Opinion
Civil No. 99-00817SOM-FIY
October 6, 2000
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER AND DECREE OF FORECLOSURE
This is an action by Plaintiff United States of America to reduce to judgment the outstanding federal income tax liabilities assessed against Melville Turner and Letitia Turner (the "Turners") and to foreclose tax liens against a parcel of real property, title to which the Turners transferred to the Ruth Realty Trust, Michael L. Kailing, trustee. On February 8, 2000, the Turners filed a motion to dismiss the Complaint arguing that they are not "persons" subject to the Internal Revenue Code, and consequently, should not be liable for the income tax assessments made against them. On March 10, 2000, the Court rejected this argument and denied the Turners' motion to dismiss.
On April 27, 2000, Magistrate Judge Yamashita issued Findings and Recommendation that the Court grant the United States' Motion for Default Judgment Against Defendant against Michael L. Kailing, trustee/agent of Executive Trust, trustee of Ruth Realty Trust. The Findings and Recommendation specifically found "that the Ruth Realty Trust has no interest in the real property described in paragraph 10 of the Plaintiff's Complaint." On June 22, 2000, the Court filed an order adopting the Findings and Recommendation.
On July 7, 2000, the Turners filed an Answer and Verified Counterclaim. On August 4, 2000, the United States answered the Turner's Counterclaim and filed a motion for summary judgment against Melville Turner and Letitia Turner seeking: (1) a judgment against each of the Turners for the unpaid income tax assessments, plus penalties and interest, made against each of them for the years 1988 through 1993, as recalculated; (2) a judgment providing that the federal tax liens of the United States be foreclosed upon the parcel of real property described in paragraph 10 of the First Amended Complaint ("Complaint"), that the property be ordered sold by a court-appointed Commissioner at a judicial sale, that the proceeds thereof be first applied to the costs of such sale and that the balance of such proceeds of sale be distributed to the United States and the Hawaii State Employees Federal Credit Union according to their relative priorities; and (3) a judgment dismissing the Turner's counterclaim.
Because the United States showed a right to the relief sought in its motion and because the Turners presented neither law nor facts showing otherwise, the Court, by Order filed September 25, 2000, granted the United States summary judgment against the Turners on the First Amended Complaint and dismissed the Turners' Counterclaim. Each of the Turners' arguments in opposition to the motion are addressed in the September 25, 2000, Order. For the reasons set forth below, this Court also orders that the parcel of real property in issue be foreclosed upon.
FINDINGS OF FACT
1. A delegate of the Secretary of the Treasury made assessments against the taxpayer, Melville K. Turner, for unpaid federal income taxes (Form 1040 taxes) for the tax years 1988, 1989, 1990, 1991, 1992, and 1993 as set forth in paragraph 13 of the Complaint.
2. Notice and demand for payment of the assessments described in paragraph 1, above, was made upon the taxpayer, Melville K. Turner. Despite notice and demand for payment, the taxpayer, Melville K. Turner, neglected, failed and/or refused to fully pay the amounts set forth in paragraph 1, above.
3. A delegate of the Secretary of the Treasury made assessments against the taxpayer, Letitia Y. Turner, for unpaid federal income taxes (Form 1040 taxes) for the tax years 1988, 1989, 1990, 1991, 1992, and 1993 as set forth in paragraph 17 of the Complaint.
4. Notice and demand for payment of the assessments described in paragraph 3, above, was made upon the taxpayer, Letitia Y. Turner. Despite notice and demand for payment, the taxpayer, Letitia Y. Turner, neglected, failed and/or refused to fully pay the amounts set forth in paragraph 3, above.
5. For each of the years for which a judgment is sought against Melville K. Turner and Letitia Y. Turner as described in paragraphs 1 and 3 above, neither taxpayer filed a federal individual income tax return. Consequently, the Internal Revenue Service prepared substitute for returns for each of the taxpayers pursuant to 26 U.S.C. § 6020 (b).
