I've been scammed. . .

[Justiceforall]

Hello, I am new to this website and was hoping to get some help in what I call the David (me) vs. Goliath (these people will remain nameless for now) trust scam. My ex-husband talked me into a trust in the mid 90's in which we "gave away" title to our home to a trustee. We are in the middle of a divorce and although he lives in the property and enjoys all the benefits, he is claiming in court "we" don't own the house the trust does, so even though there is a sizable amount of equity, he says I get nothing. Of course his cohorts (good ol boys club trustees) have done everything within their power (legal and illegal) to keep the property and any rights away from me.

My question is does anyone have any information about System Two Limited Tax and Estate Planners out of Fremont that operated in the mid 90's. I think the attorney who help set these up is Ray Sowards. I would like to know who the promoters were and if any of their trust were challenged in court.

[notorial dissent]

Welcome!!!

I don't know anything about "System Two Limited Tax and Estate Planners", I am sure someone here probably does though and will be more than happy to provide what info they have, but I think you have pretty aptly summed up what happened, and you are going to need a good lawyer to get this straightened out.

[LPC]

We are in the middle of a divorce and although he lives in the property and enjoys all the benefits, he is claiming in court "we" don't own the house the trust does, so even though there is a sizable amount of equity, he says I get nothing.

Welcome to Quatloos, and sorry to hear about your legal (and marital) problems.

The tax cases on "sham trusts" might be helpful to you, but what you really should be looking at is the divorce laws of your state, and whether the trust has any effect on your rights, even assuming it is valid. (The fact that you joined in the transfer could be a problem.)

The law of trusts might also be relevant, because the laws of most states say that you can't set up a trust for your own benefit and avoid your creditors (and you're in the position of becoming a creditor). See, for example, section 505(a) of the Uniform Trust Act.

You might also have rights to the property as a beneficiary of the trust under the literal terms of the trust (assuming that a trust document even exists).

What you describe above, about your husband's continuing use of the property, is a classic "badge of fraud" under the Uniform Fraudulent Conveyance Act and the Uniform Fraudulent Transfer Act, which means that the transfer to the trust is void as to creditors.

So there's lots of law out there that undermines your husband's position, but you're going to need a lawyer because this is not a good area for self-help.

Good luck.

[wserra]

First, last and in the middle: You need a lawyer. Welcome to Quatloos, but you need a lawyer.

That said, you might find this Tax Court memo opinion interesting. It concerns the (ahem) activities of a certain California lawyer named Ray Sowards and his relationship with a certain (ahem) business called "System Two Limited".

The Tax Court Judge didn't think a lot of Mr. Sowards:

Mr. Sowards generally used WPA [a trust he set up purportedly for the benefit of his wife and kids, but of which they knew nothing] only as a receptacle into which he deposited income received from STL [System Two Limited] and out of which moneys flowed for his personal use
...
In this case, the record discloses multiple “badges of fraud” which clearly and convincingly justify the imposition of fraud penalties. In 1996 and 1997, there was a significant understatement of income. We find Mr. Sowards’s testimony that the funds transferred by STL were loans was false. Except for Mr. Sowards’s self-serving testimony and an alleged loan document, all the evidence refutes the existence of a debtorcreditor relationship. The pattern of STL’s periodic payments (weekly), the amounts of the payments, the frequent statements Mr. Sowards provided to STL for “amounts due,” and the fact that Mr. Sowards rendered services to STL and its customers throughout the period of time that STL was making payments to WPA, establish that Mr. Sowards received remuneration for services he rendered to STL, its customers, and/or Mr. Strong. That remuneration was in the form of the STL checks to WPA which were deposited into the WPA account. We find that the understatement of this income to be clear and convincing evidence of fraudulent intent.

The Court sustained the fraud penalties on another half-dozen grounds as well.

Following that, Sowards was disciplined by the CA Bar:

July 30, 2009

RAY WILLIAM SOWARDS [#139952], 62, of San Jose was suspended for two years, stayed, placed on two years of probation with an actual six-month suspension and he was ordered to take the MPRE and comply with rule 9.20. The rule took effect July 30, 2009.

