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U.S. v. LETSCHER

September 27, 1999

UNITED STATES OF AMERICA, PLAINTIFF,
v.
JOSEPH LETSCHER, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Koeltl, District Judge.

OPINION AND ORDER

The complaint in this action seeks to reduce to judgment an assessment of federal tax liabilities, interest, fees, penalties, and statutory additions (collectively, the "tax liabilities") against the defendant Joseph Letscher, who was convicted of failing to file federal tax returns and tax evasion. Pending now are: cross-motions for summary judgment by the Government and by Mr. Letscher; the Government's motion for a default judgment against defendant Irene Letscher Vingo; the Government's motion to amend the caption and to dismiss various defendants; and Mr. Letscher's motion to strike various evidentiary materials submitted by the Government.

I.

The standard for granting summary judgment is well established. Summary judgment may not be granted unless "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Gallo v. Prudential Residential Servs., Ltd. Partnership, 22 F.3d 1219, 1223 (2d Cir. 1994). In determining whether summary judgment is appropriate, a court must resolve all ambiguities and draw all reasonable inferences against the moving party. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Co., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962)); see also Gallo, 22 F.3d at 1223. Summary judgment is improper if there is any evidence in the record from any source from which a reasonable inference could be drawn in favor of the nonmoving party. See Chambers v. TRM Copy Ctrs. Corp., 43 F.3d 29, 37 (2d Cir. 1994). "In considering the motion, the court's responsibility is not to resolve disputed issues of fact but to assess whether there are factual issues to be tried." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied; 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987). Because the defendants Joseph Letscher and Irene Letscher Vingo appear pro se, their pleadings, "however inartfully pleaded," must be held to less stringent standards than formal pleadings drafted by lawyers. Estelle v. Gamble, 429 U.S. 97, 106, 97 S.Ct. 285, 50 L.Ed.2d 251 (1976); Patrick v. LeFevre, 745 F.2d 153, 160 (2d Cir. 1984).

On a motion for summary judgment, once the moving party meets its initial burden of demonstrating the absence of a genuine issue of material fact, the nonmoving party must come forward with specific facts to show there is a factual question that must be resolved at trial. See Fed.R.Civ.P. 56(e); see also Cornett v. Sheldon, 894 F. Supp. 715, 724 (S.D.N.Y. 1995). A party opposing summary judgment must produce evidence in the record and "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible." Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir. 1993); see Wyler v. United States, 725 F.2d 156, 160 (2d Cir. 1983); Cornett, 894 F. Supp. at 724; see also Ali v. Bank of New York, 934 F. Supp. 87, 91 (S.D.N.Y. 1996).

II.

There is no genuine dispute with respect to the following facts. In March 1993, Mr. Letscher was convicted of willfully evading the payment of federal taxes for the years 1986 and 1987, and of failing to file federal income tax returns for the years 1984 and 1985. See United States v. Letscher, No. 91 Cr. 331(KC), judgment (S.D.N.Y. July 20, 1993), attached as Ex. C to Declaration of Kathleen Zebrowski dated Sept. 25, 1998 ("9/25/98 Zebrowski Decl."). Mr. Letscher was sentenced to 33 months imprisonment, followed by 3 years supervised release. See id. At sentencing, Judge Kenneth Conboy determined that Mr. Letscher's actions warranted an enhanced sentence under the federal sentencing guidelines. See United States v. Letscher, 40 F.3d 1237, slip op., at 2-3 (2d Cir. Oct. 26, 1994), attached as Ex. D to 9/25/98 Zebrowski Decl. The district court found that a two level increase in the offense level was warranted because of Mr. Letscher's use of sophisticated means of concealing income through his use of unincorporated business organizations and the abuse of W-4 forms. The Court found a further two level increase was warranted based on the defendant's perjury during trial, material misrepresentations to Government agents, and "flooding the court" with frivolous and redundant motions during the two years prior to trial. The Court also found that a three-level upward departure was justified based on Mr. Letscher's filing frivolous post-trial criminal complaints against the Internal Revenue Service (the "IRS") and the Assistant United States Attorney who prosecuted the case and Mr. Letscher's attempts to file liens against property owned by Government personnel. See id. at 2.

The judgment of conviction and sentence were affirmed by the Court of Appeals for the Second Circuit. See id. The Court of Appeals noted that the evidence at trial showed that Mr. Letscher had:

  engaged in a systematic, long-term plan to evade the
  payment of income taxes. He minimized and even
  eliminated withholding taxes by submitting false
  Internal Revenue Service ("IRS") W-4 forms to
  employers, resulting in the underwithholding of
  significant taxes. Letscher then failed to file tax
  returns to report income earned from these employers.
  He also created sham organizations to conceal real
  estate profits.

See id. at 1-2.

