TONY MARTIN., 25 TC 94, Code Sec(s) .
Tony Martin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Case Information: Code Sec(s):
[pg. 94] Docket: Docket No. 51062.
Date Issued: 10/24/1955
Judge: Opinion by FISHER, J.
Tax Year(s): Year 1949.
Disposition: Deficiency redetermined.
HEADNOTE
1. Business bad debt deduction allowed actor for advances made to a corporation formed to rehabilitate his career.
Reference(s):
Syllabus
Offficial Tax Court Syllabus
Petitioner is an entertainer and has been so engaged in business since 1932. In 1942 he was the subject of certain unfavorable publicity while serving with the Armed Forces. After being honorably discharged from the service in 1945, petitioner returned to Hollywood to resume his movie career. As a consequence of the earlier unfavorable publicity, petitioner was unable to obtain employment in the motion picture industry or in most of the entertainment media. He decided along with certain others to organize a corporation for the purpose of producing a single motion picture starring himself. The enterprise was undertaken primarily in order to rehabilitate petitioner's career and to reestablish him in the entertainment field. In order to complete the picture, it was necessary for petitioner and others to make certain loans to the corporation. The picture was financially unsuccessful and petitioner's loan ultimately became worthless.Held, petitioner sustained a loss from a business bad debt deductible in full in the year of the loss.
Counsel
J. Everett Blum, Esq., for the petitioner.
Joseph G. White, Esq., for the respondent.
The respondent determined a deficiency in income tax against petitioner for the calendar year 1949 in the amount of $4,506.62. Petitioner, by amended petition, claims an overpayment in an amount to be determined, if necessary, under a Rule 50 computation. The single question presented is whether a loss sustained by petitioner from an unpaid loan is to be deducted as a business bad debt or as a nonbusiness bad debt.[pg. 95]
FINDINGS OF FACT.
The facts are partly stipulated and to the extent so stipulated are incorporated herein by reference.
Petitioner timely filed a joint Federal income tax return for the taxable year 1949 with the collector of internal revenue for the sixth district of California.
Petitioner, a cash basis taxpayer, has been engaged in business as an entertainer, including being a motion picture actor, nightclub performer, and singer on stage, screen, and radio, from 1932 to date, except for the period from January 2, 1942, to December 13, 1945, when he was a member of the Armed Forces of the United States. During all of this time Nat C. Goldstone represented petitioner as a theatrical agent. Prior to 1942, petitioner was very successful in his business.
As a consequence of circumstances undisclosed by the record petitioner in 1942, while serving with the Armed Forces, received some unfavorable publicity. After his honorable discharge from the service at the end of 1945, he returned to Hollywood to resume his career, only to find that the stigma of this earlier unfavorable publicity remained and that he was unable to secure any employment in motion pictures, other than that contracted for prior to 1942 and guaranteed to petitioner under then existing Federal laws (the so-called G. I. Bill of Rights). Goldstone made substantial and extended efforts to secure movie and other entertainment work for petitioner, but the only employment that could be obtained for petitioner in the entertainment field was in nightclubs. In 1946, petitioner, under his previous contract arrangements with Loew's Inc., played in only one movie and was there required to sing only one song for which he was paid $47,250 in accordance with the terms of the contract. It did appear as though petitioner was to be given an opportunity to play another role but he was not finally cast in the role and did not play in the picture. Petitioner not only failed to secure this role but also was unable to obtain a renewal of his contract with Loew's Inc., despite Goldstone's offer to transfer petitioner's recording work to the MGM Record Company which had then just been formed.
At one point, Goldstone had induced Walter Wanger, a prominent motion picture producer, to consider petitioner for a part in a picture to be produced at Universal International (hereinafter referred to as U-I). Wanger enthusiastically supported petitioner for the role. However, under Wanger's partnership arrangement with U-I it had the right of approval of the cast of any pictures produced by it. Despite Wanger's efforts to secure U-I's approval of petitioner for the role, he was not so approved and the role went to another. The unfavorable publicity received by petitioner in 1942 played a significant [pg. 96]part in the refusal of the motion picture industry heads to employ petitioner.
After these and other various unsuccessful efforts on the part of petitioner and Goldstone to obtain employment in Hollywood for petitioner, it was determined that it was necessary for petitioner to make a good motion picture if he were once again to achieve public acceptance and reestablish himself in the motion picture industry. Goldstone knew of an available property entitled "Pepe le Moko," based originally on a French novel, which he believed could be utilized for a dramatic motion picture with music. Previously, two dramatic motion pictures had been made from "Pepe le Moko," and each had been successful, resulting in Hedy Lamarr becoming a star and benefiting Charles Boyer substantially in his career. Petitioner, Goldstone, and others considered "Pepe le Moko" as good subject matter for a dramatic picture with music and, therefore, a good vehicle through which petitioner might rehabilitate his career and reestablish himself in the motion picture industry.
Goldstone acquired the rights to "Pepe le Moko," personally undertaking the expenses of options on the property and having a first draft of a screenplay written. He then attempted to dispose of this material as a "package," including petitioner as the leading man. One major studio offered to buy the property from Goldstone for a substantial profit, but they would not do so if required to take petitioner as the leading man. Goldstone's other efforts to dispose of the property were equally unsuccessful. Encouraged, nevertheless, by the seeming value placed on the property, Goldstone decided that the picture should be independently produced with petitioner as leading man.
For this purpose petitioner, Goldstone, and several others caused to be organized a corporation under the name of Marston Pictures, Inc., (hereinafter called Marston) with a total capital stock of $25,000, subscribed to in the following amounts: Petitioner, $6,250; Goldstone $13,750; others, $5,000. It was customary at that time in undertaking an independent production to enter into a partnership arrangement with a major studio which would provide the physical facilities for production and defer its overhead, thereby making it possible for the independent producer to secure primary financing, in the form of a bank loan for a percentage of negative costs (the cost of making the picture), so-called first money. In such cases the independent producer, in the instant case Marston, is obliged to arrange for secondary financing, or so-called second money, which is the last money to go into the financing of the picture and also the last money to be finally repaid. With the aid of Rufus LeMaire of U-I, Goldstone was able to overcome the objections to engaging in any production with which petitioner would be associated, largely because of the personal financial undertakings of petitioner and Goldstone. Marston [pg. 97]was thus able to enter into an arrangement with U-I for the production of a motion picture based on the "Pepe le Moko" property to be entitled "Casbah."
Marston obtained a loan from the Bank of America for the usual percentage of negative costs, in an amount of some $900,000. As is customary in this type of situation, U-I, on whose lot the picture was to be produced, was required to guarantee completion of the picture. No other endorsements were required by the bank.
The picture was first budgeted at about $1,200,000, of which the Bank of America was putting up some 70-odd per cent. Goldstone meanwhile had been assured that the second money would be forthcoming as soon as needed, and that the preproduction moneys put up personally by him would be returned immediately after all of the elements were put together (a practice customary in the industry). Goldstone, therefore, was permitted to engage people and to make other commitments, and production of the picture was commenced.
Shortly thereafter it became impossible to secure the release of moneys from England, accumulated there from the distribution and exhibition of motion pictures, and it was thought generally that other countries would also soon refuse to release such moneys. As a consequence of this blocking of English funds and the expectation that currencies in other countries would also be blocked, those persons who had previously made second money loans went out of that business completely and the so-called second money for "Casbah" was withdrawn. There being no written commitment on the part of those organizations from which the second money for "Casbah" was to be obtained, such money customarily being the last to be committed, petitioner, Goldstone, and the others had no legal recourse and there was no way to compel these groups to put up such moneys. The Bank of America, which was supplying the so-called first money, however, had already executed the necessary papers and was firmly committed to financing the production.
Faced with this situation, Goldstone having himself personally advanced certain moneys, production plans having been undertaken, and petitioner and Goldstone being of the opinion that it was extremely important and perhaps absolutely necessary to complete the picture if petitioner was to reestablish himself in the motion picture industry and rehabilitate his career, Goldstone, petitioner, Miller, petitioner's press agent, and a few others agreed to provide the required second money. The movie probably could not have been completed otherwise or the purpose for undertaking the production fulfilled. Production of the picture was continued, petitioner deferring his entire salary and Goldstone also deferring any salary for his time and effort. Final production costs ran approximately $1,300,000.[pg. 98]
To provide the so-called second money, petitioner loaned Marston $12,000, Goldstone loaned $41,500, and others loaned varying small amounts. These loans were evidenced by promissory notes executed by Marston to the several lenders, each dated August 1, 1947, and due and payable November 15, 1948, bearing interest at 6 per cent per year until due.
After completion of the picture it was released for general distribution. Petitioner made several personal appearances with the picture in order to stimulate successful showings. The picture, however, was not a financial success. Nevertheless, the picture benefited petitioner and in large measure reestablished petitioner and rehabilitated his career in the motion picture industry and in the entertainment field generally.
Marston had been organized to produce only one motion picture and has never produced or in any way participated in the production of a motion picture other than "Casbah."
Marston went into bankruptcy in 1949, and petitioner's loan thereto became worthless in that year.
Petitioner has never been engaged in the business of producing motion pictures or in investing in the production of motion pictures, nor has he ever been engaged in the business of promoting, organizing, financing, managing, or loaning moneys to corporations.
Petitioner sustained a loss from a bad debt proximately related to the conduct of his trade or business.
OPINION.
Fisher, Judge:
Petitioner contends that his loss upon a loan to Marston, which became worthless in 1949, constitutes a business bad debt, while respondent has determined that the loss incurred was from a nonbusiness bad debt. The ultimate issue is whether the loss resulting from the acknowledged bad debt was proximately related to the conduct of petitioner's business as an entertainer.
Under section 23 (k) (1), a bad debt incurred in a trade or business is deductible in full in the taxable year in which it becomes worthless, while all other bad debts constitute nonbusiness bad debts and are treated as short-term capital losses in accordance with section 23 (k) (4). The respondent's regulations, Regulations 111, section 29.23 (k)-6 (derived from H. Rept. No. 2332, 77th Cong., 2d Sess., p. 76; 1942-2 C. B. 431), provide, in pertinent part, as follows:
A non-business debt is a debt, other than a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business and other than a debt evidenced by a security as that term is defined in section 23 (k) (3). The question whether a debt is one the loss from the worthlessness of which is incurred in the taxpayer's trade or business is a question of fact in each particular case. The determination of this question is substantially the same as that [pg. 99]which is made for the purpose of ascertaining whether a loss from the type of transaction covered by section 23 (e) is "incurred in trade or business" under paragraph (1) of that section.
The charhacter of the debt for this purpose is not controlled by the circumstances attending its creation or its subsequent acquisition by the taxpayer or by the use to which the borrowed funds are put by the recipient, but is to be determined rather by the relation which the loss resulting from the debt's becoming worthless bears to the trade or business of the taxpayer. If that relation is a proximate one in the conduct of the trade or business in which the taxpayer is engaged at the time the debt becomes worthless, the debt is not a non-business debt for the purpose of this section. [Emphasis supplied.]
There cannot be any serious doubt that petitioner, during 1949, was individually engaged in a trade or business, specifically, that of being an entertainer, including, in the instant case, being a motion picture actor, nightclub performer, and singer on stage, screen, and radio. SeeOlivia de Haviland Goodrich, 20 T. C. 323 (1953); William Lee Tracy, 39 B. T. A. 578 (1939); Reginald Denny, 33 B. T. A. 738 (1935). Petitioner has been so engaged in his trade or business from 1932 to date, except for a few years during World War II when he was a member of the Armed Forces.
The only issue, therefore, in determining the business or nonbusiness character of the bad debt in question is whether there existed in the instant case the requisite proximate relation of the bad debt loss to the conduct of the taxpayer's business. Such question is one of fact to be decided upon the particular circumstances involved in each case. Samuel Towers, 24 T. C. 199 (1955); Robert Cluett, 3rd, 8 T. C. 1178 (1947). The evidence shows that we have accordingly found as a fact that the $12,000 loss sustained by petitioner in 1949 from a bad debt was incurred in his trade or business and constituted a business bad debt deductible in that year in accordance with section 23 (k) (1). Our reasons for so finding are set out below.
It should be noted at the outset that petitioner does not contend that he was in the business of producing motion pictures or in any business consisting of investing in and financing of the production of motion pictures. Nor does he contend that he was engaged in a business of promoting, organizing, managing, financing, or loaning moneys to corporations for the purpose of producing motion pictures or for any other purpose. Petitioner, therefore, does not attempt to come within the scope of the so-called promoter cases, such as Weldon D. Smith, 17 T. C. 135 (1951), revd. (C. A. 2, 1953) 203 F. 2d 310; Henry E. Sage, 15 T. C. 299 (1950); and Vincent C. Campbell, 11 T. C. 510 (1948). The record indicates quite clearly that exclusive of his relationship to the Marston enterprise petitioner has never produced or financed the production of a motion picture, or in any way engaged in the production of a motion picture, except as he was employed to act and sing, which employment represented the conduct of his own business as an entertainer. The bad debt loss in issue must, [pg. 100]therefore, be proximately related to the conduct of petitioner's business as an entertainer which involves mainly rendering his personal talent services to others.