Sowards underreported his income on his federal tax returns in 1995, ’96 and ’97 by more than $120,000 and was penalized almost $80,000. In a trial before the U.S. Tax Court, the court determined that Sowards gave false testimony concerning his wife’s non-existent consulting business, the creation of an alleged trust and payments related to an alleged business loan. His actions involved moral turpitude.
In mitigation, Sowards has no prior discipline record, he cooperated with the bar’s investigation and he had extreme personal problems that led to the misconduct.

I'd say you have a good case. But did I mention that YOU NEED A LAWYER?

[Demosthenes]

Ray William Sowards - #139952

Current Status: Active

This member is active and may practice law in California.

See below for more details.

Profile Information

The following information is from the official records of The State Bar of California.

Bar Number: 139952
Address: Attorney at Law
2542 S Bascom Ave Ste 200
Campbell, CA 95008
Map it Phone Number: (408) 371-6000
Fax Number: (408) 371-6005
e-mail: rsowards@pacbell.net
County: Santa Clara
Undergraduate School: California St Univ Hayward; Hayward CA
District: District 6
Sections: None Law School: Lincoln Univ; CA
Status History

Effective Date Status Change
Present Active
1/30/2010 Active
7/30/2009 Not Eligible To Practice Law
6/6/1989 Admitted to The State Bar of California
Explanation of member status

Actions Affecting Eligibility to Practice Law

Effective Date Description Case Number Resulting Status
Disciplinary and Related Actions

Overview of the attorney discipline system.

7/30/2009 Discipline w/actual suspension 07-O-12794 Not Eligible To Practice Law

Administrative Actions

This member has no public record of administrative actions.

Copies of official attorney discipline records are available upon request.

Explanation of common actions

State Bar Court Cases

NOTE: The State Bar Court began posting public discipline documents online in 2005. The format and pagination of documents posted on this site may vary from the originals in the case file as a result of their translation from the original format into Word and PDF. Copies of additional related documents in a case are available upon request. Only Opinions designated for publication in the State Bar Court Reporter may be cited or relied on as precedent in State Bar Court proceedings. For further information about a case that is displayed here, please refer to the State Bar Court's online docket, which can be found at: http://apps.statebarcourt.ca.gov/dockets/dockets.aspx

DISCLAIMER: Any posted Notice of Disciplinary Charges, Conviction Transmittal or other initiating document, contains only allegations of professional misconduct. The attorney is presumed to be innocent of any misconduct warranting discipline until the charges have been proven.

Effective Date Case Number Description
7/30/2009 07-O-12794 Stipulation [PDF]
California Bar Journal Discipline Summaries

Summaries from the California Bar Journal are based on discipline orders but are not the official records. Not all discipline actions have associated CBJ summaries. Copies of official attorney discipline records are available upon request.

July 30, 2009

RAY WILLIAM SOWARDS [#139952], 62, of San Jose was suspended for two years, stayed, placed on two years of probation with an actual six-month suspension and he was ordered to take the MPRE and comply with rule 9.20. The rule took effect July 30, 2009.

Sowards underreported his income on his federal tax returns in 1995, ’96 and ’97 by more than $120,000 and was penalized almost $80,000. In a trial before the U.S. Tax Court, the court determined that Sowards gave false testimony concerning his wife’s non-existent consulting business, the creation of an alleged trust and payments related to an alleged business loan. His actions involved moral turpitude.

In mitigation, Sowards has no prior discipline record, he cooperated with the bar’s investigation and he had extreme personal problems that led to the misconduct.

[fortinbras]

I expect a good lawyer can undo the trust as a fraudulent conveyance or some other trick to hide community property. However, undoing the trust may open up the property to demands of the tax authorities for a lot of back taxes.

[Demosthenes]

Sowards' stipulations in his California Bar case:

http://www.cheatingfrenzy.com/sowards.pdf

"the creation of an alleged trust"

[Demosthenes]

UNITED STATES OF AMERICA, Plaintiff(s), vs. DAVID C. CLARK, et al., Defendant(s).

