Schofield-Johnson, LLC v. United States Comm'r of Internal Revenue Serv. (In re Schofield-Johnson, LLC)

108 A.F.T.R.2d 2011-6318

2011-2 USTC P 50,638

462 B.R. 539

In re SCHOFIELD–JOHNSON, LLC, Debtor.Schofield–Johnson, LLC, Plaintiff,

v.United States of America, Commissioner of Internal Revenue Service, Defendant.

Bankruptcy No. 09–81347.

Adversary No. 09–09067.

United States Bankruptcy Court, M.D. North Carolina,Durham Division.

Sept. 22, 2011.

Jason A. Morton, Morton Law, PLLC, Southern Pines, NC, William Y. Webb, Webb & Graves, PLLC, W.Y. Alex Webb, Aberdeen, NC, for Plaintiff.

Anne Elisabeth Blaess, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

THOMAS W. WALDREP, JR., Bankruptcy Judge.

This adversary proceeding was tried on August 22, 2011. Anne E. Blaess appeared on behalf of the above-captioned defendant (the “IRS”), and W.Y. Alex Webb and Jason A. Morton appeared on behalf of the above-captioned plaintiff (“Schofield–Johnson”). In this case, the IRS filed a lien and levied upon an account belonging to Schofield–Johnson, with the intent to use these funds to pay a tax liability owed by Sammy Johnson (“Sammy”). Sammy's wife, Victoria Johnson (“Victoria”), is the majority shareholder in Schofield–Johnson, an entity in which Sammy has no ownership interest. Schofield–Johnson seeks 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. The IRS seeks 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.

I. JURISDICTION

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and Local Rule 83.11 of the United States District Court for the Middle District of North Carolina. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A), which this Court has the jurisdiction to hear and determine.

II. FACTS

In 1997, Sammy sued his employer, Colonial Life Insurance Company (“Colonial”), for wrongful discharge and breach of contract. In 1999, Sammy filed a Chapter 7 bankruptcy but did not list his claim against Colonial as an asset of his bankruptcy estate.

In 2004, Sammy and his wife Victoria moved to certain property in Hurdle Mills, North Carolina, which they purchased from Victoria's son Hunter, and began living in a mobile home situated on the property. On March 1, 2006, Sammy received a net judgment of approximately $1,000,000.00 (the “Judgment Proceeds”) as a result of his lawsuit against Colonial. Shortly thereafter, Sammy directed that the Judgment Proceeds be deposited into Victoria's checking account (Sammy did not have a checking account). After the funds were deposited into her account, Victoria placed a portion of the funds in a money market account, another portion in an investment account, and used another portion to build a house on the Hurdle Mills property. The funds were also used to purchase a new Prius automobile and to give approximately $90,000 to her children.

Sometime between late 2006 and early 2007, Sammy hired various tax professionals, ostensibly to determine whether the Judgment Proceeds were taxable. According to Sammy, an accountant named Keith Pleasant told him that, based on Murphy v. I.R.S., 460 F.3d 79 (D.C.Cir.2006), at least portion of the funds might not be taxable. Sammy claims that Mr. Pleasant advised him to wait until the case was resolved on appeal before filing a tax return. Accordingly, Sammy filed for an extension of time. On July 3, 2007, the Murphy case was resolved in favor of the IRS ( Murphy v. IRS, 493 F.3d 170 (D.C.Cir.2007)), at which point it became clear that all of the Judgment Proceeds were taxable.

Sammy then filed a tax return with the IRS listing a $356,660 tax liability due to his receipt of the Judgment Proceeds. He enclosed a payment of $1,000.00, which he contends was a good-faith showing that he intended to pay his tax liability in installments. He never asked Victoria to return the Judgment Proceeds, nor did he ask her for any money with which to pay his tax liability.

