The opinion of the court was delivered by: THOMAS J. MCAVOY
On July 6, 1994, Edith LiButti, doing business as Lion Crest Stable ("Lion Crest"), brought the racehorse "Devil His Due" to Saratoga, New York to run in the Whitney Handicap on August 27, 1994. On August 25, 1994, the United States Internal Revenue Service (IRS) delivered a Notice of Seizure and Levy to Devil His Due's trainer at Saratoga. The levy was made against Edith LiButti d/b/a trainer on Crest Stable "as nominee of Robert LiButti to the extent of his interest in the thoroughbred race horse named Devil His Due." The levy sought to seize Devil His Due to satisfy a tax assessment against Robert LiButti.
On August 26, 1994, Lion Crest Stable and the IRS entered into an agreement which allowed Devil His Due to run in the Whitney Handicap. Lion Crest agreed not to file suit against the IRS under 26 U.S.C. § 7426 until August 30, 1994. Any money Devil His Due earned in the Whitney, which amounted to approximately $ 77,000 due to his second place finish, was to be held in escrow until: (1) the government permitted Lion Crest to withdraw all or some of the earnings; (2) Lion Crest obtained a court order allowing it to withdraw the earnings; or (3) Lion Crest and the government entered into a second agreement with regard to the disposition of earnings.
The court heard a preliminary injunction motion brought by the plaintiff on September 8 and 9, 1994, which essentially sought to lift the levy until such time as the merits of the 26 U.S.C. § 7426 action could be heard. A preliminary injunction was granted which allowed the horse to continue the racing season, but which denied lifting of the levy. The horse has continued to race under agreements between the plaintiff and the IRS.
On October 26, 1994, the government filed suit against Robert Libutti, Joan Libutti (plaintiff's mother), and Edith Libutti in the District of New Jersey. The relief requested in that suit is: (1) to reduce the assessments of Robert Libutti's federal income tax liabilities to judgment; and (2) to foreclose on the federal tax liens which have attached to Devil His Due as a result of such assessments, to sell Devil His Due at foreclosure sale, and to apply the proceeds of such sale to reduce Robert Libutti's outstanding tax liability. The government sought a stay of the Northern District of New York action until final judgment had been entered in the New Jersey action. The court denied this motion.
A three-day bench trial in this action commenced on March 28, 1995. The following is the court's findings of fact and conclusions of law.
II. LEGAL STANDARD -- 26 U.S.C. § 7426
26 U.S.C. § 7421 prohibits suits to restrain assessment or collection by the Internal Revenue Service. 26 U.S.C. § 7421(a), however, provides several exceptions to this rule, including allowing suits for wrongful levy pursuant to 26 U.S.C. § 7426. Specifically, § 7426(b)(1) allows a court to enjoin a levy or sale if it determines that the plaintiff has rights in the property superior to the federal tax liens and the levy or sale would irreparably injure those rights.
To prove a wrongful levy, the plaintiff must show that: (1) the IRS filed a levy covering taxpayer liability against property held by the plaintiff; (2) the plaintiff had an interest or lien on that property superior to the government's interest; and (3) the levy was wrongful because the tax debtor does not own the property levied against. Marshall v. United States, 831 F. Supp. 988, 997 (E.D.N.Y. 1993).
The respective burdens of proof are not disputed by the parties to this action. The initial burden of proof lies with the plaintiff who must "prove title to or an ownership interest in the property levied upon by the Government and that the Government levied upon the property because of a tax assessment against another taxpayer." Id. Next, the burden shifts to the government to prove by "substantial evidence" that there is a nexus between the property and the taxpayer. "Substantial evidence" has been deemed by other courts to be "considerably more than a preponderance but less than clear and convincing proof." Nelson v. United States, 821 F. Supp. 1496, 1501 (M.D. Ga. 1993). It is the plaintiff's ultimate burden, however, to prove that the levy is wrongful and should be overturned. If the plaintiff fails to support this burden, the levy remains in place. Id.
A. Sales Transactions on Devil His Due
Much of the testimony at trial focused on connections between Edith and Robert LiButti on matters other than the ownership of Devil His Due. The court was presented, however, with the details of various purchase and sales transactions regarding Devil His Due which explain his ownership at the time the levy was attached.
Through Edith LiButti's testimony and various exhibits, including bills of sale and check stubs from Lion Crest Stable's checking account, the acquisition of various interests in Devil His Due can be traced. From this information, it is clear that Edith LiButti first purchased Devil His Due from the Keeneland Sales Company in November 1989 for $ 25,000. Pltf. Exh. 37. She testified that she did so against the advice of her father. On February 26, 1990, she sold her 100 percent interest in the horse to George Nejemian, her ex-husband, for $ 45,000.
