Xemas, Inc. v. US

• Decision Date: 24 March 1988
• Docket Number: Civ. No. 6-86-1077.
• Citation: 689 F. Supp. 917
• Parties: XEMAS, INC. Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Minnesota

689 F. Supp. 917

XEMAS, INC. Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 6-86-1077.

United States District Court, D. Minnesota, Sixth Division.

March 24, 1988.

John Mack, New London, Minn., for plaintiff.

Thomas D. Sykes, U.S. Dept. of Justice, Washington D.C., for defendant.

MEMORANDUM FINDINGS AND ORDER

DEVITT, District Judge.

In this action brought under 26 U.S.C. § 7426, plaintiff claims the United States wrongfully levied and foreclosed on certain Stearns County Minnesota property, title to which was then recorded in its name, and seeks return of the property. Defendant denies the claim and asserts it properly foreclosed its federal tax lien on the property pursuant to 26 U.S.C. § 6331 et seq. in satisfaction of delinquent federal taxes due from Roman and Imelda Spaeth who were the actual owners of the property within the meaning of § 6331(a).

The issue is whether the attempted serial transfer of title to the property from the Spaeths to "Joan Noske, as trustee of Chapter 7024 of Basic Bible Church of America", and later to "BBCA, Inc." and later to "Xemas, Inc.", the plaintiff, was a sham, lacking economic reality, and an attempt to defraud the United States as a creditor.

Trial was held March 14, 15, 16 and 18, 1988. Sixteen witnesses testified. All exhibits listed on the parties exhibit lists were received. Briefs and proposed Findings of Fact and Conclusions of Law have been lodged.

The Court is fully satisfied that the Government's seizure of the property was not wrongful and that the series of attempted transfers of title was a sham, devoid of economic substance and a contrived device to defraud the United States of its claim upon the property of the taxpayers. This conclusion is supported by detailed findings later to be stated.

The facts which unfold from the witnesses, 150 exhibits and the files of the U.S. District Court for the District of Minnesota of which we take judicial notice, are of an attempt by a group of tax protester residents of Stearns County Minnesota to frustrate the Government in its attempt to satisfy its lien on a delinquent taxpayer's real property in Richmond, Minnesota. This was sought to be achieved by the taxpayers, Roman and Imelda Spaeth, aided and directed by fellow protestors Joan and James Noske and others, by creating dummy entities basically operated by underlings whom they controlled and by passing title to the Spaeth property on to those entities. Xemas, Inc., plaintiff herein, acquired title to the property on November 28, 1984.

The evidence shows that the principal participants in executing the scheme were Imelda Spaeth and Joan and James Noske. Imelda Spaeth is a housewife. (Roman Spaeth, husband of Imelda, was just painted on the scene. He testified he didn't really understand what was going on. In essence, he said he did what his wife told him to do.) Joan and James Noske, sister and brother, are college educated and have long engaged in real estate and tax work. The evidence showed that neither one has filed an income tax return since 1977. Joan Noske received a B.S. degree in business administration from St. Cloud State University in 1976 and has long practiced her accounting profession. She said she passed her CPA examinations and very shortly will receive her license in the mail.

Her brother, James Noske, has been a licensed real estate broker since 1972 and holds an MBA degree from St. Cloud State University. He said he is a third year law student at William Mitchell College of Law, St. Paul. He held the title of "Reverend" in Basic Bible Church of America, Chapter 7024. James Noske drafted the purported conveyance from the Spaeths to that entity in 1978.

The Noskes, Joan and James, both testified. They denied participation in any wrongdoing of any kind. Each was generally evasive in giving answers to key questions as to their apparent participation in the scheme. A strong showing of their involvement, however, came from other, highly credibly evidence.

A precis of the testimony of two witnesses, Daniel Strohmeier and Mary Heid, is significant in punctuating the deception orchestrated by Imelda Spaeth and the Noskes.

Strohmeier was a handyman for the Noskes for about 12 years. He did painting and ran errands. He had a limited education. He said he had a drinking problem for years and was in treatment centers for chemical dependency about 10 times. He said he had 2 oz. of blackberry brandy before 7:00 a.m. the morning he testified. He was competent.

Strohmeier testified the Noskes put him on as President of Xemas, Inc., when it was formed in October, 1984 and that he held that title till August, 1987, when he got fed up and quit. The Noskes also put his girlfriend, Mary Heid, on as Vice-President of Xemas, Inc. Strohmeier testified he did not actually run the affairs of Xemas, Inc. but only signed documents ("hundreds of them") when told to do so by the Noskes. He said he never attended any Xemas meetings and paid nothing for stock in the company. He said it was "all Greek to him" and that he "didn't know what was going on".