6. During the years 1988-1993, the Turners jointly owned various business enterprises and failed to report on a filed income tax return the income generated by these business enterprises. The Turners also owned real property and received rental. income during 1989 and 1990. To protect the federal revenues, the gross receipts from the businesses and the rental income were included in the gross income of both Letitia Turner and Melville Turner.
7. The amount of gross receipts from the various businesses described in paragraph 6, above, for each taxable year was arrived at by reviewing the deposits made in the Turners' various bank accounts for each year and subtracting therefrom income amounts which could be attributed specifically to either Melville Turner or Letitia Turner.
8. The amount of gross receipts determined to be attributed to the various business enterprises conducted by the Turners for the years 1988 through 1993 was $230,684.00 for 1998, $196,649.00 for 1989, $240,378.00 for 1990, $293,065.00 for 1991, $262,043.00 for 1992 and $305,167.00 for 1993. The amount of rental income received by the Turners was determined to be $6,300.00 for 1989 and $3,000.00 for 1990.
9. A review of the administrative file establishes that one-half of the income from the various business enterprises conducted by the Turners and one-half of the rental income should be attributed each to Melville Turner and Letitia Turner as they were both involved in the various business enterprises and rental activity.
10. The amount of income tax assessed Melville Turner and Letitia Turner for the years 1988 through 1993 has been recalculated to include in each Turner's taxable income only one-half of the gross receipts from the various business enterprises and one-half of the rental income. In addition, any amounts collected by the IRS through administrative levies have been credited one-half each to Letitia Turner and Melville Turner.
11. After the adjustments described in paragraph 10 above, the revised taxable income of Meville K. Turner for the years 1988 through 1993 is $171,727.00 for 1988, $122,766.00 for 1989, $112,992.00 for 1990, $141,686.00 for 1991, $122,279.00 for 1992 and $143,957.00 for 1993.
12. After the adjustments described in paragraph 10 above, the revised taxable income of Letitia Y. Turner for the years 1988 through 1993 is $129,584.00 for 1986, $107,781.00 for 1989, $133,520.00 for 1990, $161,063.00 for 1991, $128,957.00 for 1992 and $147,443.00 for 1993.
13. There is due and owing from the taxpayer, Melville K. Turner, on the revised taxable income amounts described in paragraph 11, above, the sum of $764,045.66 as of September 25, 2000, plus further accrued statutory interest thereon as provided by law.
14. There is due and owing from the taxpayer, Letitia Y. Turner, on the revised taxable income amounts described in paragraph 12, above, the sum of $719,271.24 as of September 25, 2000, plus further accrued statutory interest thereon as provided by law.
15. The parcel of real property upon which foreclosure is sought (described in Exhibit A, attached hereto and made a part hereof) was acquired by the Turners by "Warranty Deed" dated June 14, 1985 and recorded with the State of Hawaii Bureau of Conveyances on June 19, 1985.
16. Title to the real property upon which foreclosure is sought and described in Exhibit A is in the name the Ruth Realty Trust.
CONCLUSIONS OF LAW
1. At issue is whether the United States is entitled to a judgment against each of the Turners for their unpaid income tax liabilities and whether the United States can foreclose its tax liens against the parcel of real property described in Exhibit A to, at least in part, satisfy those unpaid tax liabilities.
2. The United States seeks to reduce to judgment its income tax assessments, plus penalties and statutory interest, made against each of the Turners for the years 1988 through 1993.
3. The assessments made against the Turners are reflected on the Certificates of Assessments and Payments. The Certificates of Assessments and Payments submitted here are a proper means of establishing that assessments were properly made and that notices and demand for payment were sent. Koff v. United States, 3 F.3d 1297, 1298 (9th Cir. 1993); Hughes v. United States, 953 F.2d 531, 535 (9th Cir. 1992); United States v. Zolla, 724 F.2d 808, 810 (9th Cir. 1984).
