United States v. Paulson

• Citation: 331 F.Supp.3d 1066
• Decision Date: 07 September 2018
• Docket Number: Case No.: 15cv2057-AJB-NLS
• Parties: UNITED STATES of America, Plaintiff, v. John Michael PAULSON, as the Executor or Statutory Executor of the Estate of Allen E. Paulson, and Individually; James D. Paulson, as Statutory Executor of the Estate of Allen E. Paulson ; Vikki E. Paulson, as Statutory Executor of the Estate of Allen E. Paulson, as Trustee of Allen E. Paulson Living Trust, and Individually; et al., Defendants. And Related Actions
• Court: U.S. District Court — Southern District of California

331 F.Supp.3d 1066

UNITED STATES of America, Plaintiff,

v. John Michael PAULSON, as the Executor or Statutory Executor of the Estate of Allen E. Paulson, and Individually; James D. Paulson, as Statutory Executor of the Estate of Allen E. Paulson ; Vikki E. Paulson, as Statutory Executor of the Estate of Allen E. Paulson, as Trustee of Allen E. Paulson Living Trust, and Individually; et al., Defendants.And Related Actions

Case No.: 15cv2057-AJB-NLS

United States District Court, S.D. California.

Signed September 7, 2018

Andrew L. Sobotka, Esq., Moha P. Yepuri, Esq., United States Department of Justice Tax Division, 717 N. Harwood Street, Suite 400, Dallas, TX 75201, for Plaintiff.

James D. Paulson, In Pro Per.

Kevin N. Anderson, Esq., Fabian Vancott, 215 South State Street, Suite 1200, Salt Lake City, UT 84111, for Defendant/Cross-Claimant John Michael Paulson.

Michele M. DeSoer, Esq., John C. Maloney, Jr., Esq., Zachary S. Davidson, Esq., Heming Xu, Esq., Zuber Lawler & Del Duca LLP, 350 South Grand Avenue, 32nd Floor, Los Angeles, CA 90071, for Defendants/Cross-Defendants Vikki E. Paulson and Crystal Christensen.

ORDER:

(1) GRANTING IN PART AND DENYING IN PART DEFENDANT PICKENS' MOTION FOR SUMMARY JUDGMENT;

(2) GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANT JOHN MICHAEL PAULSON;

(3) DENYING PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT AGAINST MS. PICKENS;

(4) DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANT JAMES D. PAULSON;

(5) DENYING JOHN MICHAEL PAULSON'S MOTION FOR SUMMARY JUDGMENT AGAINST PLAINTIFF;

(6) GRANTING IN PART AND DENYING IN PART DEFENDANT JOHN MICHAEL PAULSON'S MOTION FOR SUMMARY JUDGMENT AGAINST MADELEINE PICKENS;

(7) DENYING JOHN MICHAEL PAULSON'S MOTION FOR SUMMARY JUDGMENT AGAINST CO-TRUSTEES;

(8) GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AGAINST VIKKI PAULSON AND CRYSTAL CHRISTENSEN;

(9) DENYING DEFENDANT JOHN MICHAEL PAULSON'S MOTION TO STRIKE;