Similar testimony was offered by Mary Heid, live-in girlfriend of Strohmeier. The Noskes put her on as Vice-President and Financial Officer of Xemas, Inc. She paid nothing for stock and really didn't know what Xemas "was all about." She signed her name hundreds of times whenever Danny Strohmeier or the Noskes told her to do so.

The testimony of Strohmeier and Heid was very credible. It was convincing that Xemas, Inc. was just a dummy corporation controlled and directed by the Noskes and Imelda Spaeth for an improper tax avoidance purpose.

In response to the direction of Civil Rule 52, the court makes these additional, and more specific, findings:

1. The property at issue is a parcel of real estate, on which sits a single-family, three-bedroom, ranch-style home located in Richmond, Minnesota, legally described as:

The South Seventy-two (72) feet of Lots Four (4), Five (5), and Six (6), Block Three (3) of Ahmann's Addition to the Village of Richmond, according to the plat and survey thereof on file and of record in the office of the County Recorder in and for Stearns County, Minnesota.

The property was seized by the Internal Revenue Service on July 9, 1986, pursuant to a Notice of Seizure (Form 2433) served on that date.

2. Plaintiff Xemas, Inc. is a Minnesota corporation formed October 24, 1984. At the time of the Service's seizure of the property, Xemas held record title to the property under a purported warranty deed dated November 28, 1984.

3. Roman and Imelda Spaeth are husband and wife, residing in Richmond, Minnesota. They held title to the property involved from the 1962 until December 28, 1978, when they executed a warranty deed conveying the property to Joan Noske as Trustee of Chapter 7024 of the Basic Bible Church of America, an unincorporated association. The deed was recorded with the Stearns County Recorder's Office on January 26, 1979.

4. James and Joan Noske are brother and sister. They have resided at all pertinent times in Richmond, Minnesota, with their mother, Esther Noske.

5. Joan Noske as Trustee of Chapter 7024 of the Basic Bible Church of America (hereinafter "Chapter 7024") conveyed the property to BBCA, Inc. by a quitclaim deed dated December 30, 1980. It was recorded January 27, 1981. BBCA, Inc. is a Minnesota corporation organized on or about November 20, 1980.

6. BBCA, Inc. conveyed title to the property to Xemas, Inc. by a warranty deed dated November 28, 1984.

7. On July 14, 1980, the U.S. Government, through the Internal Revenue Service, assessed $3,380.39 in federal income taxes against Roman and Imelda Spaeth for 1977; a notice of lien reflecting this assessment was filed with the Stearns County Recorder on August 31, 1981, reflecting that they owed that amount, plus interest. On September 18, 1984, the Internal Revenue Service caused to be filed with the Stearns County Recorder another notice of lien asserting that all property and rights to property belonging to BBCA, Inc. as the nominee of Roman and Imelda Spaeth were subject to that tax lien.

8. On February 27, 1985, the Service made assessments totaling $16,560.60 against Roman Spaeth for federal income taxes for the years 1978-82. A notice of lien reflecting those assessments was filed with the Stearns County Recorder on May 8, 1985. On July 25, 1985, another notice of lien was filed with the Recorder, asserting that all property and rights to property belonging to BBCA, Inc. as the nominee of Roman Spaeth were subject to that tax lien.

9. On February 11, 1986, the Service made assessments against Imelda Spaeth for federal income taxes for the years 1978-81; the assessments totalled $29,788.69. A notice of lien reflecting the assessments was filed with the Recorder on July 9, 1986. Another notice of lien was filed with the Recorder on that same date, asserting that property and rights to property belonging to BBCA, Inc. as the nominee of Imelda Spaeth were subject to that tax lien.

10. As early as December, 1977, the Spaeths began engaging in activities intended to prevent the collection of federal income taxes that were and would be properly due from them. These activities included special arrangements by Mrs. Spaeth with the veterinary clinic where she worked as a bookkeeper. At first these arrangements provided that her paychecks during the years 1978 through 1980 were to be paid to Chapter 7991 of the Basic Bible Church of America. Later arrangements provided that her paychecks for 1981 through the present were to be paid to BBCA, Inc. These arrangements also permitted Mrs. Spaeth to avoid having taxes withheld from paychecks.

11. Mission, Inc. is a South Dakota corporation formed in August, 1981. Its primary activity was to provide a cover for a bank account that Joan and James Noske used to facilitate transactions related to their business ventures which included promoting illegal,...