TPS Try Once More

[The Observer]

One of the modus operandi of TPs is to continue trying to get multiple bites of the same apple. Here we see our plucky TP couple continue trying to argue that they don't owe taxes, that the government lost the power to collect taxes, that somehow the fact that the husband pled guilty several years earlier doesn't mean that they owe taxes.

UNITED STATES OF AMERICA,
Plaintiff,
v.
CHARLES W. LEDFORD,
INDIVIDUALLY AND AS TRUSTEE OF DOS MILAGROS TRUST II,
LORAINE LEDFORD, DOS MILAGROS TRUST II, AND PARK STATE BANK & TRUST,
Defendants.
and
TED PHILLIPS, AND CAROL PHILLIPS,
Cross Claimants,
v.
CHARLES W. LEDFORD,
INDIVIDUALLY AND AS TRUSTEE OF DOS MILAGROS TRUST II,
LORAINE LEDFORD, AND DOS MILAGROS TRUST II,
Cross Defendants.

Release Date: MARCH 30, 2012

Published by Tax Analysts(R)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO

JUDGE PHILIP A. BRIMMER

ORDER

This matter comes before the Court on the Recommendation of United States Magistrate Judge (the "Recommendation") [Docket No. 87] filed on July 13, 2011, which recommends that the Court grant the plaintiff United States' motion for summary judgment [Docket No. 56] against defendants Charles W. Ledford, Loraine Ledford, and Dos Milagros Trust II ("DMT"). This matter also comes before the Court on the motion for summary judgment or, alternatively, for default judgment [Docket No. 60] filed by cross claimants Ted Phillips and Carol Phillips.

I. BRIEF BACKGROUND

The United States initiated this action on June 10, 2010 to foreclose federal tax liens on real property located in Florissant, Colorado. The tax liens arose out of assessments against defendants Charles W. Ledford and Loraine Ledford for unpaid income taxes during numerous years between 1983 and 2002. In July 2007, the United States initiated a suit in this Court to reduce these assessments to judgment and to foreclose on certain commercial property owned by the Ledfords. See United States v. Charles Ledford, et al., Civil Action No. 07-cv-01568-WYD-KMT. Judgment entered in an amount exceeding $ 2 million against both Charles and Loraine Ledford on March 11, 2010. See Docket No. 107 in No. 07-cv-01568-WYD-KMT. The United States received partial payment on the judgment through foreclosure on the commercial property.

Through the present action, the United States seeks to foreclose on property located at 168 Fetlock Circle in Florrisant. The Ledfords purchased the parcels comprising this property in 1993 and 1994 and then, in early 2000, deeded the parcels to Dos Milagros Trust I, which then deeded the property back to the Ledfords. The Ledfords deeded the property to defendant DMT at the end of 2000, but still reside on and maintain the property. The United States also sought to foreclose on property at 95 Fetlock Circle that was previously owned by the Ledfords and which is now owned by former defendants and cross claimants Ted Phillips and Carol Phillips (the "cross claimants"). The cross claimants settled with the United States for $ 175,000 and now seek that amount from the Ledfords and DMT.

II. UNITED STATES' MOTION FOR SUMMARY JUDGMENT

The Recommendation concluded that the United States was seeking to enforce a valid tax lien against property in which the Ledfords retained an interest. The Ledfords challenge the validity of the lien, objecting to the magistrate judge's refusal to review tax returns submitted by the Ledfords in support of their argument that they did not, in fact, owe taxes. See Fed. R. Civ. P. 72(b)(3) ("The district judge must determine de novo any part of the magistrate judge's disposition that has been properly objected to."). 1 In other words, the Ledfords seek to re-litigate their underlying tax liability for the years at issue, liability that was decided against them in Civil Case No. 07-cv-01568-WYD-KMT. 2 However, "if a claim of liability or non-liability relating to a particular tax year is litigated, a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year." Commissioner of Internal Revenue Service v. Sunnen, 333 U.S. 591, 598 (1948); see United Stats v. Kitsos, 770 F.Supp. 1230, 1234 (N.D. Ill. 1991) (stating that, "[a]lthough [defendant] purports to challenge the existence of his tax liabilities here, it has been firmly established for nearly a half century that claim preclusion -- res judicata -- forecloses any such attack"). In short, the Ledfords are barred from collaterally attacking the judgment against them for unpaid taxes. Furthermore, the magistrate judge found that the Ledfords retained an interest in the real property at issue in this case. The Ledfords have interposed no objection to that conclusion, and the Court has identified "no clear error on the face of the record" in regard to that aspect of the Recommendation. 3 Therefore, the Court will accept the Recommendation and grant summary judgment to the United States and against the Ledfords. 4