4. An assessment for unpaid federal taxes, when properly certified, is presumptively correct evidence of a taxpayer's liability. United States v. Janis, 428 U.S. 433, 440-441 (1976). Thus, the Certificates of Assessments and Payments submitted here establish that assessments were properly made, that notice and demand for payment were sent, and that the Turners are presumptively liable for the unpaid taxes, penalties and interest shown on the Certificate as explained by the Declaration of Pat Young-Lau.
5. The burden is on the Turners to overcome the presumption. United States v. Strebler, 313 F.2d 402, 403-04 (8th Cir. 1963).
6. The Turners failed to present any evidence showing the assessments to be incorrect.
7. The United States through the Certificates of Assessments and Payments, the Declaration of Revenue Agent Pat Young-Lau and the Declaration of John Margenau has established that it is entitled to a judgment for unpaid income tax assessments against Melville Turner in the amount of $764,045.66 as of September 25, 2000, and a judgment against Letitia Turner in the amount of $719,271.24 as of September 25, 2000.
8. Title 26, U.S.C. § 6321 provides that the amount of a delinquent taxpayer's liability shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to the taxpayer. The lien arises at the time of assessment and attaches to all property of the taxpayer. United States v. McDermott, 507 U.S. 447, 452-455 (1993); Glass City Bank v. United States, 326 U.S. 265, 267-68 (1945). The tax liens of the United States are perfected upon assessment of the tax and no further action need be taken. United States v. Vermont, 377 U.S. 351 (1964).
9. Thus, pursuant to 26 U.S.C. § 6321, the United States has a lien upon the Turners' property through which to satisfy the Turners' unpaid tax obligations.
10. The Internal Revenue Code provides that the United States may foreclose its tax liens on property in which the taxpayer has any right, title or interest as the Turners have in the instant case. 26 U.S.C. § 7403. When, in a case such as this where "there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof," the United States may bring an action in Federal District Court to enforce the lien created by section 6321 or to subject any property held by the taxpayer to the payment of the tax. 26 U.S.C. § 7403 (a). Pursuant to § 7403(c), after adjudicating the merits of the United States' claim to the subject property, the District Court may decree a sale of the property and order distribution of the proceeds from that sale. 26 U.S.C. § 7403 (c); see also United States v. National Bank of Commerce, 472 U.S. 713, 720 (1985).
11. The Court concludes that the Turners are the owners of the real property upon which foreclosure is sought. The parcel of real property was acquired by the Turners by "Warranty Deed" dated June 14, 1985 and recorded with the State of Hawaii Bureau of Conveyances on June 19, 1985. The Turners then transferred title to the property to the Ruth Realty Trust. Although title to the property is nominally held in the name of the Ruth Realty Trust, this Court has ordered the entry of a default judgment against Michael L. Kailing as the agent/trustee of Executive Trust as the trustee of the Ruth Realty Trust and specifically found "that the Ruth Realty Trust has no interest in the real property described in paragraph 10 of the Plaintiff's Complaint." Thus, the Court finds that the Turners are the joint owners of the real property and the United States is entitled to foreclose its tax liens upon the property to satisfy the unpaid income liabilities of the Turners.
ORDER AND DECREE OF FORECLOSURE
It is hereby ORDERED and ADJUDGED, for the reasons stated herein and in the Court's September 25, 2000 order granting summary judgment in favor of the United States and against the Turners, and dismissing the Turners' Counterclaim, that:
1. Judgment is awarded against defendant Melville K. Turner for the unpaid income tax assessments, plus penalties and interest, made against him for the years 1988 through 1993, in the amount of $764,045.66 and for statutory interest thereon as allowed by law from September 25, 2000;
2. Judgment is awarded against defendant Letitia Y. Turner for the unpaid income tax assessments, plus penalties and interest, made against her for the years 1988 through 1993, in the amount of $719,271.24 and for statutory interest thereon as allowed by law from September 25, 2000;
3. That the federal tax liens of the United States relating to the tax liabilities described above shall be and are hereby foreclosed upon the parcel of real property described in Exhibit A, that the property be ordered sold by a court-appointed Commissioner at public auction, without an upset price, as authorized by law. Such sale of the property shall not be final until approved and confirmed by the Court.