Petitioner in his argument respects fully the separateness of the business of the corporate entity from that of its stockholders, Burnet v.Clark, 287 U. S. 410 (1932); Omaha National Bank v.Commissioner, (C. A. 8, 1950) 183 F. 2d 899, and does not argue that the corporate form should be ignored. In essence, he argues that the primary reason for producing the motion picture "Casbah" was the promotion again or protection and saving of his career and business. He points out that completion of the motion picture was essential to accomplishment of this objective and that the movie could not have been completed had not petitioner and the others loaned additional moneys to Marston. Petitioner concludes that in such circumstances the loss from worthlessness of the debt was proximately related to the conduct of and incurred in petitioner's trade or business.
We agree with petitioner's conclusion. The loan which here gave rise to the bad debt in issue was not contemplated at the time of organization of the enterprise. It appeared to everyone at that time that all the necessary financing was available to Marston to complete and distribute the movie "Casbah." But after commencing production, the so-called second money which had been promised was withdrawn and additional financing which was necessary to complete production could only be obtained from petitioner, Goldstone, and a few others interested in the production, individually. This was done primarily with a view to the necessity of so completing the picture if petitioner was once again to be able to achieve a measure of public acceptance and thus rehabilitate his career. At least such motivation must be considered as petitioner's primary purpose even if Goldstone or the others were more interested in personally protecting the investment they had already made in the production.
There has been no contention by petitioner that the organization and financing of a corporation to produce a motion picture might conceivably constitute an element of or facet of the conduct of his business as an entertainer, 1 but only that while such was not within the scope of the normal conduct of his business, in the circumstances of this case, when it became necessary to make the loan to Marston [pg. 101]to complete the picture which might and subsequently did serve to save petitioner's business and rehabilitate his career, such loan was business connected and even crucial to the ultimate carrying on of that business. We think it evident from the record that investment in the production of a motion picture by a corporation or otherwise was not a normal part of petitioner's business activity as an entertainer. But we think it is also clear that at the point it became necessary to supply additional funds to the corporation to complete the picture, production of which had been undertaken in the first instance to rehabilitate petitioner's career and reestablish him in the motion picture industry as an entertainer and to promote and save that career, such advances as were made by petitioner were made in connection with his business and were proximately related to the conduct of that business as the exigencies of the situation required. We do not consider this loan as an ordinary and necessary expense of petitioner's business since it clearly was neither an expense (being a loan to be repaid) nor a normal part of that business, but only that the loan and the loss sustained upon the worthlessness thereof was incurred in the carrying on of petitioner's business and was essential to the carrying on of that business.
While there are no cases involving precisely the circumstances here involved, we think that our view is supported largely by Robert Cluett, 3rd, supra, and Stuart Bart, 21 T. C. 880 (1954), and that Putnam v. Commissioner, (C. A. 8, 1955) 224 F. 2d 947, affirming a Memorandum Opinion of this Court and W. A. Dallmeyer, 14 T. C. 1282 (1950), are readily distinguishable.
In Cluett, the taxpayer's business consisted of acting as the floor member for various partnerships at the New York Stock Exchange. In this connection he owned a seat on the Exchange. Petitioner sold a fractional accretion to his Exchange seat and accepted in part payment certain promissory notes. A portion of this indebtedness became worthless in 1943 after the buyer became bankrupt. We held that the loss sustained was from a business bad debt, indicating that the debt and loss therefrom arose in the course of petitioner's business, which involved owning an Exchange seat, and that a sale of the accretion thereto was necessary if the taxpayer was to realize any benefit therefrom. It was clear, however, that such was not a usual or common event in the conduct of the taxpayer's business, but was, nevertheless, incident thereto.
The Bart case, decided on the authority ofCluett, is perhaps more like the instant case. There the taxpayer was engaged in business as an advertising agent. A certain corporate publication was one of petitioner's clients. Through that relationship petitioner had obtained other clients, some of whom advertised in the aforementioned [pg. 102]publication. At certain times petitioner made loans to the publication in an effort to retain it as a client on a profitable basis and also to hold onto other clients' advertising in the publication. We concluded that the loss incurred upon the loans which subsequently became worthless was a business bad debt incurred in the conduct of the taxpayer's trade or business and related thereto.
The crucial tests underlying our decision in Bart are brought out clearly in the Putnam case. There the taxpayer was a practicing attorney. He made loans to clients to engage in a publishing venture which ultimately was not successful. It was held that the losses incurred were from nonbusiness bad debts and not business bad debts because they were not proximate to or incurred by the taxpayer in his business as an attorney. It was pointed out that it was not in any way essential to his law practice (business) for the taxpayer to make such loans, while inBart it does appear to have been so for his business, and, again unlike the situation in Bart, that the particular publishing business was not directly or even closely connected with the taxpayer's practice of law.
The Dallmeyer case is similarly distinguishable in that there was no proximate relation between the acquisition of and loss upon certain unsecured notes from the bank of which the taxpayer was chief executive and his business as chief executive, such acquisition and loss having been a consequence of only a moral responsibility he felt and not a part of the conduct of his business activity.
In the light of the foregoing, we hold that petitioner is entitled to a deduction in 1949 for a loss from a business bad debt.
In view of our conclusion, it is unnecessary to consider petitioner's argument based on the recent decision in George J. Schaefer, 24 T. C. 638 (1955), and we merely indicate that the circumstances in the two cases are materially different from each other.
Decision will be entered under Rule 50.
1
See Commissioner v. Stokes' Estate, (C. A. 3, 1953) 200 F. 2d 637, affirming a Memorandum Opinion of this Court, where the taxpayer was considered to have been engaged individually in the business of exploiting patents sometimes through the media of a corporation established to do so, and Dalton v.Bowers, 287 U. S. 404 (1932), relied on in the instant case by respondent, where the Supreme Court had earlier reached an opposite conclusion upon the facts of that case, holding that the taxpayer there was not engaged in such a business of exploiting his inventions through corporations organized for that special purpose and forming a complete and comprehensive enterprise of which the corporation was but a part
Tuesday, July 31, 2012
Monday, July 30, 2012
Indiana tax title case
IN RE: VINOD C. GUPTA TAX DEED
RAHMAN IRREVOCABLE TRUST, Appellant-Petitioner, v. VINOD C. GUPTA and BANK D, LLC A/K/A BRUCE DENNI, and RIPLEY COUNTY TREASURER, Appellees-Respondents.
Case Information:
Docket/Court: 69A05-1105-MI-294, Court of Appeals of Indiana
Date Issued: 05/16/2012
Tax Type(s): Property
APPEAL FROM THE RIPLEY SUPERIOR COURT, The Honorable James B. Morris, Judge, Cause No. 69D01-0901-M1-1
ATTORNEY FOR APPELLANT: LEANNA WEISSMANN, Lawrenceburg, Indiana
ATTORNEY FOR APPELLEE VINOD C. GUPTA: LEWIS MAUDLIN, Salem, Indiana
ATTORNEYS FOR APPELLEE BANK D, LLC: LYNN FLEDDERMAN, DOUGLAS C. WILSON, Batesville, Indiana
OPINION
KIRSCH, Judge Pursuant to Ind. Appellate Rule 65(D), this Memorandum Decision shall not be regarded as precedent or cited before any court except for the purpose of establishing the defense of res judicata, collateral estoppel, or the law of the case.
MEMORANDUM DECISION - NOT FOR PUBLICATION
The Rahman Irrevocable Trust (“Trust”) appeals the denial of two motions for relief from the judgment pertaining to the issuance of tax deeds and raises the following restated issue: whether the trial court abused its discretion in finding that the Auditor and the purchaser complied with statutory and constitutional requirements when sending notices relating to the tax sale of trust property.
We affirm.
FACTS AND PROCEDURAL HISTORY
Dr. Shiekh A. Rahman (“Rahman”) and his wife owned two parcels of real estate in Ripley County. Rahman used the property as a satellite office for his medical practice. On September 27, 2004, Rahman transferred the parcels to the Trust, a trust he created under the provisions of a trust agreement dated November 1, 1992. The trust agreement designated Mir M. Ali (“Ali”) as the trustee of the Trust. Ali resigned on March 23, 2004, and Jawaad A. Rahman was appointed successor trustee on October 26, 2004. 1 Neither Rahman, nor his wife, was designated as a trustee or a beneficiary of the Trust.
When the parcels were transferred to the Trust, the tax mailing address for the Trust filed with the Ripley County Auditor (“Auditor”) was Ali as trustee at 19910 Overlook Circle, Lawrenceburg, Indiana (“19910 Overlook Circle”). This address was the location of Rahman's home. Ali never resided at the address. This address was subsequently renumbered by the U.S. Post Office for rezoning purposes from 19910 Overlook Circle to 19921 Overlook Circle.
After the transfer, Rahman continued to use the property for his practice. In October 2006, Rahman discovered that he had not received his most recent tax bills from the Auditor at his home address. Rahman contacted the Auditor to request that his tax statements be mailed to his primary medical office at 276 Bielby Road, Lawrenceburg, Indiana. The Auditor then sent the personal property tax statements for the medical equipment owned by Rahman to the 276 Bielby Road address. The real estate tax statements for the properties in the name of the Trust continued to be sent to Ali at 19910 Overlook Circle.
The taxes on the properties due in 2007 were not paid. On November 17, 2008, the Auditor, through its agent SRI, Inc. (“SRI”), sent a notice of tax sale by two certified mailings to Ali at 19910 Overlook Circle, the address on record in the Auditor's office. These mailings were returned undelivered with no forwarding address. On December 24, 2008, SRI sent the same notice of tax sale to Ali at 19910 Overlook Circle by first class mail. On January 8, 2009, SRI sent two more certified mailings to Ali at P.O. Box 3822, Lawrenceburg, Indiana. This address was a post office box address previously owned by Rahman. These mailings were returned undelivered. The Auditor also published a notice of the tax sale in a local paper.
On January 28, 2009, Gupta purchased the tax sale certificates for the properties at the Ripley County tax sale. The name of the owner of the properties listed on the tax sale certificates and vesting deed was Ali as trustee of the Trust. Gupta sent notice of the right of redemption to Ali at 19910 Overlook Circle by certified mail. The certified mailing was returned to Gupta undelivered with “19921” handwritten on the envelope and the “10 Ove” of the address crossed out (“Marked Certified Mailing”). Appellant's App. at 101, Def.'s Ex. A.
Upon expiration of the period of redemption, Gupta petitioned for the issuance of tax deeds and sent notice of the petition to Ali at the 19910 Overlook Circle address by certified mail. After the certified mailings for the notice of the right of redemption and notice of the petition were returned undelivered, Gupta sent the notices to Ali at the 19910 Overlook Circle address again via regular mail. The regular mailings were never returned as undelivered. In addition to the mailings, Gupta also posted a sale notice on the doors of the properties.
On April 22, 2010, the court ordered the issuance of tax deeds to Gupta for the properties. Gupta subsequently sold the properties to Bank D.
In August 2010, Rahman discovered the properties had been sold. The Trust filed a Trial Rule 60(B) motion for relief from judgment for each of the properties alleging that the Auditor provided inadequate notice of the tax sale. The trial court denied both of the Trust's motions and found that the Auditor complied with relevant notice statutes and had taken additional steps reasonably calculated to notify the owner of the tax sale.
On May 19, 2011, the Trust appealed from the trial court's orders denying the Trust's motions for relief from judgment. While the appeal was pending, the Trust reviewed the Clerk's Record and noticed that Gupta had included the receipts for the certified mailing of his notices but did not include the returned certified mailings themselves. The Trust reviewed the certified mailing tracking numbers through the U.S. Postal Service records and found that one notice was listed as “forwarded” to Gupta in Boca Raton, Florida, rather than delivered in Indiana. Appellant's App. at 95. The Trust filed a second Trial Rule 60(B) motion for relief from judgment alleging that this newly discovered evidence voided the judgments due to fraud. Afterwards, Gupta provided copies of the returned certified mailings themselves which showed that the U.S. Postal Service records were erroneous. While the Trust amended its second motion to remove allegations of fraud, it still alleged that the trial courts judgments should be voided because the Marked Certified Mailing provided Gupta with the Trust's correct address, which he disregarded. While the appeal was pending, the case was remanded back to the trial court for a hearing on the Trust's amended second motion for relief from judgment.
On November 7, 2012, the trial court denied the Trust's amended second motion for relief and found that the evidence pertaining to the notices sent by Gupta to the Trust was not newly discovered and that Gupta complied with the notice requirements pursuant to Indiana statute. The Trust also appeals the denial of its amended second motion for relief from judgment.
DISCUSSION AND DECISION
It is within the sound, equitable discretion of the trial court to grant or deny a Trial Rule 60(B) motion for relief from judgment and the decision should not be reversed in the absence of an abuse of discretion. 2 Stronger v. Sorrell, 776 N.E.2d 353, 355 (Ind. 2002) . Where, as here, the trial court enters special findings and conclusions pursuant to Indiana Trial Rule 52(A), we apply a two-tiered standard of review. Id.
First, we determine whether the evidence supports the findings, and second whether the findings support the judgment. The trial court's findings and conclusions will be set aside only if they are clearly erroneous. In reviewing the trial court's entry of special findings, we neither reweigh the evidence nor reassess the credibility of the witnesses. Rather we must accept the ultimate facts as stated by the trial court if there is evidence to sustain them.
Id.
