Case No. CV 93-0405-E-BLW


      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.








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.

-End Footnotes-

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.


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).

-End Footnotes-[*7]

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 claim implausible.

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.

-End Footnotes-

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.

-End Footnotes-[*11]

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 Morgan.

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.

-End Footnotes-

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.



[Emphasis added by non-related party.]

Relating Items and Documents:

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