The opinion of the court was delivered by: MICHAEL L. ORENSTEIN
Plaintiffs seek a judgment declaring that: (1) plaintiff, Ellen Marshall, is the custodian of these accounts; (2) the United States has no legal interest in these accounts; and (3) The Bank of New York has no legal duty to pay to the Government the monies held in these accounts. In addition, plaintiffs seek to enjoin the United States of America (the "Government") from enforcing its levy against certain of plaintiffs' bank accounts and certificates of deposit (the "accounts") at The Bank of New York.
Plaintiffs allege that the bank accounts at issue are custodial accounts under the Uniform Gift to Minors Act ("UGMA") of New York and thus are not subject to the Government's Notice of Levy which was issued on August 23, 1991 to collect 1982, 1983 and 1984 joint federal income tax liabilities of plaintiff's husband and Ellen Marshall. The tax liens stem from certain tax liabilities of the Marshalls which accrued due to the disallowance of certain deductions from a "tax shelter." Plaintiffs contend that the money in the UGMA accounts is the property of Sabrina Marshall and Grant Marshall, the children of Ellen Marshall, and the grandchildren of the donor, SelmaLee Kaufman. Plaintiffs contend that the money in the accounts are gifts from the children's grandmother. The UGMA custodial accounts levied upon were opened on January 17, 1989 for Grant and on March 22, 1989 for Sabrina at the Bank of New York. Gov't Ex. R and Q.
Plaintiffs also seek to recover costs and counsel fees against the Government pursuant to Fed. R. Civ. P. 11, 26 U.S.C. § 7430 and 28 U.S.C. § 1927.
The Government interposes an affirmative defense that the money in the accounts was deposited with fraudulent, rather than donative, intent and thus can be levied by the Internal Revenue Service. In support of this contention, the Government alleges that the accounts were opened during the time plaintiff, Ellen Marshall, was indebted to the United States and that at least some of the funds were from individuals other than the donor, the mother of the plaintiff, Ellen Marshall. In addition, the Government contends that the taxpayer Ellen Marshall has not used the money in the accounts in accordance with mandates of UGMA. Specifically, the Government asserts that the money in the custodial accounts was commingled and that loans from these accounts were improperly made to plaintiff's husband and other individuals. Consequently, the Government contends that the accounts are subject to the IRS's Notice of Levy ("Levy").
The action was tried non-jury before me upon consent of the parties. See 28 U.S.C. § 636(c)(1); Fed. R. Civ. P. 73(a). The following constitutes the court's findings of fact and conclusions of law: See Fed. R. Civ. P. 52(a).
A. The Grandmother's Alleged Donative Intent
is the mother of the plaintiff, Ellen Marshall, and the grandmother of Sabrina and Grant Marshall. It is Ms. Kaufman's practice to give twenty-five thousand dollars ($ 25,000) by check to each of her grandchildren on or about their first birthday and five thousand dollars ($ 5,000), thereafter, on or about each subsequent birthday. In accordance with this practice, Ms. Kaufman gave to her daughter, Ellen Marshall, for Sabrina, her granddaughter, a gift of $ 25,000 in 1984 and gifts of $ 5,000 for the years 1985 through 1990. In 1991, Ms. Kaufman allegedly gave Sabrina a gift of $ 3,000. Ms. Kaufman testified that the money was to be a gift or "nest egg" for her grandchildren. (Tr.5, 7, 9, 12)
Ellen Marshall testified that the purpose of the gifts was for her children's education. (Tr.94) However, Ellen Marshall testified that her mother never told her specifically what to do with the gifts. (Tr.100-101)
Similarly, Ms. Kaufman testified that she gave to Ellen Marshall gifts of $ 25,000 in 1988, $ 5,000 in 1989 and 1990 and $ 3,000 in 1991 for her grandson, Grant. In total, Ms. Kaufman allegedly provided gifts of $ 58,000 to her granddaughter Sabrina and $ 38,000 to her grandson Grant. Ellen Marshall testified that she deposited all of these checks from SelmaLee Kaufman in The Bank of New York. (Tr.95-97-98)
Ms. Kaufman followed the same gift giving policy with respect to her other grandchildren. The children of her other daughter, Susie Goldstein, who is not a party to this lawsuit, were also given checks of $ 25,000 on their first birthday, $ 5,000 thereafter on each subsequent birthday through 1990 and $ 3,000 in 1991. (Tr.7, 8) With respect to these other grandchildren, SelmaLee Kaufman gave her gifts directly to Susie Goldstein, her other daughter, for the benefit of those grandchildren.
Of the twenty-five gifts made to her four grandchildren over the course of the years, photocopies of checks representing eighteen of those gifts were obtained. All, but one, of those drafts were made payable to one of the four grandchildren. Plt's Ex. 1. The one check not made payable to a grandchild was made payable to Ellen Marshall Grant, SelmaLee Kaufman's daughter, the mother of Sabrina and Grant.
