United States v. Reading, CV 11-00698-PHX-FJM

United States of America, Plaintiff,

v.James Leslie Reading, et al., Defendants.

No. CV 11-00698-PHX-FJM

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA

Dated: September 18, 2012

ORDER

We have before us James Leslie Reading, Clare L. Reading, and Fox Group Trust's motion to dismiss complainant's seventh claim (doc. 50), defendants' memorandum in support (doc. 51), plaintiff's opposition (doc. 67), and defendants' reply (doc. 68). We also have before us plaintiff's motion for summary judgment (doc. 52), memorandum in support (doc. 52 ex. 1), and statement of material facts in support (doc. 52 ex. 2), James and Clare Reading's response (doc. 82), the Readings' memorandum in support of defendants' response (doc. 82 at 6), the Readings' response to plaintiff's statememt (sic) of facts (doc. 82 at 21), the Readings' separate statement of facts (doc. 82 at 67), the Readings' notice to amend defendants' separate statement of facts (doc. 96), plaintiff's reply (doc. 90), the Readings' motion for leave of court to file surreply (doc. 92), plaintiff's response (doc. 93), and the Readings' reply (doc. 95). Plaintiff seeks summary judgment on all claims except count three, which it voluntarily dismisses.

I

Plaintiff brings this action against James and Clare Reading, a married couple, to reduce tax assessments to judgment and foreclose statutory liens arising from assessments upon real property. The last time Mr. Reading voluntarily made a payment to the IRS was in 1989. He worked for three companies affiliated with Pilot Catastrophe Insurance ("Pilot") in 1993 and received $77,359.24 in compensation that year. On their 1993 joint federal income tax return, the Readings declared under oath that they had zero wages and salary and zero taxable income. In 1994, Mr. Reading received over $156,000 in compensation from Pilot companies, but reported zero wages and salary and zero taxable income on the Readings' 1994 joint tax return. Mr. Reading received over $117,000 in compensation from Pilot in 1995, but again reported zero wages and salary and zero taxable income on the Readings' 1995 joint return. The Readings filed their 1993, 1994, and 1995 returns on or after December 24, 2008. For all three years, Mr. Reading also submitted corrected 1099-MISC forms swearing that Pilot erroneously identified payments to him as gains, profit or income made in the course of a trade or business. Plaintiff contends that the IRS mailed a Notice of Deficiency to the Readings in 2000 for the tax years 1993, 1994, and 1995, but they declare they never received the notice.

In 2008, Mr. Reading made $23,858 by working for Colonial Claims Corporation. The Readings declared under oath on their 2008 tax return that they had zero wages and salary and zero taxable income, and a concurrently filed 1099-MISC form stated that Mr. Reading received zero compensation from Colonial Claims Corporation. The IRS mailed a Notice of Deficiency to Mr. Reading on February 16, 2010 for his 2008 income tax year.

In 1979, James and Clare Reading purchased a house in Mesa, Arizona as joint tenants with right of survivorship. The purchase price was approximately $68,000. On or about June 10, 2005, they transferred the house to Fox Group Trust by quit claim deed. The house was worth approximately $110,000 at the time. Fox Group Trust gave no consideration for this transfer other than allowing the Readings to continue living on the property as they did before the transfer. The Readings have not paid rent and they continue to be personallyobligated on the note which is secured by a mortgage on the house. The Readings pay all utilities, county real estate taxes, and mortgage payments. The Readings act as administrative trustees for Fox Group Trust.

II

When considering a motion to dismiss pursuant to Rule 12(b)(6), Fed. R. Civ. P., "a court must construe the complaint in the light most favorable to the plaintiff and must accept all well-pleaded factual allegations as true." Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000). On the other hand, a court is "not bound to accept as true a legal conclusion couched as a factual allegation." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 1965 (2007) (quoting Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932, 2944 (1986)).

Plaintiff's seventh claim asserts that the Readings' transfer of their house to Fox Group Trust was a fraudulent conveyance under the Arizona Uniform Fraudulent Transfer Act ("AUFTA"). Section 44-1009 provides that a claim for fraudulent conveyance under A.R.S. § 44-1004(A)(1) "is extinguished unless an action is brought . . . within four years after the transfer was made or the obligation was incurred or, if later, within one year after the fraudulent nature of the transfer or obligation was or through the exercise of reasonable diligence could have been discovered by the claimant." The Readings contend that § 44-1009 is a statute of repose which bars this claim, while plaintiff argues it is a statute of limitations and thus does not bind the federal government. See United States v. Summerlin, 310 U.S. 414, 416, 60 S. Ct. 1019, 1020 (1940) ("the United States is not bound by state statutes of limitation"). Plaintiff filed its complaint April 8, 2011. Plaintiff does not rely on the one-year limitation period. Therefore, since the transfer occurred June 10, 2005, this claim is barred if the four-year limit applies to the United States. If § 1009 does not apply, then the United States has ten years from the date of the assessment to file an action. 26 U.S.C. § 6502(a).

