United States v. Washington

UNITED STATES OF AMERICA, Plaintiff,

v.CRAIG A. WASHINGTON, SR., etal., Defendants.

CIVIL ACTION H-09-3996

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF TEXAS HOUSTON DIVISION

Dated: September 6, 2011

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Plaintiff the United States of America (the "United States") seeks to recover taxes allegedly owed by defendant Craig Washington, Sr. for the tax years 1988, 1989, and 1990, by foreclosing on three parcels of real property that Washington claims are owned by defendant Washington Children's Trust Number 1 (the "Trust"). On July 25 through July 26, 2011, the court conducted a non-jury trial in this matter. The court has considered the evidence and arguments of counsel presented at trial, the parties' briefing, and the applicable law, and the court now enters the following findings of fact and conclusions of law.¹

I. FINDINGS OF FACT

From a preponderance of the evidence, the court finds as follows:

A. The Property at Issue

1. On August 16, 1976, Craig A. Washington, Sr., purchased real property located at 2323 Caroline Street, Houston, Harris County, Texas, which is more fully described as follows:

Lot Seven (7) and the South 50 of the West 25 feet of Lot Fifteen (15) in Block "C" of the Subdivision of 10 acre Lot Eight (8) of the James S. Holman Survey, Harris County, Texas, according to the map or plat thereof recorded in volume 39 Page 379 of the Deed Records of Harris County, Texas, commonly known as 2323 Caroline.

2. Currently, 2323 Caroline is an office building.

3. On August 16, 1976, Washington also purchased real property located at 1313 McIlhenny, Houston, Harris County, Texas, which is more fully described as follows:

The Northwesterly 25 feet of Lot Eight (8) and the adjoining Southeasterly 25 feet of the Southwesterly 50 feet of Lot Fifteen (15) in Block "C", of the Subdivision of 10 acre Lot Eight (8) of the James S. Holman Survey, in Harris County, Texas according to the map or plat thereof recorded in Volume 39, Page 379 of the Deed Records of Harris County, Texas commonly known as 1313 McIlhenny.

4. Currently, 1313 McIlhenny is a parking lot for the office building at 2323 Caroline.

5. On September 8, 1976, Craig A. Washington, Sr., purchased real property located at 2317 Caroline Street, Houston, Harris County, Texas, which is more fully described as follows:

Lot Six (6) and the adjoining West 25 feet by 50 feet of Lot Fifteen (15) in Block "C" of the W.J. HUTCHINS ADDITION SOUTH SIDE SUBDIVISION of 10 Acre Lots Eight (8) and Twenty (20) of the J.S. HOLMAN SURVEY, Harris County, Texas, according to the Map thereof recorded in Volume 39, Page 379 of the Deed Records of Harris County, Texas, commonly known as 2317 Caroline.

6. Currently, 2317 Caroline is a parking lot for the office building at 2323 Caroline.²

B. The Trusts

7. In or around 1984, Washington began investing heavily in other real property, including a duplex in Austin, Texas, two apartment buildings, a nightclub, and land in various locations throughout Texas, with the intention of providing for his children in the event of his untimely death.

8. In 1989, U.S. Congressman Micky Leland passed away, and Washington was elected to the 19th Congressional District in the City of Houston as Leland's successor. He remained in Congress until 1994.

9. Before this election, Washington was a practicing lawyer with his own law firm in Houston, Texas. Washington discontinued the practice of law while he was in Congress because members of Congress cannot continue practicing law. However, he returned to his practice after he left Congress in late 1994 or early 1995.

10. Washington's inability to practice law during his tenure as a member of Congress caused a significant decrease in Washington's salary. When Washington realized he would be unable to continue practicing law while serving in Congress, in 1989, he decided to create trusts for his children so that he could ensure that they had the benefit of what he had earned prior to being elected to Congress.

11. At some point in or around 1989, Washington consulted with Sidney Braquet, an estate-planning lawyer, about creating trusts for his children. Braquet recalls Washington asking him whether the trusts should be revocable or irrevocable. Braquet strongly encouraged Washington to make the trusts irrevocable.

12. Washington, with help from his secretary, created a template for the trusts using a form book, which was recommended by Braquet. Washington relied on the portion of the form book relating to the creation of irrevocable trusts when he created the template, which was a template for an irrevocable trust. See Defs.' Exh. 11.

13. At some point thereafter, likely also in 1989, Washington used the template to create the Trust, which is an irrevocable trust, for the benefit of his children Craig Anthony WashingtonII, Chival Antoinette Washington, Alexander Hallow Washington, Cydney Alexandra Washington, and Christopher Alfred Washington.³ Craig A. Washington and Chival A. Washington each own 20% of the Trust. Alexander H. Washington owns 40% of the Trust. And, Cydney A. Washington and Christopher A. Washington each own 10% of the Trust.

