US v. McCombs, 87-CV-1475L.

Decision Date13 June 1995
Docket NumberNo. 87-CV-1475L.,87-CV-1475L.
PartiesUNITED STATES of America, Plaintiff, v. Kelly M. McCOMBS, Nancy Ellison, and Mary McCombs, Defendants.
CourtU.S. District Court — Western District of New York

COPYRIGHT MATERIAL OMITTED

Anne VanGraafeiland, Asst. U.S. Atty., Rochester, NY, Andrew D. Plepler, Trial Attorney, Tax Division, U.S. Department of Justice, Washington, DC, Peter Sklarew, U.S. Department of Justice, Tax Division, Washington, DC, for the United States.

Christopher S. Ciaccio, Rochester, NY, Arnold R. Petralia, Petralia, Webb & O'Connell, P.C., Rochester, NY, for Kelly M. McCombs.

Michael J. Mazzullo, Rochester, NY, Arnold R. Petralia, Petralia, Webb & O'Connell, Rochester, NY, for Robert J. McCombs.

Arnold R. Petralia, Petralia, Webb & O'Connell, Rochester, NY, for Nancy McCombs Ellison, John Ellison, Federal Savings Columbia Banking.

Christopher S. Ciaccio, Rochester, NY, Michael J. Mazzullo, Rochester, NY, Arnold R. Petralia, Petralia, Webb & O'Connell, Rochester, NY, for Mary McCombs.

Peter A. Sparagna, Office of the New York State Attorney General, Department of Law, Albany, NY, Arnold R. Petralia, Petralia, Webb & O'Connell, Rochester, NY, for the State of New York.

DECISION AND ORDER

FISHER, United States Magistrate Judge.

This matter is before the court on remand from the Second Circuit Court of Appeals, United States v. McCombs, 30 F.3d 310 (2d Cir.1994), to consider the validity and priority of two federal tax liens as against transferees of the taxpayer's property. The two main issues to be resolved on remand involve the two federal tax liens against defendant Nancy McCombs-Ellison's former property at 74 Meadow Creek Lane, Monroe County, New York.

ISSUES

1. 1982 tax lien — Whether the government's 1982 tax lien on Nancy McCombs-Ellison's property is invalid against defendants Kelly McCombs and Mary McCombs (Nancy's daughters), subsequent transferees of the property, as "purchasers" under 26 U.S.C. § 6323(a), where the consideration in the form of an assumption of the outstanding balance of two mortgages worth $57,797.94 was given for property worth $85,657; and,

2. 1984 tax lien — Whether the government can validate its 1984 tax lien on Nancy McCombs-Ellison's former property by avoiding the 1982 transfer of the property to her daughters as a fraudulent conveyance under New York Debtor and Creditor Law §§ 273 and 276.

INTRODUCTION

In a complaint filed November 24, 1987, the government sought a declaration of the validity of federal tax liens it had filed against the property of defendant Nancy McCombs-Ellison (Nancy), and an avoidance of the transfer of her property to her daughters, defendant Kelly McCombs (Kelly) and defendant Mary McCombs (Mary). It also sought foreclosure on these liens, and sale of the property to satisfy the liens. The matter was tried before the undersigned on March 19, 1992, pursuant to 28 U.S.C. § 636(c) upon consent of the parties and by order of District Court Judge David G. Larimer, date February 28, 1992. This court issued a judgment finding that Nancy was liable for unpaid withholding taxes, and that the federal tax liens on Nancy's former property were prior to the interests of defendants Kelly, Mary, and defendant Robert McCombs (Robert), a mortgagee of Kelly's and Mary's interest in the property. This court also ordered a foreclosure sale of Nancy's former property to satisfy the tax liens. United States v. McCombs-Ellison, 826 F.Supp. 1479 (W.D.N.Y.1993).

Defendants appealed. The Court of Appeals affirmed that part of the judgment imposing taxpayer liability on Nancy and the validity of the 1982 tax lien thereunder; vacated the judgment setting aside the conveyance of property from Nancy to Kelly and Mary as fraudulent under New York Debtor and Creditor Law §§ 273 and 276 and the foreclosing of the 1982 and 1984 tax liens, and remanded for further proceedings; and reversed the judgment determining that the federal tax liens were prior to Robert's mortgage interest on the property. Following this ruling, the government petitioned the Court of Appeals for a rehearing. This petition was denied by the Court of Appeals by order dated October 3, 1994. See United States v. McCombs, 30 F.3d 310 (2d Cir. 1994).

BACKGROUND
I. Findings of Fact

The following findings of fact are applicable to this disposition on remand. These are findings of fact the court made at trial in accordance with Fed.R.Civ.P. 52(a), and as corrected by the Second Circuit Court of Appeals.

