DIVERSIFIED METAL PRODUCTS, INC., Plaintiff, v. T-BOW COMPANY TRUST, INTERNAL REVENUE SERVICE, and STEVE MORGAN, Defendants.
Case No. CV 93-0405-E-BLW
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF IDAHO
1996 U.S. Dist.; 96-2 U.S. Tax Cas. (CCH) P.50,437; 78 A.F.T.R.2d (RIA) 5830
July 18, 1996, Decided
July 18, 1996, FILED
[*1] United States' Motion for Summary Judgment (Docket No. 34), filed April 30, 1996, GRANTED. The funds currently held in the Court's registry paid to the United States, pursuant to a proposed judgment consistent with this decision. The trial, currently set for July 23, 1996, VACATED.
For INTERNAL REVENUE SERVICE, defendant: Betty H Richardson, US ATTORNEY'S OFFICE, Boise, ID. Paul W Sharratt, US DEPT OF JUSTICE, Tax Division, Washington, DC.
B. LYNN WINMILL, UNITED STATES DISTRICT JUDGE
B. LYNN WINMILL
MEMORANDUM DECISION AND ORDER
This matter comes before the Court on Defendant United States'
Motion for Summary Judgment. The motion was filed on April 30,
1996, and no opposition to the motion has been filed. Therefore,
the Court has considered the brief submitted by the United States,
as well as the applicable case law and facts of this case, and
issues the following decision and order.
Diversified Metal Products, Inc. ("Diversified")
is a steel and metal fabricator, doing business in Idaho Falls,
Idaho. Steven Morgan was employed by Diversified during
1993, where he performed welding and other services. T-Bow Company
Trust ("T-Bow") was an unincorporated trust organization,
created July 2, 1992, and terminated in 1994, with Steven Morgan
as its manager. The address listed for T-Bow was [*2] the
same as Morgan's home address. T-Bow entered into an "Independent
Contractor Agreement" with Diversified on May 3, 1993,
however the effective date of the agreement was March 5, 1993.
Pursuant to the agreement, Morgan performed the same welding and
other services at Diversified as he had prior to that time;
however, T-Bow billed Diversified for the work Morgan performed,
and Diversified paid Morgan's wages directly to T-Bow.
Morgan performed all labor or services provided by T-Bow.
T-Bow had a checking account at the Bank of Commerce from March
10, 1993 to August 30, 1994. The signature card for T-Bow indicated
that Marlin Hill, as trustee, and Steven and Koreen Morgan had
signature authority on the account. Deposits to T-Bow's account
at the Bank of Commerce totaled $ 11,056.40. The checks written
on the T-Bow account indicate a pattern in that checks were made
out to "Cash" and then designated to an individual or
entity in the "memo" portion of the check. The individuals
or entity listed in the "Memo" designations were SK
& Bunch Holding, Ralph Brian, Koreen Morgan and Steven Morgan.
n1 The total of the checks made payable to, or listed in the "Memo"
designation as for SK & [*3] Bunch Holding, Koreen
Morgan and Steven Morgan for the period between March 1993 through
July 1993 was $ 9,786.00.
n1 The United States also contends that SK & Bunch Holding
Trust, a trust created with identical documents as T-Bow, is a
nominee of Steven Morgan. The Internal Revenue Service has so
determined. However, that is not at issue before the Court, and
will not be decided here.
The Internal Revenue Service has made assessments of unpaid
federal income taxes against Steven and Koreen Morgan, jointly,
and Steven Morgan, individually. Three separate assessments were
made, with Notice of Federal Tax Liens being filed with the Madison
County Recorder in Rexburg, Idaho on August 30, 1993. On August
3, 1993, the Internal Revenue Service served a Notice of Levy
on Steven Morgan's employer, Diversified, requesting payment
of all wages, salary or other income owed to Steven Morgan. The
Morgans have failed to voluntarily pay these federal tax liabilities.
The only payments have come as a result of the seizure and [*4]
sale of the Morgans' property by the Internal Revenue Service.
