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UNITED STATES v. MCCOMBS

June 12, 1995

UNITED STATES OF AMERICA, Plaintiff,
v.
KELLY M. McCOMBS, NANCY ELLISON, and MARY McCOMBS, Defendants.



The opinion of the court was delivered by: FISHER

 This matter is before the court on remand from the Second Circuit Court of Appeals, United States v. McCombs, 30 F.3d 310 [9402 USTC P 50,363, 74 A.F.T.R.2d (P-H) 5408] (2d Cir. 1994), to consider the validity and priority of two federal tax liens as against transferees of the taxpayer's property. The two main issues to be resolved on remand involve the two federal tax liens against defendant Nancy McCombs-Ellison's former property at 74 Meadow Creek Lane, Monroe County, New York.

 ISSUES

 1. 1982 tax lien - Whether the government's 1982 tax lien on Nancy McCombs-Ellison's property is invalid against defendants Kelly McCombs and Mary McCombs (Nancy's daughters), subsequent transferees of the property, as "purchasers" under 26 U.S.C. § 6323(a), where the consideration in the form of an assumption of the outstanding balance of two mortgages worth $ 57,797.94 was given for property worth $ 85,657; and,

 2. 1984 tax lien - Whether the government can validate its 1984 tax lien on Nancy McCombs-Ellison's former property by avoiding the 1982 transfer of the property to her daughters as a fraudulent conveyance under New York Debtor and Creditor Law §§ 273 and 276.

 INTRODUCTION

 In a complaint filed November 24, 1987, the government sought a declaration of the validity of federal tax liens it had filed against the property of defendant Nancy McCombs-Ellison (Nancy), and an avoidance of the transfer of her property to her daughters, defendant Kelly McCombs (Kelly) and defendant Mary McCombs (Mary). It also sought foreclosure on these liens, and sale of the property to satisfy the liens. The matter was tried before the undersigned on March 19, 1992, pursuant to 28 U.S.C. § 636(c) upon consent of the parties and by order of District Court Judge David G. Larimer, date February 28, 1992. This court issued a judgment finding that Nancy was liable for unpaid withholding taxes, and that the federal tax liens on Nancy's former property were prior to the interests of defendants Kelly, Mary, and defendant Robert McCombs (Robert), a mortgagee of Kelly's and Mary's interest in the property. This court also ordered a foreclosure sale of Nancy's former property to satisfy the tax liens. United States v. McCombs-Ellison, 826 F. Supp. 1479 (W.D.N.Y. 1993). [ 71 AFTR2d 1843]

 BACKGROUND

 I. Findings of Fact

 The following findings of fact are applicable to this disposition on remand. These are findings of fact the court made at trial in accordance with Fed. R. Civ. P. 52(a), and as corrected by the Second Circuit Court of Appeals.

 In 1962, Robert and Nancy purchased property at 74 Meadow Creek Lane (Property) in Monroe County, New York. Nancy and Robert, who were legally married at the time, financed the purchase of the Property by giving a $ 30,000 mortgage to Columbia Banking, Saving and Loan Association (Columbia Bank). The couple divorced and Robert conveyed his interest in the property to Nancy by quit claim deed in 1978.

 In 1979, Nancy entered into a restaurant business venture with Jon Ellison (Ellison). They formed two business entities, Spinnaker Pole Corporation (Spinnaker Pole), and another entitled The Port and Starboard (P & S). Nancy and Ellison purchased a restaurant, through P & S, on May 14, 1979 and leased it to Spinnaker Pole which ran the restaurant. P & S made a cash down payment and gave a purchase money mortgage to the sellers of the restaurant. Nancy helped finance this purchase with $ 50,000 she obtained by giving a second mortgage on the Property to Marine Midland Bank (Marine Midland).

 In 1981, the sellers of the restaurant foreclosed on the mortgage from P & S. Shortly thereafter, Nancy and Ellison's two business entities filed for bankruptcy. Furthermore, Spinnaker Pole had failed to pay withholding and unemployment taxes for restaurant employees. This resulted in an assessment of tax liability by the Internal Revenue Service (IRS). On June 14, 1982, the IRS assessed liability of $ 26,925.79 (1982 tax lien) against Nancy and Ellison for unpaid taxes. *fn1"

 On September 15, 1982, Nancy conveyed the Property at 74 Meadow Creek Lane to her daughters, Kelly and Mary, by warranty deed. The deed was recorded in the Monroe County Clerk's Office on September 16, 1982. As consideration for the conveyance, Kelly and Mary assumed the outstanding principal on both the Columbia Banking and Marine Midland mortgages in the amount of $ 10,469.29, and $ 47,328.65, respectively. No other consideration was recited in the deed. *fn2" This conveyance took place eight days after an IRS agent allegedly left a "calling card" at Nancy's house. On September 22, 1982, a notice of federal tax lien on the Property for the 1982 assessment was filed in the Monroe County Clerk's Office.

 On April 16, 1984, the IRS issued another assessment of tax liability against Nancy and Ellison in the amount of $ 3,091.28 (1984 tax lien). This assessment was for other unpaid withholding taxes incurred by Spinnaker Pole. On June 21, 1984, the government filed notice of its tax lien on the Property in the Monroe County Clerk's Office.