No. C 07-3086 MEJ

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA

2007 U.S. Dist. LEXIS 81843; 2007-2 U.S. Tax Cas. (CCH) P50,783; 100 A.F.T.R.2d (RIA) 6430


October 25, 2007, Decided
October 25, 2007, Filed



COUNSEL: [*1] For United States Of America, Plaintiff: Thomas Moore , LEAD ATTORNEY, U.S. Attorney's Office, San Francisco, CA; Jay Robert Weill , Attorney at Law, U.S. Attorney's Office, San Francisco, CA.

For David C. Clark, Wendy R. Clark, Clark C. Family Trust, Defendants: Ray William Sowards , Law Office of Ray Sowards, Milpitas, CA.

JUDGES: MARIA-ELENA JAMES, United States Magistrate Judge.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S DEMAND FOR JURY TRIAL

I. INTRODUCTION

Plaintiff United States of America ("Plaintiff") brought this action, pursuant to Internal Revenue Code Sections 7401 and 7403, against Defendants David C. Clark, Wendy R. Clark, Clark C. Family Trust, American Synergy Financial Company Trust and Eagle Systems International, Inc. ("Defendants"). Plaintiff wishes to reduce to judgment federal income tax assessments made against David and Wendy Clark, to set aside a fraudulent transfer of real property, and to foreclose on federal tax liens. Defendants have demanded a right to a jury trial on all three counts. On September 11, 2007, this Court requested briefs from both parties, addressing whether a jury trial is permissible in a § 7403 proceeding. Defendant thereafter [*2] submitted a memorandum in support of their jury demand; ("Def. Memo") Plaintiff has also submitted a memorandum detailing its position on the matter ("Plaint. Memo").

The issue before the Court is whether Defendants are entitled to a jury trial for the three causes of action named in Plaintiff's Complaint. After careful consideration of the parties' papers, relevant legal authority, and good cause appearing, the Court GRANTS Defendants' demand as the issue of the legality of Plaintiff's tax assessments and DENIES Defendants' demand as to the remaining two causes of action.

II. DISCUSSION

A. Venue & Jurisdiction

Venue is proper in the Northern District of California because Defendant taxpayers, David C. Clark and Wendy R. Clark, reside within this judicial district, and the subject property is also located within this district.

This Court has federal question jurisdiction over this action under Section 7402(a) and 7403 of the Internal Revenue Code of 1986, and 28 U.S.C. §§ 1340, 1345.

B. Jury Trial Issues

1. Reducing Federal Income Tax Assessments To Judgment

Plaintiff seeks to reduce to judgment certain tax assessments made against Defendants David and Wendy Clark. As stated in the Complaint, [*3] these assessments include federal income tax, penalties, and interest for the years 1996, 1998, 1999, 2000, and 2001, totaling $ 600,870.58. (Complaint, P11-15). Defendants assert that material disputes of factual and legal issues exist regarding their tax liabilities, and claim the Seventh Amendment entitles them to a jury trial as to the legality of these tax assessments. (Def. Memo, 2: 9-13). Plaintiff has not contested Defendants' demand for a jury trial as to this issue, and expressly conceded that Defendants are entitled to a jury trial on this narrow issue. (Plaint. Memo, 2: 2-8).

HN1The Seventh Amendment protects a litigant's right to a jury trial in suits at common law, where legal rights to be ascertained or determined, as opposed to equitable rights or remedies. Granfinanciera v. Nordberg, 492 U.S. 33, 41, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989). When a party challenges the validity of a tax assessment made against him, he seeks the judicial determination of a legal right. United States v. O'Connor, 291 F.2d 520, 527 (2d Cir. 1961). Therefore, a party is entitled to a jury trial as to the legality of federal tax assessments, pursuant to the Seventh Amendment. Accordingly, Defendants' demand for a jury trial [*4] as to their challenge of the legality of Plaintiffs federal tax assessments is GRANTED.