In his own defense, Mr. Letscher did not dispute that he earned income during the years charged in the indictment, or that he had not filed tax returns. See id. at 2. Rather, he contended that he did not believe that individuals are required to file tax returns or pay taxes. See id. He therefore argued that he had a good faith misunderstanding of the federal tax laws. See id.

At his criminal trial, Mr. Letscher testified that he filed tax returns and paid his taxes until 1980. (Tr.*fn1 at 648.) In 1981, he began listening to and reading materials prepared by Irwin Schiff, a tax protester. (Tr. at 651.) Starting from late 1980, Mr. Letscher attended several seminars hosted by Mr. Schiff. (Tr. at 700.) He also subscribed to newsletters prepared by Mr. Schiff. (Tr. at 702-03.) On the basis of information from Mr. Schiff and Mr. Letscher's own research, Mr. Letscher decided not to file any more tax returns because he could not find any law which required him to do so. (Tr. at 675, 708.)

In or about March 1987, Mr. Letscher went to Hawaii to learn about, among other things, "trusts." (Tr. at 744-45.) There, he met Michael Kailing, an accountant who is not a party to this action, who was allegedly knowledgeable about trusts. (Tr. at 746-47, 758.) Shortly afterwards, Mr. Letscher formed New York Investment International, Inc. ("NYII") and named Mr. Kailing, whom Mr. Letscher had allegedly known for only a few months, as the trustee. (Tr. at 747, 751, 758.) Mr. Letscher funded the trust in part with his own paychecks. (Tr. at 901.) In 1987, he deposited approximately $22,895 into the NYII account. (Tr. at 993-94.) He also stated that he served as the "agent-president" of NYII and his sister, Irene Letscher Vingo, was the secretary of NYII. (Tr. at 897, 900.) Mr. Letscher had signing and deposit authority over the trust account. (Tr. at 902.)

Mr. Letscher also testified that in 1969, his mother executed a deed transferring title to the property at 113 Glover Avenue in Yonkers, New York (the "Property") to him and his sister, Irene Letscher Vingo, reserving a life estate. (Tr. at 708-10.) In 1972, when their mother died, Mr. Letscher and Ms. Vingo obtained full title to the Property. (Tr. at 711.) In January 1988, Mr. Letscher transferred his interest in the Property to NYII. (See Indenture dated Jan. 4, 1988 and Sch. A attached as Ex. G to 9/25/98 Zebrowski Decl.)

Mr. Letscher testified that he personally incurred expenses to maintain the Property during 1983-1987. (Tr. at 834.) He stated that he fixed the plumbing in the house and also made some of the premium payments to maintain the insurance on the Property. (Tr. at 834.) Moreover, he testified that he occasionally lived at the Property. (Tr. at 846.)

In April 1992, the Government, through the IRS District Office, assessed the defendant for unpaid federal income taxes, interest, and penalties for the tax years 1981 through 1990. (See Letter from Shirley Peterson dated Apr. 21, 1992 ("4/21/92 Peterson Letter"), attached as Ex. A to Supplemental Declaration of Michael Kelly dated Dec. 30, 1998 ("12/30/98 Kelly Supp. Decl.").) The total amount assessed as of April 21, 1992 was $314,793. (See id.) Notices of assessment and demands for payment for the assessed liabilities were sent to Joseph Letscher individually and to NYII, Joseph Letscher, sole proprietor. (See id.; Decl. of Michael Kelly dated Sept. 24, 1998 ("9/24/98 Kelly Decl.") ¶ 4.)

On or about April 23, 1992 and April 24, 1992, the Government filed notices of federal tax liens reflecting these assessments against both Mr. Letscher and NYII with the Registers of New York and Westchester Counties, respectively. (See 9/24/98 Kelly Decl. ¶ 5.)

As of September 16, 1998, the sum of $532,116.50 in tax liabilities was due and owing to the United States for the tax years 1981 through 1990. (See 9/24/98 Kelly Decl. ¶ 9.)

On February 10, 1995, the Government commenced this action to reduce to judgment the assessment of tax liabilities against Mr. Letscher, and to enforce and foreclose federal tax liens on the defendant's interest in the Property. (See Compl.) The complaint also names as defendants the following parties: Irene Letscher Vingo, a tenant in common of the Property; the New York State Tax Commission and the National Westminster Bank ("the Bank"), which may have liens on the Property; and John Does 1-5 and Jane Does 1-5, who are unidentified individuals residing at the Property. Since the filing of the complaint, Francis Haviland and Mary Haviland and no others have been identified as the residents at the Property.

