The Case Of The Missing TP And The Izen-created Trust

[The Observer]

MICHAEL LEATHERS,
Plaintiff,
v.
RONALD LEATHERS, ET AL.,
Defendants.

Release Date: MAY 03, 2013

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

MEMORANDUM AND ORDER

This matter is before the court on the following:

Cross-Claimant Internal Revenue Service's (IRS) Motion
for Summary Judgment against Ronald Leathers (Doc.
135) and Memorandum in Support (Doc. 136);

Ronald Leathers' and James Holden's Response (Doc.
148) and Memorandum in Support (Doc. 149);

and IRS's Reply (Doc. 150).

I. BACKGROUND

Louise Leathers owned certain real properties in Haskell County, Kansas. During her lifetime, Louise transferred the surface rights in these properties to the Leathers Land Company, which was a partnership between Louise and her two sons, Michael and Ronald Leathers. Louise retained the mineral rights.

Louise died in 1991. Pursuant to her will -- and subsequent litigation -- the mineral interest in the Haskell County properties was distributed equally to Michael and Ronald, who each received an undivided one-half interest in the mineral estate.

By virtue of Louise's death, Michael and Ronald also each owned 50% of the Leathers Land Company. Subsequent litigation over a buy-out provision established that Michael had the right to buy out Ronald's interest in the partnership. As a result, Ronald signed a quit claim deed in May 1998 transferring the Haskell County properties to Michael. The deed said nothing about reserving to Ronald his share of the mineral interest. But neither Michael nor Ronald intended or believed that the quit claim deed transferred Ronald's share of the mineral interest to Michael. They only intended it to transfer the surface interest.

This mistake contributed to a number of complications. There were several productive oil and gas wells on the properties, and some royalty payments that might otherwise have gone to Ronald were either sent to Michael or were placed in suspense. A divorce proceeding between Ronald and his former wife, Theresa, resulted in a decree awarding Theresa one-half of Ronald's share of the mineral interest. Additionally, the U.S. Internal Revenue Service (IRS) claimed tax liens on certain royalties due to income taxes allegedly owed by Ronald amounting to more than $ 900,000. Finally, Ronald purportedly conveyed "all right, title and interests . . . related to 'mineral rights' and 'chose(s) of action'" pertaining to the mineral rights to the Dirt Cheap Mine Trust, which is allegedly a trust established to reacquire Ronald's mineral interest and royalty payments. All of the foregoing coalesced in the current litigation, where the parties asserted numerous claims and cross-claims against one another.

In a summary judgment ruling on May 13, 2010, Judge Wesley Brown granted equitable reformation of the quit claim deed based on the doctrine of mutual mistake. (Doc. 69). The court reformed the deed to reflect the intention of Ronald and Michael to reserve to Ronald his one-half share of the mineral interest. The court further found that Theresa, pursuant to the divorce decree, was entitled to one-half of Ronald's interest in the mineral estate. Accordingly, the court declared that Michael owned a one-half interest, Ronald owned a one-fourth interest, and Theresa owned a one-fourth interest in the mineral estate of the Haskell County properties. Michael retained all surface rights to the properties. (Doc. 69 at 20-21).

Judge Brown also ruled on other claims. He granted judgment to Michael on Ronald's claim for breach of fiduciary duty. (Doc. 69 at 26). He found that Ronald (and/or James Holden, the trustee of the trust) might have a claim against Michael for unjust enrichment, which could result in a constructive trust on royalty payments, but that any such claim would not include interest. Moreover, any such claim would be limited by the fact that Michael did not learn until December of 2006 that he may have received payments belonging to Ronald, and by evidence from which a factfinder could conclude that Ronald acted with unclean hands. The court additionally rejected Ronald's motion for judgment on Theresa's claim and affirmed her right under the divorce decree to one-fourth of the mineral interest.

The case was reassigned in February of 2012 to the undersigned judge. In May 2012 this court ruled on a second round of dispositive motions. (Doc. 114). The court denied Theresa's motion for judgment on her unjust enrichment claim against Michael because of genuine issues about when Theresa (and Ronald) first learned of the title problem and what they did about it. The court granted summary judgment to Michael on Ronald and Holden's claim for conversion, finding the claim barred by the statute of limitations. The court also granted judgment to Michael on Ronald and Holden's claim for fraud by silence. These rulings left at least two issues for trial: whether Michael was unjustly enriched, and whether the royalty payments received by Michael gave rise to a constructive trust in favor of Theresa and Ronald. (Doc. 114 at p. 13).

In a hearing with the parties on August 20, 2012, the court set a schedule for the oil and gas companies who pay royalties on the Haskell County properties to provide an accounting of the royalties. Those documents have since been filed. (Docs. 129-134). The court also set a briefing schedule on the IRS's motion for summary judgment against Ronald. After some delays, the IRS's motion is now ripe and the court is prepared to rule.
II. IRS MOTION FOR SUMMARY JUDGMENT (DOC. 135).

The IRS moves for summary judgment on its cross-claim against Ronald Leathers and for dismissal of a claim for attorney's fees by the attorney for the Dirt Cheap Mine Trust. The cross-claim seeks to reduce to judgment federal tax assessments against Ronald. (Doc. 74). The IRS contends it has met its burden of establishing the existence and amounts of assessments against Ronald between 1997 and 2005, and it argues Ronald has no admissible evidence to rebut the presumed validity of those assessments. It seeks a judgment in its favor and an order "that all sums found in the quiet title portion of this case to be payable to Ronald Leathers are subject to the Government's preexisting tax liens." (Doc. 135 at 1). It also contends Ronald and the trust are collaterally estopped by a related Fifth Circuit judgment from claiming a priority over the IRS's liens. Moreover, it argues that any claim for attorney's fees is either barred by sovereign immunity or is contrary to federal statute.

Ronald Leathers' response brief asserts that the IRS failed to properly mail deficiency notices to his last known address as required by statute. (Doc. 149 at 7). Moreover, it contends the IRS's calculations were arbitrary and erroneous in numerous respects, and that a pattern of errors defeats any presumption of correctness that might otherwise attach to the assessments. Insofar as Ronald's failure to file returns and pay penalties is concerned, the response claims it is up to a jury to determine whether Ronald had the state of mind required to support penalties.

Finally, the Dirt Cheap Mine Trust and its attorney Joe Izen contend that under 26 U.S.C. section 6323(b)(8), Izen's contingent fee contract gives him a super-priority on any recovery by the trust over and above any IRS tax lien. Moreover, the trust and Ronald dispute the IRS's suggestion that the related Fifth Circuit case has any preclusive effect.

III. FACTS

The court previously ordered Ronald's summary response stricken for failure to comply with the federal and local rules and with the court's standing order. (Doc. 146 at 4). His more recent attempt (Doc. 149) fares little better. It does not refer to or address many of the IRS's factual allegations. This failure makes it impossible to tell with certainty which facts defendant seeks to controvert and which are uncontested. The memorandum also contains several conclusory allegations and blanket citations (e.g., citing to a declaration at pages "7-18"), apparently leaving it to the court to scour the record for evidence supporting defendant's position.

