United States v. Paulson

204 F.Supp.3d 1102

UNITED STATES of America, Plaintiff,

v.John Michael PAULSON, as the Executor or Statutory Executor of the Estate of Allen E. Paulson, and Individually; James D. Paulson, as Statutory Executor of the Estate of Allen E. Paulson ; Vikki E. Paulson, as Statutory Executor of the Estate of Allen E. Paulson, as Trustee of the Allen E. Paulson Living Trust, and Individually; Crystal Christensen, as Statutory Executor of the Estate of Allen E. Paulson, as Trustee of the Allen E. Paulson Living Trust, and Individually; Madeleine Pickens, as Statutory Executor of the Estate of Allen E. Paulson, as Trustee of the Marital Trust created under the Allen E. Paulson Living Trust, as Trustee of the Madeleine Anne Paulson Separate Property Trust, and Individually, Defendants.

Case No.: 15cv2057 AJB (NLS)

United States District Court, S.D. California.

Signed September 6, 2016

Andrew Lee Sobotka, Moha P. Yepuri, United States Department of Justice, Dallas, TX, for Plaintiff.

Kevin N. Anderson, Leighton R. Koehler, Fabian Vancott, Las Vegas, NV, Philip D. Dracht, Fabian Vancott, Santa Barbara, CA, Jeremy J. Gray, Michele M. Desoer, Zuber Lawler & Del Duca LLP, Joshua Robert Mandell, Akerman LLP, Los Angeles, CA, Glen A. Stankee, Jason S. Oletsky, Akerman LLP, Fort Lauderdale, FL, for Defendants.

James D. Paulson, Woodland Hills, CA, pro se.

ORDER:

(1) GRANTING IN PART AND DENYING IN PART MADELEINE PICKENS' MOTION TO DISMISS (Doc. No. 15);

(2) GRANTING IN PART AND DENYING IN PART VIKKI PAULSON AND CRYSTAL CHRISTENSEN'S MOTION TO DISMISS (Doc. No. 19);

(3) DENYING JAMES PAULSON'S MOTION TO DISMISS (Doc. No. 36);

(4) DENYING MADELEINE PICKENS' MOTION TO DISMISS CROSS-CLAIM (Doc. No. 40); AND

(5) DENYING VIKKI PAULSON AND CRYSTAL CHRISTENSEN's MOTION TO DISMISS CROSS-CLAIM (Doc. No. 44)

Hon. Anthony J. Battaglia, United States District Judge

The United States of America ("Plaintiff"), seeking to recover unpaid estate taxes, penalties, and interest, filed the above action on September 16, 2015. Presently before the Court are motions to dismiss the complaint filed by Defendants Vikki Paulson, Crystal Christensen, Madeleine Pickens, and James Paulson. (Doc. No. 15, 19, and 36.) Also pending are motions to dismiss Defendant John Michael Paulson's cross-claim, (Doc. No. 38), filed by Defendants Vikki Paulson, Crystal Christensen, and Madeleine Pickens. (Doc. Nos. 40 and 50.)

For the reasons set forth below, Madeleine Pickens' motion to dismiss the complaint is GRANTED IN PART and DENIED IN PART ; Vikki Paulson and Crystal Christensen's motion to dismiss is GRANTED IN PART and DENIED IN PART ; and James Paulson's motion to dismiss is DENIED . Additionally, Madeleine Pickens' motion to dismiss John Michael Paulson's cross-claim is DENIED ; and Vikki Paulson and Crystal Christensen's motion to dismiss the cross-claim is DENIED .

I. FACTUAL BACKGROUND

The following facts are taken from the complaint and construed as true for the limited purpose of resolving the pending motions. See Moyo v. Gomez , 40 F.3d 982, 984 (9th Cir.1994). On December 23, 1986, Allen Paulson ("Mr. Paulson") established the Allen E. Paulson Living Trust (hereafter referred to as "Living Trust"). (Doc. No. 1 ¶ 9.) In 1988, Mr. Paulson entered into an antenuptial agreement with Madeleine Pickens ("Ms. Pickens") in anticipation of marriage. (Id. ¶ 10.) The agreement defined their respective separate property and established certain gifts for Ms. Pickens in the event of Mr. Paulson's death. (Id. ) The Living Trust was subsequently amended and restated several times in early 2000. (Id. ¶ 11.) On July 19, 2000, Mr. Paulson died. (Id. ¶ 21.)

The Living Trust provided Ms. Pickens with the power to elect between receiving property under the antenuptial agreement or under the Living Trust, but not under both. (Id. ¶¶ 10, 12–15.) The Living Trust also created a Marital Trust for Ms. Pickens' benefit. (Id. ¶¶ 13–15.) Under the terms of the Living Trust, the Marital Trust was to receive a residence and all personal property located at 14497 Emerald Lane in Rancho Sante Fe, California. (Id. ¶ 13.) The Living Trust also gave Ms. Pickens the right to receive a second residence located in Del Mar, California, as well as all household furnishings, furniture, and all insurance policies related to the Del Mar property. (Id. ¶ 14.) Finally, the Living Trust provided that the Marital Trust was to receive 25% of the residue of the Living Trust. (Id. ¶ 15.) The Living Trust named Ms. Pickens, John Michael Paulson, and Edward White (or alternatively, Edward White and Nicholas Diaco), as the co-trustees of the Marital Trust. (Id. ¶ 16.)