2. Setting Aside Fraudulent Transfer of Real Property

Plaintiff contends that Defendants engaged in a fraudulent transfer of real property located at 41121 Kathlean Street, Fremont, California 94583, and seeks to set aside this transfer on the basis that the transfer of title to said property lacked economic substance and was made solely for the use and benefit of Defendants David and Wendy Clark. (Complaint, P5-21). Defendants argue they have a right to trial on this particular issue, based on their assertion that this case is analogous to a private quiet title and fraudulent conveyance action when the Plaintiff is seeking a monetary judgment. (Def. Memo, 2: 15-22). In addition, Defendants appeal to the "Public Rights Doctrine" as support for their claim to a jury trial, stating that the United States Supreme Court in Granfinanciera held that a litigant's right to a jury trial is protected by the Seventh Amendment in all cases, with the exceptions of those cases in which a statutory claim asserts a "public right", [*5] and those in which Congress has assigned to non-Article 3 courts. (Def. Memo, 2: 15-28).

Plaintiff contests the demand for a jury trial on this issue on the ground that an action to set aside the fraudulent transfer of real property is an equitable action, and therefore Defendants are not entitled to a jury trial. Plaintiff cites Johnson v. Gardner, 179 F.2d 114 (9th Cir. 1949), as support for its claim. In Johnson, plaintiff trustee brought suit to set aside conveyances from defendant Ruth Vena Johnson to other defendants, "by which such transfers were to be effectuated were without a fair consideration and were intended to hinder, delay, and defraud creditors, both present and future, as of the respective times of such conveyances." Id. at 115. The defendants requested a jury trial and a panel of jurors were assembled and present in the district court. Id. at 115. However, the trial judge excused the jury, after determining that the defendants waived their right to a jury. Id. at 116. On appeal before the Ninth Circuit, the sole issue was whether the trial court erred in refusing to grant the defendants' demand for a jury trial. Id. The Ninth Circuit held the action to set aside a [*6] fraudulent conveyance of real property was an equitable action because "the wrong wrought by the fraud is not remedial at law in any efficient and practical way, and the historical equitable relief by cancellation of record is the only adequate and complete remedy." Id. at 117. Since the underlying action was one at equity, the court determined it was not one which required a jury trial, and the court ultimately upheld the district court's judgment. Johnson, 179 F.2d at 117-18.

Johnson is factually similar to the case before this Court in that Plaintiff is seeking a court's determination that a conveyance made by Defendants is devoid of sufficient consideration and ultimately motivated by the desire to avoid liability to creditors. The holding in Johnson provides strong authority and guidance; however, the Court must consider Defendants' argument regarding Granfinanciera.

In Granfinanciera, 492 U.S. 33, 56, 109 S. Ct. 2782, 106 L. Ed. 2d 26 (1989), the United States Supreme Court held that when a bankruptcy trustee seeks to recover a determinate sum through a fraudulent conveyance action, pursuant to 11 U.S.C. § 548, the action resembles a breach of contract suit for which the right to a jury trial attaches. The Supreme [*7] Court's decision to grant a jury trial was particularly grounded in the facts that "the preferences sued for were money payments of ascertained and definite amounts" and "[plaintiff]'s fraudulent conveyance action plainly seeks relief traditionally provided by law courts." Id. at 49. The Supreme Court also stated, "The nature of the relief respondent seeks strongly supports our preliminary finding that the right he invokes should be denominated legal rather than equitable." Id. at 47.

After Granfinanciera, circuit and district courts began to distinguish the case on the reasoning that the Supreme Court only intended the holding to apply for actions involving pure money transfers, rather than conveyances of real property. For example, in Resolution Trust Corp. v. Pasquariello (In re Pasquariello), 16 F.3d 525, 530 (3rd Cir. 1994), the Third Circuit continued to classify fraudulent conveyance of real property actions as an equitable issue devoid of the right to a jury trial, given the historical nature of the action, and that the particular plaintiff was not seeking monetary damages as his remedy. Id. at 529-30. The court also made the salient point that "every court of appeals to have [*8] considered the issue, albeit prior to Granfinanciera, held that HN2any attempt to remedy a fraudulent conveyance of real property through a set aside or avoidance was a matter for the equity courts and that no right to jury trial attached." Id. at 530.