On or about April 10, 1995, Mr. Letscher entered a "Notice of Special Appearance for the Limited Purpose of Objecting to the Response filed by the Government — United States." This Court construed the notice as a motion to dismiss for improper service of process, lack of personal jurisdiction, and improper venue and denied the motion. (See Memorandum Endorsement dated Aug. 9, 1995.) This Court also directed Mr. Letscher to serve and file an answer by September 1, 1995. See id. Defendant State Tax Commission entered a Notice of Appearance but has not moved or answered the complaint. (See Notice of Appearance dated Mar. 13, 1995 attached as Ex. B to 6/21/99 OTSC.) The defendant Bank filed an answer waiving any service of papers and notices except notices of sale and notices of proceeding to obtain surplus monies. (See Ans. dated Apr. 10, 1995, attached as Ex. B to 6/21/99 OTSC.) Defendants Francis Haviland and Mary Haviland have not moved or answered with respect to the complaint.

On July 17, 1996, the Clerk of the Court entered a default against each of the defendants. (See Clerk's Cert. dated July 17, 1996, attached as Ex. B to Order to Show Cause dated July 17, 1996 ("7/17/96 OTSC").) The Government then moved by order to show cause for a default judgment against the defendants. (See 7/17/96 OTSC.) Mr. Letscher then filed an answer to the complaint, and promptly filed a voluntary petition for bankruptcy. On January 12, 1998, the Bankruptcy Court dismissed Mr. Letscher's petition. (See Order dated Jan. 12, 1998, attached as Ex. H to 9/25/98 Zebrowski Decl.)

In September 1998, the Government filed this motion for summary judgment reducing the assessment of tax liabilities against Mr. Letscher to judgment and foreclosing the federal tax liens on the Property. Mr. Letscher opposes the motion and has cross-moved for summary judgment on various bases.

As to the other defendants, the Government obtained a new Certificate of Default dated June 18, 1999 from the Clerk of the Court. (See Clerk's Certif. dated June 18, 1999, attached as Ex. B to Order to Show Cause dated June 18, 1999 ("6/18/99 OTSC").) The Government then moved by Order to Show Cause for a Default Judgment. (6/18/99 OTSC.) Defendant Vingo then filed an answer to the complaint. (See Ans. dated July 26, 1999). By letter dated September 21, 1999, the Government advised the Court that the Government has settled its action against Ms. Vingo and that a stipulation will be submitted. (See Letter of Kathleen Zebrowski dated Sep. 21, 1999.) The other defendants did not respond to the Order to Show Cause and, after finding that the Government's motion was justified, by Order dated July 8, 1999, this Court granted a default judgment against the State Tax Commission, the Bank, Francis Haviland, and Mary Haviland. (See Order dated July 8, 1999.)

III.

(A)

The Government moves for summary judgment on the first cause of action to reduce the federal tax assessments against Mr. Letscher to judgment and to foreclose on the federal tax liens.

With the exception of civil fraud penalty assessments, an IRS notice of tax deficiency is presumed to be correct. See Moretti v. Comm'r of Internal Revenue, 77 F.3d 637, 643 (2d Cir. 1996); Andrew Crispo Gallery, Inc. v. Comm'r of Internal Revenue, 16 F.3d 1336, 1341 (2d Cir. 1994); Schaffer v. Commm'r of Internal Revenue, 779 F.2d 849, 857 (2d Cir. 1985); Carter v. United States, 717 F. Supp. 188, 191 (S.D.N.Y. 1989). In general, there are two aspects to this presumption of correctness: the procedural burden of going forward with the evidence and the substantive burden of persuasion. See Schaffer, 779 F.2d at 857. A taxpayer challenging the asserted deficiency has the burden of proving that the deficiency is incorrect by a preponderance of the evidence. See Moretti, 77 F.3d at 643; Schaffer 779 F.2d at 857-58.

With respect to the civil fraud penalties, they "can be imposed if the Commissioner proves by clear and convincing evidence that [the] taxpayer[] acted with an intent to evade paying taxes." Schiff v. United States, 919 F.2d 830, 833 (2d Cir. 1990) (citation omitted). Fraud can be proved by circumstantial evidence, including: "(1) consistent and substantial understatement of income, (2) failure to maintain adequate records, (3) failure to cooperate with an IRS investigation, (4) inconsistent or implausible explanations of behavior, and (5) awareness of the obligation to file returns, report income and pay taxes." Id. (citation omitted). The Court of Appeals for the Second Circuit has made it clear that the fraud penalty can be upheld on a motion for summary judgment when there is clear and convincing evidence. Id.

In this case, Mr. Letscher failed to file tax returns for ten consecutive years and engaged in conduct evincing a clear intent to evade taxes. He was convicted of willful tax evasion for the years 1986 and 1987 and for failure to file federal income tax returns for 1984 and 1985. His conviction was affirmed on appeal. Mr. Letscher established NYII, a trust which he described as an irrevocable trust and which he understood was not to be used for personal expenses. Yet, he conceded that he drew numerous checks on the NYII account for personal expenses. He also transferred the Property at 113 Glover Avenue to NYII, yet he continued to treat the Property as personal property by paying expenses on the Property and by living in the Property from time to time. Moreover, the trial judge who sentenced Mr. Letscher on his criminal conviction determined that a two-level increase of the baseline sentence under the federal ...


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