Nejemian, a chiropractor, then sold interests in the horse to four of his patients, but according to the bills of sale, kept sole responsibility for "any managerial decisions as to the colt's racing career, stud career, or sale." Def. Exh. 139-141. According to these bills of sale, Nejemian sold a 10 percent interest in Devil His Due to Robert McGirr on February 26, 1990, a 25 percent interest to Edward Darella on February 27, 1990, and a 25 percent interest to George and Richard Greeley on February 28, 1990, to be shared equally as 12 1/2 percent interests by each. Def. Exh. 139-141. Nejemian kept a 40 percent interest himself.
In early 1992, Edith LiButti began to reacquire interest in Devil His Due. On February 10, 1992, she regained Nejemian's 40 percent interest in Devil His Due as a trade for her 50 percent interest in a colt of "Turkoman" and "Solicitous."
Pltf. Exh. 6. She acquired Darella's 25 percent interest as a trade for her 15 percent interest in the horse "Litigation Rex" on February 13, 1992.
Pltf. Exh. 11. She obtained the 10 percent McGirr interest as a trade for a 100 percent interest in the horse "Easy Magic" on February 13, 1992.
Pltf. Exh. 18. Over a year later, she acquired the remaining 25 percent interest held by the Greeleys on March 5, 1993 for $ 100,000. Pltf. Exh. 26-29. She testified that she obtained the money for the purchase of the Greeleys' interests from a friend, John Terranova, who loaned her the money and that she arranged for this loan herself. See Pltf. Exh. 29 (noting a 30-day loan from Terranova).
Check stubs and canceled checks entered into evidence show that Edith LiButti repaid the loan to Terranova on March 24, 1993 after Devil His Due won the Gulfstream Handicap in Florida. See Pltf. Exh. 30-33. Thus, by the end of March 1993, plaintiff had acquired 100 percent ownership of Devil His Due. No further transactions were presented in evidence, and thus, it appears from this information that Edith LiButti was the sole owner of Devil His Due at the time it was levied upon at Saratoga on August 25, 1994.
B. Additional Evidence of Ownership
Edith LiButti also testified at trial that she has paid all expenses involved in training and upkeep of Devil His Due. She has collected the race proceeds associated with the horse, except for a 25 percent interest owned by the Greeleys during the period when she owned only 75 percent of Devil His Due. The foal certificate issued by the Jockey Club also lists full ownership in Edith LiButti/Lion Crest Stable. Pltf. Exh. 1.
Deposition testimony by Allen Jerkens, the trainer of Devil His Due, shows that he discussed jockeys for Devil His Due with Edith LiButti and generally spoke with her "a couple of times a week" when the horse began to race. Allen Jerkens Dep. at 47. He also stated that he always refers those who approach him regarding the sale of Devil His Due to Edith. Id. at 59. Mr. Jerkens' deposition testimony also shows that Edith LiButti owned Litigation Rex and Easy Magic, interests in which she sold to repurchase Devil His Due. Id. at 53-57. His wife, Elizabeth Jerkens, who performs the bookkeeping for the H.A. Jerkens training business, testified in deposition that she has discussed any outstanding bills for Lion Crest Stable with Edith LiButti. Elizabeth Jerkens Dep. at 119-121.
The government introduced one witness at trial, Stewart Welch, who testified as to a telephone conversation with a woman who identified herself as Edith LiButti. He testified that during this conversation she said that her father had an ownership interest in Devil His Due. According to his testimony, Stewart Welch, a bloodstock agent, became interested in purchasing an interest in Devil His Due in January 1994. After discussions with Allen Jerkens, the horse's trainer, he then called Edith LiButti "probably within the day" he talked to Jerkens, to inquire if the horse was for sale. Trial Trans., Mar. 30, 1995 at 567. He said that the conversation lasted for a "couple of minutes." Id. at 570. He testified that upon inquiring as to the current owners of the horse, Ms. LiButti answered that she, Robert LiButti, and Bob Fox had ownership interests. She told him that a 25 percent interest in Devil His Due was for sale for approximately $ 700,000. She told him to call Bob Fox regarding the possibility of a sale.
In a telephone conversation with Bob Fox, Mr. Welch was told that a 25 percent interest would cost $ 750,000 and that the contract was to be to be made out to Lion Crest Stable. Mr. Welch testified that he believed Bob Fox to have an agency interest in Devil His Due. Mr. Welch faxed Bob Fox a copy of the sale agreement for a 25 percent interest in Devil His Due. Def. Exh. 295. The agreement clearly lists Bob Fox as the agent for Lion Crest Stable. Mr. Welch testified that he did not hear from Bob Fox regarding the contract after that, but he ran into him a few days later and Fox informed him that he had not signed the contract in order ...