As for defendant DMT, the United States contends that it is an alter ego or nominee of Mr. Ledford or received its interest in the property pursuant to a fraudulent transfer. The magistrate judge recommended that summary judgment enter against DMT, and DMT has not filed an objection. In the absence of an objection, the district court may review a magistrate judge's recommendation under any standard it deems appropriate. See Summers v. Utah, 927 F.2d 1165, 1167 (10th Cir. 1991); see also Thomas v. Arn, 474 U.S. 140, 150 (1985) ("t does not appear that Congress intended to require district court review of a magistrate's factual or legal conclusions, under a de novo or any other standard, when neither party objects to those findings"). In this matter, the Court has reviewed the Recommendation to satisfy itself that there is "no clear error on the face of the record." 5 See Fed. R. Civ. P. 72(b), Advisory Committee Notes. Based on this review, the Court has concluded that the Recommendation is a correct application of the facts and the law. Therefore, the Court will grant the United States' motion for summary judgment as to defendant DMT.

III. CROSS CLAIMANTS' MOTION FOR SUMMARY JUDGMENT

The only remaining claim is the cross-claim alleging a breach of warranty against the Ledfords and DMT. The cross claimants contend that the existence of the tax liens on the property of 95 Fetlock Circle constituted a violation of covenants contained in warranty deeds executed by the Ledfords and DMT. As a result of that violation, the cross claimaints aver that they suffered $ 175,000 in damages, the amount they paid to settle the United States' claim against them in this action. They now seek summary judgment or, alternatively, default judgment on their claim. See Docket No. 60.

The Court has exercised supplemental jurisdiction over this cross-claim pursuant to 28 U.S.C. section 1367(a), which provides that, "in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." 6 A district court, however, may decline to exercise supplemental jurisdiction when, among other reasons, it "has dismissed all claims over which it has original jurisdiction." 28 U.S.C. section 1367(c)(3).

As a general proposition, "[p]endent jurisdiction is exercised on a discretionary basis, keeping in mind considerations of judicial economy, convenience and fairness to the litigants." Bauchman v. West High School, 132 F.3d 542, 549 (10th Cir. 1997); see United International Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1220 (10th Cir. 2000) ("Once federal question jurisdiction exists, it is within the trial court's discretion to exercise supplemental jurisdiction over those state law claims that derive from a common nucleus of facts."). The cross claimants contend that the "interests of 'judicial economy, fairness, convenience and comity' weigh heavily in favor of this Court exercising supplemental jurisdiction to hear the . . . cross-claim." Docket No. 86 at 4. In the specific context of section 1367(c)(3), however, the Tenth Circuit has concluded that, "f federal claims are dismissed before trial, leaving only issues of state law, 'the federal court should decline the exercise of jurisdiction by dismissing the case without prejudice.'" Bauchman, 132 F.3d at 549 (quoting Carnegie-Mellon University v. Cohill, 484 U.S. 343, 350 (1988)); see Smith v. City of Enid ex rel. Enid City Comm'n, 149 F.3d 1151, 1156 (10th Cir. 1998) (stating that, "the court may, and usually should, decline to exercise jurisdiction over any remaining state claims" after dismissing federal claims) (cited by Cohon ex rel. Bass v. New Mexico, 646 F.3d 717, 723 (10th Cir. 2011)). "'[N]otions of comity and federalism demand that a state court try its own lawsuits, absent compelling reasons to the contrary.'" Brooks v. Gaenzle, 614 F.3d 1213, 1230 (10th Cir. 2010) (quoting Ball v. Renner, 54 F.3d 664, 669 (10th Cir. 1995)); Endris v. Sheridan County Police Dep't, 2011 WL 441694, at *2 (10th Cir. Feb. 9, 2011) (concluding that "any state-law claims for assault and battery or mental and emotional injury were inappropriate subjects for the exercise of pendent jurisdiction where all federal claims had been dismissed.") (citing Brooks, 614 F.3d at 1229) (footnote omitted and emphasis added).

The Court concludes that any potential delay or duplication resulting from a dismissal without prejudice does not constitute a compelling reason to retain jurisdiction. See Hamilton v. Upper Crust, Inc., 2011 WL 3880932, at *10 (N.D. Okla. Sep. 2, 2011) ("The Court finds that the Tenth Circuit's expressed preference for declining pendent jurisdiction outweighs the parties' slight interest in preventing delay."); cf. Merrifield v. Board of County Comm'rs for County of Santa Fe, 654 F.3d 1073, 1086 (10th Cir. 2011). Moreover, the Court notes that "Colorado law recognizes if a plaintiff asserts all of his or her claims, including state law claims, in federal court, and the federal court declines to exercise supplemental jurisdiction over the state claims, the plaintiff may refile those claims in state court." Brooks, 614 F.3d at 1230 (citations, quotation marks and alterations omitted); see 28 U.S.C. section 1367(d) (providing that the state law statute of limitations "shall be tolled while the claim is pending and for a period of 30 days after it is dismissed unless State law provides for a longer tolling period"). For these reasons, the Court will dismiss the cross-claim without prejudice.