However, one check made payable to Sabrina Marshall was endorsed "For Deposit Only, 4 Anchorage Lane Owners, Inc." Plt's Ex. 1 at p. 58; (Tr.20, 26). Ellen Marshall contends that such an endorsement was a mistake. (Tr.28) Ellen Marshall testified that she and her mother had no knowledge of Anchorage Lane Owners, Inc. and that she was neither a principal of this entity nor had any transactions with this entity. (Tr.88) The court finds Ellen Marshall's testimony credible in this regard. In fact, the photostat of the back of the check may belong to another check unrelated to this case.
Ms. Kaufman testified that she did not intend to retain any control over the gifts she made nor to take any of the money back. (Tr.7, 8) Ms. Kaufman testified that once the gifts were given to her daughter she did not know what happened to the money or how it was handled. (Tr.12, 13) Ms. Kaufman testified that the money was given to her daughters with the expressed purpose to be used for the grandchildren. (Tr.13) She never told them in what form to use the money. (Tr.13)
Ms. Kaufman further testified that prior to the instant litigation she did not know that Ellen Marshall had made loans with some of the funds given to Sabrina or Grant. (Tr.14) Ms. Kaufman testified that the first time her daughter indicated that she was having tax problems was in 1992. (Tr.17) The court finds Ms. Kaufman's testimony credible.
B. The Government's Tracing of the Grandmother's Gifts
1. Early Gifts to Sabrina
In attempting to trace how the proceeds of the gifts were used, the Government subpoenaed a representative of The Bank of New York (the "Bank") to testify regarding certain Bank of New York documents. Beginning with custodial certificate of deposit ("CD") 9319, which is the earliest record maintained by the Bank, the documents indicate that $ 21,090.01 was deposited into CD 9319 on January 9, 1985. While Ellen Marshall testified that the money in this CD was from Ms. Kaufman's original gift to Sabrina of $ 25,000 in 1984, she claims not to know what happened to the remaining $ 3,909.99.
With respect to CD 9629, the documentary evidence reveals that a custodial CD for Sabrina was opened on November 24, 1986 with a balance of $ 5,000. Gov't Ex. D. The source of the money deposited in this CD was cash. (Tr.37, 122). The CD was, thereafter, rolled over into CD #0580. This CD was closed on February 26, 1988 with a balance of $ 5334.85. The closing check was made payable to Ellen Marshall and deposited in Citibank account #49174474.
Gov't Ex. E.
With respect to CD 9603, the documentary evidence reveals that this custodial CD for Sabrina was opened on July 17, 1986 with a balance of $ 5,000. Gov't Ex. F. CD 9603 was closed on July 16, 1987 with a balance of $ 5,294.55. The closing check was made payable to Ellen Marshall and deposited in her husband's business account.
With respect to CD 0770, the documentary evidence reveals that this custodial CD for Sabrina was opened on July 29, 1987 with a balance of $ 5,000. Gov't Ex. H. The source of this check was a $ 5,000 check (check #140) from SelmaLee Kaufman to Sabrina Grant, dated July 20, 1987. Gov't Ex. H-1. This CD was closed on February 26, 1988 with a balance of $ 5,147.09. The closing check was made payable to Ellen Marshall and deposited in Citibank account # 49174474 -- the same account that the proceeds of CD 9629 were deposited into.
On July 20, 1988, a similar custodial CD (#1661) was opened for Sabrina with a balance of $ 5,000 (check #149, dated July 19, 1988). Gov't Ex. T-2; Plt's Ex. 1 at pp. 5-6. As of the time of trial, this CD remains open with no additional deposits having been made since the CD was established. As of the time of trial, the balance was $ 6,675.49. Gov't Ex. T-2(a).
On July 20, 1988, SelmaLee Kaufman's gift of $ 25,000
(check #150, dated July 19, 1988) was deposited into CD 1679 with "Ellen Grant Kaufman as custodian for Grant Marshall." Gov't Ex. T-1; Plt's Ex. 1 at pp. 5-6. One year later, Ms. Kaufman's gift to Grant of $ 5,000, in the form of a check #182, dated July 18, 1989 (def's ex. T-3), was added to a rolled over CD which resulted in a balance of $ 31,825. This new CD (#2750) was set to expire on July 20, 1990. Gov't Ex. T-4.
3. UGMA Gifts to Sabrina and Grant
Account #438-945305 (hereinafter "#305"), Sabrina's UGMA's account at The Bank of New York, was opened on March 22, 1989. On July 19, 1989, Sabrina's grandmother's 1989 $ 5,000 gift was deposited into this account.
See Plt's Ex. 1 at pp. 5-6; Gov't Ex. Q at p. 2. Again, on April 12, 1990, another $ 5,000 gift from Sabrina's grandmother was deposited into this account. See Plt's Ex. 1 at pp. 53-54, Gov't Ex. Q at p. 2. On July 18, 1991, the Bank records reflect an additional $ 5,000 deposit into this account. Gov't Ex. Q at p. 9. The Bank's records of that date do not reflect a deposit of $ 3,000 into Sabrina's custodial account -- the date which corresponds to the date when Ms. Kaufman gave Sabrina a gift of $ 3,000. Plt's Ex. 1 at pp. 1-2. The additional $ 2,000 deposit reflected in this custodial account is unexplained.