The Trust argues that its Trial Rule 60(B) motions for relief from judgment should have been granted because it did not receive adequate statutory and constitutional notice from the Auditor or Gupta relating to the tax sale of the properties. 3 The issuance of a tax deed by the trial court creates a presumption that the tax sale and all of the statutory steps leading up to the issuance of the tax deed were proper. Edwards v. Neace, 898 N.E.2d 343, 348 (Ind. Ct. App. 2008) . However, this presumption may be rebutted by affirmative evidence showing the contrary. Id. The tax deed may be set aside if the three notices required by Indiana Code sections 6-1.1-24-4 (notice of tax sale sent by county auditor to owner of real estate), 6-1.1-25-4.5 (notice of right of redemption sent by tax sale purchaser to owner), and 6-1.1-25-4.6 (notice of petition for tax deed sent by tax sale purchaser to owner), were not in compliance with the requirements of these sections. Ind. Code § 6-1.1-25-16(7).
I. Notice from the Auditor
Regarding the notices sent by the Auditor, the Trust claims that because Rahman contacted the Auditor to change the mailing address where his tax statements should be sent, the Auditor should have sent the tax statement of the properties as well as the notice of tax sale to this address. The Trust also argues that had the Auditor conducted a thorough search of its records, it would have discovered additional addresses for sending notice. It contends that the Auditor's failure to do so provided the Trust with statutorily and constitutionally defective notice.
Indiana Code section 6-1.1-24-4 4 provides, in relevant part, that the county auditor must take the following steps when providing notice of tax sale to an owner of real property:
[T]he county auditor shall send a notice of the sale by certified mail, return receipt requested, to ... the owner of record of real property with a single owner ... at the last address of the owner for the property as indicated in the records of the county auditor on the date that the tax sale list is certified.
In addition, the county auditor shall mail a duplicate notice to the owner of record ... by first class mail to the owners from whom the certified mail return receipt was not signed and returned.
Additionally, the county auditor may determine that mailing a first class notice to or serving a notice on the property is a reasonable step to notify the owner, if the address of the owner is not the same address as the physical location of the property.
If both notices are returned due to incorrect or insufficient addresses, the county auditor shall research the county auditor records to determine a more complete or accurate address. If a more complete or accurate address is found, the county auditor shall resend the notices to the address that is found in accordance with this section. Failure to obtain a more complete or accurate address does not invalidate an otherwise valid sale.
Ind. Code § 6-1.1-24-4.
The evidence shows that the Auditor complied with these steps when providing notice of the tax sale to the Trust. The Auditor sent, through its agent, SRI, a notice of tax sale via two certified mailings to Ali at 19910 Overlook Court, which was the last address on record in the Auditor's office for the Trust. Both certified mailings were returned undelivered with no suggestions for a forwarding address. SRI then sent a notice of tax sale to Ali at 19910 Overlook through first class mail. There was no evidence that the first class mailing was returned undelivered, and as a result, the Auditor was not required to take additional steps pursuant to Indiana Code section 6-1.1-24-4. However, the Auditor apparently did conduct a search of the Auditor's records 5 and sent two more certified mailings to Ali at P.O. Box 3822. After all the certified mailings were returned undelivered, the Auditor published the notice of tax sale in a local paper prior to sale.
Although the Trust argues that Rahman notified the Auditor to change the mailing address where his tax statements should be sent, Rahman was not designated as the trustee or beneficiary of the Trust and had totally divested himself of any and all interest in the ownership of the properties. Tr. at 28, Tr. Supp. at 34. As a result, Rahman had no legal authority to change the mailing address of the Trust. Id. The burden is on the owner of the real property to notify the county auditor of the owner's correct address. Ind. Code § 6-1.1-24-4. The Trust failed to provide any evidence that either owner of the properties, Ali, trustee of the Trust, or his successor trustee, Jawaad Rahman, contacted the Auditor to change the mailing address of the Trust.
Additionally, while the Trust argues that the physical addresses of the properties and personal property records related to the properties were in the Auditor's records, the Auditor was not required to send the notice of tax sale to either address. First, the plain language of Indiana Code section 6-1.1-24-4 requires that the county auditor search the county auditor records only if both the notices mailed via certified mail and first class mail are returned due to incorrect or insufficient addresses. There was no evidence that the notice of tax sale sent via first class mail was returned undelivered. Even if both mailings had been returned undelivered, serving notice to the property address is left to the discretion of the county auditor. Ind. Code § 6-1.1-24-4. Finally, requiring the Auditor to associate the medical equipment owned by Rahman, who is neither a trustee nor beneficiary of the Trust, with the properties owned by Ali, trustee of the Trust, would demand that the Auditor engage in speculation.
Even though the Trust did not receive the notice of tax sale, “failure by an owner to receive or accept the notice ... does not affect the validity of the judgment and order” as long as the county auditor has mailed the notice of tax sale to the required addresses. Ind. Code § 6-1.1-24-4. The evidence shows that the notices sent by the Auditor were sufficient under Indiana Code section 6-1.1-24-4. Accordingly, the trial court did not abuse its discretion in finding that the Auditor complied with statutory and constitutional requirements when sending notice relating to the tax sale of the properties.
II. Notice from Gupta
Regarding the notice sent by Gupta, the Trust argues that the Marked Certified Mailing received by Gupta provided notice to him of the Trust's correct mailing address. The Trust contends that Gupta's failure to mail the notice of the right of redemption and the notice of filing a petition for tax deed to this address constituted statutorily and constitutionally defective notice.
Pursuant to Indiana Code section 6-1.1-25-4.5(d), the notice of the right of redemption is to be given “by sending a copy of the notice by certified mail to ... the owner of record at the time of the ... sale of the property ... at the last address of the owner for the property, as indicated in the records of the county auditor ....” Notice of filing a petition for tax deed is given in the same manner. Ind. Code § 6-1.1-25-4.6(a). When the statutes are read in context of the United States Supreme Court's decision in Jones v. Flowers, 547 U.S. 220, 225 (2006) , notices mailed by certified mail and returned undelivered and unsigned, require “further action be taken ... to effectuate notice reasonably calculated to apprise an interested party of tax sale proceedings ....” Edwards, 898 N.E.2d at 348 (quoting Jones, 547 U.S. 220 at 225 ). Resending notice via first class regular mail is considered to be such a “reasonable additional step.” Jones, 547 U.S. 220 at 234-235 .
The evidence shows that Gupta complied with the notice requirements pursuant to Indiana statute by mailing the notice of the right of redemption and the notice of the petition for tax deed to the Trust by certified mail to 19910 Overlook Circle, the address on file in the Auditor's office. He then took the additional steps of sending both notices via first class mail when the certified mailings were returned undelivered. The first class mailings were never returned undelivered. Finally, Gupta tacked notice on the door of the building located on the properties. “[P]osting notice on real property is 'a singularly appropriate and effective way of ensuring that a person ... is actually apprised of the proceedings against him.'” Jones, 547 U.S. at 236 (internal citation omitted).
Additionally, the evidence supports the trial court's conclusion that the markings on the Marked Certified Mailing were “simply numbers coupled with other writings” and that it did not provide information to Gupta of “another address to which [Gupta] ha[d] another duty of notice.” Appellant's App. at 13-15. The Marked Certified Mailing with the “19921” handwritten on the envelope and the “10 Ove” of the address crossed out, Appellant's App. at 101, Def.'s Ex. A., did not provide direct proof from the U.S. Post Office of a correct forwarding address. In McBain v. Hamilton, 744 N.E.2d 984, 986 (Ind. Ct. App. 2001) , we held that the Auditor was required to send notice to another address when “[t]he Notice, which the Auditor's office sent by certified mail ... was returned by the post office with a notation indicating that the order to forward the [property owners'] mail to their new address at 7612 Emerald Greens Drive in Cordova, Tennessee had expired.” No such clear notation was present here to require Gupta to send notice to a different address in order to comply with Indiana statute. Consequently, the trial court did not abuse its discretion in finding that Gupta complied with statutory and constitutional requirements when sending notice relating to the tax sale of the properties.
Affirmed.
BARNES, J., and BRADFORD, J., concur.
1
No evidence was presented that notice of Ali's resignation and Jawaad A. Rahman's appointment was ever recorded with the Auditor.
2
The Trust alternatively frames the issue as a matter of statutory interpretation of the notice provisions under the relevant Indiana statutes in order to obtain de novo review. However, the issue in this case involves whether the Auditor and Gupta received information that would trigger the requirement that they take additional steps to provide notice as specified in the statutes. This is a factual determination based on the evidence and subject to the abuse of discretion standard.
3
Gupta argues that Rahman's Trial Rule 60(B) motions for relief from judgment are barred by Indiana Code section 6-1.1.-25-4.6(h) which sets a sixty-day deadline to appeal from the order of the trial court directing the county auditor to issue a tax deed. However, the Trust alleges that it has received constitutionally defective notice and “[a]n exception exists where a motion for relief from judgment alleges a tax deed is void due to constitutionally inadequate notice, in which case an appeal must be brought within a reasonable time rather than sixty days.” Edwards v. Neace, 898 N.E.2d 343, 348 (Ind. Ct. App. 2008) .
Gupta also argues that the Trust's final Trial Rule 60(B) motion for relief was precluded by res judicata. However, the Trust claims that the trial court's issuance of tax deeds was void due to statutorily and constitutionally inadequate notice and res judicata does not apply to void judgments. Weber v. Redding, 163 N.E. 269, 271 (Ind. 1928) ; Neese v. Kelley, 705 N.E.2d 1047, 1051 (Ind. Ct. App. 1999) .
4
This statute was amended in 2007 by the Indiana General Assembly to comply with the United States Supreme Court's opinion setting forth the requirements of constitutional notice in Jones v. Flowers, 547 U.S. 220 (2006) . 2007 Ind. Legis. Serv. P.L. 89-2007 (WEST).
5
A reasonable inference may be drawn from the record that SRI conducted such a search and discovered this post office box owned by Rahman because it is not an address that Rahman testified that he had given to the Auditor.
RAHMAN IRREVOCABLE TRUST, Appellant-Petitioner, v. VINOD C. GUPTA and BANK D, LLC A/K/A BRUCE DENNI, and RIPLEY COUNTY TREASURER, Appellees-Respondents.
Case Information:
Docket/Court: 69A05-1105-MI-294, Court of Appeals of Indiana
Date Issued: 05/16/2012
Tax Type(s): Property
APPEAL FROM THE RIPLEY SUPERIOR COURT, The Honorable James B. Morris, Judge, Cause No. 69D01-0901-M1-1
ATTORNEY FOR APPELLANT: LEANNA WEISSMANN, Lawrenceburg, Indiana
ATTORNEY FOR APPELLEE VINOD C. GUPTA: LEWIS MAUDLIN, Salem, Indiana
ATTORNEYS FOR APPELLEE BANK D, LLC: LYNN FLEDDERMAN, DOUGLAS C. WILSON, Batesville, Indiana
OPINION
KIRSCH, Judge Pursuant to Ind. Appellate Rule 65(D), this Memorandum Decision shall not be regarded as precedent or cited before any court except for the purpose of establishing the defense of res judicata, collateral estoppel, or the law of the case.
MEMORANDUM DECISION - NOT FOR PUBLICATION
The Rahman Irrevocable Trust (“Trust”) appeals the denial of two motions for relief from the judgment pertaining to the issuance of tax deeds and raises the following restated issue: whether the trial court abused its discretion in finding that the Auditor and the purchaser complied with statutory and constitutional requirements when sending notices relating to the tax sale of trust property.
We affirm.
FACTS AND PROCEDURAL HISTORY
Dr. Shiekh A. Rahman (“Rahman”) and his wife owned two parcels of real estate in Ripley County. Rahman used the property as a satellite office for his medical practice. On September 27, 2004, Rahman transferred the parcels to the Trust, a trust he created under the provisions of a trust agreement dated November 1, 1992. The trust agreement designated Mir M. Ali (“Ali”) as the trustee of the Trust. Ali resigned on March 23, 2004, and Jawaad A. Rahman was appointed successor trustee on October 26, 2004. 1 Neither Rahman, nor his wife, was designated as a trustee or a beneficiary of the Trust.
When the parcels were transferred to the Trust, the tax mailing address for the Trust filed with the Ripley County Auditor (“Auditor”) was Ali as trustee at 19910 Overlook Circle, Lawrenceburg, Indiana (“19910 Overlook Circle”). This address was the location of Rahman's home. Ali never resided at the address. This address was subsequently renumbered by the U.S. Post Office for rezoning purposes from 19910 Overlook Circle to 19921 Overlook Circle.
After the transfer, Rahman continued to use the property for his practice. In October 2006, Rahman discovered that he had not received his most recent tax bills from the Auditor at his home address. Rahman contacted the Auditor to request that his tax statements be mailed to his primary medical office at 276 Bielby Road, Lawrenceburg, Indiana. The Auditor then sent the personal property tax statements for the medical equipment owned by Rahman to the 276 Bielby Road address. The real estate tax statements for the properties in the name of the Trust continued to be sent to Ali at 19910 Overlook Circle.