In Bresson v. Commissioner of Internal Revenue, 213 F.3d 1173 (9th Cir. 2000), the United States Court of Appeals for the Ninth Circuit determined that the California UniformFraudulent Transfer Act's nearly identical extinguishment provision was a statute of limitations which did not bar the government's claim. Id. at 1178. As in this case, the government acted in its sovereign capacity by attempting to collect taxes and its underlying right to collect money derived from the Internal Revenue Code. Id.; cf. United States v. Cal., 507 U.S. 746, 113 S. Ct. 1784 (1993) (government became entitled to claim by indemnifying a private contractor's state-law debt and could assert claim only through subrogation, an equitable action created by courts; therefore, Summerlin was "clearly distinguishable"). "[S]tates 'transgress the limits of state power' when they attempt to set limitations periods on claims acquired by the United States in its governmental capacity." Id. at 1179. Thus, like California's statute, Arizona's "'extinguishment' provision cannot evade the rule of Summerlin." Bresson, 213 F.3d at 1178. Therefore defendants' motion to dismiss is denied.

III

Summary judgment is appropriate if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Rule 56(a), Fed. R. Civ. P. When considering a motion for summary judgment, the court takes undisputed facts as true and evaluates disputed facts in the light most favorable to the non-moving party. Anthoine v. N. Cent. Cntys. Consortium, 605 F.3d 740, 745 (9th Cir. 2010).

The United States' first two claims are to reduce tax and related assessments made against the Readings to judgment. Assessments against Mr. Reading for his 1993, 1994, 1995, and 2008 tax years totaled $556,871.63 as of May 1, 2012. Assessments against Mrs. Reading for 1994 and 1995 totaled $116,632.96 as of May 1, 2012. These amounts include taxes, late filing penalties, failure to pay tax penalties, estimated tax penalties, and interest.

Defendants dispute plaintiff's calculation of income for 1994 and 1995. The IRS taxed Mr. Reading on 100% of his compensation for those years and taxed Mrs. Reading on 50% of her husband's compensation. In its reply brief, plaintiff agrees to reduce the amount of compensation received by Mr. Reading by 50% for his 1994 and 1995 tax years and recalculate interest and balances owed for those years.

Defendants also dispute the IRS's calculation of capital gains for 1993 and 1994. TheIRS issued the Notice of Deficiency and adjusted the amount of taxes owed in 2011 after the Readings provided the IRS with more information. Rather than a gain of $85,889 in 1993, the IRS calculated a loss of $214.59 for that year. The IRS reduced capital gains for 1994 from $11,948 per person for Mr. and Mrs. Reading to $4,140.53 per person. The IRS also reduced a gain of $15,537 to a loss of $77.94 for the 1994 tax year. These capital gains adjustments resulted in tax decreases and downward penalty adjustments for the years 1993 and 1994. Defendants' arguments on this issue ignore the IRS's adjusted calculations and the government's use of the lower revised numbers in this action.

Defendants' remaining arguments against the assessments and penalties are without merit. The Readings apparently believe that compensation received from an employer is not taxable because money was received in exchange for labor and time. "The assertion that proceeds received for personal services cannot be given a 'zero-basis for the purpose of the assessment of taxation,' is frivolous." Carter v. Comm'r of Internal Revenue, 784 F.2d 1006, 1009 (9th Cir. 1986); see also 26 U.S.C. § 61 ("gross income means all income from whatever source derived, including . . . [c]ompensation for services").

The Readings contend that they are not liable for taxes because plaintiff has not identified a statute which makes them liable to pay a tax. This is frivolous. The Internal Revenue Code imposes a tax on the taxable income of individuals. 26 U.S.C. § 1(a)-(d). Every person whose gross income exceeds the exemption amount must file an income tax return. 26 U.S.C. § 6012(a). When a tax return is required, the taxpayer must pay the tax without assessment or notice and demand from the IRS. 26 U.S.C. § 6151(a). Many statutes make defendants liable to pay taxes on their income.

Defend...