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U.S. v. MORRELL

March 23, 2001

UNITED STATES OF AMERICA, PLAINTIFF,
V.
HAROLD MORRELL AND MICHAEL F. MORRELL, DEFENDANTS.



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

ORDER

The United States moves pursuant to Rule 56, Fed.R.Civ.P., for summary judgment to declare the validity of certain tax liens and to order foreclosure on the liens and sale of property, consisting of a residence conveyed by taxpayers to their son and an annuity traceable to securities that had been transferred by taxpayers to their son, that is subject to the liens. Defendants oppose the motion, arguing that there are factual issues for trial: (1) that the son's interests in the real and personal property that had been transferred to him are superior to the tax liens; (2) that some of the funds used to purchase the annuity came from the son's independently accumulated assets, or alternatively, from property transferred by the taxpayers before the liens attached; and (3) that the government is not entitled to the appreciation in the value of assets after the transfers by the parents to the son.

The Facts

The facts, which in part are set forth in a Joint Agreed Statement of Material Facts ("Joint Statement") entered into by the parties, are undisputed except as indicated. Defendant Harold Morrell invested in tax shelters and claimed deductions on his joint income tax returns filed with his wife, Dolores Morrell, for the years 1977 — 1980.*fn1 The IRS disallowed the deductions for these four years and assessed deficiencies. Harold and Dolores Morrell contested the deficiencies in Tax Court. On August 13, 1990, the Tax Court entered an agreed decision finding deficiencies for those years, exclusive of interest, of $182,645, which with interest had grown to over $750,000 as of the date of the decision and approximately $1.4 million when the parties entered into the Joint Statement.

The IRS separately assessed the deficiencies and demanded payment for each of the years 1977 — 1980 between November 15 and December 10, 1990, thereby creating liens against all property of Harold and Dolores Morrell pursuant to 26 U.S.C. § 6321 and 6322. These statutes provide that a lien attaches at the time of assessment to "all property and rights to property" of the taxpayer for the amount of the assessment, including interest that may accrue, and continues until the liability is satisfied or becomes unenforceable by lapse of time. Tax liens were filed against Harold and Dolores Morrell in Suffolk County on September 11, 1991. Harold Morrell does not contest the deficiencies, and agrees that judgment should be entered against him for the full amount of the liability.

Harold and Dolores Morrell transferred real estate, stocks and other securities to their son, defendant Michael F. Morrell. The real estate, a home in Suffolk County having a fair market value of approximately $400,000 at the time, was transferred by deed dated May 24, 1991, after the assessment and attachment of the government's lien.*fn2 Harold and Dolores Morrell continued to reside there after the transfer as they had before. There was no mortgage on the property. Harold and Dolores Morrell also transferred to Michael Morrell in May 1991 their holdings in municipal trusts worth over $217,000. The transfer was effectuated by transferring the holdings from the parents' account at Dean Witter to Michael's account at Dean Witter. Michael subsequently transferred the municipal trusts to a joint Dean Witter account of Michael and his spouse. In April 1992, Harold and Dolores Morrell transferred stock holdings worth approximately $200,000 from their Dean Witter account to the Dean Witter account of Michael and his spouse.

Harold Morrell claimed in his deposition that all of these transfers, which admittedly followed the assessment, were not undertaken to avoid payment of tax deficiencies. Instead, he asserted, the assets were transferred in light of the declining health of Dolores Morrell, so that the parents would qualify for government medical assistance. Michael Morrell testified in his deposition that he shared the same understanding of the reason for the transfers of assets, and was not aware at that time of his parents' tax difficulties. For purposes of the summary judgment motion, the government does not contest motivation, but asserts that it is entitled to foreclose on its liens regardless of motivation.

Michael Morrell's assertion of an interest superior to the government liens is based upon the defendants' claim that in exchange for the transfer of assets, Michael orally agreed to support his parents and in fact did so. Defendants argue that Michael Morrell therefore is a "purchaser" protected under 26 U.S.C. § 6323(a) or, alternatively, that he is entitled to an equitable lien for the hundreds of thousands of dollars he spent to support his parents over the years following the transfers of assets.

Harold Morrell testified at his deposition that he and his wife transferred their residence, stocks and securities pursuant to a unitary plan to divest themselves of all assets, and that no other assets were left after the transfers.*fn3 Harold Morrell testified as follows as to the timing of the alleged support agreement in relationship to the transfer of property:

Q. In connection with the transfer of the assets, did your son later make some promises to you as to what he would do for you?
A. Well, we had set up for a planned estate, and he agreed after we transferred everything over to his name he would support us. We were concerned about our health, my wife's health, which subsequently has died, but concerned about Medicare, so we didn't want to have anything around. So we made a deal. We decided that we'll have Michael take everything now and then support us so that we wouldn't be exposing the assets to Medicaid.
Q. At the time of the transfers that you made to your son, had your son agreed to give you support?

A. Yes.

Q. And your recollection is that his promise for the support was before the transfers ...

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