The taxes on the properties due in 2007 were not paid. On November 17, 2008, the Auditor, through its agent SRI, Inc. (“SRI”), sent a notice of tax sale by two certified mailings to Ali at 19910 Overlook Circle, the address on record in the Auditor's office. These mailings were returned undelivered with no forwarding address. On December 24, 2008, SRI sent the same notice of tax sale to Ali at 19910 Overlook Circle by first class mail. On January 8, 2009, SRI sent two more certified mailings to Ali at P.O. Box 3822, Lawrenceburg, Indiana. This address was a post office box address previously owned by Rahman. These mailings were returned undelivered. The Auditor also published a notice of the tax sale in a local paper.
On January 28, 2009, Gupta purchased the tax sale certificates for the properties at the Ripley County tax sale. The name of the owner of the properties listed on the tax sale certificates and vesting deed was Ali as trustee of the Trust. Gupta sent notice of the right of redemption to Ali at 19910 Overlook Circle by certified mail. The certified mailing was returned to Gupta undelivered with “19921” handwritten on the envelope and the “10 Ove” of the address crossed out (“Marked Certified Mailing”). Appellant's App. at 101, Def.'s Ex. A.
Upon expiration of the period of redemption, Gupta petitioned for the issuance of tax deeds and sent notice of the petition to Ali at the 19910 Overlook Circle address by certified mail. After the certified mailings for the notice of the right of redemption and notice of the petition were returned undelivered, Gupta sent the notices to Ali at the 19910 Overlook Circle address again via regular mail. The regular mailings were never returned as undelivered. In addition to the mailings, Gupta also posted a sale notice on the doors of the properties.
On April 22, 2010, the court ordered the issuance of tax deeds to Gupta for the properties. Gupta subsequently sold the properties to Bank D.
In August 2010, Rahman discovered the properties had been sold. The Trust filed a Trial Rule 60(B) motion for relief from judgment for each of the properties alleging that the Auditor provided inadequate notice of the tax sale. The trial court denied both of the Trust's motions and found that the Auditor complied with relevant notice statutes and had taken additional steps reasonably calculated to notify the owner of the tax sale.
On May 19, 2011, the Trust appealed from the trial court's orders denying the Trust's motions for relief from judgment. While the appeal was pending, the Trust reviewed the Clerk's Record and noticed that Gupta had included the receipts for the certified mailing of his notices but did not include the returned certified mailings themselves. The Trust reviewed the certified mailing tracking numbers through the U.S. Postal Service records and found that one notice was listed as “forwarded” to Gupta in Boca Raton, Florida, rather than delivered in Indiana. Appellant's App. at 95. The Trust filed a second Trial Rule 60(B) motion for relief from judgment alleging that this newly discovered evidence voided the judgments due to fraud. Afterwards, Gupta provided copies of the returned certified mailings themselves which showed that the U.S. Postal Service records were erroneous. While the Trust amended its second motion to remove allegations of fraud, it still alleged that the trial courts judgments should be voided because the Marked Certified Mailing provided Gupta with the Trust's correct address, which he disregarded. While the appeal was pending, the case was remanded back to the trial court for a hearing on the Trust's amended second motion for relief from judgment.
On November 7, 2012, the trial court denied the Trust's amended second motion for relief and found that the evidence pertaining to the notices sent by Gupta to the Trust was not newly discovered and that Gupta complied with the notice requirements pursuant to Indiana statute. The Trust also appeals the denial of its amended second motion for relief from judgment.
DISCUSSION AND DECISION
It is within the sound, equitable discretion of the trial court to grant or deny a Trial Rule 60(B) motion for relief from judgment and the decision should not be reversed in the absence of an abuse of discretion. 2 Stronger v. Sorrell, 776 N.E.2d 353, 355 (Ind. 2002) . Where, as here, the trial court enters special findings and conclusions pursuant to Indiana Trial Rule 52(A), we apply a two-tiered standard of review. Id.
First, we determine whether the evidence supports the findings, and second whether the findings support the judgment. The trial court's findings and conclusions will be set aside only if they are clearly erroneous. In reviewing the trial court's entry of special findings, we neither reweigh the evidence nor reassess the credibility of the witnesses. Rather we must accept the ultimate facts as stated by the trial court if there is evidence to sustain them.
Id.
The Trust argues that its Trial Rule 60(B) motions for relief from judgment should have been granted because it did not receive adequate statutory and constitutional notice from the Auditor or Gupta relating to the tax sale of the properties. 3 The issuance of a tax deed by the trial court creates a presumption that the tax sale and all of the statutory steps leading up to the issuance of the tax deed were proper. Edwards v. Neace, 898 N.E.2d 343, 348 (Ind. Ct. App. 2008) . However, this presumption may be rebutted by affirmative evidence showing the contrary. Id. The tax deed may be set aside if the three notices required by Indiana Code sections 6-1.1-24-4 (notice of tax sale sent by county auditor to owner of real estate), 6-1.1-25-4.5 (notice of right of redemption sent by tax sale purchaser to owner), and 6-1.1-25-4.6 (notice of petition for tax deed sent by tax sale purchaser to owner), were not in compliance with the requirements of these sections. Ind. Code § 6-1.1-25-16(7).
I. Notice from the Auditor
Regarding the notices sent by the Auditor, the Trust claims that because Rahman contacted the Auditor to change the mailing address where his tax statements should be sent, the Auditor should have sent the tax statement of the properties as well as the notice of tax sale to this address. The Trust also argues that had the Auditor conducted a thorough search of its records, it would have discovered additional addresses for sending notice. It contends that the Auditor's failure to do so provided the Trust with statutorily and constitutionally defective notice.
Indiana Code section 6-1.1-24-4 4 provides, in relevant part, that the county auditor must take the following steps when providing notice of tax sale to an owner of real property:
[T]he county auditor shall send a notice of the sale by certified mail, return receipt requested, to ... the owner of record of real property with a single owner ... at the last address of the owner for the property as indicated in the records of the county auditor on the date that the tax sale list is certified.
In addition, the county auditor shall mail a duplicate notice to the owner of record ... by first class mail to the owners from whom the certified mail return receipt was not signed and returned.
Additionally, the county auditor may determine that mailing a first class notice to or serving a notice on the property is a reasonable step to notify the owner, if the address of the owner is not the same address as the physical location of the property.
If both notices are returned due to incorrect or insufficient addresses, the county auditor shall research the county auditor records to determine a more complete or accurate address. If a more complete or accurate address is found, the county auditor shall resend the notices to the address that is found in accordance with this section. Failure to obtain a more complete or accurate address does not invalidate an otherwise valid sale.
Ind. Code § 6-1.1-24-4.
The evidence shows that the Auditor complied with these steps when providing notice of the tax sale to the Trust. The Auditor sent, through its agent, SRI, a notice of tax sale via two certified mailings to Ali at 19910 Overlook Court, which was the last address on record in the Auditor's office for the Trust. Both certified mailings were returned undelivered with no suggestions for a forwarding address. SRI then sent a notice of tax sale to Ali at 19910 Overlook through first class mail. There was no evidence that the first class mailing was returned undelivered, and as a result, the Auditor was not required to take additional steps pursuant to Indiana Code section 6-1.1-24-4. However, the Auditor apparently did conduct a search of the Auditor's records 5 and sent two more certified mailings to Ali at P.O. Box 3822. After all the certified mailings were returned undelivered, the Auditor published the notice of tax sale in a local paper prior to sale.
Although the Trust argues that Rahman notified the Auditor to change the mailing address where his tax statements should be sent, Rahman was not designated as the trustee or beneficiary of the Trust and had totally divested himself of any and all interest in the ownership of the properties. Tr. at 28, Tr. Supp. at 34. As a result, Rahman had no legal authority to change the mailing address of the Trust. Id. The burden is on the owner of the real property to notify the county auditor of the owner's correct address. Ind. Code § 6-1.1-24-4. The Trust failed to provide any evidence that either owner of the properties, Ali, trustee of the Trust, or his successor trustee, Jawaad Rahman, contacted the Auditor to change the mailing address of the Trust.
Additionally, while the Trust argues that the physical addresses of the properties and personal property records related to the properties were in the Auditor's records, the Auditor was not required to send the notice of tax sale to either address. First, the plain language of Indiana Code section 6-1.1-24-4 requires that the county auditor search the county auditor records only if both the notices mailed via certified mail and first class mail are returned due to incorrect or insufficient addresses. There was no evidence that the notice of tax sale sent via first class mail was returned undelivered. Even if both mailings had been returned undelivered, serving notice to the property address is left to the discretion of the county auditor. Ind. Code § 6-1.1-24-4. Finally, requiring the Auditor to associate the medical equipment owned by Rahman, who is neither a trustee nor beneficiary of the Trust, with the properties owned by Ali, trustee of the Trust, would demand that the Auditor engage in speculation.
Even though the Trust did not receive the notice of tax sale, “failure by an owner to receive or accept the notice ... does not affect the validity of the judgment and order” as long as the county auditor has mailed the notice of tax sale to the required addresses. Ind. Code § 6-1.1-24-4. The evidence shows that the notices sent by the Auditor were sufficient under Indiana Code section 6-1.1-24-4. Accordingly, the trial court did not abuse its discretion in finding that the Auditor complied with statutory and constitutional requirements when sending notice relating to the tax sale of the properties.
II. Notice from Gupta
Regarding the notice sent by Gupta, the Trust argues that the Marked Certified Mailing received by Gupta provided notice to him of the Trust's correct mailing address. The Trust contends that Gupta's failure to mail the notice of the right of redemption and the notice of filing a petition for tax deed to this address constituted statutorily and constitutionally defective notice.
Pursuant to Indiana Code section 6-1.1-25-4.5(d), the notice of the right of redemption is to be given “by sending a copy of the notice by certified mail to ... the owner of record at the time of the ... sale of the property ... at the last address of the owner for the property, as indicated in the records of the county auditor ....” Notice of filing a petition for tax deed is given in the same manner. Ind. Code § 6-1.1-25-4.6(a). When the statutes are read in context of the United States Supreme Court's decision in Jones v. Flowers, 547 U.S. 220, 225 (2006) , notices mailed by certified mail and returned undelivered and unsigned, require “further action be taken ... to effectuate notice reasonably calculated to apprise an interested party of tax sale proceedings ....” Edwards, 898 N.E.2d at 348 (quoting Jones, 547 U.S. 220 at 225 ). Resending notice via first class regular mail is considered to be such a “reasonable additional step.” Jones, 547 U.S. 220 at 234-235 .
The evidence shows that Gupta complied with the notice requirements pursuant to Indiana statute by mailing the notice of the right of redemption and the notice of the petition for tax deed to the Trust by certified mail to 19910 Overlook Circle, the address on file in the Auditor's office. He then took the additional steps of sending both notices via first class mail when the certified mailings were returned undelivered. The first class mailings were never returned undelivered. Finally, Gupta tacked notice on the door of the building located on the properties. “[P]osting notice on real property is 'a singularly appropriate and effective way of ensuring that a person ... is actually apprised of the proceedings against him.'” Jones, 547 U.S. at 236 (internal citation omitted).
Additionally, the evidence supports the trial court's conclusion that the markings on the Marked Certified Mailing were “simply numbers coupled with other writings” and that it did not provide information to Gupta of “another address to which [Gupta] ha[d] another duty of notice.” Appellant's App. at 13-15. The Marked Certified Mailing with the “19921” handwritten on the envelope and the “10 Ove” of the address crossed out, Appellant's App. at 101, Def.'s Ex. A., did not provide direct proof from the U.S. Post Office of a correct forwarding address. In McBain v. Hamilton, 744 N.E.2d 984, 986 (Ind. Ct. App. 2001) , we held that the Auditor was required to send notice to another address when “[t]he Notice, which the Auditor's office sent by certified mail ... was returned by the post office with a notation indicating that the order to forward the [property owners'] mail to their new address at 7612 Emerald Greens Drive in Cordova, Tennessee had expired.” No such clear notation was present here to require Gupta to send notice to a different address in order to comply with Indiana statute. Consequently, the trial court did not abuse its discretion in finding that Gupta complied with statutory and constitutional requirements when sending notice relating to the tax sale of the properties.
Affirmed.
BARNES, J., and BRADFORD, J., concur.
1
No evidence was presented that notice of Ali's resignation and Jawaad A. Rahman's appointment was ever recorded with the Auditor.
2
The Trust alternatively frames the issue as a matter of statutory interpretation of the notice provisions under the relevant Indiana statutes in order to obtain de novo review. However, the issue in this case involves whether the Auditor and Gupta received information that would trigger the requirement that they take additional steps to provide notice as specified in the statutes. This is a factual determination based on the evidence and subject to the abuse of discretion standard.
3
Gupta argues that Rahman's Trial Rule 60(B) motions for relief from judgment are barred by Indiana Code section 6-1.1.-25-4.6(h) which sets a sixty-day deadline to appeal from the order of the trial court directing the county auditor to issue a tax deed. However, the Trust alleges that it has received constitutionally defective notice and “[a]n exception exists where a motion for relief from judgment alleges a tax deed is void due to constitutionally inadequate notice, in which case an appeal must be brought within a reasonable time rather than sixty days.” Edwards v. Neace, 898 N.E.2d 343, 348 (Ind. Ct. App. 2008) .
Gupta also argues that the Trust's final Trial Rule 60(B) motion for relief was precluded by res judicata. However, the Trust claims that the trial court's issuance of tax deeds was void due to statutorily and constitutionally inadequate notice and res judicata does not apply to void judgments. Weber v. Redding, 163 N.E. 269, 271 (Ind. 1928) ; Neese v. Kelley, 705 N.E.2d 1047, 1051 (Ind. Ct. App. 1999) .