But the response's most glaring deficiency is that Ronald's declaration -- which is cited as support throughout the response -- is unsigned. And a December 17, 2012 affidavit of Joe Izen, attorney for Ronald and the Dirt Cheap trust, makes clear this was no accident. Izen states that he prepared the declaration and sent it to Ronald, but shortly thereafter Ronald ceased communicating with counsel and "the current whereabouts of . . . Ronald Leathers [] is unknown to his counsel." (Doc. 149-34). Izen's affidavit is among the numerous exhibits attached to the summary judgment response, although the brief itself does not mention or otherwise discuss Ronald's failure to sign the declaration or his disappearance. 1

This unsigned, unsworn declaration in the name of Ronald Leathers is not properly considered on summary judgment. See Fed. R. Civ. P. 56(c)(4); 28 U.S.C. section 1746 (requirements for unsworn declarations). See also Fed. R. Civ. P. 56, Adv. Comm. Notes, 2010 Amendments ("A formal affidavit is no longer required. 28 U.S.C. section 1746 allows a written unsworn declaration . . . subscribed in proper form as true under penalty of perjury to substitute for an affidavit."); Howell v. New Mexico Dept. of Aging & Long-Term Services, 398 Fed.Appx. 355, 359, 2010 WL 3965927 (10th Cir. 2010) (unsigned document "'was not within the range of evidence the district court should consider' on summary judgment").

With the foregoing constraints, the court finds the following facts to be uncontroverted for purposes of the summary judgment motion.

Defendant Ronald R. Leathers (hereinafter "Ronald") is a citizen of the State of Colorado, with his last known place of residence in Colorado Springs, Colorado. Ronald resided in Kansas for at least some of the years at issue in this suit. He also claims an interest in land located in Kansas.

A history of Ronald's interactions with the IRS is set forth in the declaration of IRS Revenue Officer Ginger Wray. (Wray Decl., Doc. 136-1).

The IRS assessed federal income taxes against Ronald for tax years 1997 through 2005 after Ronald failed to file any returns and then either failed to respond to IRS correspondence or recited constitutional arguments against the payment of federal income tax that the IRS considered legally frivolous. (Wray Decl. paragraph 4-5 and supporting exhibits). The IRS has certified that a search was conducted and no 1040 forms for Ronald were filed for the tax years 1997 to 2005.

Ronald's tax liabilities for 1997 to 2002 are based on assessments made by the "Automated Substitute for Return group" at an IRS Service Center. His liability for the 2003 to 2005 tax years was computed in examination by a revenue agent, who determined Ronald's taxable income based upon the same kinds of records used by the IRS Service Center, including information obtained through IRS summonses directed at third parties who had paid Ronald income in the past. These payors included the mineral companies now holding royalties in suspense. (Wray Decl. paragraph 5).

The IRS determined Ronald's taxable income for the foregoing tax years by reviewing Information Reporting Program (IRP) transcripts. These are retrievable computer records maintained by the IRS that reflect data reported by third parties on various IRS forms, including W-2 Forms (employee wages), 1099 (non-employee compensation), and 1098 (home mortgage interest). IRP transcripts are obtained by running searches under the individual's social security number in the computer file system maintained by the IRS.

The IRS also prepared examination reports showing its calculation of Ronald's tax indebtedness for the tax years 1999 to 2005. (Wray Decl. paragraph 12, Exh. E).

As established by the Certified Forms 4340 appended to the Wray declaration, a duly authorized delegate of the Secretary of the Treasury has made assessments for individual income taxes, plus statutory penalties and interest accruing to the date of assessment, against Ronald for the nine tax years (1997 to 2005) in which he failed to file income tax returns. (Wray Decl. paragraphs 7-8 and Exh. B). 2

Since the date of these assessments, additional interest has accrued by law. As of September 21, 2012, the total amount due and owing on the assessments, including interest, was $ 1,561,117.06.

The IRS has been attempting to collect Ronald's unpaid taxes for over ten years. He has failed or refused to pay the assessments and has not filed returns for any of the relevant years. He has responded to some IRS notices, but in doing so has set forth arguments that the IRS reasonably considered to be frivolous. For example, in October 2000 Ronald sent a ten-page letter to the IRS which said he was "refusing for [entrapment] and computer fraud" the IRS's assessment. The letter contained page after page of bogus demands characteristic of "tax protesters," including a demand for "proof of your claim that you maintain a security interest, in or against my person/property to substantiate that you are a Holder, authorized to make a presentment" and "assurances as to your delegation of authority to operate in a Union State, in a municipal capacity," as well as a reminder that "I, Ronald R. Leathers, have previously declared and affirmed my status that I am a man unenfranchised nonresident alien, and not a 'person' described in 26 U.S.C. section 7343." In June of 2005 he sent the IRS a letter declaring that "I am not a U.S. citizen-federal subject and that I have no deficient tax 'accounts' with your principal." The letter complained about the federal Government's "deceitful and deceptive acts, e.g. failing to disclose the underlying and covert objectives, i.e. clothing me with the status of 'U.S. citizenship', and making that status dominant over my natural born American (state) Citizenship." (Doc. 136-7, -8).

In March of 2008, Agent Wray received a letter from Joe Alfred Izen, Jr., stating that his office had been retained to represent Ronald Leathers, and demanding a collection due process hearing on behalf of Ronald relating to the tax years 2003 to 2005. Izen completed and included a Form 12153 (Request for a Collection Due Process or Equivalent Hearing). Izen signed the form and hand-wrote next to his signature, "Power of Attorney (Form 2848) Attorney" with his Texas Bar number. The form was not signed by Ronald. Izen did not otherwise complete or send a Form 2848 signed by Ronald.

Because the IRS had not received a Form 2848 authorizing Izen to represent Ronald before the IRS, Wray sent Ronald a letter explaining that such a form would have to be completed before Izen could represent Ronald and before she could process Izen's request for a due process hearing. Wray attempted to contact Izen by phone and left a request with his office to send the form. Her letter to Ronald stated that he had 20 days to reply. The IRS received no reply to the letter or in response to its message for Izen. (Doc. 136-11). Izen has offered no explanation for his failures to respond.

Wray sent another letter to Ronald on July 10, 2008. The letter again recounted the failure to submit a Form 2848 authorizing Izen to represent Ronald. It noted that although the time for the requested due process hearing had expired, Ronald was still eligible to appeal certain issues and that he could do so by signing a form himself or by having Izen submit one if a Form 2848 were included. (Doc. 136-12). No additional request was sent to the IRS.

This action originally began as a state court lawsuit to quiet title. It was filed by Michael Leathers in Haskell County, Kansas, in the 26th Judicial District of Kansas. In June of 2008, Michael amended his petition to add the United States as a party, alleging that its tax liens filed in Haskell County for Ronald's unpaid assessments gave it a potential interest in the mineral rights that were the subject of the action. The United States removed the action to this court in July 2008. It added a cross-claim in June 2010 seeking to reduce its tax assessments to judgment. (Doc. 74).

In February of 2007, co-defendant OXY, USA ("OXY") brought an interpleader action in U.S. District Court for the Southern District of Texas. The action named Michael, Ronald, James Holden, and the IRS, and it sought a determination of who was entitled to approximately $ 25,000 in royalty payments held by OXY. The district court determined that the IRS was entitled to the money. The Fifth Circuit Court of Appeals affirmed. The circuit opinion noted the district court had determined that Holden was a "fake trustee," that there was no substance to the trust, that Ronald was "the real . . . non-taxpayer," and that the parties had acquiesced in those findings in the district court. OXY USA, Inc. v. Holden, 306 Fed.Appx. 69, 2009 WL 27477 (5th Cir. 2009); (Doc. 136-13).