On January 17, 1989, the date Grant's custodial account was opened, $ 5,000 cash was deposited into custodial account #438-944670 (hereinafter "#670") Gov't Ex. O; (Tr.44, 58) The representative of the Bank testified that this could have resulted from either a "cash" deposit or by the cashing of a Bank of New York check. (Tr.57-58)
Also deposited into Grant's custodial account was a check from his grandmother for $ 5,000, dated July 25, 1990. Gov't Ex. 0-1 and R. As noted above, a $ 3,000 check (#1142) from SelmaLee Kaufman made payable to Grant, dated July 31, 1991, was given to Ellen Marshall. There is no documentation regarding where this check was deposited.
On cross-examination, plaintiffs successfully demonstrated that some of The Bank of New York's failure to trace specific gifts supposedly deposited in the various custodial accounts resulted not necessarily from plaintiff's secretion of assets but rather from an inability to locate all the necessary records. (Tr.53-55). In fact, the representative of The Bank of New York failed to review the account cards maintained at the local branch of the Bank of New York.
C. The Loaning of Money from the Custodial Accounts
1. To Sabrina and Grant Marshall's father and Ellen Marshall's husband
Ellen Marshall testified that she loaned her husband $ 19,500 from the proceeds of CD 9319. (Tr.105) The check drawn on that CD for $ 19,527 was endorsed by Ellen Marshall and deposited by her husband. Gov't Ex. C. A check for $ 5,294.58 was also drawn on CD 9603 made payable to and endorsed by Ellen Marshall. That check was also deposited by her husband. (Tr.108); Gov't Ex. G.
The proceeds of both of these CD's were loaned by the plaintiff, Ellen Marshall, to her husband in 1987 from her daughter's custodial accounts.
There was no written agreement documenting the loan or any notation regarding any interest rate. (Tr.105, 153) While Ellen Marshall testified that she never discussed with her husband an appropriate interest rate on the loan, her husband testified that an interest rate of twelve percent had been agreed to. (Tr.105, 153)
The loan took place after Ellen Marshall and her husband were notified of their tax deficiency and after they filed a petition in the tax court contesting the deficiency. (Tr.153) Ellen Marshall testified that the money was needed to finance her husband's law practice. (Tr.109, 154)
Mr. Marshall testified that the loan proceeds were needed during the pendency of litigation involving the dissolution of his former law partnership and were to provide capital to develop his successor law practice in the personal injury and medical malpractice areas. (Tr.154) Mr. Marshall testified that at the time he was loaned the money from his wife, he had already expended $ 50,000 in legal fees in connection with the dissolution of his former law partnership. (Tr.155) Mr. Marshall testified that three hundred thousand dollars in accounts receivables were owed to him by his former law partnership on October 1, 1985 and that as of the date of trial no portion of those funds had been paid to him. (Tr.154-155)
SelmaLee Kaufman testified that her son-in-law in 1989 also received a loan from her for $ 25,000. This loan was documented in a handwritten I.O.U. signed by him, dated October 13, 1989. Gov't Ex. A. Included in that I.O.U was the principal amount borrowed, the date the money was lent and the fact that interest would be paid.
The testimony also revealed that SelmaLee Kaufman loaned her son-in-law $ 35,000 from her business. Similarly, this loan was documented in that same handwritten I.O.U. Gov't Ex. A. Included in that I.O.U was the principal amount borrowed, the date the money was lent and the fact that interest would be paid.
According to Mr. Marshall, these loans from SelmaLee Kaufman, individually, and from her business were made because: (1) he had still not received any of the proceeds from the dissolution of his former law partnership; (2) an additional $ 50,000 had been laid out for legal fees in connection with that dissolution; and (3) monies were needed for disbursements in certain personal injury and medical malpractice cases he was handling. (Tr.157) To date, neither of these loans have been repaid.
Ellen Marshall loaned $ 5,334.85 to her friend, Louis Cutajar, by endorsing over to him CD 0580 -- funds from Sabrina's 1986 custodial CD. (Tr.112-113); Gov't Ex. E. She also loaned him an additional $ 5,147.09 by endorsing over to him CD 0770 -- also funds from Sabrina's custodial CD. (Tr.115); Gov't Ex. I. Both loans were made on February 26, 1988. See Gov't Ex. E and I. There was never a written loan agreement between Ellen Marshall and Mr. Cutajar. (Tr.115) However, Ellen Marshall testified that interest would be paid based on the going rate. (Tr.115)
Ellen Marshall claims that these loans were repaid in full. (Tr.116). However, only a check, dated March 6, 1989, for $ 7,000 from Mr. Cutajar made payable to Ellen Marshall was produced at trial. (Tr.116) This check was deposited on March 22, 1989 into account #305, Sabrina's custodial account.
This check is the only evidence supporting any repayment of the Cutajar loan to Sabrina. Gov't Ex. Q at p. 2. While Ms. Marshall claims the full amount of the loan was repaid, she does not remember in what form Mr. Cutajar repaid any outstanding amount. (Tr.116) It does not appear from the court's review of the evidence that any other check was ever deposited into any of the various custodial accounts of Sabrina to reflect a complete repayment by Mr. Cutajar ...