Johnson v. United States

VICTORIA JOHNSON, Plaintiff and Counterclaim Defendant,

v. UNITED STATES OF AMERICA, Defendant, CounterclaimPlaintiff, and Third-Party Plaintiff,SAMMY E. JOHNSON, J. HUNTER SCHOFIELD,and MATTHEW SCHOFIELD, Third-Party Defendants.

1:09CV957

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA

January 17, 2012

MEMORANDUM OPINION, RECOMMENDATION, AND ORDER

OF UNITED STATES MAGISTRATE JUDGE

The instant matter comes before the undersigned United States Magistrate Judge for a recommended ruling on the United States' Motion for Summary Judgment (Docket Entry 47) and the Motion of Victoria Johnson for Summary Judgment (Docket Entry 49), as well as for disposition of Plaintiff's counsel's Motion to Withdraw (Docket Entry 60). For the reasons that follow, the United States' Motion for Summary Judgment should be granted, the Motion of Victoria Johnson for Summary Judgment should be denied, and Plaintiff's counsel's Motion to Withdraw will be granted.

Background

In 1997, Plaintiff Victoria Johnson's ("Victoria's") husband, Sammy Johnson ("Sammy"), was fired from his job at Colonial Life & Accident Insurance Co. ("Colonial Life"). (See Docket Entry 48 at 2.) Sammy sued Colonial Life for breach of contract and wrongful discharge. (See Docket Entry 50 at 2.) After a lengthy legal proceeding, a jury awarded Sammy a judgment of $1,613,661.00 plus interest and costs in March 2006. (See Docket Entry 48 at 2; see also Docket Entry 48-6.) Sammy received a net award of $1,049,444.45 after legal fees and expenses, which he directed to be placed into his wife's checking account because (according to Sammy) "he wanted nothing to do with the money." (Docket Entry 50 at 3; see also Docket Entry 48 at 2-3.)

Roughly six months after Sammy's receipt of the funds (and the transfer to Victoria), Sammy and Victoria began to investigate whether the judgment award was taxable. (See Docket Entry 48 at 3; see also Docket Entry 48-4 at 66-67.) Sammy and Victoria first contacted an accountant who advised them that, in his opinion, the funds were taxable, but also suggested that they seek a second opinion. (See Docket Entry 48 at 4; see also Docket Entry 48-1 at 65-67; Docket Entry 48-4 at 66-67.) Sammy subsequently contacted a second accountant, Keith Pleasant ("Pleasant"), who advised Sammy that based on the recent opinion of the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") inMurphy v. United States, 460 F.3d 79 (D.C. Cir.), vacated, 2006 WL 4005276 (D.C. Cir. Dec. 22, 2006), a portion of the award may not be taxable. (See Docket Entry 48 at 3-4.) Pleasant advised Sammy to delay filing his tax return until the appeals process was complete with respect to the Murphy decision. (See id. at 4.) Accordingly, Pleasant prepared an extension request for Sammy's 2006 income tax return filing. (See id.)

After vacating its original decision in Murphy, the D.C. Circuit held that the funds at issue in that case were taxable. Murphy v. Internal Revenue Service, 493 F.3d 170 (D.C. Cir. 2007). Sammy then filed his 2006 income tax return reporting $1,021,024 of taxable income and an income tax owed of $358,223. (See Docket Entry 48 at 5.) Sammy, however, submitted a payment of only $1,000. (See Docket Entry 48 at 5.) The unpaid balance continues to accrue interest and penalties, which, as of May 15, 2011, resulted in Sammy owing $503,980.47 to the United States for the 2006 income tax year (see id.).

Upon the original transfer from Sammy to Victoria in March 2006, Victoria had deposited the funds into a money market account. (See id. at 6.) She subsequently used the funds in various ways, including to build the home where she and Sammy now live, to establish an investment account, and to make gifts to three of her children. (Id. ; see also Docket Entry 48-4 at 56, 71-74.) In early 2008, Victoria, along with two of her children, J. HunterSchofield ("Hunter") and Matthew Schofield ("Matthew"), formed Schofield-Johnson, LLC ("Schofield-Johnson"). (See Docket Entry 48 at 6.) Victoria contributed nearly all of the entity's assets, including the home she built and the investment accounts she had established with the funds from Sammy's lawsuit. (Id.) Sammy has no ownership interest in Schofield-Johnson. (See Docket Entry 50 at 3.)