IV. SUMMARY JUDGMENT STANDARD

The rules governing summary judgment are well-known and are only briefly outlined here. Federal Rule of Civil Procedure 56(a) directs the entry of summary judgment in favor of a party who "shows that there is no genuine dispute as to any material fact and [that] the movant is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(a). A dispute is "genuine" if the evidence is such that a rational trier of fact could resolve the issue either way, and a fact is "material" if under the substantive law it is essential to the proper disposition of the claim. See Adamson v. Multi Community Diversified Svcs., Inc., 514 F.3d 1136, 1145 (10th Cir. 2008). When confronted with a fully briefed motion for summary judgment, the court must ultimately determine "whether there is the need for a trial-whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). If so, the court cannot grant summary judgment. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

V. DISCUSSION

The district courts of the United States have jurisdiction to issue orders and render judgments for the enforcement of the internal revenue laws. 26 U.S.C. section 7402(a).

The uncontroverted facts show that Ronald failed to file income tax returns for a nine-year period although he was required to do so by law. See 26 U.S.C. section 6012 (persons required to file returns).

When a taxpayer fails to make a timely return, the Secretary of the Treasury (i.e., the IRS) is authorized to execute a substitute return "from his own knowledge and from such information as he can obtained through testimony or otherwise." section 6020(b)(1). Such a return "shall be prima facie good and sufficient for all legal purposes." section 6020(b)(2). The IRS prepared substitute returns for Ronald using information including data reported by third parties. This information showed that Ronald received significant income in the form of oil and gas royalty payments and from sales of real estate. For example, in 1997 he was paid royalties of almost $ 300,000 and he received over $ 200,000 on sales of real property. (Doc. 136-5).

The IRS is required to assess all income taxes imposed by law under methods provided by law or regulation. section 6201-6203. The IRS has produced Form 4340 Certifications of Assessments for Ronald Leathers for the tax years 1997 to 2005 (Doc. 136-3) showing the assessment of taxes, penalties and interest against Ronald. These forms are "are presumptive proof of a valid assessment." March v. I.R.S., 335 F.3d 1186, 1188 (10th Cir. 2003); Long v. United States, 972 F.2d 1174, 1181 (10th Cir. 1992) ("For purposes of granting summary judgment, a Certificate of Assessments and Payments is sufficient evidence that an assessment was made in the manner prescribed by section 6203 and Treas.Reg. 301.6203-1).

The government generally establishes a prima facie case when it shows a timely assessment of the tax due, supported by a minimal evidentiary foundation. United States v. McMullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Once the IRS produces substantive evidence demonstrating that the taxpayer received unreported income, a presumption of correctness attaches to the Commissioner's assessment. This presumption "will permit judgment in the Commissioner's favor unless the opposing party produces substantial evidence overcoming it." McMullin, 948 F.2d at 1192; Guthrie v. Sawyer, 970 F.3d 733, 737-38 (10th Cir. 1992) (Form 4340 certificates are "presumptive proof of a valid assessment" and if a taxpayer does not present evidence indicating to the contrary, "a district court may properly rely on the forms to conclude that valid assessments were made."). Ronald has failed to come forward with any admissible evidence to contradict these assessments.

Notices of Deficiency. The law requires the IRS to give notice before it may assess or collect any tax deficiency. Armstrong v. C.I.R., 15 F.3d 970, 973 (10th Cir. 1994); 26 U.S.C. section 6213(a). A notice of deficiency is valid, even if it is not received by the taxpayer, if it is mailed to the taxpayer's last known address.

Ronald's brief challenges whether proper notices of deficiency were sent to his last known address. (Doc. 149 at 7-8). To the extent this argument is based upon factual assertions in Ronald's declaration, it is unsubstantiated by any admissible evidence. To the extent it claims a lack of any proof that deficiency notices were actually mailed by the IRS, the Form 4340 entries showing that statutory notices were sent are sufficient, absent any contrary evidence, to meet the Government's burden to show that notices were in fact sent by certified or registered mail. See e.g. United States v. Goodman, 2012 WL 3155824 (D. Colo., Aug. 12, 2012) ("The 'notice' entries on the Forms 4340 demonstrate that adequate notice and demand was made and carry a presumption of correctness.") [citations omitted]. The court also notes that the IRS reply brief includes copies of certified mail deficiency letters for the tax years 2001 to 2005. (Doc. 150). The IRS has met its burden of showing that deficiency notices were in fact mailed.

Ronald further contends the IRS failed to comply with the statutory requirement to send deficiency notices to his "last known address." "The term 'last known address' has been defined by case law to mean 'that address to which the IRS reasonably believes the taxpayer wishes the notice sent.'" Armstrong, 15 F.3d at 973. The address on the taxpayer's most recent tax return is ordinarily deemed to be his last known address. The taxpayer may otherwise provide clear and concise notice of his current address to the IRS, such as by filing a subsequent tax return with a new address.

The record shows the IRS had two potential addresses for Ronald during the period in question: one on Lake Elbo Road in Manhattan, Kansas, and one on Vincent Drive in Colorado Springs. (Doc. 136-5 at 3-6). Ronald's complaint appears to be that notices were sent to his Kansas address (at least prior to 2001) when he wanted them sent to his Colorado address. (Doc. 149 at 7). The IRS had 1099's showing that payors made payments to Ronald at both of these addresses for the tax year 1997. More importantly -- although the IRS does not mention this fact -- Ronald used the Kansas address in filing his 1996 federal income tax return. (Doc. 149-28). Because that was his most recently-filed return, the IRS was entitled to send deficiency notices to the Kansas address absent clear and concise notice from Ronald that he wanted the mailings sent to a different address. The notices the IRS initially sent to Ronald's Kansas address were therefore not defective. And even accepting Ronald's contention that his October 2000 correspondence gave the IRS notice that he wanted future mailings sent to his Colorado address, 3 the record shows that the IRS in fact sent subsequent notices to his Colorado address. See Doc. 136-1. The IRS has cited copies of deficiency letters pertaining to tax years 2001 to 2005 that were sent to Ronald at his Colorado address. (Doc. 150, Attachments).

The record as a whole, including the certified Form 4340's with a summary of the IRS's records and actions, provides the required "minimal evidentiary foundation" necessary to justify a presumption that proper notices and assessments were made. The court cannot consider Ronald's inadmissible declaration as somehow creating a genuine issue of fact on that score.

Claim of arbitrary assessment. Ronald next claims the IRS calculation of assessments was arbitrary and erroneous. Once the IRS shows an evidentiary foundation for the assessment, as it has done here, the taxpayer may overcome the presumption of correctness that attaches to it by citing proof that the assessment is arbitrary and erroneous. See United States v. Gosnell, 961 F.2d 1518, 1520 (10th Cir. 1992); Jones v. C.I.R., 903 F.2d 1301, 1304 (10th Cir. 1990) (citing United States v. Janis, 428 U.S. 433, 442 (1976)); Doyal v. Comm'r, 616 F.2d 1191, 1192 (10th Cir. 1980) (the only exception to the general rule concerning the burden of proof is when the taxpayer shows the IRS's deficiency determination is arbitrary and excessive).

Among other things, Ronald claims the IRS arbitrarily assessed self-employment taxes on royalty income, failed to deduct the cost basis of property in determining capital gain, improperly imposed penalties for failing to pay estimated taxes, improperly failed to apply a carry-forward loss from a prior return, and improperly assessed short-term instead of long-term capital gain rates. (Doc. 149 at 9-11). All of these claimed errors, however, depend in material part upon allegations in Ronald's inadmissible declaration, which the court cannot consider as evidence. Ronald has failed to cite any admissible evidence to raise a genuine issue concerning the foregoing assessments.