As of April 22, 1996, the outstanding liability, including statutory
interest, from the 1989 and 1990 tax years is $ 5,673.74, which
liabilities continue to accrue interest at the statutory rate.
This interpleader action was filed by Diversified in
order for the Court to determine competing claims to two checks
totaling $ 849.60. The action was originally filed in Bonneville
County, Idaho, and removed to this Court by the United States.
The checks are from Diversified and made payable to T-Bow,
and represent monies paid for welding and other labor performed
by Steven Morgan at Diversified. The United States, T-Bow
and Steven Morgan all claim an interest in the funds. Although
Diversified has been previously dismissed on its own motion,
it requests attorney's fees and costs should the United States
be unsuccessful in its claim.
The United States submits this Motion for Summary Judgment,
and claims that it has priority to the interpleaded funds over
the other claimants because the of the liens that arose in its
favor as of the date of the assessments. The United States contends
that these liens have priority over the claims [*5] of
Steven Morgan, as they attach to all of his property and rights
to property. The United States further argues that its liens have
priority over T-Bow, as T-Bow is merely an alter ego and/or nominee
of Steven Morgan. Finally, the United States argues that because
it is entitled to the entire funds interpleaded to the Court,
Diversified may not recover attorney's fees, as such would
diminish the United States' recovery on its tax liens.
III. SUMMARY JUDGMENT STANDARD
Motions for summary judgment are governed by Rule 56 of the
Federal Rules of Civil Procedure. Rule 56 provides, in pertinent
part, that judgment "shall be rendered forthwith if 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," U.S.C.S. Court Rules,
Rule 56(c), Federal Rules of Civil Procedure.
The Supreme Court has made it clear that under Rule 56 summary
judgment is mandated if the non-moving party fails to make a showing
sufficient to establish the existence of an element which is essential
to the non-moving party's [*6] case and upon which the
non-moving party will bear the burden of proof at trial. See,
Celotex Corp v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265,
106 S. Ct. 2548 (1986). If the non-moving party fails to make
such a showing on any essential element, "there can be no
'genuine issue of material fact,' since a complete failure of
proof concerning an essential element of the nonmoving party's
case necessarily renders all other facts immaterial." Id.
at 323. n2
n2 See also, Rule 56(e) which provides, in part:
When a motion for summary judgment is made and supported as
provided in this rule, an adverse party may not rest upon the
mere allegations or denials of the adverse party's pleadings,
but the adverse party's response, by affidavits or as otherwise
provided in this rule, must set forth specific facts showing that
there is a genuine issue for trial. If the adverse party does
not so respond, summary judgment, if appropriate, shall be entered
against the adverse party.
U.S.C.S. Court Rules, Rules of Civil Procedure, Rule 56(e).
Moreover, under Rule 56, it is clear that an issue, in order
to preclude entry of summary judgment, must be both "material"
and "genuine." An issue is "material" if it
affects the outcome of the litigation. An issue, before it may
be considered "genuine," must be established by "sufficient
evidence supporting the claimed factual dispute . . . to require
a jury or judge to resolve the parties' differing versions of
the truth at trial." Hahn v. Sargent, 523 F.2d 461, 464
(1st Cir. 1975) (quoting First Nat'l Bank v. Cities Serv.
Co. Inc., 391 U.S. 253, 289, 20 L. Ed. 2d 569, 88 S. Ct. 1575
(1968)). The Ninth Circuit cases are in accord. See, e.g.,
British Motor Car Distrib. v. San Francisco Automotive Indus.
Welfare Fund, 882 F.2d 371 (9th Cir. 1989).
According to the Ninth Circuit, in order to withstand a motion for summary judgment, a party
(1) must make a showing sufficient to establish a genuine issue
of fact with respect to any element for which it bears the burden
of proof; (2) must show that there is an issue that may reasonably
be resolved in favor of either party; and (3) must come forward
with more persuasive evidence than would otherwise be necessary
when [*8] the factual context makes the non-moving party's
Id. at 374 (citation omitted).
