Opinion
No. 02 CV 6774 (NG)
April 9, 2004
REPORT AND RECOMMENDATION
On December 30, 2002, the United States filed this action against defendant Grantley E. Crichlow, pursuant to 26 U.S.C. § 7401, seeking to reduce to judgment defendant's outstanding liabilities for federal internal revenue taxes, plus statutory accruals. By Notice of Motion dated April 9, 2003, plaintiff moves for entry of a default judgment against defendant Crichlow for failure to answer or otherwise respond to the Complaint.
The motion was referred to the undersigned to prepare a Report and Recommendation.
FACTUAL BACKGROUND
According to the Complaint, Grantley E. Crichlow, who resides in Brooklyn, New York, filed his federal income tax returns for the tax years 1981, 1982, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1994, 1995, 1996, but failed to pay the amounts owed in full. (Compl. ¶¶ 2, 3). The Secretary of the Treasury has calculated the amount of unpaid taxes due and owing to be $143,336.82. (Cirenza Decl. ¶ 7). Penalties and interest on this amount have been calculated as $633,459.78 through December 31, 2002. (Id.) Together, with interest and penalties, the government alleges that defendant owes a total of $776,796.60 in unpaid taxes, interest and penalties up to December 31, 2002.
Citations to "Cirenza Decl." refer to Plaintiff's Amended Declaration of Bartholomew Cirenza, dated March 8, 2004.
These figures are based on the numbers set forth in a chart in plaintiff's Complaint. (Compl. ¶ 3). However, the Complaint lists the total amounts owed as $777,982.23. (Id.) This appears to be an error in computation. (Cirenza Decl. ¶ 7).
Plaintiff alleges that defendant was sent notices of assessment and demands for payment for each of the amounts, but defendant has nevertheless refused to, failed to, or neglected to pay.
Plaintiff thereafter commenced this action and served the Complaint on defendant on February 3, 2003. Defendant failed to answer or otherwise respond. (Cirenza Decl. ¶ 3).
On April 10, 2003, the Clerk of Court entered a default against defendant. Plaintiff now seeks a default judgment in the amount of $776,796.60.
DEFAULT JUDGMENT
Rule 55(a) of the Federal Rules of Civil Procedure provides: "[w]hen a party against whom a judgment for affirmative relief is sought failed to plead or otherwise defend as provided by these rules and the fact is made to appear by affidavit or otherwise, the clerk shall enter the party's default." Fed.R.Civ.P. 55(a). After a default has been entered against a party, if that party fails to appear or otherwise move to set aside the default pursuant to Rule 55(c), a default judgment may be entered. See Fed.R.Civ.P. 55(b).
In determining whether a default judgment should enter, courts have cautioned that a default judgment is an extreme remedy that should only be granted as a last resort. See Meehan v. Snow, 652 F.2d 274, 277 (2d Cir. 1981). While the Second Circuit has recognized the "push on a trial court to dispose of cases that, in disregard of the rules, are not processed expeditiously [and] . . . delay and clog its calendar," it has held that the district court must balance that interest with its responsibility to "[afford] litigants a reasonable chance to be heard." See Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95-96 (2d Cir. 1993).
A. Service
Before determining whether a default should enter here, the court must first ascertain that the defaulting party has been properly served with the summons and complaint. See Copelco Capital, Inc. v. Gen. Consul of Bolivia, 940 F. Supp. 93, 94 (S.D.N.Y. 1996) (holding that "[a] court may not properly enter a default judgment unless it has jurisdiction over the person of the party against whom the judgment is sought, 'which also means that he must have been effectively served with process'") (quoting 10 Charles Alan Wright, Arthur R. Miller, Mary Kay Kane,Federal Practice Procedure: Civil 2d § 2682, at 407 (1983)).
As the Supreme Court noted in Henderson v. United States, "the core function of service is to supply notice of the pendency of a legal action, in a manner and at a time that affords the defendant a fair opportunity to answer the complaint and present defenses and objection." 517 U.S. 654, 672 (1996). In following the Supreme Court's definition of acceptable service, the Second Circuit has held that there must be service "reasonably calculated to provide actual notice of the action." Nat'l Dev. Co. v. Triad Holding Corp., 930 F.2d 253, 258 (2d Cir. 1991),cert. denied, 502 U.S. 968 (1991). If a defendant does not receive service in compliance with Rule 4 of the Federal Rules of Civil Procedure, and does not waive formal service, the court lacks personal jurisdiction over the defendant. See Jackson v. Hayakawa, 682 F.2d 1344, 1347 (9th Cir. 1982). "Neither actual notice, nor simply naming the person in the caption of the complaint will subject defendant to personal jurisdiction if service was not made in substantial compliance with Rule 4." Id. (citations omitted).