Ronald also challenges the IRS's assessment of penalties for failure to file returns and failure to pay taxes due. He argues that whether a taxpayer had the state of mind to support such penalties is necessarily a genuine issue of fact precluding summary judgment. (Doc. 149 at 12). But as the IRS points out, these civil penalties are required by law for failure to file a required return or to timely pay the required tax after notice and demand "unless it is shown that such failure is due to reasonable cause and not due to willful neglect." (26 U.S.C. section 6651(a)). Ronald offers no admissible evidence of reasonable cause. (Even if the court considered his inadmissible declaration and its bare-bones explanation that he "had a good-faith belief that he was not a person required to file under the Internal Revenue Code" it would not be sufficient to create a genuine issue.) "Reasonable cause" requires the taxpayer to show that he exercised ordinary business care and prudence but was unable to file the return within the prescribed time. United States v. Boyle, 469 U.S. 241, 246 (1985). No evidence is cited which could possibly satisfy that standard. Ronald's prior correspondence to the IRS claiming not to owe any federal taxes because he was "a state Citizen, a natural born American Citizen" (Doc. 136-8) is more indicative of willful neglect than reasonable cause. See Yoder v. Commissioner, T.C. Memo. 1990-116, 1990 WL 20137 (U.S. Tax Ct. 1990) (taxpayer's reliance on misguided interpretations of the Constitution does not constitute reasonable grounds for failure to file return). In sum, the record before the court shows no genuine issue of fact with respect to assessment of these penalties.

The court concludes that Ronald has cited evidence to show a genuine issue of fact with respect to the assessment for the tax year 1998. He has cited a Form 668(Z) "Certificate of Release of Federal Tax Lien" (Doc. 149-26), dated August 26, 2012, which purports to certify that Ronald "has satisfied the taxes listed . . . and all statutory additions" for that year. The certificate lists the entire sum ($ 96,619.39) claimed by the IRS to be owing for tax year 1998. (See Doc. 136-3 at 21). Although Ronald has arguably failed to establish a proper foundation for this document (See Izen affidavit, Doc. 149-2 at 13), the IRS reply does not address the genuineness or the significance of this certificate. In view of this document, the court will not grant summary judgment unless the IRS first addresses the certificate and shows that Ronald's assessment for 1998 has not been satisfied. Because it has not made that showing, its motion for summary judgment is denied with respect to tax year 1998. Otherwise, for the reasons stated above, the IRS motion to reduce to judgment the assessments for tax years 1997 and 1999-2005 will be granted.

Determination regarding IRS liens. In addition to seeking a judgment for the tax assessments, the IRS motion for summary judgment requests an order "that all sums found in the quiet title portion of this case to be payable to Ronald Leathers are subject to the Government's preexisting tax liens" (Doc. 135 at 1). Its memorandum in support of the motion seems to go a step farther, asking for an order "that all royalty sums [Ronald] is found to be entitled to in this quiet title action be paid directly to the Government." (Doc. 136 at 10).

It is not entirely clear here what the government is seeking. If it only seeks a declaration that it has a lien on any property in which Ronald retains an interest, that unremarkable request can be granted. Such a lien rises by operation of law as of the time of the assessment, 26 U.S.C. section 6321, 6322, and applies to any property in which Ronald retains an interest. Cf. Drye v. United States, 528 U.S. 49, 57 (1999) (language in section 6321 and 6331 shows that Congress meant to reach every interest in property that a taxpayer might have). Moreover, Ronald's purported transfer of rights to the trust does not affect the lien. The government's lien continues to attach to Ronald's mineral interest and the royalties therefrom, regardless of whether the royalties are in the hands of the energy companies or in the hands of the trust. See United States v. Bess, 357 U.S. 51, 57 (1958) ("The transfer of the property subsequent to the attachment of the lien does not affect the lien, for 'it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere [with the burden].'") But if the government is seeking an order declaring that its liens have priority over any interest claimed by the Dirt Cheap Mine Trust, that is a different question.

In apparent recognition that its request for an order to turnover suspended royalties might involve a determination of the validity and priority of any interest claimed by the Dirt Cheap Mine Trust, the government's memorandum argues that any claim by Ronald 4 that the trust holds a superior interest is foreclosed by the collateral estoppel effect of the judgment reviewed in OXY USA, Inc. v. Holden, 306 Fed.Appx. 69, 2009 WL 27477 (5th Cir. 2009). (Doc. 136 at 10-11). It notes that the district court in that related case found "there is no substance to the trust," that Ronald "is the real . . . non-taxpayer," and that Holden was a "fake trustee." These declarations were made by the Texas district court judge at a conference between the parties and, according to the Fifth Circuit opinion, they were not disputed and were "acquiesced" in by Holden and Ronald's counsel. (Doc. 136-13 at 3).

A prior judgment in federal court may preclude a subsequent action under principles of collateral estoppel. See Murdock v. Ute Indian Tribe, 975 F.2d 683, 687 (10th Cir. 1992), cert. den., 507 U.S. 1042 (1993). But the doctrine attaches only when an issue of fact or law is actually litigated and determined by a valid and final judgment. B-S Steel of Kansas, Inc. v. Texas Industries, Inc., 439 F.3d 653, 662 (10th Cir. 2006) [citations omitted]. It will preclude reconsideration of an issue decided in a prior action where: (1) the issue previously decided is identical with the one presented in the action in question, (2) the prior action has been finally adjudicated on the merits, (3) the party against whom the doctrine is invoked was a party, or in privity with a party, to the prior adjudication, and (4) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action. B-S Steel, 439 F.3d at 662.

The court cannot conclude that the findings of the Texas district court represent an adjudication on the merits of the validity of this trust. "Generally speaking, when a particular fact is established not by judicial resolution but by stipulation of the parties, that fact has not been 'actually litigated' and thus is not a proper candidate for issue preclusion." United States v. Botefuhr, 309 F.3d 1263, 1282 (10th Cir. 2002). There is no indication here that the parties pleaded, briefed or presented evidence to the Texas district court concerning the validity of the trust. The court's conclusions about the trust were apparently based on a concession or stipulation by the defendants. As the Restatement notes:

A judgment is not conclusive in a subsequent action
as to issues which might have been but were not litigated
and determined in the prior action. There are many
reasons why a party may choose not to raise an issue,
or to contest an assertion, in a particular action.
The action may involve so small an amount that litigation
of the issue may cost more than the value of the
lawsuit. Or the forum may be an inconvenient one
in which to produce the necessary evidence or in
which to litigate at all. The interests of conserving
judicial resources, of maintaining consistency, and
of avoiding oppression or harassment of the adverse
party are less compelling when the issue on which
preclusion is sought has not actually been litigated
before. And if preclusive effect were given to issues
not litigated, the result might serve to discourage
compromise, to decrease the likelihood that the issues
in an action would be narrowed by stipulation, and
thus to intensify litigation.

Restatement (Second) of Judgments section 27, comment e. The prior action involved a dispute in Texas over approximately $ 25,000 in royalties held by one producer in that state. For undisclosed reasons, Holden and the trust conceded the facts supporting the IRS's claim to that fund. Absent a showing that the validity of the trust was actually litigated, the Texas district court's findings extend only to resolution of the claim before it and do not preclude the defendants from now claiming the trust is valid or that it has some interest in the royalties at issue here. Cf. United States v. International Bldg. Co., 345 U.S. 502, 505 (1953) ("As the case reaches us, we are unable to tell whether the agreement of the parties was based on the merits or on some collateral consideration.").

