bills of sale, or lease agreements in regard to the property at issue.
4. Purchase of "Slick"
The government also asserts that a nexus is shown by the fact that, in July 1986, Lion Crest Stable purchased a horse named "Slick" from the Keeneland Association and that it sold the horse to Robert LiButti on March 18, 1987 for $ 400,000. The same day, Robert LiButti sold the horse to an individual named John Ballis for $ 1,000,000. As a result, Robert LiButti's loan balance to Edith LiButti was increased by $ 400,000. The court cannot draw any inference from this information showing a connection between Robert LiButti and Devil His Due.
IV. CONCLUSIONS OF LAW
A. Fifth Amendment Privilege
Before discussing the legal theories of the case, it is necessary to discuss the government's assertion that because Robert LiButti invoked his Fifth Amendment privileges during his deposition in this action, the court must infer that his testimony would be adverse to Edith LiButti and must infer that it would serve to make a substantial connection between Robert LiButti, Lion Crest Stable, and Devil His Due. The government asserts that his refusal to testify by itself, and when taken together with other evidence on the record, establishes the required nexus between him and Devil His Due. The government requests specifically, that adverse inferences be drawn against Edith LiButti because of her father's failure to testify.
The Supreme Court has held that "the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them." Baxter v. Palmigiano, 425 U.S. 308, 96 S. Ct. 1551, 1558, 47 L. Ed. 2d 810 (1976). The Supreme Court has since noted that "Baxter did no more than permit an inference to be drawn in a civil case from a party's refusal to testify" and that such silence "was only one of a number of factors to be considered by the finder of fact in assessing a penalty." Lefkowitz v. Cunningham, 431 U.S. 801, 97 S. Ct. 2132, 2137 n.5, 53 L. Ed. 2d 1 (1977).
The Second Circuit has noted that, a bright line rule against drawing inferences due to the invocation of the Fifth Amendment is undesirable in civil cases, and unlike in criminal cases, in civil cases, "there is generally no constitutional interest underlying a particular claim of privilege; the calculus of interests is therefore all the more difficult." Brink's Inc. v. City of New York, 717 F.2d 700, 709 (2d Cir. 1983). However, the Second Circuit has permitted, but not required, a negative interest to be drawn against a party due to his invocation of his Fifth Amendment privilege. Machado v. Commanding Officer, 860 F.2d 542, 544-45 (2d Cir. 1988). Additionally, it has been held that "it is unlikely that the refusal to testify alone could support an adverse finding [against the party refusing to testify]." RSO Records, Inc. v. Peri, 596 F. Supp. 849, 857 (S.D.N.Y. 1984). The court finds that based on this precedent, it is far less likely to be proper to allow a non-party's refusal to testify to be the only support for an adverse inference against a party to the suit.
Relying on Brink's Inc., supra, the government claims that a negative inference may be drawn against a party when a witness closely identified with that party refuses to testify. The government cites to similar cases from the Third and Eighth Circuit Courts of Appeals. The court, however, finds these cases inapplicable to the one at hand because two of the cases involved former corporate personnel who invoked the Fifth Amendment regarding matters within their employment, and accordingly, the courts allowed the witnesses' silence to act as a negative inference against the corporate party. See Rad Services, Inc. v. Aetna Casualty & Sur. Co., 808 F.2d 271, 275 (3d Cir. 1986); Brink's Inc., 717 F.2d at 710 (also noting the unusual situation in that case because the witnesses in question were parties to a third-party claim, thus creating conflicting interests for Brink's). Similarly, in another case cited by the government, Cerro Gordo Charity v. Fireman's Fund Am. Life Ins. Co., 819 F.2d 1471, 1481-82 (8th Cir. 1987), the Court of Appeals approved the trial court's decision to permit the insurance company defendant to call a former voting member of the plaintiff charity to the witness stand so that he could invoke the Fifth Amendment in front of the jury. It did not hold that a court, in deciding a bench trial, is required to draw a negative inference against a non-party witness who has invoked the Fifth Amendment. See also Rosebud Sioux Tribe v. A & P Steel, Inc., 733 F.2d 509, 522 (8th Cir. 1984) (also holding simply that "under certain circumstances, a party may call a witness to the stand even when that witness has made known an intention to invoke the Fifth Amendment" and noting that the court was not creating a bright line rule on the issue). The court does not see how these cases have any application to the situation at hand.
