United States v. Wodtke

• Decision Date: 26 December 1985
• Docket Number: No. C 82-4004.,C 82-4004.
• Parties: UNITED STATES of America, Plaintiff, v. Leonhard and June WODTKE, Individually and as Trustees for Life Science Church of Oto, Iowa, and Order of Almighty God, Oto, Iowa, John Hancock Mutual Life Insurance Company, Defendants.
• Court: U.S. District Court — Northern District of Iowa

627 F. Supp. 1034

UNITED STATES of America, Plaintiff, v. Leonhard and June WODTKE, Individually and as Trustees for Life Science Church of Oto, Iowa, and Order of Almighty God, Oto, Iowa, John Hancock Mutual Life Insurance Company, Defendants.

No. C 82-4004.

United States District Court, N.D. Iowa, W.D.

December 26, 1985.

Leonhard and June Wodtke, pro se.

Janet Brown for John Hancock Mut. Life Ins. Co.

David A. Slacter, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., Asher E. Schroeder, Asst. U.S. Atty., Sioux City, Iowa, for U.S.

FINDINGS OF FACT, CONCLUSIONS OF LAW, MEMORANDUM DECISION AND ORDER

DONALD E. O'BRIEN, Chief Judge.

This matter comes before the Court after a three-day trial to the Court. The Court finds for the plaintiff, United States of America. The Court hereby makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. This matter came on for trial. Plaintiff, the United States, was represented by David A. Slacter and Asher E. Schroeder. Defendants Leonhard and June Wodtke appeared pro se and Defendant John Hancock Mutual Life Insurance Company (John Hancock) was represented by Janet Brown.

2. Plaintiff instituted this action to reduce tax assessments made against Leonhard and June Wodtke to judgment. The plaintiff also sought to foreclose its tax liens against certain real property, a farm owned by Leonhard and June Wodtke.

3. Leonhard and June Wodtke are husband and wife residing on a 300-acre farm in Oto, Iowa, in the county of Woodbury.

4. The Wodtkes purchased this farm in 1954. (Plaintiff's Exh. 10).

5. The Wodtkes obtained a mortgage from John Hancock in order to purchase the farm. (Defendants' Exh. 102). As of the day prior to trial, the outstanding balance due on the mortgage with interest and attorneys' fees was $20,557.75. Interest continues to accrue on this amount.

6. During the years 1973 and 1974, the Wodtkes derived income from their farm and a gasoline service station operated by Leonhard Wodtke.

7. The Wodtkes filed timely tax returns for 1973 and 1974 and paid the amount of tax shown to be due and owing on these returns. (Plaintiffs Exhs. 6 and 7).

8. In January of 1975, Revenue Agent John Mansfield of the Sioux City, Iowa office of the Internal Revenue Service was assigned to audit the Wodtkes' tax returns for the years 1973 and 1974.

9. Mansfield began working on the audit in early July of 1975 at which time he wrote a letter to the Wodtkes informing them of the audit.

10. Mansfield began his audit shortly thereafter. The Wodtkes refused to supply substantiation for the deductions they claimed on their tax returns.

11. Because Mansfield had to leave Sioux City for additional training, the audit was taken over by Revenue Agent Robert Ackerman, also of the Sioux City Internal Revenue Service office.

12. Mr. Ackerman served an Internal Revenue Service summons on the Wodtkes which asked them to produce all records and other documents which substantiated the deductions claimed on their tax returns for 1973 and 1974.

13. The Wodtkes refused to comply with the summons based on Fifth Amendment grounds. The United States District Court for the Northern District of Iowa ultimately determined that the Wodtkes had interposed the Fifth Amendment in good faith and they therefore did not have to produce any records.

14. Mansfield returned from training by the time the summons issue was decided. In order to complete his audit he used the information left that was available. This information included a letter from Standard Oil listing the amount expended by the Wodtkes during 1973 and 1974 for gasoline and other products and for rent. Mansfield also had some employment tax forms which were produced by the Wodtkes.

15. Because the Wodtkes refused to supply any further substantiation of expenses, Mansfield disallowed all deductions claimed by the Wodtkes on their tax returns for these two years other than the deductions substantiated by the documents he did have.

16. Mansfield authored a report which set forth the results of his audit. This report broke down each of the two years into farm and service station expenses. In each area, Mansfield disallowed all business deductions claimed by the Wodtkes other than those substantiated by written documentation. Mansfield's stated reason for so doing was the Wodtkes' failure to produce any written substantiation for their deductions. (Plaintiff's Exh. 2).

17. Mansfield's audit report was incorporated into a notice of deficiency mailed to the Wodtkes by certified mail on March 21, 1977. (Plaintiff's Exh. 1).

18. The notice of deficiency proposed deficiencies for the years 1973 and 1974 as follows:

                Year  Addition to Tax  Negligence Penalty
                1973    $70,787.60          $3,539.38
                1974     95,865.62           4,793.28
                

The notice of deficiency was essentially the same as Mansfield's audit report except that certain math errors were corrected and a penalty for negligence or intentional disregard for rules and regulations was imposed pursuant to § 6653(a) of the Internal Revenue Code.