The IRS goes on to make confusing representations about the scope of its motion. Its reply brief seems to say any dispute about priority of the trust's claimed interest is irrelevant at this point because the IRS cross-claim "seeks only to reduce to judgment its tax assessments against [Ronald] Leathers -- not to foreclose on any existing tax liens" and, as such, the matter does not turn on whether the IRS liens "are enforceable against Leathers, the 'Dirt Cheap Mine Trust,' or any other party." (Doc. 150 at 7).

As noted above, the court finds the IRS has a lien on all royalty proceeds in which Ronald retains an interest. Otherwise, the court rejects the IRS's contention that collateral estoppel precludes the trust from claiming an interest in the royalties. (The court expresses no opinion here on the validity of the trust or the purported assignment by Ronald. Those issues have not been presented here or briefed). 5 Moreover, as the IRS is apparently not seeking to foreclose its tax liens, any dispute about the priority of its liens versus any interest claimed by the trust is not before the court.

Claim for attorney's fees. At a pretrial conference on August 24, 2012, Joe Izen -- attorney for James Holden and Ronald Leathers -- asserted that he has a claim for attorney's fees. When the government challenged whether Izen had properly raised such a claim, the court directed Izen to brief his position by the end of August 2012 (Doc. 128 at 22), with the government agreeing it would address the merits and forego any objection that Izen did not properly plead the claim. (Doc. 128 at 24). Izen failed to brief the issue by the end of August, however, prompting the government to renew a procedural objection in its summary judgment motion and to now argue that Izen "should be deemed to have waived the opportunity to assert this claim entirely." (Doc. 150 at 9). Notwithstanding these procedural issues, both sides have addressed the merits of the claim in their summary judgment briefs. The government contends any lien claim by Izen is premature absent a judgment for Ronald (Doc. 150 at 9), and also that Izen has not established the requirements for an attorney's lien under section 6323(b)(8).

The court is not persuaded that Izen's failure to meet the briefing deadline warrants what would effectively be a sanction of dismissal of his claim. Cf. Ehrenhaus v. Reynolds, 965 F.2d 916 (10th Cir. 1992) (factors relevant to sanction).

With respect to the merits, Izen claims an entitlement to attorney's fees by virtue of a contingency-fee contract "with Cross-Defendants." (Doc. 149 at 5). He cites 26 U.S.C. section 6323(b)(8) as allowing an award and argues that the statute gives his claim a super-priority over any of the government's alleged tax liens. (Doc. 149 at 12). As the government points out, however, any charging lien Izen could conceivably claim first requires a judgment or settlement fund for the benefit of his client. 6 There is no such judgment or settlement at this point. Moreover, Izen has cited no proof that he has a lien or contract enforceable against any judgment for Ronald. He cites a contingency-fee contract that names James Holden, the trustee of the Dirt Cheap Mine Trust, as his client, and in which the trust promises to pay him 45% of any amount collected on the trust's behalf. (Doc. 149-18). If it is determined in this action that royalties are payable to Ronald rather than to the trust, Izen's agreement with the trust would provide no basis for a lien or claim against those funds.

Under the circumstances, the court will grant the United States' summary judgment motion with respect to the claim by Izen for attorney's fees under 26 U.S.C. section 6328(b)(8). This ruling is without prejudice to reassertion of the claim, however, if the basis for it is subsequently established.

VI. CONCLUSION

The IRS's Motion for Summary Judgment (Doc. 135) is granted in part and denied in part.

The court determines that Ronald Leathers is indebted to the United States for federal income tax liabilities in the amount of $ 1,464,497.67, 7 plus interest and statutory additions from the dates of assessment (set forth in Doc. 136-1 at Pp. 3-5) until the judgment and the costs of this action are paid.

The court further determines that all sums found to be payable to Ronald Leathers in this action are subject to the tax liens of the United States as of the date of its respective assessments against Ronald Leathers for tax years 1997 and 1999-2005.

Attorney Joe Alfred Izen's claim for attorney fees under authority of 26 U.S.C. section 6323(b)(8) is denied without prejudice.

A motion for reconsideration of this order is not encouraged. The standards governing motions to reconsider are well established. A motion to reconsider is appropriate where the court has obviously misapprehended a party's position or the facts or applicable law, or where the party produces new evidence that could not have been obtained through the exercise of reasonable diligence. Revisiting the issues already addressed is not the purpose of a motion to reconsider and advancing new arguments or supporting facts which were otherwise available for presentation when the original motion was briefed or argued is inappropriate. Comeau v. Rupp, 810 F.Supp. 1172 (D. Kan. 1992). Any such motion shall not exceed five pages and shall strictly comply with the standards enunciated by this court in Comeau v. Rupp. The response to any motion for reconsideration shall not exceed five pages. No reply shall be filed.

IT IS SO ORDERED.

Dated this 3rd day of May 2013, at Wichita, Kansas.

Monti L. Belot
United States District Judge

FOOTNOTES:


/1/ The memoranda previously stricken by the court (Docs. 143, 144) similarly contained an unsigned declaration in the name of Ronald Leathers. (Doc. 144-24). Defendant's prior memoranda filed November 14, 2012 cited Ronald's declaration without disclosing to the court the fact of or the reason for Ronald's failure to sign.

Because of the deficiencies in Ronald's submissions, the court has given serious consideration to striking them and imposing sanctions. Because of the age of this case, the court has decided not to strike the submissions but rather to consider them for what they are worth. However, Texas and Kansas counsel are advised that the court will revisit the issue of sanctions at the conclusion of the case. Fed. R. Civ. P. 11. Ronald's Kansas counsel is specifically admonished that it is his responsibility to ensure that Texas counsel's submissions comply with the applicable rules. Finally, Ronald's Kansas counsel will be required to attend all hearings and trial proceedings and, if necessary, to conduct them as lead counsel.

/2/ Ronald's contention that the Wray declaration or the 4340 forms cannot be considered because these matters are not based on Wray's personal knowledge is rejected. See Pollinger v. I.R.S. Oversight Bd., 362 Fed.Appx. 5 (11th Cir. 2010) (certifying official not required to have personal knowledge of how taxes were assessed; taxpayer presented nothing to overcome the presumption of correctness of assessments in Form 4340); Hughes v. United States, 953 F.2d 531, 540 (9th Cir. 1992) (certified Form 4340 admissible as self-authenticating public records).

The court finds the contention especially disingenuous in view of Ronald's counsel's submission of an unsigned declaration of his client.

/3/ Ronald's letter made no such request; it merely listed his Colorado address. (Doc. 136-7). Ronald additionally cites an undated letter he allegedly sent to the IRS (Doc. 149-30 at 1), but no foundation for that letter has been established.

/4/ The government discusses "Ronald's claims" and the collateral estoppel effect of the judgment on Ronald without really addressing the fact that the trust is -- at least nominally -- a party separate from Ronald. Its motion jumps back and forth between suggesting on the one hand that it "seeks to preclude Ronald Leathers only," while at other times asserting that "[t]he Trust's assertion that it has priority . . . has been resolved and need not be litigated again." (Doc. 136 at 11-12).