14. Washington originally intended to deed at least ten pieces of real property to the trusts he created. He did deed property located at 3443 Palm Street in Houston, Texas, to the Trust, but that property was sold during Washington's bankruptcy.⁴

15. Washington is trustee of the Trust as well as custodian of records. He does not collect a fee for these duties.

D. Financial Issues: 1988 and 1989 Taxes Assessed, Bankruptcy Filed

16. On January 8, 1990, a delegate of the Secretary of Treasury assessed taxes amounting to $76,971.00 against Washington for the 1988 tax year.

17. On November 19, 1990, a delegate of the Secretary of Treasury assessed taxes amounting to $21,276.00 against Washington for the 1990 tax year.

18. On January 11, 1991, Washington filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The bankruptcy was later converted to a Chapter 7 proceeding.

19. Washington filed for bankruptcy with the intent to reorganize so that he could pay his tax debt.

F. Lost or Destroyed Evidence

20. After Washington was elected to the U.S. Congress and no longer worked at his law firm, many of the documents that Washington had stored at the law firm were moved to a storage facility. In June 2001, that storage facility flooded during a tropical depression. The flood destroyed most of the documents contained in the storage facility.

21. In December 2008, Washington attempted to obtain a loan for one of the trusts that he allegedly created at the same time that he created the Trust. He searched through his records and was unable to find the trust document he needed, or any of the trust documents, including the Trust. He testified that he believes that all of the trust documents he created in 1989 must have been stored in the warehouse and destroyed in the 2001 flood. The court cannot conclude, based on this testimony, that the documents were destroyed in the flood. However, the court found Washington's testimony relating to a diligent search credible, and it therefore concludes that the document containing the terms of the Trust is either lost or was destroyed during the 2001 flood.

G. Proof of Claim

22. On September 23, 1992, the Internal Revenue Service ("IRS") filed a Proof of Claim ("POC") in Washington's bankruptcy proceeding for $216,709.81, which included unpaid income tax for the tax years 1987 through 1990, as well as interest and penalties. Gov't Exh. 16. The amount of the claim upon which the IRS claimed priority was $178,467.46. Id.

23. Terry C. Kennemer, a Revenue Officer with the IRS, attended some, but not all, of the creditors' meetings during the bankruptcy.

H. Divorce and First Transfer of Property

24. Washington and Dorothy M.L. Washington were married in 1965. They had two children together—Craig Anthony Washington, II, and Chival Antoinette Washington.⁵

25. On January 11, 1992, Washington filed for divorce.

26. On March 10, 1993, pursuant to a property settlement agreement in their divorce, Washington conveyed the Property at Issue to Dorothy M.L. Washington, and Dorothy M.L. Washington conveyed real property located at 3001 North Calumet Drive, Houston, Harris County, Texas (the "Calumet Drive Property"), to Washington.

I. 1990 Taxes Assessed

27. On September 16, 1996, a delegate of the Secretary of Treasury assessed taxes amounting to $58,250.00 against Washington for the 1990 tax year.⁶

J. Bankruptcy Disbursements and Dismissal

28. The Bankruptcy Trustee disbursed $230,866.95 during Washington's bankruptcy. Gov't Exh. 15. Over $93,000 of the disbursements were for administrative fees and charges. Id. Approximately $54,197.23 was paid to the IRS, which only equated to 23.48% of the priority claim.

29. On February 28, 2000, Washington's bankruptcy was dismissed. The 1988, 1989, and 1990 tax debts were neither discharged nor fully paid.

J. Offer in Compromise Filed and Returned

30. On January 3, 2000, Hoover Morris was appointed as Washington's power of attorney for dealings with the IRS. Gov't Exhs. 1, 25; Defs.' Exh. 2.

31. On August 7, 2000, Morris submitted an Offer in Compromise Form 656 on Washington's behalf to the IRS for the 1988, 1989, and 1990 tax debts (the "OIC").⁷ Gov't Exh. 1; Defs.' Exh. 2.

32. The IRS only uses Form 656 for offers in compromise. Form 656 contains a waiver of the statute of limitations for the time period during which the offer in compromise is pending. The form expressly provides that the "collection statute of limitation is suspended for all tax periods on your offer during the period your offer is pending." Gov't Exh. 27. The form further explains that an offer is considered "pending" while the IRS investigates and evaluates the offer, for 30 days after the IRS rejects the offer, and while the taxpayer appeals the offer rejection. Id.33. On January 24, 2001, Washington's OIC was returned, as the...