IV. CONCLUSION

For the foregoing reasons, it is

ORDERED that the Recommendation of United States Magistrate Judge [Docket No. 87] is ACCEPTED. It is further

ORDERED that the plaintiff United States' motion for summary judgment [Docket No. 56] is GRANTED. Judgment shall enter in favor of the United States and against defendants Charles W. Ledford, Loraine Ledford, and Dos Milagros Trust II (as nominee). The United States' tax liens shall be foreclosed on the property at 168 Fetlock Circle, Florissant, Colorado free and clear of any interest of defendants Charles W. Ledford, Loraine Ledford, and Dos Milagros Trust II. It is further

ORDERED that this action shall be dismissed as to defendant Park State Bank & Trust. It is further

ORDERED that the cross-claim by cross claimants Ted Phillips and Carol Phillips against Charles W. Ledford, Loraine Ledford, and Dos Milagros Trust II is dismissed without prejudice and the cross claimants' motion for summary judgment or, alternatively, for default judgment [Docket No. 60] is denied as moot. It is further

ORDERED that this case shall be closed in its entirety.

DATED March 30, 2012.

BY THE COURT:

Philip A. Brimmer
United States District Judge

FOOTNOTES:

/1/ In light of the Ledfords' pro se status, the Court liberally construes their pleadings, see Haines v. Kerner, 404 U.S. 519, 520-21 (1972); Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991), but may not act as their advocate. See Hall, 935 F.2d at 1110.

/2/ On March 25, 2005, defendant Charles Ledford pled guilty to conspiracy to commit tax fraud for tax years 1992 through 2002 in violation of 18 U.S.C. section 371. The arguments here also appear to collaterally attack that guilty plea.

/3/ The Ledfords assert, for the first time, that this Court lacks subject matter jurisdiction because the Secretary of the Treasury was not authorized to foreclose tax liens in this Court after a 2000 elimination of revenue districts. Cf. Cunningham v. BHP Petroleum Great Britain PLC, 427 F.3d 1238, 1245 (10th Cir. 2005) (stating that, if "a federal court determines that it is without subject matter jurisdiction, the court is powerless to continue"). The Ledfords' argument has no merit. See United States v. Zdun, 2011 WL 609794, at *2 (D. Or. Feb. 14, 2011) (rejecting the same argument and concluding that "elimination of internal revenue districts and director positions does not obstruct the Secretary's ability to assess taxes"); Nelson v. Internal Revenue Service, 108 A.F.T.R.2d 2011-5123, 2010 WL 7096091 (N.D. Ala. Sep. 13, 2010) ("[P]laintiff alleges that the revenue officer lacked delegation of enforcement authority because internal revenue districts and district directors were terminated in 2000. This argument has no merit and relies on an erroneous reading of the Restructuring and Reform Act of 1998 -- this Act merely restructured the IRS and did nothing to eliminate the authority of revenue officers to enforce the internal revenue laws."); see also United States v. Barry, 371 F. App'x 3, 8-9 (11th Cir. 2010).

/4/ On July 12, 2010, defendant Park State Bank and Trust disclaimed any interest in the real property at issue here. See Docket No. 5. Therefore, the Court will dismiss the United States' action as to defendant Park State Bank and Trust.

/5/ This standard of review is something less than a "clearly erroneous or contrary to law" standard of review, Fed. R. Civ. P. 72(a), which in turn is less than a de novo review. Fed. R. Civ. P. 72(b).

/6 /Cf. Fed. R. Civ. P. 13(g) ("A pleading may state as a cross-claim any claim by one party against a coparty if the claim arises out of the transaction or occurrence that is the subject matter of the original action or of a counterclaim, or if the claim relates to any property that is the subject matter of the original action. The crossclaim may include a claim that the coparty is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant.").

[Kestrel]

It's fairly easy to find out of a tax lien exists on a property. If the Phillips were eager enough to accept a warranty deed without doing a title search, they shouldn't have been surprised.

I wonder if the government imposed the lien after the fact, to reclaim property transferred by the Ledfords in an attempt to avoid collection.

[LPC]

It's fairly easy to find out of a tax lien exists on a property. If the Phillips were eager enough to accept a warranty deed without doing a title search, they shouldn't have been surprised.

I wonder if the government imposed the lien after the fact, to reclaim property transferred by the Ledfords in an attempt to avoid collection.

I know we've been through this before, but a federal tax lien arises at the assessment of the tax, after the tax is unpaid despite demand. A notice of federal tax lien is relevant only to third parties.