4
This statute was amended in 2007 by the Indiana General Assembly to comply with the United States Supreme Court's opinion setting forth the requirements of constitutional notice in Jones v. Flowers, 547 U.S. 220 (2006) . 2007 Ind. Legis. Serv. P.L. 89-2007 (WEST).
5
A reasonable inference may be drawn from the record that SRI conducted such a search and discovered this post office box owned by Rahman because it is not an address that Rahman testified that he had given to the Auditor.
Inidana Tax Title
& M INVESTMENT GROUP, LLC, Appellant-Petitioner, v. AHLEMEYER FARMS, INC. and 1 MONROE BANK, Appellee-Respondent.
Case Information:
Docket/Court: 03A04-1112-CC-639, Court of Appeals of Indiana
Date Issued: 07/16/2012
Tax Type(s): Property
APPEAL FROM THE BARTHOLOMEW CIRCUIT COURT, The Honorable Stephen R. Heimann, Judge, Cause No. 03C01-1109-CC-5167
ATTORNEY FOR APPELLANT: JON ORLOSKY, Muncie, Indiana
ATTORNEYS FOR APPELLEE: ROBERT DELANO JONES, E. PAIGE FREITAG, Jones, McGlasson & Benckart, Bloomington, Indiana
ATTORNEYS FOR AMICUS CURIAE STATE OF INDIANA, GREGORY F. ZOELLER, Attorney General of Indiana, THOMAS M. FISHER, Solicitor General of Indiana, TAMARA L. WEAVER, Deputy Attorney General, Indianapolis, Indiana
OPINION
KIRSCH, Judge FOR PUBLICATION
OPINION - FOR PUBLICATION
M & M Investments, LLC (“M & M”) appeals the trial court's order denying its petition for a tax deed as to property of which Monroe Bank was the mortgagee. M & M raises two issues, which we restate as:
I. Whether the trial court erred when it failed to certify Monroe Bank's challenge to the constitutionality of Indiana Code section 6-1.1-24-3(b) to the Attorney General of Indiana (“Attorney General”), which would have allowed the Attorney General to intervene in the action; and
II. Whether Indiana Code section 6-1.1-24-3(b), which governs the notice to be given a mortgagee when real property had been scheduled to be sold at tax sale, violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution when a mortgagee has a publicly recorded mortgage.
We affirm.
FACTS AND PROCEDURAL HISTORY
On September 22, 2010, M & M purchased at tax sale real property, which at the time was owned by Ahlemeyer Farms, Inc. (“Ahlemeyer Farms”) and located at 2737 Central Avenue, Columbus, Indiana. The tax sale purchase price was $95,000. Monroe Bank is the mortgagee of the property under two separate mortgages with Ahlemeyer Farms, one in the principal amount of $700,000 executed on March 30, 2006, and a second mortgage in the principal amount of $50,000 executed on November 9, 2007. Those mortgages were in full force and effect on September 22, 2010 and secured by separate promissory notes. Both mortgages, along with any modifications thereto, were recorded in the Office of the Recorder of Bartholomew County.
The Auditor of Bartholomew County gave notice of the tax sale to Ahlemeyer Farms, as record owner of the real property, and published a list of the tax sale properties. No notice of the tax sale was given to Monroe Bank prior to the actual tax sale. Monroe Bank did not request a copy of the notice of tax sale pursuant to Indiana Code section 6-1.1-24-3(b). Monroe Bank did receive the notices required by statute after M & M purchased the property at tax sale.
On September 27, 2011, M & M filed its “Petition to Direct the Auditor of Bartholomew County to Issue Tax Deed.” Appellant's App. at 8-10. On October 21, 2011, Monroe Bank filed its response to the petition, contending that Indiana Code section 6-1.1-24-3(b) violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution. On November 17, 2011, the trial court entered its order denying M & M's petition for a tax deed, finding that the “Indiana Code provisions for notice do not provide constitutionally protected due process to Monroe Bank as mortgagee.” Id. at 4-6. M & M now appeals.
DISCUSSION AND DECISION
I. Certification to Attorney General of Indiana
M & M argues that the trial court erred when it failed to certify Monroe Bank's challenge to the constitutionality of Indiana Code section 6-1.1-24-3(b) to the Attorney General, which would have allowed the Attorney General to intervene in the action. It contends that, pursuant to Indiana Code section 34-33.1-1-1, the trial court had an affirmative duty to certify the constitutional challenge to the Indiana tax sale statutes to the Attorney General, and because this was not done, the judgment should be set aside and the case remanded so that proper certification can be made.
Under Indiana Code section 34-33.1-1-1:
(a) If the constitutionality of a state statute, ordinance, or franchise affecting the public interest is called into question in an action, suit, or proceeding in any court to which any agency, officer, or employee of the state is not a party, the court shall certify this fact to the attorney general and shall permit the attorney general to intervene on behalf of the state and present:
(1) evidence that relates to the question of constitutionality, if the evidence is otherwise admissible; and
(2) arguments on the question of constitutionality.
(b) If a party to an action bases its claim or defense on:
(1) a statute or executive order administered by a state officer or agency; or
(2) a rule, order, requirement, or agreement issued or made under the statute or executive order;
the attorney general shall be permitted to intervene in the action.
In the present case, after M & M filed its petition for tax deed, Monroe Bank filed its response, which contained a due process challenge to the constitutionality of Indiana Code section 6-1.1-24-3. Because this response called into question the constitutionality of a state statute in a proceeding to which the State was not a party, the trial court was required under Indiana Code section 34-33.1-1-1 to certify this fact to the Attorney General to allow the Attorney General the opportunity to intervene on behalf of the State in the action. The trial court here failed to certify Monroe Bank's constitutional challenge to the Attorney General before it issued its order denying M & M's petition for tax deed.
Although the trial court failed to certify the constitutional challenge as required by Indiana Code section 34-33.1-1-1, we note that the Attorney General has appeared in this appeal as an amicus curiae and has filed a brief, arguing the merits of the case. Because the Attorney General has not requested that the case be remanded and has been given the opportunity to present evidence relating to the question of constitutionality and argument on the question of constitutionality, we will consider the merits of this appeal without remanding to the trial court in order to allow the Attorney General to intervene. However, we caution trial courts to follow the statutory procedure under Indiana Code section 34-33.1-1-1 when faced with constitutional challenges.
II. Constitutionality of Indiana Code Section 6-1.1-24-3
M & M argues that Indiana's statutory notice scheme pertaining to tax sales is constitutional because under that scheme there are three opportunities for a mortgagee to receive notice of the tax sale. These include: (1) notice of a tax sale is to be posted in a public place in a public county building and published in a local newspaper; (2) if the mortgagee wishes to have notice mailed by certified mail, it can request notice pursuant to Indiana Code section 6-1.1-24-3(b); and (3) notice is required to be given post-tax sale under Indiana Code sections 6-1.1-25-4.5 and -4.6. Specifically, M & M contends that Indiana Code section 6-1.1-24-3(b) is not unconstitutional because all a mortgagee has to do in order to be eligible to receive pre-tax sale notice is to send a certified letter to the Auditor annually requesting such notice. M & M asserts that such a statutory scheme, which places a burden on the mortgagee to take affirmative steps, i.e., annually request by certified mail that pre-tax sale notice be sent, is a permissible statutory notice burden and does not create an excessive burden as to render the statute unconstitutional.
We presume that state legislation is constitutional. Horseman v. Keller, 841 N.E.2d 164, 170 (Ind. 2006) (citing In re Tina T., 579 N.E.2d 48, 56 (Ind. 1991) (“Legislation ... is clothed in a presumption of constitutionality.”)). Thus, our standard of review where a trial court finds an Indiana statute unconstitutional is even less deferential than de novo. Id. (citing Ind. Dep't of Envtl. Mgmt. v. Chem. Waste Mgmt., 643 N.E.2d 331, 336 n.2 (Ind. 1994) ). “'Since statutes are presumed to be constitutional, if there are any grounds for reversing the trial court's judgment [that a statute is unconstitutional] we will do so.'” Id.
The statute at issue in the present case is Indiana Code section 6-1.1-24-3, which discusses notices to be given prior to a tax sale and states in pertinent part:
(a) When real property is eligible for sale under this chapter, the county auditor shall post a copy of the notice required by sections 2 and 2.2 of this chapter at a public place of posting in the county courthouse or in another public county building at least twenty-one (21) days before the earliest date of application for judgment. In addition, the county auditor shall, in accordance with IC 5-3-1-4, publish the notice required in sections 2 and 2.2 of this chapter once each week for three (3) consecutive weeks before the earliest date on which the application for judgment may be made. The expenses of this publication shall be paid out of the county general fund without prior appropriation.
(b) At least twenty-one (21) days before the application for judgment is made, the county auditor shall mail a copy of the notice required by sections 2 and 2.2 of this chapter by certified mail, return receipt requested, to any mortgagee who annually requests, by certified mail, a copy of the notice. However, the failure of the county auditor to mail this notice or its nondelivery does not affect the validity of the judgment and order.
Ind. Code § 6-1.1-24-3(a), (b). Under subsection (b), the auditor is to provide notice to any mortgagee that requests such notice before the trial court enters judgment for the taxes due and orders the property to be sold at tax sale. This notice is referred to as pre-tax sale notice, as opposed to the post-tax sale notice that mortgagees, as persons with substantial property interest of public record in the property, shall receive after the property has been sold at tax sale under Indiana Code sections 6-1.1-25-4.5 and -4.6. The pre-tax sale notice statute clearly states that the validity of the trial court's order to sell the property at tax sale will not be affected even if the auditor fails to mail the notice to a mortgagee who requests it or if such notice is not delivered for any other reason. Ind. Code § 6-1.1-24-3(b).
In Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983) , the United States Supreme Court held that a prior version of Indiana's statute regarding pre-tax sale notice to mortgagees, which only required notice by publication to mortgagees, violated the Due Process Clause. Id. at 800. The Supreme Court did note that the pre-tax sale notice statute had been amended in 1980 to provide notice by certified mail to any mortgagee who requested it, 2 but that the amended version was not before the Court. Id. at 793 n.2. However, the Supreme Court's analysis and holding in Mennonite is important to the analysis of the present statute:
In Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) , this Court recognized that prior to an action which will affect an interest in life, liberty, or property protected by the Due Process Clause of the Fourteenth Amendment, a State must provide “notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”
....
Since a mortgagee clearly has a legally protected property interest, he is entitled to notice reasonably calculated to apprise him of a pending tax sale. When the mortgagee is identified in a mortgage that is publicly recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee's last known available address, or by personal service. But unless the mortgagee is not reasonably identifiable, constructive notice alone does not satisfy the mandate of Mullane.
....
Personal service or mailed notice is required even though sophisticated creditors have means at their disposal to discover whether property taxes have not been paid and whether tax sale proceedings are therefore likely to be initiated. In the first place, a mortgage need not involve a complex commercial transaction among knowledgeable parties, and it may well be the least sophisticated creditor whose security interest is threatened by a tax sale. More importantly, a party's ability to take steps to safeguard its interests does not relieve the State of its constitutional obligation. It is true that particularly extensive efforts to provide notice may often be required when the State is aware of a party's inexperience or incompetence.
....
Notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, whether unlettered or well versed in commercial practice, if its name and address are reasonably ascertainable. Furthermore, a mortgagee's knowledge of delinquency in the payment of taxes is not equivalent to notice that a tax sale is pending.
Mennonite, 462 U.S. at 799-800 (emphasis in original).
The Indiana Supreme Court later addressed the then-existing version of Indiana Code section 6-1.1-24-4.2, which was repealed in 1989 and is now codified at Indiana Code section 6-1.1-24-3, in Elizondo v. Read, 588 N.E.2d 501 (Ind. 1992) , abrogated by Jones v. Flowers, 547 U.S. 220 (2006) . At that time, Indiana's pre-tax sale notice statute “required the county auditor to send notice of sale to any mortgagee of real property subject to sale if the mortgagee annually, on a form provided by the State Board of Accounts, requested such notice and agreed to pay a fee to the county auditor to cover the costs of sending the notice.” Id. at 502. Despite the finding in Mennonite that a party's ability to take steps to safeguard its interests does not relieve the State of its constitutional obligation to provide adequate notice, our Supreme Court held that the language in the pre-tax sale notice statute that required mortgagees to file a request form annually to receive notice was reasonable and did not violate the Due Process Clause. Id. at 503-04. The Court also held that constitutionally adequate pre-tax sale notice was given to the property owners where the auditor mailed notice to the property owners' last known address, even though the owners had twice moved and the notice was returned unclaimed. Id. at 504-05.
In a dissent by Justice Givan, he concluded that the decision in Mennonite had held, as to mortgagees, that when a mortgage is publicly recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee. Id. at 505. The mortgagee in Elizondo, as in the present case, had a publicly recorded mortgage and did not request notice or file the necessary form to receive notice of the tax sale and, therefore, received no pre-tax sale notice. Id. at 502. Justice Givan concluded that, even if a mortgagee does not request notice, under Mennonite the auditor is required to mail notice to the mortgagee because it had a publicly recorded mortgage. Id. at 505. He further concluded that due process also required that the auditor should have determined the property owners' current address and sent another notice. Id.