 In November, 1984, Kelly and Mary borrowed $ 53,000 from their father Robert, and gave him a mortgage on the Property for that amount in return. This money was used to pay off the Marine Midland mortgage on the Property. The mortgage was recorded in the Monroe County Clerk's Office on January 24, 1985. As of July 10, 1985, Kelly and Mary had paid down the outstanding balance on the Columbia Bank mortgage by $ 6,000.

 II. Procedural Posture

 The government filed its complaint on November 24, 1987 against Nancy, Ellison, Kelly, Mary, Robert and Columbia Bank. *fn3" It sought the following relief:

 
(1) Declare the federal tax liens assessed against all property and rights to property of defendant Nancy McCombs-Ellison valid;
 
(2) Enter judgment for the plaintiff against Nancy McCombs-Ellison in the amount of $ 30,035.07 plus interest from the date of assessment;
 
(3) Set aside a transfer to defendants Kelly and Mary McCombs of property located at 74 Meadow Creek Lane, Rochester, New York, as fraudulent;
 
(4) Order that the federal tax liens on the property, located at 74 Meadow Creek Lane, Rochester, New York, be foreclosed and the property sold free and clear of titles, liens, claims or interests of any defendants.

 In support of its claims, the government argued, inter alia, that its two tax liens on the Property were valid and prior to the interests of Kelly and Mary. With respect to its 1982 tax lien it maintained that although Kelly and Mary received transfer of the property from Nancy and recorded the deed before the government recorded its tax lien on the property, the government had a priority interest in the property because the tax lien attached to the property before the conveyance to Kelly and Mary took place, and Kelly and Mary were not "purchasers" under 26 U.S.C. section 6323(a). See, United States v. McCombs, 30 F.3d at 321-22. In its argument to enforce the 1984 tax lien, the government sought to set aside the entire 1982 conveyance from Nancy to her daughter as fraudulent under New York law. Nancy did not own the Property at the time of the 1984 tax assessment. With the conveyance set aside, the Property would have still belonged to Nancy at the time of the 1984 assessment, and the federal tax lien could have attached to it. Id. 30 F.3d at 322.

 A bench trial on this matter was conducted on March 19, 1992. As evidence at trial, the government submitted 23 documents. The defendants stipulated that 22 of these exhibits should be entered, and reserved the right to impeach them during cross-examination of government witnesses. Unexpectedly, the government rested its case without calling any witnesses. Thus, defendants were not able to exercise their strategy of impeaching the evidence.

 After the government rested its case, the defendants moved for "summary judgment," and in the alternative, moved to dismiss the complaint on the basis that the government did not establish its claims of Nancy's tax liability or fraudulent conveyance. The court reserved decision.

 Defendants' case entailed only calling Nancy as a witness. She testified as to the issues of her tax liability for unpaid withholding and unemployment taxes. (This is an important point because the defendants have the burden of proof on the federal issue of whether Kelly and Mary are "purchasers"). The defendants then rested their case, and renewed the motions for "summary judgment" and to dismiss the complaint. Decision was again reserved by the court.

 After the trial, the parties filed post-trial briefs and had oral argument on the issues raised. The court issued a verdict and opinion finding, inter alia, that Nancy was liable for unpaid taxes in the amount claimed by the government; that the conveyance of the Property from Nancy to Kelly and Mary was fraudulent under New York law; that the government's tax liens on the Property were valid and prior to the interests of Kelly, Mary, and Robert. The court also ordered a foreclosure sale of the property. *fn4"

 The government petitioned the Second Circuit Court of Appeals for rehearing and sought the following relief:

 
(1) That the District Court, on remand, should determine whether the consideration paid by Kelly and Mary for the property was fair consideration in relation to the property's fair market value;
 
(2) that the parties should be allowed, on remand, to present further evidence to establish that fair market value of the property at the time of the transfer;
 
(3) that the District Court, on remand, be allowed to consider whether the value of Kelly and Mary's assumption of the existing mortgages as consideration for transfer of the property should be less than the face value of the mortgages; and
 
(4) that the District Court be free on remand to consider the fraudulent conveyance theory with respect to both the 1982 and 1984 assessments.

 Appellee's Petition for Rehearing, dated August 25, 1994, at 12. The Second Circuit denied this petition without opinion, by order dated October 3, 1994.

 Therefore, established in this case for remand are the findings that Nancy is personally liable for the unpaid withholding and unemployment taxes and that the 1982 tax lien validly attached to the property. Further established is that Robert's mortgage interest on the Property has priority over both of the government's tax liens. This leaves the court on remand to determine the validity and priority of the 1982 and 1984 tax liens as against Kelly and Mary.

 DISCUSSION

 A. 1982 Tax Lien

 The first issue to be addressed on remand has to do with the priority of the 1982 tax lien. The Second Circuit has already determined that a valid tax lien attached to Nancy's Property for her unpaid tax liability on the 1982 assessment. United States v. McCombs, 30 F.3d at 321-22. It left for this court to resolve the relative priority of this lien and in doing so, "determine only whether or not Kelly and Mary are 'purchasers' ...


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