19. Mr. Wodtke filed a timely petition with the United States Tax Court to contest the audit determination of the Internal Revenue Service.

20. Mrs. Wodtke did not petition the Tax Court.

21. The Internal Revenue Service is precluded by statute from assessing taxes proposed in a notice of deficiency for 90 days after mailing of the notice. This is to give a taxpayer time to petition the Tax Court. If a petition is filed, the taxes cannot be assessed until after the Tax Court decision is final.

22. The Internal Revenue Service assessed the taxes proposed in the notice of deficiency against Mrs. Wodtke after the expiration of the 90-day period on August 24, 1977 as follows:

                Year     Tax       Penalty    Interest   Lien Fees
                1973  $70,787.60  $3,539.38  $16,621.99   $12.001
                1974   95,865.62   4,793.28   16,758.75     -
                

23. Later, because there was some confusion as to whether Mrs. Wodtke had also filed a petition with the Tax Court or whether Mr. Wodtke's petition included Mrs. Wodtke, the Internal Revenue Service abated the taxes assessed against Mrs. Wodtke. This abatement occurred on July 19, 1977.

24. Later, the Internal Revenue Service determined that the petition filed by Mr. Wodtke only covered Mr. Wodtke's liability and not that of Mrs. Wodtke. The Internal Revenue Service then reassessed the taxes against Mrs. Wodtke on August 24, 1977. (Plaintiff's Exh. 4).

25. Mr. Wodtke was accorded a hearing by the Tax Court in Des Moines, Iowa. Mrs. Wodtke, Revenue Agent Mansfield and others were present.

26. By decision dated November 21, 1978 the Tax Court upheld the notice of deficiency. The Eighth Circuit affirmed on appeal in an unpublished opinion. (Plaintiff's Exh. 3).

27. The Internal Revenue Service assessed taxes against Mr. Wodtke on August 10, 1979 for the years 1973 and 1974 as follows:

                Year     Tax       Penalty    Interest   Lien Fees
                1973  $70,787.60  $3,539.38  $22,545.85   $12.002
                1974   95,865.62   4,793.28   24,781.27     -
                

(Plaintiff's Exh. 5).

28. The Internal Revenue Service filed notices of federal tax liens against all property and rights to property belonging to the Wodtkes with the Office of the Recorder for Woodbury County. A tax lien was filed with respect to Mrs. Wodtke on February 20, 1980 and against Mr. Wodtke on the same day. A second tax lien was filed with respect to Mr. Wodtke on July 31, 1980 to correct the spelling of his first name.³

29. As of July 29, 1985, Mr. Wodtke was indebted to the United States in the amount of $442,625.08. This amount includes the amount of his assessment, plus interest of $101,812.71 for 1973 and $137,601.73 for 1974 together with penalties for each year.

30. As of July 29, 1985, Mrs. Wodtke was indebted to the United States in the amount of $447,031.75. This total includes the amount of her assessment, plus interest of $103,517.77 for 1973 and $139.910.87 for 1974 together with penalties for each year.

31. Interest continues to accrue on the amounts by which the Wodtkes are indebted to the United States at the rate specified by law.

32. On December 7, 1976, Mr. Wodtke executed a "vow of poverty" by which he purported to give all of his present and future possessions and all income to an Order of the Life Science Church called The Order of Almighty God, Alpha Chapter. The gift stated it was irrevocable except provided that all property would revert to the donor if certain events occurred. (Defendants' Exh. B, p. 1).

33. Approximately one year later, on December 27, 1977, Mrs. Wodtke executed a similar "vow." By her vow, Mrs. Wodtke purported to give "all" of her property to The Order of Almighty God 904, Chapter. (Defendants' Exh. B, p. 2).

34. The Wodtkes testified that these various names were all synonyms for the Life Science Church of Oto, Iowa.

35. The Wodtkes each testified that the Church had documents describing its existence and purpose but declined to produce such documents or state where such documents were located. The Court concludes that the Church has never been incorporated.

36. The Wodtkes testified that the Church was run by a board of directors and a number of trustees. However, the Wodtkes declined to name any of these individuals. The only names ever appearing on documents relating to the Church are Leonhard and June Wodtke.

37. By two quit claim deeds dated December 31, 1977, the Wodtkes purportedly transferred to themselves as Trustees of the Life Science Church of Oto, Iowa, and the Order of Almighty God, a portion of their 300-acre farm for the recited consideration of $1.00. There was no other consideration for the transfer; therefore, the transaction lacked sufficient consideration. (Plaintiff's Exh. 9, p. 1).

38. By quit claim deed dated September 13, 1978, the remainder of the farm purportedly was transferred to the Church and Order. Again, the deed recited token consideration of $1.00;...