Recently, the United States Supreme Court decided Jones v. Flowers, 547 U.S. 220 (2006) , which specifically discussed the due process to which a property owner is entitled when the government is aware that its notice of a tax sale has been returned as undeliverable and which abrogated the decision in Elizondo. Id. at 226. The Supreme Court held that the government, although it followed Arkansas's requirements as to pre-tax sale notice to property owners, violated due process when it failed to take further steps after notice to the property owners was returned unclaimed. Id. at 239. The Court specifically determined that the government should have taken additional reasonable steps to notify the property owner of the tax sale if practicable to do so and noted that the property owner's failure to keep his address up to date with the government as required by the state statute did not surrender his right to “constitutionally sufficient notice,” citing the statement from Mennonite that “a party's ability to take steps to safeguard its own interests does not relieve the State of its constitutional obligation.” Jones, 547 U.S. at 232, 234 (quoting Mennonite, 462 U.S. at 799 ).
As previously noted, Jones abrogated the Indiana Supreme Court's decision in Elizondo, both as it relates to property owners and as it relates to pre-tax sale notice required to be given to mortgagees. In Jones, the property owner failed to comply with the applicable state statute by updating his address with the county. Similarly, here, Monroe Bank did not comply with the applicable statute because it failed to request that it be provided with pre-tax sale notice via certified mail pursuant to Indiana Code section 6-1.1-24-3(b). However, the decision in Jones reaffirmed the determination from Mennonite that a party's ability to take steps to safeguard its interests does not relieve the State of its constitutional obligation to provide adequate notice prior to a tax sale, which extinguishes a protected property interest. 547 U.S. at 232 (citing Mennonite, 462 U.S. at 799 ).
The Indiana Supreme Court did not acknowledge this important constitutional principle in its majority decision in Elizondo. Instead, the Court followed the reasoning of the dissent in Mennonite, which stated that constructive notice is only insufficient where the property owner cannot easily learn of the state's action threatening his interest, and concluded that Indiana's then-existing pre-tax sale notice scheme, which required a mortgagee to take affirmative steps in order to receive notice prior to a tax sale, did not violate the Due Process Clause. Elizondo, 588 N.E.2d at 504 (citing Mennonite, 462 U.S. at 807 ). However, the majority in Mennonite clearly held that “[w]hen a mortgagee is identified in a mortgage that is publicly recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee's last known address, or by personal service.” 462 U.S. at 798 (emphasis added). Therefore, the decision in Elizondo, which places the burden of receiving pre-tax sale notice on mortgagees by mandating that affirmative steps be taken to receive notice prior to a tax sale contravenes the holdings of Mennonite, of which one of the holdings has recently been reaffirmed in Jones. Requiring a mortgagee that has a publicly recorded mortgage to send a request through certified mail as a prerequisite to receiving notice prior to a tax sale is analogous to requiring a property owner to update his address in order to receive notice. This requirement was rejected in Jones. 547 U.S. at 232 . When a mortgagee has a publicly recorded mortgage, as in the present case, we conclude, under the holdings of both Mennonite and Jones, that due process requires that the government must supplement notice by publication with pre-tax sale notice mailed to the mortgagee's last known available address or by personal service, regardless of whether the mortgagee has requested such notice. 3
Further, pursuant to the holding of Jones, adequate notice under the Due Process Clause does not allow the government to fail to take additional steps when it knows that notice has failed. There, the Court concluded that the State should have taken additional steps to notify the property owner, if practicable to do so, when the original notice was returned unclaimed. 547 U.S. at 234. In the present case, the second sentence of Indiana Code section 6-1.1-24-3(b), which states that the failure of the auditor to mail the requested notice or the fact that such notice was undelivered for any reason does not affect the validity of the tax sale, is in contravention to the holding in Jones because it excuses the auditor from providing pre-tax sale notice by mail, even when it has been requested. We therefore conclude that the Indiana pre-tax sale notice statute violates the Due Process Clause of the Fourteenth Amendment because it does not require the government to provide sufficient notice prior to the tax sale either by mail or by personal service to mortgagees who have publicly recorded mortgages, even if such notice is not requested by the mortgagees, and because it provides that, even if the government fails to mail the requested notice or the notice is undeliverable for some reason, the validity of the tax sale will not be affected. 4 The trial court correctly denied M & M's petition for a tax deed.
Affirmed.
BAKER, J., and BROWN, J., concur.
1
Ahlemeyer Farms, Inc. is not seeking relief on appeal and has not filed a brief as either appellant or appellee. Pursuant to Indiana Appellate Rule 17(A), however, a party of record in the trial court is a party on appeal.
2
The amended statute, Indiana Code section 6-1.1-24-4.2, which was subsequently repealed, provided for notice by certified mail to any mortgagee of real property which is subject to tax sale proceedings if the mortgagee has annually requested such notice and has agreed to pay a fee, not to exceed $10, to cover the cost of sending the notice.
3
The government is not required to undertake extraordinary efforts to discover the identity and whereabouts of a mortgagee whose identity is not in the public record.
4
Post-tax sale notice is the notice that mortgagees, as persons with substantial property interest of public record in the property, shall receive after the property has been sold at tax sale under Indiana Code sections 6-1.1-25-4.5 and -4.6. We further conclude that the fact that Monroe Bank received the post-tax sale notices required under Indiana Code sections 6-1.1-25-4.5 and -4.6 did not correct the constitutional violation of lack of sufficient notice prior to the tax sale. If a mortgagee only receives post-tax sale notice, this deprives it of the opportunity to protect its property interest prior to and at the tax sale, including purchasing the property itself at the tax sale. In Mennonite, the Court stated that “a mortgagee possesses a substantial property interest that is significantly affected by a tax sale” and is “entitled to notice reasonably calculated to apprise him of a pending tax sale.” Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 (1983) (emphasis added). Therefore, notice after the tax sale has taken place does not remedy the due process violation of the lack of adequate notice prior to the tax sale.
Case Information:
Docket/Court: 03A04-1112-CC-639, Court of Appeals of Indiana
Date Issued: 07/16/2012
Tax Type(s): Property
APPEAL FROM THE BARTHOLOMEW CIRCUIT COURT, The Honorable Stephen R. Heimann, Judge, Cause No. 03C01-1109-CC-5167
ATTORNEY FOR APPELLANT: JON ORLOSKY, Muncie, Indiana
ATTORNEYS FOR APPELLEE: ROBERT DELANO JONES, E. PAIGE FREITAG, Jones, McGlasson & Benckart, Bloomington, Indiana
ATTORNEYS FOR AMICUS CURIAE STATE OF INDIANA, GREGORY F. ZOELLER, Attorney General of Indiana, THOMAS M. FISHER, Solicitor General of Indiana, TAMARA L. WEAVER, Deputy Attorney General, Indianapolis, Indiana
OPINION
KIRSCH, Judge FOR PUBLICATION
OPINION - FOR PUBLICATION
M & M Investments, LLC (“M & M”) appeals the trial court's order denying its petition for a tax deed as to property of which Monroe Bank was the mortgagee. M & M raises two issues, which we restate as:
I. Whether the trial court erred when it failed to certify Monroe Bank's challenge to the constitutionality of Indiana Code section 6-1.1-24-3(b) to the Attorney General of Indiana (“Attorney General”), which would have allowed the Attorney General to intervene in the action; and
II. Whether Indiana Code section 6-1.1-24-3(b), which governs the notice to be given a mortgagee when real property had been scheduled to be sold at tax sale, violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution when a mortgagee has a publicly recorded mortgage.
We affirm.
FACTS AND PROCEDURAL HISTORY
On September 22, 2010, M & M purchased at tax sale real property, which at the time was owned by Ahlemeyer Farms, Inc. (“Ahlemeyer Farms”) and located at 2737 Central Avenue, Columbus, Indiana. The tax sale purchase price was $95,000. Monroe Bank is the mortgagee of the property under two separate mortgages with Ahlemeyer Farms, one in the principal amount of $700,000 executed on March 30, 2006, and a second mortgage in the principal amount of $50,000 executed on November 9, 2007. Those mortgages were in full force and effect on September 22, 2010 and secured by separate promissory notes. Both mortgages, along with any modifications thereto, were recorded in the Office of the Recorder of Bartholomew County.
The Auditor of Bartholomew County gave notice of the tax sale to Ahlemeyer Farms, as record owner of the real property, and published a list of the tax sale properties. No notice of the tax sale was given to Monroe Bank prior to the actual tax sale. Monroe Bank did not request a copy of the notice of tax sale pursuant to Indiana Code section 6-1.1-24-3(b). Monroe Bank did receive the notices required by statute after M & M purchased the property at tax sale.
On September 27, 2011, M & M filed its “Petition to Direct the Auditor of Bartholomew County to Issue Tax Deed.” Appellant's App. at 8-10. On October 21, 2011, Monroe Bank filed its response to the petition, contending that Indiana Code section 6-1.1-24-3(b) violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution. On November 17, 2011, the trial court entered its order denying M & M's petition for a tax deed, finding that the “Indiana Code provisions for notice do not provide constitutionally protected due process to Monroe Bank as mortgagee.” Id. at 4-6. M & M now appeals.
DISCUSSION AND DECISION
I. Certification to Attorney General of Indiana
M & M argues that the trial court erred when it failed to certify Monroe Bank's challenge to the constitutionality of Indiana Code section 6-1.1-24-3(b) to the Attorney General, which would have allowed the Attorney General to intervene in the action. It contends that, pursuant to Indiana Code section 34-33.1-1-1, the trial court had an affirmative duty to certify the constitutional challenge to the Indiana tax sale statutes to the Attorney General, and because this was not done, the judgment should be set aside and the case remanded so that proper certification can be made.
Under Indiana Code section 34-33.1-1-1:
(a) If the constitutionality of a state statute, ordinance, or franchise affecting the public interest is called into question in an action, suit, or proceeding in any court to which any agency, officer, or employee of the state is not a party, the court shall certify this fact to the attorney general and shall permit the attorney general to intervene on behalf of the state and present:
(1) evidence that relates to the question of constitutionality, if the evidence is otherwise admissible; and
(2) arguments on the question of constitutionality.
(b) If a party to an action bases its claim or defense on:
(1) a statute or executive order administered by a state officer or agency; or
(2) a rule, order, requirement, or agreement issued or made under the statute or executive order;
the attorney general shall be permitted to intervene in the action.
In the present case, after M & M filed its petition for tax deed, Monroe Bank filed its response, which contained a due process challenge to the constitutionality of Indiana Code section 6-1.1-24-3. Because this response called into question the constitutionality of a state statute in a proceeding to which the State was not a party, the trial court was required under Indiana Code section 34-33.1-1-1 to certify this fact to the Attorney General to allow the Attorney General the opportunity to intervene on behalf of the State in the action. The trial court here failed to certify Monroe Bank's constitutional challenge to the Attorney General before it issued its order denying M & M's petition for tax deed.
Although the trial court failed to certify the constitutional challenge as required by Indiana Code section 34-33.1-1-1, we note that the Attorney General has appeared in this appeal as an amicus curiae and has filed a brief, arguing the merits of the case. Because the Attorney General has not requested that the case be remanded and has been given the opportunity to present evidence relating to the question of constitutionality and argument on the question of constitutionality, we will consider the merits of this appeal without remanding to the trial court in order to allow the Attorney General to intervene. However, we caution trial courts to follow the statutory procedure under Indiana Code section 34-33.1-1-1 when faced with constitutional challenges.
II. Constitutionality of Indiana Code Section 6-1.1-24-3
M & M argues that Indiana's statutory notice scheme pertaining to tax sales is constitutional because under that scheme there are three opportunities for a mortgagee to receive notice of the tax sale. These include: (1) notice of a tax sale is to be posted in a public place in a public county building and published in a local newspaper; (2) if the mortgagee wishes to have notice mailed by certified mail, it can request notice pursuant to Indiana Code section 6-1.1-24-3(b); and (3) notice is required to be given post-tax sale under Indiana Code sections 6-1.1-25-4.5 and -4.6. Specifically, M & M contends that Indiana Code section 6-1.1-24-3(b) is not unconstitutional because all a mortgagee has to do in order to be eligible to receive pre-tax sale notice is to send a certified letter to the Auditor annually requesting such notice. M & M asserts that such a statutory scheme, which places a burden on the mortgagee to take affirmative steps, i.e., annually request by certified mail that pre-tax sale notice be sent, is a permissible statutory notice burden and does not create an excessive burden as to render the statute unconstitutional.
We presume that state legislation is constitutional. Horseman v. Keller, 841 N.E.2d 164, 170 (Ind. 2006) (citing In re Tina T., 579 N.E.2d 48, 56 (Ind. 1991) (“Legislation ... is clothed in a presumption of constitutionality.”)). Thus, our standard of review where a trial court finds an Indiana statute unconstitutional is even less deferential than de novo. Id. (citing Ind. Dep't of Envtl. Mgmt. v. Chem. Waste Mgmt., 643 N.E.2d 331, 336 n.2 (Ind. 1994) ). “'Since statutes are presumed to be constitutional, if there are any grounds for reversing the trial court's judgment [that a statute is unconstitutional] we will do so.'” Id.