Service of process in federal actions is governed by Rule 4 of the Federal Rules of Civil Procedure, which provides in relevant part as follows:
Service upon an individual . . . may be effected in any judicial district of the United States: (1) pursuant to the law of the state in which the district court is located, or in which service is effected, for the service of a summons upon the defendant in an action brought in the courts of general jurisdiction of that State; or (2) by delivering a copy of the summons and of the complaint to the individual personally or by leaving copies thereof at the individual's dwelling house or usual place of abode with some person of suitable age and discretion then residing therein. . . .
Fed.R.Civ.P. 4(e). Looking to the relevant state law, service of process may be made under New York C.P.L.R. § 308,
2. by delivering the summons within the state to a person of suitable age and discretion at the actual place of business, dwelling place or usual place of abode of the person to be served and by mailing the summons to the person to be served at his or her last known residence. . . .
N.Y.C.P.L.R. § 308(2) (McKinney 1990). It is well-established that the "plaintiff has the burden of proving, by a preponderance of the credible evidence, that service was properly made" in strict accordance with Section 308(2) of the C.P.L.R. McCray v. Petrini, 212 A.D.2d 676, 622 N.Y.S.2d 815, 816 (2d Dep't 1995);see also Rates Tech., Inc. v. UTT Corp., No. 94 CV 0326, 1995 WL 86264, at *1 (S.D.N.Y. Mar. 2, 1995).
Here, service was made at the defendant's residence 13 Elliot Place, Brooklyn, N.Y. 11217. Since service has been properly effected, sufficient to confer jurisdiction over the defendant, this Court next considers whether the facts alleged in the Complaint state a valid cause of action.
B. Tax Delinquency Actions
It is clear that the federal government may commence an action in federal court to collect unpaid federal taxes. 26 U.S.C. § 7401. See United States v. Alfano, 34 F. Supp.2d 827, 836 (E.D.N.Y. 1999); see also Beeler v. United States, 894 F. Supp. 761, 772 (S.D.N.Y. 1995); United States v. Atlantic Richfield Co., No. 72 CV 523, 1973 U.S. Dist. LEXIS 13831, *2 (E.D. Pa. Apr. 30, 1973). It is equally clear that the government may seek to recover not only delinquent tax obligations but statutory interest and penalties when the taxes are not timely paid. See United States v. Letscher, 83 F. Supp.2d 367, 374 (S.D.N.Y. 1999); Powers v. Karen, 768 F. Supp. 46, 48 (E.D.N.Y. 1997); United States v. Bynum, No. 73 CV 232, 1975 U.S. Dist. LEXIS 11918, at *5-6 (E.D.N.Y. June 13, 1975).
The statute of limitations that governs the collection of federal income taxes is set forth in 26 U.S.C. § 6501, which provides that "the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed." 26 U.S.C. § 6501(a). Section 6502(a) of Title 26 which was in effect at the time this action was filed further provides that:
(a) Length of Period — Where the assessment of any tax imposed by this title has been made within the period limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun
(1) with 10 years after assessment of the tax, or
(2) Prior Request — If, in any request to extend the period of limitations made on or before December 31, 1999, a taxpayer agreed to extend such period beyond the 10-year period referred to in section 6502(a) of the Internal Revenue Code of 1986, such extension shall expire on the latest of
(A) the last day of such 10-year period;
(B) December 31, 2002; or
(C) in the case of an extension in connection with an installment agreement, the 90th day after the end of the period of such extension.
Here, the Complaint alleges that the taxes owed by defendant were assessed and notices were sent to him at some time in the year following each year in which taxes were determined to be owing and well within the three year assessment period set forth in subsection (a) of Section 6501. In addition, the government has submitted several Tax Collection Waivers, Form 900, which were signed by defendant agreeing to extend the 10 year statutory period in which the government may collect taxes assessed against him.
Specifically, on February 3, 1988, defendant executed a Form 900 extending until December 31, 1999 the 10 year statutory period for collection of the taxes assessed against him for the years 1981, 1982, and 1984. (Pl.'s Mem. at 1). A second waiver was executed by defendant on November 6, 1995 extending the period through December 31, 2005 for the collection of taxes assessed for the years 1981 through 1982 and 1984 through 1991. (Id.) Under 26 U.S.C. § 6502(a), that agreed-upon extension of time was shortened by three years to December 31, 2002. Since this action was commenced to collect the taxes on December 30, 2002, within the agreed-upon period of extension, the action was timely failed and the Complaint on its face states a valid cause of action.
According to the government's Memorandum of Law ("Pl.'s Mem.") filed March 22, 2004, the period was also extended for the year 1983, but the government is not making a claim for that year. (Pl.'s Mem. at 2 n. 1).
When a default judgment is entered, the defendant is deemed to have admitted all of the well-pleaded factual allegations in the complaint pertaining to liability. See Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992),cert. denied, 506 U.S. 1080 (1993). For the purposes of an inquest, a court accepts as true all factual allegations in the Complaint, except those claims relating to damages. See Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981).