/5/ Cf Holman v. United States, 505 F.3d 1060, 1065 (10th Cir. 2007) (tax lien applies to property held by third party if it is determined that the third party is holding the property as a nominee of the delinquent taxpayer). The court notes that even assuming the validity of this particular trust, Ronald apparently retained a 45% beneficial interest in the trust proceeds. (Doc. 149-18).

/6/ Any claim is further limited to "reasonable compensation for obtaining such judgment or procuring such settlement." 26 U.S.C. section 6323(b)(8).

/7/ This figure represents the total amount due as of September 21, 2012 ($ 1,561,117.06) (Doc. 136-1) less the balance of $ 96,619.39 allegedly owing for tax year 1998 (Doc. 136-2 at 21). As noted previously, the IRS has not shown it is entitled to summary judgment on the assessment pertaining to 1998.

[The Observer]

And the saga continues...


MICHAEL LEATHERS,
Plaintiff,
v.
RONALD LEATHERS, ET AL.,
Defendants.

Release Date: SEPTEMBER 25, 2015



IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

MEMORANDUM AND ORDER

This protracted litigation came before the court on September 17, 2015, for a bench trial on the remaining claims. Appearing at the hearing were Martin Shoemaker, on behalf of the United States, and Joe Izen, attorney for the Dirt Cheap Mine Trust and Ronald Leathers. Defendant James Holden was also present. The record shows that Ronald Leathers was given notice of the trial but did not appear at the hearing. The parties presented arguments and decided to submit the matter without calling any witnesses, relying instead on deposition testimony, exhibits, and the uncontroverted facts found by the court in prior summary judgment orders.

In October of 2014, the court began a bench trial to resolve the following three issues: 1) a claim for unjust enrichment by Ronald Leathers and/or James Holden against Michael Leathers; 2) a claim by the Internal Revenue Service against Ronald for unpaid taxes for the year 1998; and 3) the validity of the Dirt Cheap Mine Trust and of Ronald's purported transfer to the trust. In the course of that hearing, the court was notified that Ronald had filed for bankruptcy in the District of Colorado. Doc. 223. As a result the court terminated the October 2014 hearing. The bankruptcy case was subsequently dismissed, Doc. 224, and the bench trial was rescheduled.

On September 2, 2015, the court approved a stipulated order of partial judgment resolving the unjust enrichment claim by Holden against Michael Leathers. Doc. 230. This resolves the unjust enrichment claim in its entirety. 1

Accordingly, the remaining issues to be decided are: 1) the IRS's claim against Ronald for unpaid taxes for the year 1998; 2) the validity of the Dirt Cheap Mine Trust and Ronald's October 2006 transfers to it (or, as stated by the United States, whether Ronald's transfer of his mineral interest rights to the trust were fraudulent as to the IRS, making the property subject to the IRS's federal tax liens for the years 2003-2005); and 3) a motion for attorney's fees under 26 U.S.C. section 6323(b)(8) by attorney Joe Izen.

1. 1998 Taxes -- Ronald Leathers.

In a prior summary judgment ruling, the court determined there was a question of fact remaining on the IRS's cross-claim that Ronald Leathers owed unpaid taxes for the tax year 1998. Doc. 151 at 18. The issue resulted from an IRS tax lien release dated August 26, 2012, filed in Haskell County, Kansas, stating that Ronald Leathers had satisfied his tax obligations for that year.

The IRS has now produced a certificate declaring that it has revoked the lien release and reinstated its tax lien. Govt. Exh. 506. The document asserts that a notice of federal tax lien was mistakenly listed as a certificate releasing the lien. The IRS has also produced a certified Form 4340 showing that Ronald Leathers was assessed a total of $ 96,659.39 in taxes for 1998 which remains unpaid (Govt. Exh. 501) and that he filed no income tax return for that year (Govt. Exh. 502). The IRS also cites transcripts showing how Ronald's tax obligation was calculated. (Govt. Exh. 503). Finally, the IRS has provided a certified statement showing that as of September 17, 2015, and including interest and penalties, Ronald Leathers now owes a total of $ 192,205.24 for tax year 1998. Govt. Exh. 514.

The record before the court shows by a preponderance of evidence that the IRS mistakenly filed the tax lien release relating to Ronald's 1998 taxes, and that Ronald's tax liability for the year 1998 remains unsatisfied. As of September 17, 2015, the amount due and owing for tax year 1998, including interest and penalties, is $ 192,205.24. The United States is entitled to judgment in that amount against Ronald Leathers on its claim pertaining to unpaid taxes for 1998.

2. Transfers to the Dirt Cheap Mine Trust.

The relevant background facts were discussed in prior summary judgment orders and are set forth here only as necessary to explain the court's ruling.

Michael Leathers and Ronald Leathers inherited certain property from their mother, including mineral interests in several sections of land in Haskell County, Kansas. The brothers engaged in litigation over surface rights to the property and Michael obtained a judgment allowing him to buy out Ronald's interest in the surface. As a result of that judgment, Ronald executed a quit claim deed on May 11, 1998, disclaiming his interest in the property in favor of Michael. The quit claim deed, however, failed to reserve Ronald's interest in the minerals, although neither brother intended the deed to convey Ronald's mineral interest.

Ronald and his wife Theresa got divorced in 2002. Michael testified in the course of that proceeding that Ronald owned 1/2 of the mineral interests in the Haskell County property. The divorce decree awarded Theresa half of Ronald's share of the minerals, or a 1/4 interest in the minerals.

Several productive wells were completed on the Haskell County properties. Michael communicated to one or more producers that despite the quit claim deed, Ronald owned a 1/2 share of the minerals (and subsequently a 1/4 share, with Theresa owing a 1/4 share). Due to the quit claim deed, however, Ronald and Theresa did not receive their full share of royalties. Anadarko, for example, paid Michael his share of the royalties on one of the wells but placed Ronald's share in suspense. Some royalties that should have been paid to Ronald and Theresa were instead paid to Michael. Ronald knew by early 2002 that there was a problem with the title and with the payment of royalties because of the quit claim deed. The record shows clearly that Ronald was dilatory and failed to take reasonable steps to clear up the title and the royalty problem despite having notice of it for several years.

Over three years later, in November 2005, Ronald wrote Michael a letter stating that he had recently discovered the problem concerning the quit claim deed and asserting that Michael had been receiving royalties that should have been paid to Ronald. Michael suggested that he could execute a quit claim deed as to Ronald's share to clear up the title, but that his attorney would want a release for any royalties previously paid to Michael in error. There were no further discussions between the brothers.

Ronald, meanwhile, did not file any personal income tax returns or pay any income taxes beginning in the tax year 1997 and continuing through 2005. The IRS made assessments against Ronald and asserted tax liens for taxes due, plus penalties and interest. By the fall of 2006, facing significant tax liabilities, Ronald met with James Holden, whom Ronald understood was "a legal strategist" who "stands for people, and help[s] them with issues at the IRS." Ronald Depo. at 117-18. Ronald testified that Holden is "an American" but is "not a U.S. citizen." Holden talked to Ronald about forming a trust, the purpose of which -- at least initially according to Ronald -- was "to deal with the [IRS] notices of lien and notices of levy," Ronald Depo. at 120, although Ronald later testified that the purpose was simply to get back the title to the minerals. Id. at 121. Ronald had told Holden about the mineral dispute with Michael and how Michael ended up with the title.