The government has not provided any cases in which a non-party witness' invocation of his Fifth Amendment privilege has resulted in drawing an adverse interest against a party where the non-party witness was not in some way a former member or employee of the party at issue. Additionally, the Second Circuit has held in a case where a non-party, who did not have a former member or employee relationship with the party at issue, invoked his Fifth Amendment privilege that "no adverse interest against appellees could have been drawn by his refusal to testify." Brenner v. World Boxing Council, 675 F.2d 445, 454 n.7 (2d Cir. 1982). Thus, the court in this case, refuses to draw an adverse inference against Edith LiButti because of Robert LiButti's assertion of his Fifth Amendment privileges.
B. Choice of Law
Although the government has apparently ignored the issue, each of the legal theories on which it relies must be determined on the basis of state law. Nonetheless, the government has not made any argument about which state's law should apply in this action.
Because this is a federal question action, the court must use a federal common law choice of law rule in order to decide which state's substantive law governs the purported legal theories at issue. Corporacion Venezolana de Fomento v. Vintero Sales Corp., 629 F.2d 786, 795 (2d Cir. 1980). Following the federal choice of law rule, the Second Circuit has applied the law of the jurisdiction with the greatest interest in the substantive legal claim at hand. Id. at 795.
In this case, although the levy was placed on the horse while it was in New York, this state does not appear to have an interest under any of the legal theories advanced by the government. New Jersey, on the other hand, has a strong interest in light of the theories the government is advancing. Since the government is arguing that Robert LiButti held an interest in Devil His Due because of connections to Lion Crest Stable, a New Jersey entity, and because Edith and Robert LiButti reside in New Jersey, it has an interest in the action. Thus, the court will apply New Jersey law, when possible, to these claims.
C. Plaintiff's Initial Burden
The government notes in its post-trial memorandum that it does not dispute, according to the form of the transactions at issue, that plaintiff has met her initial burden of establishing title to the property levied upon. The court, therefore, deems this established and turns to an examination of the government's burden to show a connection between Robert LiButti, the taxpayer, and the property levied upon, Devil His Due.
D. Government's Burden
As noted before, once the plaintiff has met her initial burden, the government must then prove a nexus between the taxpayer and the property levied upon by "substantial evidence." "Substantial evidence" has been deemed by other courts to be "considerably more than a preponderance but less than clear and convincing proof." Nelson, 821 F. Supp. at 1501. This court uses the same standard.
1. Nominee Theory
As stated previously, the court should apply New Jersey law regarding nominee relationships to analyze the possibility of such a relationship between Edith and Robert LiButti. See Hill v. United States, 844 F. Supp. 263, 270 (W.D.N.C. 1993) (noting that the court must apply state law to determine whether a nominee relationship exists). However, courts have not followed state law when no case law on what factors to apply can be found. See Towe Antique Ford Found. v. IRS, 791 F. Supp. 1450, 1454 (D. Mont. 1992) (applying the test for nominees used by other courts when no applicable law from the appropriate state could be found). Having found no reported cases addressing the factors relevant to the nominee theory from New Jersey, the court uses the factors considered by other courts and agreed to by the parties in this action.
As noted in the caption of this action, the levy was issued against the plaintiff "as nominee of Robert LiButti." The government claims that the proof at trial supports that Devil His Due is being held by Edith LiButti, doing business as Lion Crest Stable, as a nominee of Robert LiButti. The parties do not contest that in order to establish that property is held by a nominee the court must consider six factors: (1) whether inadequate or no consideration was paid by the nominee; (2) whether the property was placed in the nominee's name in anticipation of a lawsuit or other liability while the transferor remains in control of the property; (3) whether there is a close relationship between the nominee and transferor; (4) whether the they failed to record the conveyance; (5) whether the transferor retains possession; and (6) whether the transferor continues to enjoy the benefits of the transferred property. Id.
Applying these factors to the case at hand, the government has not shown substantial evidence to support the nominee theory. Most importantly, the government did not provide any proof that there was a transfer of Devil His Due from Robert to Edith LiButti. The court finds that the government's proof showed a close relationship between these individuals. However, the other factors have not been supported.
2. Fraudulent Conveyance Theory
The government lists fraudulent conveyance among the defenses set forth in its amended answer. However, as just noted, since the none of the proof at trial supported that Devil His Due was conveyed from Robert to Edith LiButti, any argument of this theory is meritless.