Since defendant has failed to appear and contest the allegations in the Complaint, the Court finds, for purposes of this default motion, that defendant has failed to fully pay taxes in each of the tax years 1981, 1982, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1994, 1995, and 1996.
DEFAULT DAMAGES
A) Basis for Default Judgment Damages
It is well-settled that the burden is on the plaintiff to establish its entitlement to recovery. See Clague v. Bednarski, 105 F.R.D. 552 (E.D.N.Y. 1985). Although here the defendant has failed to contest the plaintiff's claim for damages, this Court must still determine that there is a basis for the damages sought. Indeed, where a default judgment has been entered, the courts require the plaintiff to prove damages in an evidentiary proceeding at which the defendant has the opportunity to contest the claimed damages. See Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty, Corp., 973 F.2d at 158; see also Levesque v. Kelly Communications, Inc., No. 91 CV 7045, 1993 WL 22113, at *4 (S.D.N.Y. 1993) (noting that "'[w]hile a default judgment constitutes an admission of liability, the quantum of damages remains to be established by proof unless the amount is liquidated or susceptible of mathematical computation'") (quoting Flaks v. Koegel, 504 F.2d 702, 707 (2d Cir. 1974)).
While "the court must ensure that there is a basis for the damages specified in a default judgment, it may, but need not, make the determination through a hearing." Fustok v. Conticommodity Servs., Inc., 122 F.R.D. 151, 156 (S.D.N.Y. 1988), aff'd, 873 F.2d 38 (2d Cir. 1989) (citing Transportes Aereos De Angola v. Jet Traders Inv. Corp., 624 F. Supp. 264, 266 (D. Del. 1985)). Where, as here, the defendant has defaulted on liability, the Court still must assess the damages and hold an evidentiary hearing, if necessary. However, where the plaintiff has filed reasonably detailed affidavits and exhibits pertaining to the damages incurred and where the defendants has failed to submit papers on the damages issue, the Court can make an informed decision regarding damages without an evidentiary hearing.
In seeking the entry of an order of default judgment from the Court, the government has set forth in the amended affidavit of Mr. Cirenza, dated March 8, 2004, a chart detailing the unpaid tax assessments, plus interest and penalties, for each year in which defendant has failed to pay taxes. Mr. Crichlow has not contested any of these numbers. It is well established that "[w]ith the exception of civil fraud penalty assessments, an IRS notice of tax deficiency is presumed to be correct." United States v. Letscher, 83 F. Supp.2d at 372 (citing cases); see also United States v. Lease, 346 F.2d 696 (2d Cir. 1965). The taxpayer has the burden of providing by a preponderance of the evidence that the deficiency is incorrect. See Fustok v. Conticommodity Servs., Inc., 122 F.R.D. at 156; see also Moretti v. Comm'r of Internal Revenue, 77 F.3d 637, 643 (2d Cir. 1996). In this case, the IRS sent notices of tax deficiencies to Mr. Crichlow, setting forth the amounts due and owing for each of the tax years 1981, 1982, 1984-1991, 1994-1996. Thus, where, as here, the defendant has failed to respond to the Complaint and has not challenged the alleged deficiencies, the Court finds that the amounts of tax deficiencies asserted by the plaintiff to be due and owing are presumed to correct.
With respect to the civil fraud penalties sought by the government, "they 'can be imposed if the Commissioner proves by clear and convincing evidence that [the] taxpayer acted with an intent to evade paying taxes.'" United States v. Letscher, 83 F. Supp.2d at 373 (quoting Schiff v. United States, 919 F.2d 830, 832 (2d Cir. 1990)). Circumstantial evidence, including "consistent and substantial understatement of income," or an "awareness of the obligation to file returns, report income and pay taxes," has been found sufficient to support the imposition of penalties. Id. Here, the government has alleged that Mr. Crichlow was aware of his obligation to pay taxes as demonstrated by the fact that he filed returns for all 13 years of delinquency, received notices of the delinquencies, and even executed waivers extending the period of collection. In the absence of any objections to the penalties or explanation from the taxpayer as to why payment was not tendered, the Court finds the government's undisputed allegations sufficient to warrant imposition of penalties in this case.
Accordingly, having reviewed the declaration of Mr. Cirenza, dated March 8, 2004, the Court respectfully recommends that a default judgment in the amount of $776,796.60 be entered against defendant Grantley E. Crichlow.
Any objections to this Report and Recommendation must be filed with the Clerk of the Court, with a copy to the undersigned, within ten (10) days of receipt of this Report. Failure to file objections within the specified time waives the right to appeal the District Court's Order. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(e), 72; Small v. Secretary of Health and Human Servs., 892 F.2d 15, 16 (2d Cir. 1989).
The Clerk is directed to mail copies of this Report and Recommendation to the parties.