Of course, when applying the above standard, the court must
view all of the evidence in a light most favorable to the non-moving
party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255,
91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986); Hughes v. United
States, 953 F.2d 531, 541 (9th Cir. 1992).
The United States bases its Motion for Summary Judgment on
its contention that its claims have priority over those of both
Morgan and T-Bow. n3 Pursuant to the Internal Revenue Code, if
a person who is liable to pay any federal tax fails to pay such
tax after notice and demand, a federal tax lien arises against
all property and rights to property belonging to that person.
I.R.C. ß 6321. The date the lien arises is the date of the
assessment of the tax and continues in full force and effect until
the liability is extinguished or becomes unenforceable, I.R.C.
ß 6322. The lien attaches to all after-acquired property
of the taxpayer, including rights to payment. Bank of America
Nat'l Trust & Savings Ass'n v. Mamakos, 509 F.2d 1217, 1219
(9th Cir. 1975). Furthermore, [*9] in order to be enforceable
as against third parties, the Notice of Federal Tax Lien must
be filed. A federal tax lien arises automatically upon the failure
of a taxpayer to pay an assessed tax after notice and demand.
I.R.C. ß 6321; See also, United States v. Speers, 382
U.S. 266, 267, 15 L. Ed. 2d 314, 86 S. Ct. 411 (1965).
n3 The Internal Revenue Service, and not the United States,
was originally named as defendant in this action. However, the
United States is correct that the Internal Revenue Service has
no capacity to sue or be sued. Blackmar v. Guerre, 342 U.S. 512, 514, 96 L. Ed. 534, 72 S. Ct. 410
(1952). Therefore, the United States is properly substituted
for the Internal Revenue Service in this action.
Exhibits 1, 3 and 5 to the Declaration of Cindy Mason indicate
that notice of the tax liabilities were served on the Morgans.
The Certificates of Assessments and Payments submitted as attachments
to Exhibits 1 and 3, in the absence of evidence to the contrary,
are presumptive evidence that assessments [*10] were properly
made and that the required notices were properly mailed. Hughes
v. United States, 953 F.2d 531, 535 (9th Cir. 1992). Additionally,
Exhibits 2, 4 and 7 to the Declaration of Cindy Mason indicate
that the three Notice of Federal Tax Liens were properly recorded.
n4 The Court, in the absence of any evidence to the contrary,
finds that the liabilities were properly calculated, the Morgans
and T-Bow were given proper notice and demand for payment, and
the liens were properly recorded. The liens arose on the dates
of assessment, May 31, 1993. n5 The two checks at issue from Diversified
were issued on August 4, 1993 and August 11, 1993, after the liens had arisen.
n4 The Court notes that Exhibit 2 is a lien notice against
both Steven and Koreen Morgan, and was recorded on August 30,
1993. Exhibit 4 is a lien notice against Steven Morgan only, and
was recorded on August 30, 1993. Exhibit 7 is a lien notice against
T-Bow as agent, nominee, transferee and/or alter ego of Steven
and Koreen Morgan. It was not recorded until November 15, 1993.
n5 The Court notes that the 1988 tax liability, which totals
$ 516.50 and is referenced in Exhibits 1 and 2 to the Declaration
of Cindy Mason, has been satisfied and is no longer at issue in
the instant case.
The priority of federal tax liens is governed by a "first
in time, first in right" theory. A competing claim prevails
against a federal tax lien only if it becomes choate and perfected
before the federal tax lien attaches and becomes effective. United
States v. City of New Britain, 347 U.S. 81, 86-88, 98 L. Ed. 520,
74 S. Ct. 367 (1954). To be choate, a competing claim must
be definite as to the identify of the lienor, definite as to the
identity of the property to which the lien attaches, and definite
as to the amount of the lien. Id. No such claim has been
alleged, and thus the United States argues that to the extent
the interpleaded funds are determined to be property or rights
to property of Steven Morgan, the federal tax liens have attached
and must be paid prior to any claim by Steven Morgan to such funds.
