preponderance of the evidence presented. In constructing this set of factual findings, the Magistrate Judge has included every finding proposed by any of the parties which is appropriately supported by evidence without attempting to decide its relevance or materiality; those questions are reserved for the analysis section below.
Defendant Paul David Musgrave1 was born in 1954 and is sixty-three years old. His spouse, Barbara Musgrave, was also born in 1954 and is sixty-two years old. They were married in 1978 and have three adult children. Since the 1980's, David and Barbara Musgrave have shared financial responsibility for their household expenses. David Musgrave is trained as an accountant and became a certified public accountant in 1985, although he lost CPA license as a result of his conviction in this case.
David Musgrave currently owns a fifty percent interest in M & M Investment Partnership which owns the real estate used by GMD Industries, LLC. He also owns a twenty percent interest in that corporation which does business as Production Screw Machine Company and makes turned metal products for the automotive, medical, and commercial industries. David Musgrave does financial, management, and other work for both companies. The other half of M&M Investment Partnership and the other eighty percent of GMD Industries is own by Harrison McQuinn, David Musgrave's stepfather. David Musgrave made a $200,000 capital contribution for his investment in GMD. These two companies are obviously closely held businesses. Because of that David Musgrave does not know the precise value of his interests in the companies and cannot easily sell them. The businesses have been listed for sale, but have not been sold.
Barbara Musgrave is a registered nurse who began working in that capacity in 1976, before her marriage to David, and is still working. When the Musgraves lived in Dayton, Ohio, Barbara Musgrave worked at Kettering Medical Center from 1976 to 2009. Toward the end of her employment with Kettering, she was earning between $70,000 and $80,000 per year. During that time she contributed to a personal retirement account through Kettering's employee retirement plan. When she left Kettering, she rolled that retirement account over into a TDAmeritrade individual retirement account ("IRA") which she continues to hold solely in her own name. Barbara Musgrave also holds, solely in her own name, a TD Ameritrade Roth IRA. David Musgrave did not contribute any money to the funds in these two accounts.
Barbara Musgrave's father, Robert Gulling, was employed in an executive capacity at the Timken Roller Bearing Company after his naval...