The statute at issue in the present case is Indiana Code section 6-1.1-24-3, which discusses notices to be given prior to a tax sale and states in pertinent part:
(a) When real property is eligible for sale under this chapter, the county auditor shall post a copy of the notice required by sections 2 and 2.2 of this chapter at a public place of posting in the county courthouse or in another public county building at least twenty-one (21) days before the earliest date of application for judgment. In addition, the county auditor shall, in accordance with IC 5-3-1-4, publish the notice required in sections 2 and 2.2 of this chapter once each week for three (3) consecutive weeks before the earliest date on which the application for judgment may be made. The expenses of this publication shall be paid out of the county general fund without prior appropriation.
(b) At least twenty-one (21) days before the application for judgment is made, the county auditor shall mail a copy of the notice required by sections 2 and 2.2 of this chapter by certified mail, return receipt requested, to any mortgagee who annually requests, by certified mail, a copy of the notice. However, the failure of the county auditor to mail this notice or its nondelivery does not affect the validity of the judgment and order.
Ind. Code § 6-1.1-24-3(a), (b). Under subsection (b), the auditor is to provide notice to any mortgagee that requests such notice before the trial court enters judgment for the taxes due and orders the property to be sold at tax sale. This notice is referred to as pre-tax sale notice, as opposed to the post-tax sale notice that mortgagees, as persons with substantial property interest of public record in the property, shall receive after the property has been sold at tax sale under Indiana Code sections 6-1.1-25-4.5 and -4.6. The pre-tax sale notice statute clearly states that the validity of the trial court's order to sell the property at tax sale will not be affected even if the auditor fails to mail the notice to a mortgagee who requests it or if such notice is not delivered for any other reason. Ind. Code § 6-1.1-24-3(b).
In Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983) , the United States Supreme Court held that a prior version of Indiana's statute regarding pre-tax sale notice to mortgagees, which only required notice by publication to mortgagees, violated the Due Process Clause. Id. at 800. The Supreme Court did note that the pre-tax sale notice statute had been amended in 1980 to provide notice by certified mail to any mortgagee who requested it, 2 but that the amended version was not before the Court. Id. at 793 n.2. However, the Supreme Court's analysis and holding in Mennonite is important to the analysis of the present statute:
In Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314 (1950) , this Court recognized that prior to an action which will affect an interest in life, liberty, or property protected by the Due Process Clause of the Fourteenth Amendment, a State must provide “notice reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.”
....
Since a mortgagee clearly has a legally protected property interest, he is entitled to notice reasonably calculated to apprise him of a pending tax sale. When the mortgagee is identified in a mortgage that is publicly recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee's last known available address, or by personal service. But unless the mortgagee is not reasonably identifiable, constructive notice alone does not satisfy the mandate of Mullane.
....
Personal service or mailed notice is required even though sophisticated creditors have means at their disposal to discover whether property taxes have not been paid and whether tax sale proceedings are therefore likely to be initiated. In the first place, a mortgage need not involve a complex commercial transaction among knowledgeable parties, and it may well be the least sophisticated creditor whose security interest is threatened by a tax sale. More importantly, a party's ability to take steps to safeguard its interests does not relieve the State of its constitutional obligation. It is true that particularly extensive efforts to provide notice may often be required when the State is aware of a party's inexperience or incompetence.
....
Notice by mail or other means as certain to ensure actual notice is a minimum constitutional precondition to a proceeding which will adversely affect the liberty or property interests of any party, whether unlettered or well versed in commercial practice, if its name and address are reasonably ascertainable. Furthermore, a mortgagee's knowledge of delinquency in the payment of taxes is not equivalent to notice that a tax sale is pending.
Mennonite, 462 U.S. at 799-800 (emphasis in original).
The Indiana Supreme Court later addressed the then-existing version of Indiana Code section 6-1.1-24-4.2, which was repealed in 1989 and is now codified at Indiana Code section 6-1.1-24-3, in Elizondo v. Read, 588 N.E.2d 501 (Ind. 1992) , abrogated by Jones v. Flowers, 547 U.S. 220 (2006) . At that time, Indiana's pre-tax sale notice statute “required the county auditor to send notice of sale to any mortgagee of real property subject to sale if the mortgagee annually, on a form provided by the State Board of Accounts, requested such notice and agreed to pay a fee to the county auditor to cover the costs of sending the notice.” Id. at 502. Despite the finding in Mennonite that a party's ability to take steps to safeguard its interests does not relieve the State of its constitutional obligation to provide adequate notice, our Supreme Court held that the language in the pre-tax sale notice statute that required mortgagees to file a request form annually to receive notice was reasonable and did not violate the Due Process Clause. Id. at 503-04. The Court also held that constitutionally adequate pre-tax sale notice was given to the property owners where the auditor mailed notice to the property owners' last known address, even though the owners had twice moved and the notice was returned unclaimed. Id. at 504-05.
In a dissent by Justice Givan, he concluded that the decision in Mennonite had held, as to mortgagees, that when a mortgage is publicly recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee. Id. at 505. The mortgagee in Elizondo, as in the present case, had a publicly recorded mortgage and did not request notice or file the necessary form to receive notice of the tax sale and, therefore, received no pre-tax sale notice. Id. at 502. Justice Givan concluded that, even if a mortgagee does not request notice, under Mennonite the auditor is required to mail notice to the mortgagee because it had a publicly recorded mortgage. Id. at 505. He further concluded that due process also required that the auditor should have determined the property owners' current address and sent another notice. Id.
Recently, the United States Supreme Court decided Jones v. Flowers, 547 U.S. 220 (2006) , which specifically discussed the due process to which a property owner is entitled when the government is aware that its notice of a tax sale has been returned as undeliverable and which abrogated the decision in Elizondo. Id. at 226. The Supreme Court held that the government, although it followed Arkansas's requirements as to pre-tax sale notice to property owners, violated due process when it failed to take further steps after notice to the property owners was returned unclaimed. Id. at 239. The Court specifically determined that the government should have taken additional reasonable steps to notify the property owner of the tax sale if practicable to do so and noted that the property owner's failure to keep his address up to date with the government as required by the state statute did not surrender his right to “constitutionally sufficient notice,” citing the statement from Mennonite that “a party's ability to take steps to safeguard its own interests does not relieve the State of its constitutional obligation.” Jones, 547 U.S. at 232, 234 (quoting Mennonite, 462 U.S. at 799 ).
As previously noted, Jones abrogated the Indiana Supreme Court's decision in Elizondo, both as it relates to property owners and as it relates to pre-tax sale notice required to be given to mortgagees. In Jones, the property owner failed to comply with the applicable state statute by updating his address with the county. Similarly, here, Monroe Bank did not comply with the applicable statute because it failed to request that it be provided with pre-tax sale notice via certified mail pursuant to Indiana Code section 6-1.1-24-3(b). However, the decision in Jones reaffirmed the determination from Mennonite that a party's ability to take steps to safeguard its interests does not relieve the State of its constitutional obligation to provide adequate notice prior to a tax sale, which extinguishes a protected property interest. 547 U.S. at 232 (citing Mennonite, 462 U.S. at 799 ).
The Indiana Supreme Court did not acknowledge this important constitutional principle in its majority decision in Elizondo. Instead, the Court followed the reasoning of the dissent in Mennonite, which stated that constructive notice is only insufficient where the property owner cannot easily learn of the state's action threatening his interest, and concluded that Indiana's then-existing pre-tax sale notice scheme, which required a mortgagee to take affirmative steps in order to receive notice prior to a tax sale, did not violate the Due Process Clause. Elizondo, 588 N.E.2d at 504 (citing Mennonite, 462 U.S. at 807 ). However, the majority in Mennonite clearly held that “[w]hen a mortgagee is identified in a mortgage that is publicly recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee's last known address, or by personal service.” 462 U.S. at 798 (emphasis added). Therefore, the decision in Elizondo, which places the burden of receiving pre-tax sale notice on mortgagees by mandating that affirmative steps be taken to receive notice prior to a tax sale contravenes the holdings of Mennonite, of which one of the holdings has recently been reaffirmed in Jones. Requiring a mortgagee that has a publicly recorded mortgage to send a request through certified mail as a prerequisite to receiving notice prior to a tax sale is analogous to requiring a property owner to update his address in order to receive notice. This requirement was rejected in Jones. 547 U.S. at 232 . When a mortgagee has a publicly recorded mortgage, as in the present case, we conclude, under the holdings of both Mennonite and Jones, that due process requires that the government must supplement notice by publication with pre-tax sale notice mailed to the mortgagee's last known available address or by personal service, regardless of whether the mortgagee has requested such notice. 3
Further, pursuant to the holding of Jones, adequate notice under the Due Process Clause does not allow the government to fail to take additional steps when it knows that notice has failed. There, the Court concluded that the State should have taken additional steps to notify the property owner, if practicable to do so, when the original notice was returned unclaimed. 547 U.S. at 234. In the present case, the second sentence of Indiana Code section 6-1.1-24-3(b), which states that the failure of the auditor to mail the requested notice or the fact that such notice was undelivered for any reason does not affect the validity of the tax sale, is in contravention to the holding in Jones because it excuses the auditor from providing pre-tax sale notice by mail, even when it has been requested. We therefore conclude that the Indiana pre-tax sale notice statute violates the Due Process Clause of the Fourteenth Amendment because it does not require the government to provide sufficient notice prior to the tax sale either by mail or by personal service to mortgagees who have publicly recorded mortgages, even if such notice is not requested by the mortgagees, and because it provides that, even if the government fails to mail the requested notice or the notice is undeliverable for some reason, the validity of the tax sale will not be affected. 4 The trial court correctly denied M & M's petition for a tax deed.
Affirmed.
BAKER, J., and BROWN, J., concur.
1
Ahlemeyer Farms, Inc. is not seeking relief on appeal and has not filed a brief as either appellant or appellee. Pursuant to Indiana Appellate Rule 17(A), however, a party of record in the trial court is a party on appeal.
2
The amended statute, Indiana Code section 6-1.1-24-4.2, which was subsequently repealed, provided for notice by certified mail to any mortgagee of real property which is subject to tax sale proceedings if the mortgagee has annually requested such notice and has agreed to pay a fee, not to exceed $10, to cover the cost of sending the notice.
3
The government is not required to undertake extraordinary efforts to discover the identity and whereabouts of a mortgagee whose identity is not in the public record.
4
Post-tax sale notice is the notice that mortgagees, as persons with substantial property interest of public record in the property, shall receive after the property has been sold at tax sale under Indiana Code sections 6-1.1-25-4.5 and -4.6. We further conclude that the fact that Monroe Bank received the post-tax sale notices required under Indiana Code sections 6-1.1-25-4.5 and -4.6 did not correct the constitutional violation of lack of sufficient notice prior to the tax sale. If a mortgagee only receives post-tax sale notice, this deprives it of the opportunity to protect its property interest prior to and at the tax sale, including purchasing the property itself at the tax sale. In Mennonite, the Court stated that “a mortgagee possesses a substantial property interest that is significantly affected by a tax sale” and is “entitled to notice reasonably calculated to apprise him of a pending tax sale.” Mennonite Bd. of Missions v. Adams, 462 U.S. 791, 798 (1983) (emphasis added). Therefore, notice after the tax sale has taken place does not remedy the due process violation of the lack of adequate notice prior to the tax sale.
Inhertied IRA
Charles Grant Beech and Elizabeth A. Beech v. Commissioner., U.S. Tax Court, T.C. Summary Opinion 2012-74, (Jul. 26, 2012)
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Charles Grant Beech and Elizabeth A. Beech v. Commissioner.
Docket No. 1948-11S. Filed July 26, 2012.
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Charles Grant Beech and Elizabeth A. Beech, pro sese. L. Katrine Shelton, for respondent.
SUMMARY OPINION
DEAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent issued a notice of deficiency (notice) to petitioners in which he determined a deficiency of $9,212 for 2008 as well as a section 6662(a) accuracy-related penalty of $1,842. After concessions, 1 the issue for decision is whether petitioners received taxable income when Elizabeth Beech (petitioner) received a death benefit distribution of $35,358 from her mother's individual retirement account (IRA).
Background
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by reference. Petitioners resided in California when they filed their petition.
Petitioner's mother died on March 22, 2008. Petitioner was the beneficiary of her mother's traditional IRA that was managed by Citi Smith Barney (Citi). Citi made two death benefit distributions to petitioner—one on May 21, 2008, for $2,828 and one on May 23, 2008, for $35,358. The distribution check for $35,358 was made out to petitioner.
Petitioner established an inherited traditional IRA with American Funds and deposited the death benefit distribution of $35,358 into the inherited traditional IRA in June 2008.
Petitioners reported an IRA distribution of $38,194 on line 15a, IRA distributions, on their 2008 Form 1040, U.S. Individual Income Tax Return. 2 They reported $2,828 as the taxable amount of the distribution on line 15b of their return.
Respondent issued petitioners the notice in which he determined that all of the retirement income petitioners reported on their 2008 return was taxable income.
Discussion 3
Section 61(a) requires taxpayers to include in gross income all income from whatever source derived. Exclusions from income are to be narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
Amounts paid or distributed out of an IRA are generally includible in gross income by the payee or distributee. Sec. 408(d)(1). Section 408(d)(3) provides, however, that a distribution is not includible in gross income if the entire amount of the distribution received by an individual is paid into a qualified IRA for the benefit of that individual within 60 days of the distribution. This recontribution is known as a “rollover contribution”. Id.