Jimmy Holden describes himself as a consultant on litigation. He previously had a tax accounting business "finding loopholes for people." He is not a lawyer and has no college degree. At his deposition, Holden testified that he created the trust at issue as a "simple contract trust, non-statutory, purely discretionary, because it has to be, otherwise you have attachable things." Holden Depo. at 20. The trust was set up "to protect future income, and for his [Ronald's] own benefit and that of his children."

Holden drafted the Dirt Cheap Mine Trust Agreement, dated October 6, 2006. It stated among other things that Holden was the trustee; that the trust may issue up to 100 "Certificates of Participation (units) as this Trustee may determine" in exchange for contributions to the trust corpus; that all distributions from the trust were purely discretionary with the trustee; that the purpose of the trust was to "provide a retirement vehicle for Ronald Roy Leathers"; that Ronald intends to convey "a certain chose in action" to the trust in exchange for 45 units of participation; and that the certificates issued to Ronald were "non-assignable, non-assessable and non-transferable" except that Ronald may bequeath them to his children. The trust document was signed only by Holden. On the same date, Ronald Leathers signed an "Irrevocable Assignment of Chose(s) in Action" purporting to irrevocably convey to the trust "all right, title and interests to related to [sic] 'mineral rights' and 'chose(s) of action' flowing from said 'mineral rights' of which I might have, known and or unknown." Def. Exh. 201, 202. These documents were signed in Colorado.

Holden testified that he would get 10% of any recovery by the trust on the chose in action (i.e., on a suit to recover Ronald's mineral interest and royalties from Michael) although such compensation was not provided for in the trust agreement.

On October 23, 2006 Holden executed an "Appointment of Attorney" stating that attorney Joe Izen was appointed to represent the financial interests of the trust in exchange for 45 units of participation in the trust. On October 27, 2006, Holden signed an attorney consultation and fee agreement retaining Izen to represent the Dirt Cheap Mine Trust on all claims arising out of the actions of Mike Leathers (and his wife) and Theresa Leathers. The agreement called for a 45% contingency fee on any recovery. Def. Exh. 203, 204.

In his deposition, Holden testified:

The whole purpose of the trust was one thing, and
that was to provide some kind of protection regarding
the IRS for future payments, et cetera. It's very
complex, as I'm sure you know, but once an assignment
is done, then it changes IRS's reach, and that was
the purpose. The purpose of the trust was not to
sue Mike Leathers. He [Ronald] could have done
that directly with Joe [Izen]. That wasn't the
purpose. The purpose was to afford some protection
for any recovery that did occur for Mr. Ron Leathers
and his three children.

Holden Depo. at 29.

The Dirt Cheap Mine Trust does not have a bank account, does not file tax returns, and is not filed of record anywhere.

Under federal law, a transfer made by a debtor is considered fraudulent as to a debt to the United States if the debtor makes the transfer with "actual intent to hinder, delay, or defraud a creditor." 28 U.S.C. section 3304(b)(1)(A). The statute provides a list of factors to consider in judging intent. section 3304(b)(2). Kansas law similarly provides that transfers made with intent to hinder, delay or defraud creditors are considered fraudulent as to present and future creditors. K.S.A. section 33-204(a)(1).

The court finds that Ronald's transfer of the chose-in-action involving his mineral rights to the trust (as well as the transfer of the mineral rights, to the extent he purported to transfer them) constituted a fraudulent transfer with respect to his tax debt to the IRS. The circumstances surrounding the transfer and the deposition testimony of Ronald and Holden show that Ronald's intent in making the transfer was to hinder the IRS from collecting Ronald's tax debt. As the testimony of Holden in particular makes clear, the whole purpose of the trust was to attempt to remove from the reach of the IRS the mineral interest and any royalties to which Ronald was or would be entitled. As Holden himself pointed out, if Ronald's purpose had been merely to sue Michael to obtain a share of the mineral rights and royalties, he could have simply retained Izen to pursue the claim on a contingency fee basis and wouldn't have needed any sort of trust or transfer of property. The court finds that Ronald's transfer of the chose in action and/or mineral interest was fraudulent as to the IRS debt.

The appropriate remedy under these circumstances is for the court to declare Ronald's transfer to the trust to be null and void. 28 U.S.C. section 3306(a); K.S.A. section 33-207(a). The court makes that declaration, and further finds that the federal tax liens arising from Ronald's unpaid taxes for the years 1997 through 2005 attach to the royalties now held in suspense in Ronald's name or for his benefit by the defendant energy companies. Moreover, the federal tax liens are senior to any interest in the property claimed by Ronald Leathers, the Dirt Cheap Mine Trust, or James Holden.

Finally, based on the evidence showing the current tax obligation of Ronald Leathers for the years 1997 to 2005 (Govt. Exh. 514), the court concludes that a final judgment should be entered in favor of the United States and against Ronald Leathers in the amount of $ 1,545,779.36.

3. Izen Motion for Attorney's Fees (Doc. 197).

Section 6323(b)(8) of Title 26 provides in part that an IRS lien is not valid against certain attorneys' liens. With some exceptions, an IRS lien is not valid against an attorney who under local law holds a lien enforceable against a judgment or settlement, to the extent of the attorney's reasonable compensation for procuring the judgment or settlement. By awarding such a "superpriority" to attorneys whose efforts have created an asset from which the government can recover delinquent taxes, the statue encourages attorneys to bring suits that may ultimately benefit the United States Treasury. See Spencer v. Kirkpatrick, 883 F. Supp. 588, 590 (W.D. Okla. 1995).

Section 7-108 of the Kansas Statutes provides that, in any action in which an attorney is employed, the attorney has a lien for compensation upon money in the attorney's hands due to the client and money due to the client and in the hands of the adverse party. K.S.A. section 7-108. Izen cites a 45% contingency fee contract he had with the Dirt Cheap Mine Trust in support of his claim of a lien, and also asserts that Ronald Leathers "adopted the written contingent fee agreement I had with James Holden and Dirt Cheap Mine Trust in his deposition testimony. . . ." Doc. 198-1 at 8. The latter claim is unsupportable. Any "oral adoption" by Ronald Leathers at his deposition does not meet the Kansas requirement that "[a] contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer. . . ." Kansas Rule of Professional Responsibility 1.5. As to Ronald, Izen has established no binding contingent fee arrangement, although it is clear that Ronald authorized Izen to act as his attorney in this matter.

The United States makes several arguments against any lien in Izen's favor against the suspended royalties held by defendant energy companies, including that Izen's efforts did not result in the court's finding that Ronald has an interest in the suspended royalties; that the court's determination of Ronald owning a 1/4 interest in the minerals was not due to Izen's efforts; that Izen improperly seeks compensation for work done in other cases; and that most of Izen's work went toward attempts to defeat the IRS's claims against Ronald. See Doc. 201 at 3-5.