Priority Over T-Bow
The United States argues that the federal tax lien takes priority
over and attaches to any funds due T-Bow for work performed by
Steven Morgan at Diversified because T-Bow is the alter
ego and/or nominee of Morgan, and that it is a sham trust devoid
of economic reality. As stated above, the liens properly arose
on May 31, 1993, and [*12] thus the tax liens against Steven
Morgan attach to all property and rights to property owned by
him on May 31, 1993, and thereafter acquired, I.R.C. ß 6321;
Runkel v. United States, 527 F.2d 914, 916 (9th Cir. 1975).
The Internal Revenue Service is authorized to levy upon property
that belongs to the taxpayer but is possessed by or nominally
held by the taxpayer's "nominee, alter-ego, or transferee."
Al-Kim, Inc. v. United States, 650 F.2d 944, 946 (9th Cir.
1979); see also, Wolfe v. United States, 798 F.2d 1241,
1243 (9th Cir. 1986); I.R.C. ß 6331. That being said,
the next question is whether T-Bow is the alter-ego of Steven
As the United States' brief points out, the issue of whether
Steven Morgan has a property interest is an issue decided by state
law. See, Aquilino v. United States, 363 U.S. 509, 512-513,
4 L. Ed. 2d 1365, 80 S. Ct. 1277 (1960); Towe Antique Ford
Foundation v. Internal Revenue Service, 999 F.2d 1387, 1391 (9th
Cir. 1993). The Idaho Supreme Court has stated that if: (1)
there is such a unity of interest and ownership that the separate
personalities of the corporation and the individual no longer
exist, and (2) if the acts are treated [*13] as those of
the corporation an inequitable result will follow, then the corporate
entity may be disregarded. See Chick v. Tomlinson, 531 P.2d
573, 575, 96 Idaho 483 (Idaho 1975). The Tomlinson
court examined several factors when it considered whether to disregard an entity's separate identity. These factors have been utilized, as a non-exclusive list, by other courts as well. They are:
(1) whether the individual is a majority shareholder, officer, director, trustee, managing partner, or otherwise in a position of authority over the affairs of the entity;
(2) whether the individual controls and dominates the business entity's actions and affairs without consulting others;
(3) whether the individual controls and sometimes withholds information from other investors;
(4) whether the individual uses the business entity to shield himself from personal liability;
(5) whether the individual uses the business entity for his own personal and financial gain;
(6) whether the individual mingles his own and his family's affairs in the affairs of the business entity; and
(7) whether the individual uses the business entity to assume his own debts, or the [*14] debts of another, or whether the individual uses his own funds to pay the business entity's debts.
See Towe Antique Ford Foundation v. I.R.S., supra, 999 F.2d
1387 at 1391 (applying Montana law). The first factor is met,
as Morgan was a manager of T-Bow. The second factor is satisfied
since Morgan was able to act independently of the trustees. The
trust creation documents indicate that Marlin Hill needed to co-sign
all checks and approve all major purchases; however, the documents
also allowed him to delegate the management of the trust to others.
Steven and Koreen Morgan were managers of the trust. It is also
clear that Morgan has mingled his own and his family's affairs
in those of T-Bow.
The United States further cites to the fact that Morgan had
been assessed for his 1988 federal tax liability prior to the
time when T-Bow was formed. Additionally, Morgan's 1989 and 1990
tax liabilities had accrued prior to December 14, 1992, which
is the date T-Bow's creation documents were filed with the Madison
County Recorder. He was also under a labor contract with T-Bow,
and Morgan's employer and duties were unchanged after the "Independent
Contractor Agreement" was executed between [*15] T-Bow
and Diversified. Finally, the funds paid to T-Bow by Diversified
were placed in T-Bow's checking account, and then checks were
made out on that account and designated to Steven Morgan, Koreen
Morgan or SK & Bunch Holding Trust, which the Internal Revenue
Service has determined to be another nominee of Steven Morgan.