Furthermore, in another decision by the United States Supreme Court, the court warns of a statutory scheme that "[forecloses] a court of equity from the exercise of its traditional discretion." United States v. Rodgers, 461 U.S. 677, 103 S. Ct. 2132, 76 L. Ed. 2d 236 (1983). In Rodgers, the Supreme Court weighed the propriety of a judicial sale of property owned by a delinquent taxpayer. In its decision, the Supreme Court stated, "[a] § 7403 HN3proceeding is by its nature a proceeding in equity." Rodgers, 461 U.S. at 708.

HN4The right to a jury trial depends on the nature of the relief that is sought. Chauffeurs, Teamsters & Helpers, Local No. 391 v. Terry, 494 U.S. 558, 110 S. Ct. 1339, 108 L. Ed. 2d 519 (1990). Here, Plaintiff in this case is not seeking monetary damages equivalent to those sought by the plaintiff in Granfinanciera; rather, Plaintiff seeks to set aside the fraudulent conveyance of real property, in the traditional and equitable sense of the action. (Plaint. Memo, 2:26-28). Accordingly, the issue [*9] becomes an equitable one suitable for determination by a judge, and therefore Defendants' demand for a jury trial as to this issue is DENIED.

3. Foreclosure on Federal Tax Liens

As to its last claim, Plaintiff seeks to foreclose on federal tax liens against the above-mentioned parcel of real property belonging to David and Wendy Clark. Defendants have demanded a jury trial as to this issue, and Plaintiff contends that this is an equitable claim that does not carry a Seventh Amendment right to jury trial.

HN5Foreclosure suits are historically equitable actions for which there is no right to trial by jury. United States v. Annis, 634 F.2d 1270, 1272 (10th Cir. 1980); Gefen v. United States, 400 F.2d 476, 477-79 (5th Cir. 1968); Damsky v. Zavatt, 289 F.2d 46, 52-54 (2d Cir. 1961). Thus, courts have long ago determined that there is no right to trial available to the parties involved in a lawsuit concerning the foreclosure of federal tax liens. Accordingly, Defendants' demand for a jury trial as to this issue is DENIED.

IV. CONCLUSION

Based on the analysis above, the Court GRANTS Defendants' demand for a jury trial, but solely to the issue of the legality of Plaintiff's tax assessments. The Court [*10] DENIES Defendants' demand for a jury trial as to the remaining two issues for setting aside a fraudulent conveyance and foreclosure on federal tax liens. Accordingly, this case shall be bifurcated into separate trials for the legal and equitable claims. The Court shall issue a case management order forthwith.

IT IS SO ORDERED.

Dated: October 25, 2007

MJames

MARIA-ELENA JAMES

[Demosthenes]

TRE INTERNATIONAL TRUST, Petitioner, vs. UNITED STATES OF AMERICA, Respondent.

No. MC 01-70 PHX RCB

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

2002 U.S. Dist. LEXIS 9919; 2002-1 U.S. Tax Cas. (CCH) P50,386; 89 A.F.T.R.2d (RIA) 2192

April 2, 2002, Decided
April 3, 2002, Filed

COUNSEL: For TRE INTERNATIONAL TRUST, petitioner: Robert G Bernhoft, Law Office of Robert G Bernhoft, Milwaukee, WI.

For UNITED STATES OF AMERICA, respondent: John B Snyder, III, US Dept of Justice, Washington, DC.

For UNITED STATES OF AMERICA, respondent: Paul Kipp Charlton, Esq, US Attorney's Office, Phoenix, AZ.

JUDGES: Robert C. Broomfield, Senior United States District Judge.

OPINION BY: Robert C. Broomfield

OPINION


ORDER

On August 1, 2001, Petitioner brought this action seeking to quash an IRS summons seeking records from a third-party record keeper (doc. # 1). Respondent moved to dismiss the petition to quash and counter-petitioned to enforce the summons (doc. # 10). Petitioner then responded and requested an evidentiary hearing (doc. # 13).