In 1962, Robert and Nancy purchased property at 74 Meadow Creek Lane (Property) in Monroe County, New York. Nancy and Robert, who were legally married at the time, financed the purchase of the Property by giving a $30,000 mortgage to Columbia Banking, Saving and Loan Association (Columbia Bank). The couple divorced and Robert conveyed his interest in the property to Nancy by quit claim deed in 1978.

In 1979, Nancy entered into a restaurant business venture with Jon Ellison (Ellison). They formed two business entities, Spinnaker Pole Corporation (Spinnaker Pole), and another entitled The Port and Starboard (P & S). Nancy and Ellison purchased a restaurant, through P & S, on May 14, 1979 and leased it to Spinnaker Pole which ran the restaurant. P & S made a cash down payment and gave a purchase money mortgage to the sellers of the restaurant. Nancy helped finance this purchase with $50,000 she obtained by giving a second mortgage on the Property to Marine Midland Bank (Marine Midland).

In 1981, the sellers of the restaurant foreclosed on the mortgage from P & S. Shortly thereafter, Nancy and Ellison's two business entities filed for bankruptcy. Furthermore, Spinnaker Pole had failed to pay withholding and unemployment taxes for restaurant employees. This resulted in an assessment of tax liability by the Internal Revenue Service (IRS). On June 14, 1982, the IRS assessed liability of $26,925.79 (1982 tax lien) against Nancy and Ellison for unpaid taxes.1

On September 15, 1982, Nancy conveyed the Property at 74 Meadow Creek Lane to her daughters, Kelly and Mary, by warranty deed. The deed was recorded in the Monroe County Clerk's Office on September 16, 1982. As consideration for the conveyance, Kelly and Mary assumed the outstanding principal on both the Columbia Banking and Marine Midland mortgages in the amount of $10,469.29, and $47,328.65, respectively. No other consideration was recited in the deed.2 This conveyance took place eight days after an IRS agent allegedly left a "calling card" at Nancy's house. On September 22, 1982, a notice of federal tax lien on the Property for the 1982 assessment was filed in the Monroe County Clerk's Office.

On April 16, 1984, the IRS issued another assessment of tax liability against Nancy and Ellison in the amount of $3,091.28 (1984 tax lien). This assessment was for other unpaid withholding taxes incurred by Spinnaker Pole. On June 21, 1984, the government filed notice of its tax lien on the Property in the Monroe County Clerk's Office.

In November, 1984, Kelly and Mary borrowed $53,000 from their father Robert, and gave him a mortgage on the Property for that amount in return. This money was used to pay off the Marine Midland mortgage on the Property. The mortgage was recorded in the Monroe County Clerk's Office on January 24, 1985. As of July 10, 1985, Kelly and Mary had paid down the outstanding balance on the Columbia Bank mortgage by $6,000.

II. Procedural Posture

The government filed its complaint on November 24, 1987 against Nancy, Ellison, Kelly, Mary, Robert and Columbia Bank.3 It sought the following relief:

(1) Declare the federal tax liens assessed against all property and rights to property of defendant Nancy McCombs-Ellison valid;
(2) Enter judgment for the plaintiff against Nancy McCombs-Ellison in the amount of $30,035.07 plus interest from the date of assessment;
(3) Set aside a transfer to defendants Kelly and Mary McCombs of property located at 74 Meadow Creek Lane, Rochester, New York, as fraudulent;
(4) Order that the federal tax liens on the property, located at 74 Meadow Creek Lane, Rochester, New York, be foreclosed and the property sold free and clear of titles, liens, claims or interests of any defendants.

In support of its claims, the government argued, inter alia, that its two tax liens on the Property were valid and prior to the interests of Kelly and Mary. With respect to its 1982 tax lien it maintained that although Kelly and Mary received transfer of the property from Nancy and recorded the deed before the government recorded its tax lien on the property, the government had a priority interest in the property because the tax lien attached to the property before the conveyance to Kelly and Mary took place, and Kelly and Mary were not "purchasers" under 26 U.S.C. section 6323(a). See, United States v. McCombs, 30 F.3d at 321-22. In its argument to enforce the 1984 tax lien, the government sought to set aside the entire 1982 conveyance from Nancy to her daughters as fraudulent under New York law. Nancy did not own the Property at the time of the 1984 tax assessment. With the conveyance set aside, the Property would have still belonged to Nancy at the time of the 1984 assessment, and the federal tax lien could have attached to it. Id. 30 F.3d at 322.

A bench trial on this matter was conducted on March 19, 1992. As evidence at trial, the government submitted 23 documents. The defendants stipulated that 22 of these exhibits should be entered, and reserved the right to impeach them during cross-examination of government witnesses. Unexpectedly, the government rested its case without calling any witnesses. Thus, defendants were not able to exercise their strategy of impeaching the evidence.

After the government rested its case, the defendants moved for "summary judgment," and in the alternative, moved to dismiss the complaint on the basis that the government did not establish its claims of Nancy's tax...

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