(10) DENYING DEFENDANT VIKKI PAULSON'S MOTION TO STRIKE

Hon. Anthony J. Battaglia, United States District Judge

Pending before the Court are eight motions for summary judgment. (Doc. Nos. 98, 111, 114, 118, 119, 121, 122, 123.) Additionally, Defendants John Michael Paulson and Vikki E. Paulson and Crystal Christensen filed two motions to strike. (Doc. Nos. 143, 153.) On August 3, 2018, the Court held a hearing on the motions and then submitted the matters.¹ (Doc. No. 170.) As will be explained in greater detail below, the Court GRANTS IN PART AND DENIES IN PART Plaintiff's motion for summary judgment against Michael Paulson, (Doc. No. 111), DENIES John Michael Paulson's cross-motion for summary judgment, (Doc. No. 119), GRANTS IN PART AND DENIES IN PART Ms. Pickens' motion for summary judgment against Plaintiff, (Doc. No. 98), DENIES Plaintiff's cross-motion for summary judgment against Ms. Pickens, (Doc. No. 114), DENIES Plaintiff's motion for summary judgment against James Paulson, (Doc. No. 118), GRANTS IN PART AND DENIES IN PART John Michael Paulson's summary judgment motion against Ms. Pickens, (Doc. No. 121), DENIES John Michael Paulson's motion for summary judgment against Vikki Paulson and Crystal Christensen, (Doc. No. 122), and GRANTS IN PART AND DENIES IN PART Plaintiff's motion for summary judgment against Vikki Paulson and Crystal Christensen, (Doc. No. 123). Additionally, the Court DENIES both motions to strike. (Doc. Nos. 143, 153.)

BACKGROUND

A. Factual Background

On December 23, 1986, Allen Paulson ("Mr. Paulson") established the Allen E. Paulson Living Trust (hereafter referred to as "Living Trust"). (Doc. No. 1 ¶ 9.) In 1988, Mr. Paulson entered into an antenuptial agreement with Madeleine Pickens ("Ms. Pickens") in anticipation of marriage.

(Id. ¶ 10.) The agreement defined their respective separate property and established certain gifts for Ms. Pickens in the event of Mr. Paulson's death. (Id. ) The Living Trust was subsequently amended and restated several times in early 2000. (Id. ¶ 11.) On July 19, 2000, Mr. Paulson died. (Id. ¶ 21.) Mr. Paulson was survived by several heirs, including his third wife Ms. Pickens, his three sons from a prior marriage, Richard Paulson, James Paulson, and Michael Paulson, and a granddaughter Crystal Christensen. (Doc. No. 111-1 at 9.)

The Living Trust provided Ms. Pickens with the power to elect between receiving property under the antenuptial agreement or under the Living Trust, but not under both. (Doc. No. 1 ¶¶ 10, 12–15.) The Living Trust also created a Marital Trust for Ms. Pickens' benefit. (Id. ¶¶ 13–15.) Under the terms of the Living Trust, the Marital Trust was to receive a residence and all personal property located at 14497 Emerald Lane in Rancho Sante Fe, California. (Id. ¶ 13.) The Living Trust also gave Ms. Pickens the right to receive a second residence located in Del Mar, California, as well as all household furnishings, furniture, and all insurance policies related to the Del Mar property. (Id. ¶ 14.) Finally, the Living Trust provided that the Marital Trust was to receive 25% of the residue of the Living Trust. (Id. ¶ 15.) The Living Trust named Ms. Pickens, John Michael Paulson, and Edward White (or alternatively, Edward White and Nicholas Diaco), as the co-trustees of the Marital Trust. (Id. ¶ 16.) The Marital Trust created by the Living Trust was never funded. (Doc. No. 98-51 at 2.)

At the time of Mr. Paulson's death, all of Mr. Paulson's assets were held by the Living Trust except for his shares in the Gold River Hotel & Casino Corporation. (Doc. No. 1 ¶ 24.) The Living Trust's assets, as reported at the time of Mr. Paulson's death included approximately $24,764,500 in real estate, $113,761,706 in stocks and bonds, $23,664,644 in cash and receivables, and $31,243,494 in miscellaneous assets. (Id. ) Accordingly, the Estate's assets totaled approximately $193,434,344 at the time of Mr. Paulson's death. (Id. )