In July 2009, the United States Internal Revenue Service ("IRS") filed a nominee lien against Victoria and a separate lien against Schofield-Johnson for the debt owed by Sammy. (See id. at 5.) The IRS subsequently levied on Victoria's personal accounts at the State Employee Credit Union, from which the IRS eventually obtained over $20,000. (See id.) Victoria filed a Complaint in this Court alleging wrongful levy on the basis that she is not a nominee of Sammy. (Docket Entry 1.) The United States answered Victoria's Complaint (Docket Entry 14) and asserted a counter-claim against Victoria and a third-party claim against Sammy for fraudulent transfer (see id. at 14). After discovering that Victoria had transferred $25,000 to both Hunter and Matthew, the United States filed an Amended Counterclaim and Third-Party Complaint to include Hunter and Matthew in the fraudulent transfer claim. (See Docket Entry 24.)

In a separate action, Schofield-Johnson filed for bankruptcy protection, effectively staying the levies against it. (See DocketEntry 50 at 5.) That case remains pending in the United States Bankruptcy Court for the Middle District of North Carolina. In re Schofield-Johnson, LLC, Case No. 09-81347 (Bankr. M.D.N.C.). Of particular relevance to the instant proceeding, Schofield-Johnson initiated an adversary proceeding in the bankruptcy action seeking "a judgment declaring that the levy by the IRS was wrongful and that its account may not be used to satisfy Sammy's individual tax liability." (See Docket Entry 59-1 at 1; see also Schofiel-Johnson, LLC v. United States of America, Commissioner of Internal Revenue Service, Adv. No. 09-09067 (Bankr. M.D.N.C.).) In response, the IRS sought "a ruling that Schofield-Johnson is merely the nominee of Sammy Johnson or that Sammy's transfer of certain funds to Victoria was fraudulent, and that therefore, the IRS may properly levy upon Schofield-Johnson's account to satisfy Sammy's tax liability." (See Docket Entry 59-1 at 1-2; see also Docket Entry 48 at 6.)

Trial was held in the adversary proceeding in August 2011. (See Docket Entry 59-1 at 1.) Thereafter, the bankruptcy court issued a Memorandum Opinion in which it determined that, in order to decide whether Schofield-Johnson was the nominee of Sammy, the bankruptcy court first had to analyze whether the transfer between Sammy and Victoria was fraudulent (see id. at 5). After concluding that state law provided the appropriate decisional authority forthat determination (see id.), the bankruptcy court looked to N.C. Gen. Stat. § 39-23.4(a), which states that:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligations was incurred, if the debtor made the transfer or incurred the obligation . . . [w]ith intent to hinder, delay or defraud any creditor of the debtor.

After addressing each of the relevant factors provided in N.C. Gen. Stat. § 39-23.4(b) to determine intent, the bankruptcy court held that, "[s]ince the overwhelming majority of the factors favors the position of the IRS, . . . the transfer from Sammy to Victoria was fraudulent under North Carolina law." (Docket Entry 59-1 at 11.) Although that decision was subsequently appealed, see Schofield-Johnson, LLC v. Internal Revenue Service, 1:11-cv-00960 (M.D.N.C.), said appeal was ultimately withdrawn, see id. , Docket Entries 14, 15, leaving the bankruptcy court's Memorandum Opinion as the final judgment in that matter.

In the instant action between Victoria and the United States, the Court is now asked to address Victoria's and the United States' cross-motions for summary judgment (see Docket Entries 47, 49), which, as discussed below, require findings nearly identical to those already determined by the bankruptcy court in the adversary proceeding between Schofield-Johnson and the United States. Under these circumstances, this Memorandum Opinion will evaluate whether either party is entitled to judgment as a matter of law on the following two issues: (1) is Victoria a nominee of Sammy; and(2) was the transfer from Sammy to Victoria fraudulent under 28 U.S.C. § 3304(b).

Motions for Summary Judgment

Under Fed. R. Civ. P. 56(a), "[t]he [C]ourt shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." In considering that question, the Court "may not make credibility determinations or weigh the evidence." Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150 (2000). However, "unsupported speculation is not sufficient to defeat a summary judgment motion if the undisputed evidence indicates that the other party should win as a matter of law." Francis v. Booz, Allen & Hamilton, Inc., 452 F.3d 299, 308 (4th Cir. 2006).

Victoria as a Nominee of Sammy

The United States may enforce federal tax liens against property owned by a third-party that is a nominee or alter ego of a delinquent tax payer. G.M. Leasing Corp v. United States, 429 U.S. 338, 350-51 (1977). To decide if an individual qualifies as a nominee, the Court must first determine whether the delinquent taxpayer has any rights in the property under state law. Drye v. United States, 528 U.S. 49, 58 (1999); see also OMOA Wireless, S. De R.L. v. United States, No. 1:06CV148, 2010 WL 3199959, at *4 (M.D.N.C. Aug. 12, 2010) (Osteen, Jr., J.) (unpublished) ("Theinitial inquiry in any case involving a federal tax lien is to determine what rights the taxpayer has to the property in question under state law.").

The Court, by way of opinion of Judge Osteen, Jr., previously has held...