The Ledfords apparently transferred one property to some trust, which transferred it back to them, so the existence of a notice of lien should have been irrelevant.

The Phillips might have been purchasers for value, in which case the existence of a notice of lien would be relevant if they had no actual knowledge of the tax debt. The fact that they settled with the IRS suggests that there was either a notice of lien on record or the Philips had actual knowledge of the tax debt, and so the lien attached to the property they purchased and they had to pay off the IRS to prevent foreclosure on their property.

[Kestrel]

I know we've been through this before, but a federal tax lien arises at the assessment of the tax, after the tax is unpaid despite demand. A notice of federal tax lien is relevant only to third parties.

What I am wondering is whether the federal tax lien can be attached to property that was transferred within a short time prior to the assessment, particularly if the Ledfords sold it to the Phillips for a "too good to be true" price. The Phillips may have been unaware of the IRS demand, but the Ledfords knew the IRS was breating down their necks demanding payment and may have made the transfer to spite collection.

I'm picturing a scenario similar to what happens in bankruptcy. The debtor attempts to keep the property out of the hands of creditors by transferring it to a third party for a bargain price, then the court and the trustee reclaim the property. Can tax liens be imposed in a similar way?

[Famspear]

I know we've been through this before, but a federal tax lien arises at the assessment of the tax, after the tax is unpaid despite demand. A notice of federal tax lien is relevant only to third parties.

What I am wondering is whether the federal tax lien can be attached to property that was transferred within a short time prior to the assessment, particularly if the Ledfords sold it to the Phillips for a "too good to be true" price. The Phillips may have been unaware of the IRS demand, but the Ledfords knew the IRS was breating down their necks demanding payment and may have made the transfer to spite collection.

I'm picturing a scenario similar to what happens in bankruptcy. The debtor attempts to keep the property out of the hands of creditors by transferring it to a third party for a bargain price, then the court and the trustee reclaim the property. Can tax liens be imposed in a similar way?

A "nice" question (and I don't know the status of the case law on that).

However, if the property is re-acquired by the taxpayer after the date of the assessment and the tax remains unpaid at the time of the re-acquisition, the tax lien automatically attaches to that property. The federal tax lien attaches to all property owned by the taxpayer at the time of the assessment and to after-acquired property (the Glass City Bank doctrine; Glass City Bank v. United States, 326 U.S. 265 (1945)).

[Prof]

Like any other creditor, the IRS would be able to attack a transfer under the Uniform Fraudulent Transfer Act; limitations is generally 4 years, but 6 years in New York, for example. The action would like under the constructive conveyance provision of transfer for less than fair value which happened while the Debtor was insolvent or which rendered the debtor insolvent. However, in cases like the one described, the actual fraud provision would allow recapture if the transfer was with the intent to hinder, delay or defraud, which does not reference either the value received or the solvency of the transferring party.

[The Observer]

What I am wondering is whether the federal tax lien can be attached to property that was transferred within a short time prior to the assessment, particularly if the Ledfords sold it to the Phillips for a "too good to be true" price.

As Prof described, if the IRS can develop the evidence to show constructive fraud on the part of the taxpayers to divest themselves of property in order to defeat collection of the tax, they can pursue the property. Alternatively, the IRS could file an administrative nominee or transferee notice lien against the new owners for a specific asset, but would have to defend their actions in court should the purchasers bring suit. This latter scenario would still require the IRS to show the purpose of the transfer was to defeat the collection of the tax and was not a bona fide purchase. So facts such as the taxpayers receiving a fair market price for the property, not maintaining control or responsibility over the property, and paying off the original notes as a result of the sale would tend to make it harder for the government to sustain their position.

Regarding constructive fraud, I believe that the IRS would have to show that the transfer of the property left the taxpayer unable to pay the tax (Prof, correct me if I am wrong). So if the taxpayer sold a piece of property, even if it was through a fraudulent method, as long as the taxpayer has other remaining assets that would satisfy the liability, the sale would not meet the constructive fraud criteria.

[Prof]

Yes, BUT:

I am unfamiliar with any provisions of those provisions of the IRC which allow recapture of transferred assets; however, all states have some version of UFTA -- for constructively fraudulent transfers where no intent need be show-- states basically that a transfer for less than fair consideration (a gift, a "brother-in-law" price) is fraudulent only if the transferor is insolvent or rendered insolvent by the transfer. Otherwise, creditors are free to collect from remaining assets.

However, the actual fraud provisions of the UFTA allow recovery where it can be shown that the transfer was with intent to hinder, delay or defraud a creditor. In such cases, there is no need to show that the transfer was for less than fair value or that the transferor was insolvent/rendered insolvent. Usually, intent can be shown by the "badges of fraud," a list of traditional evidentiary points such as transfer out of the jurisdiction.