John Michael Paulson ("Michael Paulson") is the son of Mr. Paulson, and served as the executor of the Estate of Allen E. Paulson ("Estate") until his purported resignation on January 15, 2013. (Id. ¶¶ 4, 54.) Michael Paulson also served as a co-trustee of the Living Trust with Edward White until White's resignation on October 8, 2001. (Id. ¶ 25.) Shortly thereafter, Nicholas Diaco consented to act as co-trustee of the Living Trust with Michael Paulson. (Id. ) In April 2001, the Estate filed a Form 4768 with the IRS, and requested an extension of time to file its Form 706 Estate tax return until October 19, 2001. (Id. ¶ 26.) Additionally, the Estate requested an extension of time to pay its taxes until April 19, 2002. (Id. ) The IRS approved both of the Estate's extension requests. (Id. )

On October 23, 2001, the IRS received the Estate's Form 706 Estate tax return, which was signed by Michael Paulson as co-executor of the Estate. (Id. ¶ 27.) In completing the tax return, the Estate elected to use an alternate valuation date of January 19, 2001, under 26 U.S.C. § 2032(a). (Id. ) The Estate reported a total gross estate of $187,729,626, a net taxable estate of $9,234,172, and an estate tax liability of $4,459,051. (Id. ¶¶ 27–28.) On November 26, 2001, the IRS assessed the originally reported tax of $4,459,051. (Id. ¶ 28.) The Estate elected to pay part of its taxes and defer the other portion under a fifteen-year payment plan pursuant to 26 U.S.C. § 6166 of the Internal Revenue Code.² (Id. ¶ 29.) Accordingly, the Estate paid $706,296 as the amount unqualified for deferral under § 6166, leaving a deferred balance of $3,752,755 to be paid under the installment election. (Id. ) On November 15, 2001, the IRS selected the Estate tax return for examination. (Id. ¶ 31.)

While the Estate's tax return was under review, several personal disputes arose between Michael Paulson, Ms. Pickens, and the other beneficiaries of the Living Trust. (Id. ¶ 32.) On February 2, 2003, the parties reached a settlement agreement, which the California Probate Court approved on March 14, 2003 ("2003 Settlement"). (Id. ¶¶ 33, 34; Doc. No. 15-5.) Under the 2003 Settlement, Ms. Pickens forewent property under both the antenuptial agreement and the Living Trust, instead choosing to receive direct distributions from the Living Trust. (Doc. No. 1 ¶¶ 33–34.) The 2003 Settlement resulted in Ms. Pickens receiving the Emerald Lane Residence, the Ocean Front Residence, and the stock in the Del Mar County Club, Inc. (Id. ¶ 33.) As approved by the Probate Court, these distributions were made directly to Ms. Pickens as trustee of the Madeleine Anne Paulson Separate Property Trust. (Id. ¶ 35.) During 2004, Michael Paulson, acting as trustee of the Living Trust, distributed approximately $5,921,887 in trust assets to various individuals. (Id. ¶ 36.)

On January 16, 2005, the IRS issued a notice of deficiency to Michael Paulson as executor of the estate, which proposed a $37,801,245 deficiency in the estate tax reported on the return. (Id. ¶ 38.) Michael Paulson petitioned Plaintiff's Tax Court challenging the additional estate tax proposed by the IRS. (Id. ¶ 39.) On December 2, 2005, pursuant to the parties' stipulation, the Tax Court determined that the Estate owed $6,669,477 in additional estate taxes. (Id. ¶ 40.) The Estate elected to pay this additional tax amount under the same fifteen-year installment period permitted by 26 U.S.C. § 6166. (Id. )

During 2006, Michael Paulson, acting as trustee of the Living Trust distributed an additional $1,250,000 from the Living Trust. (Id. ¶ 43.) In March of 2009, the Probate Court removed Michael Paulson as trustee for misconduct. (Id. ¶ 44.) Vikki Paulson and James Paulson were then appointed as co-trustees. (Id. ) In August 2009, Vikki Paulson and James Paulson reported that the Living Trust had assets worth $13,738,727. (Id. )

On May 7, 2010, in response to one or more missed installment payments, the IRS issued the Estate a notice of final determination stating that the extension of time for...