HN1In order to obtain enforcement of a summons, the IRS must make a prima facie showing of good faith and legitimate purpose. This is done by submitting an affidavit or declaration by the summoning agent which states: 1) the investigation is being [*2] conducted for a legitimate purpose; 2) the summons is relevant to that purpose; 3) the information sought is not currently within the possession of the Service; and 4) all appropriate administrative steps were followed. United States v. Powell, 379, U.S. 48, 58 (1964).

The declaration of Theresa Alvarez, provided by respondent, meets the requirements of Powell. Alvarez declares that she is conducting an investigation into the "individual income tax liabilities of Thomas and Ruby Day for the tax years ending December 31, 1997 and December 31, 1998." Declaration of Revenue Agent Theresa Alvarez at P 2. Information from TRE is relevant to the investigation because Thomas and Ruby Day transferred their personal residence to a trust that has the same address as TRE and "a loan file shows that checks from TRE International's checking account were used to make payments for Thomas and Ruby Day's Loan on their personal residence." Id. P 23. The summoned documents were not in the possession of the IRS at the time the summons was issued. Id. P 21. The declaration outlines all of the procedures followed to issue the summons, which do not appear irregular in any way. Id. [*3] PP 3-20.

HN2To quash the summons, the taxpayer has the burden of proving that the IRS summons is an abuse of process or that enforcement is not sought in good faith. Id. A taxpayer is only entitled to an evidentiary hearing if there is a sufficient showing of the government's bad faith. United States v. Samuels, Kramer & Co., 712 F.2d 1342, 1348 (9th Cir. 1983). The taxpayer must be able to provide a minimal amount of evidence to entitle him to an evidentiary hearing. United States v. Stuckey, 646 F.2d 1369, 1372 (9th Cir. 1981). Required evidence consists of specific factual allegations, supported by affidavits, in rebuttal to the government's prima facie showing of good faith. Samuels, Kramer & Co., 712 F.2d at 1348. These facts must raise sufficient doubt about the government's purpose for enforcing the summons. United States v. Church of Scientology, 520 F.2d 818, 825 (9th Cir. 1975). Sufficient doubt is raised if the court can infer the possibility of some wrongful conduct by the government. Samuels, Kramer & Co., 712 F.2d at 1348.

TRE's allegations and evidence are not sufficient to warrant [*4] an evidentiary hearing. TRE alleges that the summons was issued to "harass and intimidate trust companies" as part of "wide-ranging IRS criminal investigation" into a trust consulting firm who has done business with TRE. Petition to Quash Summons at P 9. TRE further alleges that the "IRS is abusing its administrative summons power to discourage the use of business forms it finds inconvenient and otherwise undesirable." Id. P 10.

In support of these allegations, TRE offers a declaration by William Willardson, a trustee of TRE. Willardson declares that he "was told by various third parties that System Two Limited [the trust consulting firm referenced above] had been 'raided' by IRS and that IRS had obtained customer lists from System Two." Declaration of William Willardson at P6. TRE also includes a letter it received from the IRS informing it of various tax violations by System Two Limited and requesting that TRE amend its tax returns if it participated in any of the enumerated violations. None of the allegations or evidence raise any credible doubt as to the government's purpose for issuing the disputed summons.

The declarant has no personal knowledge of the facts attested. [*5] Neither the declaration nor the letter provided by TRE substantiate or even hint at a wide-ranging criminal investigation or an intent harass trust companies and eliminate an inconvenient form of business. Therefore, TRE's request for an evidentiary hearing and motion to quash the summons must be denied, and respondent's counter-petition to enforce granted.

IT IS ORDERED that Petitioner's Motion for an Evidentiary Hearing (doc. # 13) is DENIED.

IT IS FURTHER ORDERED that Petitioner's Petition to Quash the IRS Summons (doc. # 1) is DENIED.

IT IS FURTHER ORDERED that Respondent's Counter-petition to Enforce the Summons (doc. # 10) is GRANTED.

DATED this 2 day of April, 2002.

Robert C. Broomfield

Senior United States District Judge