On February 26, 2008, Victoria formed Schofield–Johnson with her two sons, Hunter and Matthew, for the dual purposes of protecting assets against any potential malpractice claims (Victoria is a physician) and developing family land. Hunter and Matthew are not Sammy's sons, and Sammy has not held any interest in Schofield–Johnson since its formation. Shortly after forming Schofield–Johnson, Victoria, Hunter, and Matthew funded the company as follows. First, Victoria contributed her investment account (in which the Judgment Proceeds were deposited) and the 12 acres of land on which her and Sammy's home is located (the home was built and furnished using the Judgment Proceeds). Second, Hunter and Victoria contributed 52 acres of land that they owned jointly. Third, Matthew contributed $1,000.00. Sammy contributed nothing.

On July 15, 2009, after failed attempts to collect the money from Sammy, the IRS filed a lien against all of Schofield–Johnson's real and intangible property in order to satisfy Sammy's tax liability of $494,320 (a $381,000 assessment plus statutory penalties). The next day, the IRS levied on and attempted to seize Schofield–Johnson's investment account at RBC Wealth Management, and the funds were scheduled to be released to the IRS on August 12, 2009. On August 10, 2009, Schofield–Johnson filed its Chapter 11 bankruptcy.

III. DISCUSSION

A. Schofield–Johnson is a Nominee of Sammy Johnson

While there is no express authority for it in the Internal Revenue Code, the Supreme Court in G.M. Leasing Corp. v. United States, 429 U.S. 338, 350–51, 97 S.Ct. 619, 50 L.Ed.2d 530 (1977), authorized the federal government to enforce federal tax liens against property owned by a third-party that is a nominee or alter ego of a delinquent taxpayer. See also United States v. Scherping, 187 F.3d 796, 801 (8th Cir.1999); Shades Ridge Holding Co., Inc. v. United States, 888 F.2d 725, 728 (11th Cir.1989); Lemaster v. United States, 891 F.2d 115, 119 (6th Cir.1989). In deciding whether the IRS may enforce such a lien against property owned by a third-party, a 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, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999); U.S. v. Thornton, 859 F.2d 151, 1988 WL 97278 at *2 (4th Cir.1988) (unpublished table opinion).

To date, there are no published opinions from the Fourth Circuit that apply the law of federal tax liens to property held by a nominee or alter ego of the taxpayer. In U.S. v. Thornton, the Fourth Circuit held that when determining whether a taxpayer has rights in property under Maryland law, the district court should apply the law of resulting trusts as opposed to state law regarding the collection of real estate taxes. 1988 WL 97278 at *3. However, the Middle District of North Carolina has recently held that the law of fraudulent transfers is the appropriate law to determine the ownership status of property, especially in cases where the government specifically pleads the elements of a fraudulent conveyance. OMOA Wireless v. United States, 2010 WL 3199959 at *5–6 (M.D.N.C. Aug 12, 2010) (slip op.). The codification of North Carolina fraudulent conveyance law obviates the need to rely on the equitable remedy of a resulting trust. Id.

In this case, the IRS argues, as it did in OMOA Wireless, that Sammy's transfer to Victoria was fraudulent. Because the IRS does not make any resulting trust claims, its nominee claim should be considered together with its fraudulent conveyance claim. In other words, based on the holding in OMOA Wireless, the Court should first consider whether the transfers at issue were fraudulent in order to determine whether Sammy retains any property rights in the Judgment Proceeds that are now in the possession of Schofield–Johnson. If the transfers are fraudulent—and therefore Sammy still retains property rights in the proceeds—Schofield–Johnson may be the nominee of Sammy, and the IRS may enforce its lien and levy. The IRS may also have separate remedies under North Carolina fraudulent conveyance law, as discussed below.

B. The Transfer from Sammy to Victoria was Fraudulent

N.C. Gen.Stat. § 39–23.4(a) provides 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 obligation 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.

N.C. Gen.Stat. § 39–23.4(b) lists the following factors that the court may consider when determining a debtor's intent:

1. The transfer or obligation was to an insider;

2. The debtor retained possession or control of the property transferred after the transfer;

3. The transfer or obligation was disclosed or concealed;

4. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

5. The transfer was of substantially all the debtor's assets;

6. The debtor absconded;

7. The debtor removed or concealed assets;

8. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

9. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

10. The transfer occurred shortly before or shortly after a substantial debt was incurred;

11. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor;

12. The debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor...