Clark v. Internal Revenue Serv.

MONA WATSON CLARK, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant.

No. 06-CV-00544

UNITED STATES DISTRICT COURT DISTRICT OF HAWAII

Dated: July 26, 2011

Hon. Marvin E. Aspen

MEMORANDUM OF FINDINGS OF FACT AND CONCLUSIONS OF LAW

MARVIN E. ASPEN, District Court Judge:

On December 16, 2010, we concluded a four-day bench trial on Plaintiff Mona Watson Clark's only remaining claim, Count V of her first amended complaint. (Dkt. Nos. 47 & 225.) In Count V, Plaintiff alleged that the Defendant, the Internal Revenue Service ("IRS"), made unauthorized disclosures of tax return information pertaining to her great uncle's estate. (Dkt. No. 47 ¶¶ 87-89.) Plaintiff is a beneficiary and the current executor of the estate. What follows are our findings of fact and conclusions of law.¹

I. Findings of Fact

As we indicated in our summary judgment order, the sole issue to be tried in this case was whether the IRS knowingly or negligently made any unauthorized disclosures of tax return information in conjunction with the issuance of an estate tax refund to the beneficiaries of Lewis M. Watson's estate. (9/14/10 Op. at 26-28.) 26 U.S.C. § 7431. At trial, Plaintiff attempted to portray this claim as part of a much broader pattern of mishandling of the estate. Much of Plaintiff's evidence pertained to persons and entities who are not parties to this suit, specifically, Arthur M. Wirtz and his affiliates. We recount it briefly in order to elucidate the context in which this litigation arose.

A. Background

1. Lewis M. Watson's Estate

Plaintiff Mona Watson Clark is the grand-niece of Lewis M. Watson. Watson died on March 13, 1961. (Statement of Agreed Facts ("SAF") ¶ 1.) In his will, Watson created a trust for the residuary property in his estate that was not specifically devised. (Pl.'s Ex. 17 at 4.) Watson named his wife, Marion Watson, as executrix of his estate and trustee of the residuary trust. (Id. at 4, 8.) Watson also named one of his business associates, Arthur M. Wirtz, as a successor executor and trustee. (Id.) Plaintiff is one of the residuary beneficiaries named in the will.² (Id.)

According to the estate tax return filed on June 13, 1962, the estate included, among other things, mineral interests in two properties in Jack County and Ward County, Texas. (Pl.'s Ex. 38 at 24.) The estate tax return listed the value of these interests as "nil," because drilling on the Jack County property had yielded "only a trace finding of oil" and "there ha[d] been no interest in or development of" the Ward County property. (Id.)

Marion Watson served as executrix of the estate from the time of her husband's death until her own death on August 4, 1963. (12/13/2010 Tr. at 22; SAF ¶¶ 3-4.) Wirtz succeededMarion Watson as executor of the estate on December 27, 1963. (SAF ¶ 4.) In 1964, in his capacity as executor, Wirtz made a distribution of estate property in the amount of $37,821.37 to the residuary beneficiaries, including Plaintiff, who was a minor at the time. (Pl.'s Ex. 84.) Until several years later, Plaintiff believed that this distribution was the final distribution of estate property. (12/13/2010 Tr. at 22.)

2. Wirtz's Misappropriation of Estate Property

Plaintiff testified at trial that, in 1981, she discovered that Wirtz had been receiving royalties from oil drilling on the Ward County property in which the estate had a mineral interest. (12/13/2010 Tr. at 24-28.) Because Plaintiff believed these royalties to be estate property, she and her fellow beneficiaries hired the law firm of Schiff, Hardin & Waite to obtain them from Wirtz. (Id. at 27, 89.)

Ultimately, in 1982, Wirtz made a distribution to the beneficiaries that included $195,808.13 in royalties accrued from December 1980 through August 1981 and $21,244.95 in interest therefrom. (Pl.'s Ex. 20 at 1.) This distribution was part of what was supposed to be the final account of the estate filed with the probate division of the Circuit Court of Cook County, Illinois on November 1, 1982. (Id.) On that same day, the estate was discharged, as was Wirtz in his capacity as executor. (Pl.'s Ex. 21.)

Plaintiff admitted at trial, however, that neither she nor the other beneficiaries told the IRS that Wirtz was no longer the estate's executor. (12/13/10 Tr. at 101.) In fact, on January 21, 1983, the IRS received what was marked as the "final" tax return for the estate prepared by Schiff, Hardin & Waite. (Id. at 28; Pl.'s Ex. 22 at 1.) The tax return listed "Arthur M. Wirtz, Successor Executor" as the fiduciary of the estate. (Pl.'s Ex. 22 at 1.) The tax return was alsosigned by John Milligan, one of Wirtz's associates, on Wirtz's behalf. (Id.) A few months later, on July 21, 1983, Arthur M. Wirtz died. (SAF ¶ 6.)