3. Alter Ego Theory
The government argues that the proof at trial shows that Robert LiButti is the alter ego of Lion Crest Stable, and thus, since Devil His Due is purportedly owned by Lion Crest, the horse is the property of Robert LiButti. Alter ego doctrine commonly arises in the context of a creditor's efforts to pierce a corporate veil, and the government clearly relies on the principle of "piercing the corporate veil" in this action. See Def. Pretrial Memo. at 40.
New Jersey law clearly allows piercing of the corporate veil when that theory is legally applicable. The court has found a wide variety of New Jersey case law in which individuals have been found to be the alter egos of corporations. See, e.g., Coppa v. Taxation Div. Director, N.J. Tax 236, 239 (N.J. Tax Ct. 1986); Laborers' Local Union Nos. 472 & 172 v. Interstate Curb & Sidewalk, 90 N.J. 456, 448 A.2d 980, 982 (N.J. 1982); McKee v. Harris-Seybold Co., 109 N.J. Super. 555, 264 A.2d 98, 108 (N.J. Super. Ct. 1970). However, the case at hand involves a sole proprietorship rather than a corporation, and after an exhaustive search of New Jersey case law, the court cannot find any legal authority for the government's proposal that the court apply the alter ego doctrine to a sole proprietorship. While it is clear that New Jersey does not consider the sole proprietorship entity to be the exact legal equivalent of the natural person behind the business, see, e.g., In re Grand Jury Proceedings of Guarino, 104 N.J. 218, 516 A.2d 1063, 1064 (N.J. 1986) (holding that the Fifth Amendment privileges of an individual do not extend to the business records of his sole proprietorship), the court can find no New Jersey legal authority for the proposition that a sole proprietorship may be subject to the alter ego doctrine.
Thus, the court rejects this line of argument by the government and does not find Robert LiButti to be the alter ego of Lion Crest Stable.
4. Lien on Going Concern Theory
The government also briefly states within its alter ego argument that even if it was found that Robert LiButti no longer controlled Lion Crest, "the tax liens attached to Lion Crest's property and value as a going concern upon the assessment." Def. Pretrial Memo. at 41. It is clear that the first tax assessments against Robert LiButti were made in 1986. The government thus asserts the theory that the lien attached in 1986 continues today. However, as the plaintiff points out, under its terms, the 1986 lien expired in 1992, prior to the levy in this case. Thus, although the government refiled the notice of lien in August 1994, any lien on Lion Crest Stable as a going concern had already expired. Preliminary Inj. Hearing, Def. Exh. 3 at 1-4.
5. Constructive Trust Theory
The government also argues that even if Robert LiButti relinquished any active and substantial control that he held over Lion Crest Stable, the levy is valid against Devil His Due because Lion Crest holds title to the horse as a constructive trustee for the creditors of Robert LiButti. The government claims that the proof at trial shows that Robert LiButti retains equitable interests in Lion Crest. The government argues, "courts must impose a constructive trust with respect to fraudulently conveyed property in order to preclude any further harm to the transferor's creditors, and because the transferee cannot possibly maintain the right to proceeds from property the title to which they should never have obtained in the first place." Def. Pretrial Memo. at 42-43. However, it is clear from the government's argument, that this theory of constructive trust relies strongly on the court's finding that Robert LiButti is, or at one time was, the alter ego of Lion Crest Stable.
See id. at 43. Since the court has rejected the alter ego argument, it too must reject the constructive trust theory.
E. Plaintiff's Ultimate Burden of Proof
As stated previously, the government must support a nexus between the taxpayer and the property at issue by "substantial evidence." Based on the foregoing, the court finds that the government has not supported its burden. Based on the facts presented by the plaintiff, however, especially as discussed previously in Section IIIA and IIIB of this decision, the court finds that plaintiff has met her ultimate burden of proving that the levy is wrongful. See Century Hotels v. United States, 952 F.2d 107, 109 (5th Cir. 1992) (stating that "if the IRS proved a nexus by substantial evidence, [the plaintiff] then had the ultimate burden of proving the levy was wrongful").
In conclusion, the court holds that the plaintiff has supported her burden of proof while the government has not, and thus, the levy placed on Devil His Due is wrongful. The court hereby orders that the levy placed on Devil His Due on August 25, 1994 be lifted and that the IRS be permanently enjoined from enforcing such levy.
IT IS SO ORDERED.
Dated August 3, 1995
at Binghamton, New York
Thomas J. McAvoy
Chief U.S. District Judge