The Towe court considered additional factors in determining whether an alter ego situation existed. Those factors are whether:
(1) no consideration or inadequate consideration was paid by the nominee;
(2) the property was placed in the name of the nominee in anticipation of a suit or occurrence of liabilities while the transferor continued to exercise control over the property;
(3) a close relationship between transferor and the nominee existed;
(4) the conveyance failed to be recorded;
(5) possession was retained by the transferor; and
(6) the transferor continued to enjoy the benefits of the transferred property.
See, Towe Antique Ford Foundation v. I.R.S., supra, 999
F.2d at 1393. In the instant case, the tax liabilities had
already arisen when the trust was formed, and the Morgans had
notice of those liabilities [*16] prior to the execution
of the "Independent Contractor Agreement." These facts
indicate that the channeling of wages through T-Bow was done in
anticipation of the tax lien, all the while Morgan continued to
exercise control over the money.
It is also clear that a close relationship existed between
the Morgans and T-Bow. Steven and Koreen Morgan were managers
of the trust, and their home address was an address listed for
the trust. The trust was, in effect, Steven Morgan's employer,
as it contracted to send Steven out to work at Diversified
and billed Diversified for Steven's wages. Steven was
paid directly by T-Bow, and only indirectly by Diversified.
It is also clear that Morgan retained possession and continued
to enjoy the benefits of T-Bow's assets. The Morgans continued
to retain possession of the funds in the T-Bow account, by virtue
of their managerial status, and because T-Bow paid Steven his
wages from the trust checking account.
Based on the foregoing, the Court finds that T-Bow was in fact
the alter ego of Steven Morgan. Because of the alter ego status
of T-Bow, the funds payable to T-Bow and deposited within the
registry of the Court are properly considered to be the property
[*17] of Steven Morgan, and thus subject to the federal
tax lien. n6
n6 An additional ground for granting summary judgment is that
the Morgans have failed "to make a showing sufficient to
establish the existence of an element which is essential to [their]
case and upon which [they] will bear the burden of proof at trial."
Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265,
106 S. Ct. 2548 (1986). By not responding to the motion for
summary judgment, the Morgans have made no showing that Steven
Morgan or T-Bow has any claim to the funds which has priority
over the United States' lien. For this reason alone, the Court
could grant summary judgment to the United States. However, the
Court finds it preferable to resolve motions for summary judgment
on the merits whenever possible.
Diversified's Claim for Attorney's Fees
The Ninth Circuit has held that a party's claim for attorney's
fees and costs may not deplete any portion of any interpleaded
fund prior to full satisfaction of the federal [*18] tax
lien thereon. Abex Corp. v. Ski's Enterprises, Inc., 748 F.2d
513, 516-517 (9th Cir. 1984). Diversified apparently
concedes this fact, as it only sought attorney's fees in the event
that the United States did not prevail on its claim to the funds.
Here, the lien far exceeds the $ 849.60 interpleaded, and thus
the Court will not grant Diversified its attorney's fees
in this matter.
The Court finds that the federal tax lien was properly assessed,
noticed and recorded, and that it takes priority over any competing
claims. The Court further finds that T-Bow was the alter ego or-nominee
of Steven Morgan, and the funds payable to it are in fact, Morgan's
property, and subject to the lien. Finally, because an award of
attorney's fees to Diversified would deplete the interpleaded
funds prior to full satisfaction of the lien, the Court declines
to award such fees and costs.
Based on the foregoing and the Court being fully advised in the premises,
IT IS THEREFORE ORDEred that the United States' Motion for Summary Judgment (Docket No. 34), filed April 30, 1996, should be, and is hereby, GRANTED.
IT IS FURTHER ORDEred that the funds currently [*19] held in the Court's registry shall be paid to the United States, pursuant to a proposed judgment consistent with this decision. The Court directs the United States to prepare and submit for the Court's approval such proposed judgment.
IT IS FURTHER ORDEred that the trial, currently set for July 23, 1996, is hereby VACATED.
DATED this 18th day of July, 1996.
B. LYNN WINMILL
UNITED STATES DISTRICT JUDGE
[Emphasis added by non-related party.]
Relating Items and Documents:
United States Response and Claim
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