3. Issuance of Tax Refund to the Estate

But Wirtz's mishandling of estate property in the manner just described is not the basis for Plaintiff's current claim. Instead, Plaintiff's claim pertains to the IRS' issuance of a tax refund to the estate beneficiaries several years after Wirtz's death. (9/14/10 Op. at 26-28.)

Regarding the refund, Plaintiff testified that, in 1990, she received a call from an attorney at Schiff, Hardin & Waite. (12/13/10 Tr. at 43, 90-91.) The attorney informed her that he had received a check from a Mr. Scranton, who was an attorney for the corporation affiliated with Wirtz's family ("the Wirtz Corporation"). (Id.) Plaintiff later testified that the check, which was for the amount of $16,375.95, was payable to the estate of Lewis M. Watson. (Id. at 90.) Plaintiff also stated that Scranton delivered the check to Schiff, Hardin & Waite, which then distributed the proceeds to the beneficiaries of the estate, including Plaintiff. (Id.)

Plaintiff did not indicate at trial whether she took any action to discover why the estate was receiving a check—from one of Wirtz's affiliates—roughly seven years after the estate's supposed closing and Wirtz's death.

4. Plaintiff's Involvement in the Pursue Energy Bankruptcy

Plaintiff's concerns about the estate reemerged in 2003. Around Christmastime of that year, Plaintiff's mother, Virginia Fairfield Clark, who is also a beneficiary of the estate, received a letter from Andrew Glick of the Northern Trust Company. (12/13/10 Tr. at 29.) The letter notified Plaintiff's mother of a proposed settlement agreement between mineral interest owners and Pursue Energy Corporation ("Pursue Energy"), which is an affiliate of the D.H. HuntCompany.³ (Id. at 29-30.) Plaintiff initially disregarded the letter because she "hadn't been aware of any property in Mississippi," to which, we infer, the letter referred. (Id.) But when Plaintiff's mother received a second letter regarding a proposed settlement agreement, Plaintiff began to investigate further. (Id. at 30.)

Ultimately, Plaintiff learned from court records that her mother was listed in the matrix of creditors in a bankruptcy proceeding in Mississippi involving Pursue Energy. (Id. at 31.) Plaintiff then filed a proof of claim on behalf of her mother and the estate beneficiaries in that proceeding. (Id.) Plaintiff was unable to produce documentation supporting her proof of claim, however. (Id. at 31-32.) Plaintiff attributes this failure to Pursue Energy's refusal to produce information in its possession about her mother's purported claim, despite an order from the bankruptcy judge to do so. (Id.) Although she admitted she "could not prove that he was lying," Plaintiff asserted that Pursue Energy's general counsel lied to the bankruptcy judge by stating that the company had no documentation pertaining to Plaintiff's mother's claim and that the listing of Plaintiff's mother on the matrix of creditors was a mistake.⁴ (Id. at 31-32.)

Believing that the listing of her mother's name was no mistake and intent on uncovering the apparent asset underlying her mother's creditor status, Plaintiff turned to the IRS:

And so I thought, 'Well, what's the logical place to get this information?' Because Wirtz can lie to us, [the D.H.] Hunt [Company] can lie to us, but they are not going to be lying to the IRS. At least, hopefully, they are not going to be lying to the IRS. So I started requesting information from the IRS, so that I could find out what exactly this asset was.

(Id. at 32.) This lawsuit grew out of Plaintiff's interactions with the IRS.

B. Plaintiff's Current Claim

With this expansive backdrop in view, we turn to Plaintiff's remaining claim against the IRS. Despite initially hoping that the IRS would be able to provide her with information about the purported estate asset in Mississippi, Plaintiff has come to believe that the IRS facilitated the mishandling of estate property. Specifically, Plaintiff asserts that the unauthorized disclosure of the estate's tax return information allowed an unknown third party to defraud the estate of a mineral asset in Mississippi through a like-kind property exchange. In Plaintiff's view, all of this activity culminated in the issuance of the refund in 1990.

Plaintiff's primary evidence of the IRS' alleged actions is a series of transcripts generated by the IRS for recordkeeping purposes. These transcripts, which consist of numerical codes, apparently represent actions taken and documents filed with respect to certain taxpayers, specifically, the Watson estate. Because many of the underlying documents are not in evidence, the interpretation of these transcripts is at the heart of Plaintiff's case.

At trial, Plaintiff offered her own interpretation of the transcripts based on her review of IRS publications detailing what the numerical codes in the transcripts signify. Plaintiff also presented the declaration and testimony of Mark Sullivan, a former IRS employee, who claimed to be an expert on IRS matters. At times, Plaintiff's interpretation of the transcripts contradicted Sullivan's. In other instances, Plaintiff drew conclusions from the transcripts that Sullivan was either unable or unwilling to draw. Before addressing whether and to what extent to...