At the time of Mr. Paulson's death, all of Mr. Paulson's assets were held by the Living Trust except for his shares in the Gold River Hotel & Casino Corporation. (Id. ¶ 24.) The Living Trust's assets, as reported at the time of Mr. Paulson's death included approximately $24,764,500 in real estate; $113,761,706 in stocks and bonds; $23,664,644 in cash and receivables, and $31,243,494 in miscellaneous assets. (Id. ) Accordingly, the Estate's assets totaled approximately $193,434,344 at the time of Mr. Paulson's death. (Id. )

John Michael Paulson ("Michael Paulson") is the son of Mr. Paulson, and served as the executor of the Estate of Allen E. Paulson ("Estate") after Mr. Paulson's death on July 19, 2000. (Id. ¶¶ 4, 54.) Nicholas Diaco consented to act as co-trustee of the Living Trust with Michael Paulson. (Id. ¶ 25.) In April 2001, the Estate filed a Form 4768 with the IRS, and requested an extension of time to file its Form 706 Estate tax return until October 19, 2001. (Id. ¶ 26.) Additionally, the Estate requested an extension of time to pay its taxes until April 19, 2002. (Id. ) The IRS approved the Estate's request for both extensions. (Id. ¶ 26.)

On October 23, 2001, the IRS received the Estate's Form 706 Estate tax return, which was signed by Michael Paulson, as co-executor of the Estate. (Id. ¶ 27.) In completing the tax return, the Estate elected to use an alternate valuation date of January 19, 2001, under 26 U.S.C. § 2032(a). (Id. ) The Estate reported a total gross estate of $187,729,626, a net taxable estate of $9,234,172, and an estate tax liability of $4,459.051. (Id. ¶¶ 27–28.) On November 26, 2001, the IRS assessed the originally reported tax of $4,459,051.

(Id. ¶ 28.) The Estate elected to pay part of its taxes and defer the other portion under a fifteen-year payment plan pursuant to 26 U.S.C. § 6166 of the Internal Revenue Code.¹ (Id. ¶ 29.) Accordingly, the Estate paid $706,296 as the amount unqualified for deferral under § 6166, leaving a deferred balance of $3,752,755 to be paid under the installment election. (Id. ) On November 15, 2001, the IRS selected the Estate tax return for examination. (Id. ¶ 31.)

While the Estate's tax return was under review, several personal disputes arose between Michael Paulson, Ms. Pickens, and the other beneficiaries of the Living Trust. (Id. ¶ 32.) On February 2, 2003, the parties reached a settlement agreement, which the California Probate Court approved on March 14, 2003 ("2003 Settlement"). (Doc. No. 1 ¶ 33); (Doc. No. 15-5.) Under the 2003 Settlement, Ms. Pickens forewent property under both the antenuptial agreement and the Living Trust, instead choosing to receive direct distributions from the Living Trust. (Id. ¶¶ 33–34.) The 2003 Settlement resulted in Ms. Pickens receiving the Rancho Sante Fe residence, the Del Mar residence, and the stock in the Del Mar County Club, Inc. (Id. ¶ 33.) As approved by the Probate Court, these distributions were made directly to Ms. Pickens as trustee of the Madeleine Anne Paulson Separate Property Trust. (Id. ¶ 35.) During 2004, Michael Paulson, acting as trustee of the Living Trust, distributed approximately $5,921,887 in trust assets to various individuals. (Id. ¶ 36.)

On January 15, 2005, the IRS issued a notice of deficiency to Michael Paulson as executor of the estate, which proposed a $37,801,245 deficiency in the estate tax reported on the return. (Id. ¶ 38.) Michael Paulson petitioned the United States Tax Court challenging the additional estate tax proposed by the IRS. (Id. ¶ 39.) On December 2, 2005, pursuant to the parties' stipulation, the Tax Court determined that the Estate owed $6,669,477 in additional estate taxes. (Id. ¶ 40.) The Estate elected to pay this additional tax amount under the same fifteen-year installment period permitted by 26 U.S.C. § 6166. (Id. )

During 2006, Michael Paulson, acting as trustee of the Living Trust distributed an additional $1,250,000 from the Living Trust. (Id. ¶ 43.) In March 2009, the Probate Court removed Michael Paulson as trustee for misconduct. (Id. ¶ 44.) Vikki Paulson and James Paulson were appointed as co-trustees. (Id. ¶ 44.) In August 2011, Vikki Paulson and James Paulson reported that the Living Trust had assets worth $13,738,727. (Id. ¶ 44.)

On May 7, 2010, in response to one or more missed installment payments, the IRS issued the Estate a notice of final determination stating that the extension of time for payment under § 6166 no longer applied to the Estate's tax obligations. (Id. ¶ 46.) On June 10, 2010, the Probate Court removed James Paulson as a co-trustee for breach of court orders. (Id. ) Accordingly, Vikki remained as the sole trustee of the Living Trust. (Id. )

On August 5, 2010, the Estate filed a petition in United States Tax Court challenging the IRS's proposed termination of the Estate's § 6166 installment payment election. (Id. ¶ 47.) On February 28, 2011, Crystal Christensen ("Ms. Christensen") was appointed as co-trustee of the Living Trust. (Id. ¶ 48.) At that time, the Living Trust held assets worth approximately $8,802,034. (Id. ) In May 2011, the Tax Court entered a stipulated decision sustaining the IRS's decision to terminate the Estate's installment payment election. (Id. ¶ 49.)

Between June 28, 2011, and July 7, 2011, the United States recorded notices of federal tax liens against the Estate...