4. The Commissioner as appointed herein by the Court shall sell the property within four months after the Commissioner is notified of this Order and Decree of Foreclosure. The Commissioner shall hold all proceeds of the sale of the property to the credit of this cause subject to the directions of this Court. Upon payment according to such directions, the Commissioner shall file an accurate accounting of Commissioner's receipts and expenses.
5. Richard Ogasawara, whose address is 1660 Hoolana Place, Pearl City, Hawaii 96782, and whose telephone number is (808) 455-1106, is hereby appointed by this Court as Commissioner, and as Commissioner shall henceforth sell the property at foreclosure sale to the highest bidder at the Commissioner's sale by public auction, without an upset price, after first giving notice of such sale by publication in at least one newspaper regularly issued and of general circulation in the District of Hawaii. Said notice shall be published once a week for at least four (4) consecutive weeks, with the auction to take place no sooner than fourteen (14) days after the appearance of the fourth advertisement. Said notice shall give the date, time, and place of the sale and an intelligible description of the property, including any improvements. The Commissioner shall have further authority to continue sale from time to time at the Commissioner's discretion. No bond shall be required of the Commissioner. In the event that the Commissioner refuses, or becomes unable, to carry out his duties set forth herein, the Court shall appoint another without further notice of hearing.
6. The Commissioner and all persons occupying the subject property shall allow reasonable access to view the subject property, a minimum of two separate days prior to the sale of the subject property, by means of an open house or other reasonable means.
7. The fee of the Commissioner shall be such as the Court deems just and reasonable. together with actual and necessary expenses incurred with the sale of the subject property.
8. The Commissioner shall hold all proceeds from the sale of the property to the credit of this cause subject to the direction of this Court. Upon payment according to such direction, the Commissioner shall file an accurate accounting of all receipts and expenses.
9. The order of distribution of the sale proceeds to the parties claiming an interest in the property shall be made in accordance with their respective priorities to be determined by the Court.
10. The sale so made and confirmed shall perpetually bar defendants herein named and all persons and parties claiming by, through or under them, except governmental authorities enforcing liens for unpaid real property taxes, and except to the extent that the Court determines Defendant Hawaii State Employees Federal Credit Union's ("Hawaii State") mortgage lien to be a valid lien senior to that of the United States, from any and all right, title and interest in the property or any part thereof. At a hearing to consider confirmation of the foreclosure sale, the Court shall hear proof of claims of any other parties, and shall determine the priority among the parties, and the final payment of the proceeds of the foreclosure sale shall be directed.
11. Plaintiff United States and all other parties are hereby authorized to purchase the property at the foreclosure sale. The successful bidder at the foreclosure sale shall be required at the time of such sale to make a down payment to the Commissioner in an amount not less than ten (10%) percent of the highest successful price bid, such payment to be in cash, certified check or cashier's check, provided that Plaintiff United States and Defendant Hawaii State, should either party be the high bidder, may satisfy the down payment by way of offset up to the amount of their secured debts. The balance of the purchase price must be paid in full at the closing of the sale, which shall take place 35 days after entry of the order confirming the sale. If the bidder fails to fulfill this requirement, the deposit shall be forfeited and applied to cover the cost of sale, including the Commissioner's fee, with any amount remaining to be returned to the bidder. Such payment is to be in cash, certified check or cashier's check, provided that Plaintiff United States and Defendant Hawaii State, should either one of them be the high bidder at the confirmation of sale, may satisfy the balance of the purchase price by way of offset up to the amount of their secured liens, as discussed above, as appropriate. Costs of conveyancing, including preparation of the conveyance document, conveying tax, securing possession of such mortgage property, escrow services, and recording of such conveyance, shall be at the expense of such purchaser.
12. Pending the sale of the properties, the Turners shall take all reasonable steps necessary to preserve the real property (including all buildings, improvements, fixtures and appurtenances on the property) in its current condition. They shall not commit waste against the properties, nor shall they cause or permit anyone else to do so. The Turners shall not do anything that tends to reduce the value or marketability of the properties, nor shall they cause or permit anyone else to do so. The Turners shall not record any instruments, publish any notice, or take any other action (such as running newspaper advertisements or posting signs) that may directly or indirectly tend to adversely affect the value of the properties or that may tend to deter or discourage potential bidders from participating in the public auction, nor shall they cause or permit anyone else to do so.
13. All persons occupying the properties shall leave and vacate the properties permanently within sixty (60) days of the date of this Decree, each taking with them their personal property (but leaving all improvements, buildings, and appurtenances to the properties). If any person fails or refuses to leave and vacate the Property by the time specified in this Decree, the Commissioner is authorized and directed to take all actions that are reasonably necessary to bring about the ejectment of those persons, including obtaining a judgment for possession and a writ of possession. If any person fails or refuses to remove his or her personal property from the premises by the time specified herein, any personal property remaining on the properties thereafter is deemed forfeited and abandoned, and the Commissioner is authorized to remove it and dispose of it in any manner the Commissioner sees fit, including sale, in which case the proceeds of the sale are to be applied first to the expenses of sale and the balance to be paid into the Court for further distribution.
14. When the sale of the properties is confirmed by this Court, the State of Hawaii, Bureau of Conveyances shall permit the transfer of the properties to be reflected upon register of the title.
15. The sale can be supplemented with the practices and procedures in the State of Hawaii and Section 667 of the Hawaii Revised Statutes.
16. The Court reserves jurisdiction to determine the party or parties to whom any surplus shall be awarded herein.
17. At the hearing on confirmation herein above mentioned, if it appears that the proceeds of such sale shall be insufficient to pay all the amounts which are valid claims against the Turners and a deficiency exists, judgment shall be entered for such deficiencies against each of the Turners and in favor of Plaintiff United States and Defendant Hawaii State, as appropriate. As the property is owned jointly by the Turners, one-half of the proceeds of sale available for distribution shall be applied to pay claims against Melville Turner and one-half of such proceeds shall be distributed to pay claims of Letitia Turner.
IT IS SO ORDERED.
EXHIBIT A
All of that certain parcel of land situate at Kalaepohaku, Honolulu, City and County of Honolulu State of Hawaii being LOT 320 of the "ST. LOUIS HEIGHTS TRACT, SERIES 3", as shown on File Plan Number 487, filed in the Bureau of Conveyances of the State of Hawaii, and containing an area of 5,460 square feet, more or less.
Together with Easement "A" for water pipeline purposes under Lot 319, as granted by Declaration of Easements dated June 6, 1985, recorded in Liber 18716 at Page 658, said Easement "A" being more particularly described as follows:
Land situate approximately 290 feet west of the intersection of Ruth Place and Peter Street at Kalaepohaku, Honolulu, City and County of Honolulu, State of Hawaii, and being a portion of Grant 224 to Kamakani.
Beginning at the south corner of this parcel of land, being, also, a point 28.50 feet from the south corner of Lot 319 of St. Louis Heights Tract, Series 3, (F.P. 487), the coordinates of which referred to Government Survey Triangulation Station "WAAHILA" being 1,704.81 feet north and 4,023.48 feet east, and running by azimuths measured clockwise from true South:
1. 120° 58' 1.50 feet along the remainder of Grant 224 to Kamakani;
2. 210° 58' 56.00 feet along the remainder of Grant 224 to Kamakani;
3. 300° 58' 1.50 feet along the remainder of Grant 224 to Kamakani;
4. 30° 58' 56.00 feet along Lot 320 of St. Louis Heights Tract, Series 3, (F.P. 487) and along the remainder of Grant 224 to Kamakani to the point of beginning and containing an area of 84 square feet, more or