The United States further asserts: "Since the Court's quiet title ruling in May 2010, Izen's efforts have been on attempting to show that the federal tax liens do not attach to any of the property at issue in this litigation, either because Ronald owes no taxes or because the Dirt Cheap Mine Trust has a superior claim to the property." Doc. 201 at 3. The record supports this assertion. The vast majority of work cited by Mr. Izen was not undertaken to obtain a judgment for Ronald from which his tax obligation could be satisfied. As the United States points out, Michael's resistance to reformation of the quit claim deed and to Ronald's ownership of the royalties held in suspense in his name was fleeting and perfunctory. Michael conceded the point on summary judgment and the court reformed the deed in May 2010 to reflect Ronald's 1/4 share of the minerals. 2 Rather, the vast majority of Mr. Izen's efforts have centered on attempts to defeat the claims of the IRS by asserting that the Dirt Cheap Mine Trust owned the royalties and/or minerals, or that Ronald did not actually owe the taxes claimed by the IRS. Those types of efforts are not compensable under section 6323(b)(8). Nor are Mr. Izen's unsuccessful attempts to defeat Theresa Leathers' legitimate interest in the minerals and royalties, or his unsuccessful assertion of conversion, fraud, and constructive trust claims. Efforts representing the interests of James Holden and the Dirt Cheap Mine Trust -- a trust whose purpose was to hinder the IRS's collection of Ronald's tax debt -- are also not compensable under section 6323(b)(8). Likewise, his unsuccessful efforts in "the Austin Case" -- a Texas case that was dismissed for lack of jurisdiction -- and the OXY case -- where Izen unsuccessfully opposed the IRS's claim to royalties deposited in federal court in Houston 3 -- were not attorney actions "procuring [a] judgment" benefitting the Treasury. Cf. W.T. Mechanical Inc. v. Heatmasters, Inc., 2011 WL 4345474, *3 (N.D. Ill., Sept. 15, 2011) (section 6323(b)(8) encourages attorneys to obtain judgments that enable their clients to pay their tax liabilities; it does not permit attorneys to tack on fees for other matters).

The United States also asserts: "Izen has made no efforts on behalf of Ronald that have resulted in funds available for IRS collection." Doc. 201 at 4. That is not completely true. Izen's efforts helped to some degree to obtain reformation of the quit claim deed and to establish Ronald's right to a corresponding share of the royalties, and thus did help produce a judgment that made funds available for IRS collection. But as the court already noted, Michael barely contested those matters and they were resolved on summary judgment years ago. Since then, Izen's efforts have largely focused on attempts to defeat the IRS's claims to those same royalties. The latter efforts are not compensable under section 6323(b)(8).

The burden is on the attorney in these circumstances to show that his services were reasonably incurred for obtaining a judgment. This includes an obligation to segregate the fees mentioned above that do not qualify for superpriority status under under section 6323(b)(8). The billing records submitted by Mr. Izen largely fail to do so. The court has reviewed the record and notes the following. For the period from commencement of the Kansas cases over the mineral rights until the court's ruling on summary judgment in May 2010, Mr. Izen has presented itemized bills of approximately $ 86,375, representing approximately 288 hours at $ 300 per hour. Doc. 198-3. The court determines that the reasonable compensation for Izen's efforts in procuring the judgment establishing Ronald's 1/4 ownership of the mineral interest and in the corresponding royalties amounts to 40% of that figure, or 115 hours at $ 300 per hour, for a total of $ 34,500. This reduced figure excludes Izen's efforts that did not serve to procure the judgment in Ronald's favor (and in fact hindered it), including the unsuccessful efforts regarding the interests of the trust, pursuing unsuccessful claims against Michael, and challenging the interest of Theresa Leathers. Beyond that amount, the record does not show that the fees listed were incurred for a purpose that would give them superpriority status under section 6323(b)(8). In making this finding the court has considered all of the relevant factors related to reasonableness. See Kansas Rules of Profession Conduct (KRPC) 1.5(a).

The court has also reviewed the $ 32,780.54 in expenses claimed by Izen in connection with this case. Doc. 198-3 at 12-13. The list includes $ 21,590.66 in payments or retainers to local counsel Jack Shultz. These "expenses" in reality appear to be additional legal fees. Izen has failed to show that such payments are entitled to priority under section 6323(b)(8) as reasonable attorney's fees incurred in procuring a judgment from which the IRS can collect Ronald's taxes. The list also includes a $ 6,000 payment "to Jimmy Holden for Ron Leathers to procure income tax preparation services." None of the foregoing have been shown to be reasonable expenses incurred in connection with Izen's procuring a judgment in favor of Ronald. With the foregoing items (totaling $ 27,590.66) excluded, the court finds reasonable the remaining expenses of $ 5,189.88.

In sum, the court finds that Izen has a lien for professional services in the amount of $ 39,689.88, and that his lien is entitled to priority over the IRS liens from Ronald's tax debt against the royalties currently held in suspense for Ronald by the defendant energy companies.

CONCLUSION.

The court finds that as of September 17, 2015, the amount due and owing by Ronald Leathers for tax year 1998, including interest and penalties, is $ 192,205.24. The United States is entitled to judgment in that amount against Ronald Leathers on its claim pertaining to unpaid taxes for 1998.

Based on the current tax obligation of Ronald Leathers for the years 1997 to 2005 (Govt. Exh. 514), the United States is entitled to final judgment in its favor against Ronald Leathers in the amount of $ 1,545,779.36.

The court finds that Ronald Leather's purported transfer of a chose-in-action involving his mineral rights in Haskell County, Kansas, to the Dirt Cheap Mine Trust (as well as a transfer of the mineral rights, to the extent he purported to transfer them) constituted a fraudulent transfer with respect to Ronald's tax debt to the IRS. Accordingly, the transfer is null and void as it concerns the IRS and the collection of Ronald's tax debt.

With respect to royalties currently held in suspense in the name of Ronald Leathers by the defendant energy companies, the federal tax liens established by the IRS totaling $ 1,545,779.36 are senior to any interest in that property claimed by Ronald Leathers, the Dirt Cheap Mine Trust, or James Holden.

The motion for an award of attorney's fees under 26 U.S.C. section 6323(b)(8) by attorney Joe Izen (Doc. 197) is granted in part. The court finds that Izen has a lien for attorney's fees and expenses in the amount of $ 39,689.88 against the royalties currently held in suspense in the name of Ronald Leathers by the defendant energy companies. This lien is superior to the lien of the IRS in the same property.

IT IS SO ORDERED.

Dated this 25th day of September 2015, at Wichita, Kansas.

Monti L. Belot
United States District Judge

FOOTNOTES:

/1/ Ronald Leathers has waived or is estopped from challenging Holden's settlement of the unjust enrichment claim with Michael Leathers, based on Ronald's representation that Holden was his assignee on this claim. See Doc. 98 at 1-2. See also Restatement (Third) of Trusts 5 (2003) (the obligor of a chose in action that has been assigned by the obligee discharges the liability by paying the assignee).

/2/ In June 2008, Michael filed suit against Ronald and Holden in Haskell County, Kansas, seeking to quiet title to the minerals. The complaint sought a declaration that Michael was the 100% owner of the minerals. The case was removed to this court in July 2008 after the United States was made a party. In pleadings filed in early 2009 and thereafter, Michael conceded that Ronald and Theresa each owned a 1/4 share of the minerals and were entitled to an accounting of royalties, although he asserted that they were barred by the statute of limitations, equitable defenses, or other reasons from recovering past royalty payments from him.

/3/ The OXY suit involved a little over $ 25,000 in royalties that OXY paid into federal court in Houston, Texas. Michael disclaimed any interest in the funds. Relying on Ronald's purported transfer to the Dirt Cheap Mine Trust, Izen argued that the trust rather than the IRS was entitled to the funds. In a ruling affirmed by the Fifth Circuit, the district court held that the IRS was entitled to the funds on account of Ronald's tax debt. OXY USA, Inc. v. Holden, 306 Fed. Appx. 69, 2009 WL 27477 (5th Cir., Jan. 5, 2009).