Rollover treatment is not available in the case of an inherited IRA. Sec. 408(d)(3)(C). An IRA is treated as inherited for purposes of section 408(d)(3)(C) if the individual for whose benefit the account or annuity is maintained acquired that account by reason of the death of another individual who was not his or her spouse. Sec. 408(d)(3)(C)(ii).
A taxpayer is not treated as having received a taxable distribution from an IRA, however, if funds in the IRA are transferred from one account trustee directly to another account trustee without the IRA owner's or beneficiary's ever gaining control or use of the funds. See Jankelovits v. Commissioner, T.C. Memo. 2008-285 (citing Rev. Rul. 78-406, 1978-2 C.B. 157, Crow v. Commissioner, T.C. Memo. 2002-178, and Martin v. Commissioner, T.C. Memo. 1992-331, aff'd without published opinion, 987 F.2d 770 (5th Cir. 1993)).
The funds in issue were paid from petitioner's mother's IRA to petitioner because she was the named beneficiary. Citi issued petitioner a check, and she deposited the funds into an IRA account managed by American Funds. The funds were from an inherited IRA, leaving a trustee-to-trustee transfer as the only basis upon which a nontaxable transfer of the funds could be effected. See Jankelovits v. Commissioner, T.C. Memo. 2008-285.
Although petitioners argue that their intent was to effect a trustee-to-trustee transfer, it is well established that a taxpayer's intention to take advantage of tax laws does not determine the tax consequences of his or her transactions. Bezdjian v. Commissioner, 845 F.2d 217 (9th Cir. 1988), aff'g T.C. Memo. 1987-140; Carlton v. United States, 385 F.2d 238, 243 (5th Cir. 1967) (citing Commissioner v. Duberstein, 363 U.S. 278, 286 (1960)). What actually was done determines the tax treatment of a transaction. Weiss v. Stearn, 265 U.S. 242, 254 (1924).
Petitioners also argue that they substantially complied with the requirements of section 408(d)(3)(A)(i) and that Wood v. Commissioner, 93 T.C. 114 (1989), supports their argument.
In Wood the taxpayer retired and received a lump-sum distribution of cash and stocks from his employer's profit-sharing plan. He established an IRA with Merrill Lynch and instructed the account executive to transfer the entire distribution into the IRA to effect a nontaxable transfer of the funds.
The account executive assured the taxpayer that the transfer would be made within the applicable 60-day period. The cash and stock were transferred into the IRA within the 60-day rollover period, but because of a bookkeeping error the stock transfer was erroneously indicated as not having occurred until after the rollover period had elapsed.
The Court found that the taxpayer substantially complied with the 60-day rollover period because: (1) he requested that the entire distribution be transferred to the IRA and (2) when bookkeeping “entries are at variance with the facts, the decision must rest on the facts.” Wood v. Commissioner, 93 T.C. at 121 (citing Dean v. Commissioner, 57 T.C. 32, 44 (1971), Kaplan v. Commissioner, 21 T.C. 134, 140 (1953), Lanteen Med. Labs., Inc. v. Commissioner, 10 T.C. 279, 288 (1948), and Elkins v. Commissioner, 12 B.T.A. 1058 (1928)).
Petitioners' reliance on Wood is misplaced. Generally, this Court applies the doctrine of substantial compliance “to excuse taxpayers from strict compliance with procedural regulatory requirements”. Dirks v. Commissioner, T.C. Memo. 2004-138 (citing Estate of Chamberlain v. Commissioner, T.C. Memo. 1999-181 (and cases cited therein), aff'd, 9 Fed. Appx. 713 (9th Cir. 2001)), aff'd, 154 Fed. Appx. 614 (9th Cir. 2005). Although the Court of Appeals for the Ninth Circuit 4 has indicated that the doctrine may also be applied to “statutory prerequisites”, it can only be applied “where invocation thereof would not defeat the policies of the underlying statutory provisions.” Sawyer v. Cnty. of Sonoma, 719 F.2d 1001, 1008 (9th Cir. 1983). Petitioners do not ask to be excused from a statutory prerequisite but ask to be excused from an express statutory prohibition.
The Court cannot find that petitioners substantially complied with section 408(d)(3)(A)(i) because section 408(d)(3)(C) expressly denies rollover treatment to an inherited IRA. “Many parts of the tax code are compromises, and all parts reflect the need for lines that can't be deduced from first principles. * * * The Code's lines are arbitrary. * * * Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries.” Kim v. Commissioner, 679 F.3d 623, 625-626 (7th Cir. 2012), aff'g T.C. Dkt. No. 11902-10 (May 20, 2011) (bench opinion).
The death benefit of $35,358 that petitioner received was taxable income for 2008. Respondent's determination is sustained.
We have considered all of petitioners' arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1 Petitioners did not address the unreported interest income of $1,121 determined in the notice of deficiency; therefore, this issue is deemed conceded. See Rule 34(b)(4). Respondent concedes the sec. 6662(a) accuracy-related penalty.
2 The Citi death benefit distributions totaled $38,186. There is no explanation in the record for the additional IRA distribution of $8 petitioners reported on their return.
3 The issue before the Court is a legal issue; therefore, secs. 7491(a) and 6201(d) are not applicable.
4 But for sec. 7463(b), an appeal of this case would lie with the Court of Appeals for the Ninth Circuit. Seesec. 7482(b)(1)(A). Therefore, the Court follows the law of that circuit. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
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Charles Grant Beech and Elizabeth A. Beech v. Commissioner.
Docket No. 1948-11S. Filed July 26, 2012.
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
Charles Grant Beech and Elizabeth A. Beech, pro sese. L. Katrine Shelton, for respondent.
SUMMARY OPINION
DEAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Respondent issued a notice of deficiency (notice) to petitioners in which he determined a deficiency of $9,212 for 2008 as well as a section 6662(a) accuracy-related penalty of $1,842. After concessions, 1 the issue for decision is whether petitioners received taxable income when Elizabeth Beech (petitioner) received a death benefit distribution of $35,358 from her mother's individual retirement account (IRA).
Background
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by reference. Petitioners resided in California when they filed their petition.
Petitioner's mother died on March 22, 2008. Petitioner was the beneficiary of her mother's traditional IRA that was managed by Citi Smith Barney (Citi). Citi made two death benefit distributions to petitioner—one on May 21, 2008, for $2,828 and one on May 23, 2008, for $35,358. The distribution check for $35,358 was made out to petitioner.
Petitioner established an inherited traditional IRA with American Funds and deposited the death benefit distribution of $35,358 into the inherited traditional IRA in June 2008.
Petitioners reported an IRA distribution of $38,194 on line 15a, IRA distributions, on their 2008 Form 1040, U.S. Individual Income Tax Return. 2 They reported $2,828 as the taxable amount of the distribution on line 15b of their return.
Respondent issued petitioners the notice in which he determined that all of the retirement income petitioners reported on their 2008 return was taxable income.
Discussion 3
Section 61(a) requires taxpayers to include in gross income all income from whatever source derived. Exclusions from income are to be narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
Amounts paid or distributed out of an IRA are generally includible in gross income by the payee or distributee. Sec. 408(d)(1). Section 408(d)(3) provides, however, that a distribution is not includible in gross income if the entire amount of the distribution received by an individual is paid into a qualified IRA for the benefit of that individual within 60 days of the distribution. This recontribution is known as a “rollover contribution”. Id.
Rollover treatment is not available in the case of an inherited IRA. Sec. 408(d)(3)(C). An IRA is treated as inherited for purposes of section 408(d)(3)(C) if the individual for whose benefit the account or annuity is maintained acquired that account by reason of the death of another individual who was not his or her spouse. Sec. 408(d)(3)(C)(ii).
A taxpayer is not treated as having received a taxable distribution from an IRA, however, if funds in the IRA are transferred from one account trustee directly to another account trustee without the IRA owner's or beneficiary's ever gaining control or use of the funds. See Jankelovits v. Commissioner, T.C. Memo. 2008-285 (citing Rev. Rul. 78-406, 1978-2 C.B. 157, Crow v. Commissioner, T.C. Memo. 2002-178, and Martin v. Commissioner, T.C. Memo. 1992-331, aff'd without published opinion, 987 F.2d 770 (5th Cir. 1993)).
The funds in issue were paid from petitioner's mother's IRA to petitioner because she was the named beneficiary. Citi issued petitioner a check, and she deposited the funds into an IRA account managed by American Funds. The funds were from an inherited IRA, leaving a trustee-to-trustee transfer as the only basis upon which a nontaxable transfer of the funds could be effected. See Jankelovits v. Commissioner, T.C. Memo. 2008-285.
Although petitioners argue that their intent was to effect a trustee-to-trustee transfer, it is well established that a taxpayer's intention to take advantage of tax laws does not determine the tax consequences of his or her transactions. Bezdjian v. Commissioner, 845 F.2d 217 (9th Cir. 1988), aff'g T.C. Memo. 1987-140; Carlton v. United States, 385 F.2d 238, 243 (5th Cir. 1967) (citing Commissioner v. Duberstein, 363 U.S. 278, 286 (1960)). What actually was done determines the tax treatment of a transaction. Weiss v. Stearn, 265 U.S. 242, 254 (1924).
Petitioners also argue that they substantially complied with the requirements of section 408(d)(3)(A)(i) and that Wood v. Commissioner, 93 T.C. 114 (1989), supports their argument.
In Wood the taxpayer retired and received a lump-sum distribution of cash and stocks from his employer's profit-sharing plan. He established an IRA with Merrill Lynch and instructed the account executive to transfer the entire distribution into the IRA to effect a nontaxable transfer of the funds.
The account executive assured the taxpayer that the transfer would be made within the applicable 60-day period. The cash and stock were transferred into the IRA within the 60-day rollover period, but because of a bookkeeping error the stock transfer was erroneously indicated as not having occurred until after the rollover period had elapsed.
The Court found that the taxpayer substantially complied with the 60-day rollover period because: (1) he requested that the entire distribution be transferred to the IRA and (2) when bookkeeping “entries are at variance with the facts, the decision must rest on the facts.” Wood v. Commissioner, 93 T.C. at 121 (citing Dean v. Commissioner, 57 T.C. 32, 44 (1971), Kaplan v. Commissioner, 21 T.C. 134, 140 (1953), Lanteen Med. Labs., Inc. v. Commissioner, 10 T.C. 279, 288 (1948), and Elkins v. Commissioner, 12 B.T.A. 1058 (1928)).
Petitioners' reliance on Wood is misplaced. Generally, this Court applies the doctrine of substantial compliance “to excuse taxpayers from strict compliance with procedural regulatory requirements”. Dirks v. Commissioner, T.C. Memo. 2004-138 (citing Estate of Chamberlain v. Commissioner, T.C. Memo. 1999-181 (and cases cited therein), aff'd, 9 Fed. Appx. 713 (9th Cir. 2001)), aff'd, 154 Fed. Appx. 614 (9th Cir. 2005). Although the Court of Appeals for the Ninth Circuit 4 has indicated that the doctrine may also be applied to “statutory prerequisites”, it can only be applied “where invocation thereof would not defeat the policies of the underlying statutory provisions.” Sawyer v. Cnty. of Sonoma, 719 F.2d 1001, 1008 (9th Cir. 1983). Petitioners do not ask to be excused from a statutory prerequisite but ask to be excused from an express statutory prohibition.
The Court cannot find that petitioners substantially complied with section 408(d)(3)(A)(i) because section 408(d)(3)(C) expressly denies rollover treatment to an inherited IRA. “Many parts of the tax code are compromises, and all parts reflect the need for lines that can't be deduced from first principles. * * * The Code's lines are arbitrary. * * * Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries.” Kim v. Commissioner, 679 F.3d 623, 625-626 (7th Cir. 2012), aff'g T.C. Dkt. No. 11902-10 (May 20, 2011) (bench opinion).
The death benefit of $35,358 that petitioner received was taxable income for 2008. Respondent's determination is sustained.
We have considered all of petitioners' arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1 Petitioners did not address the unreported interest income of $1,121 determined in the notice of deficiency; therefore, this issue is deemed conceded. See Rule 34(b)(4). Respondent concedes the sec. 6662(a) accuracy-related penalty.
2 The Citi death benefit distributions totaled $38,186. There is no explanation in the record for the additional IRA distribution of $8 petitioners reported on their return.
3 The issue before the Court is a legal issue; therefore, secs. 7491(a) and 6201(d) are not applicable.
4 But for sec. 7463(b), an appeal of this case would lie with the Court of Appeals for the Ninth Circuit. Seesec. 7482(b)(1)(A). Therefore, the Court follows the law of that circuit. See Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Minister Payroll Tax
USTC Cases, Gilbert Vaughn and Corletta J. Vaughn, Appelants v. Internal Revenue Service, Appelee., U.S. District Court, E.D. North Carolina, 2012-2 U.S.T.C. ¶50,487, (Jul. 24, 2012)
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Gilbert Vaughn and Corletta J. Vaughn, Appelants v. Internal Revenue Service, Appelee.
U.S. District Court, E.D. North Carolina, East. Div.; 4:11-CV-222-FL, July 24, 2012.
ORDER
FLANAGAN, United States District Judge: This matter is before the court on appeal from order of the United States Bankruptcy Court, dated October 17, 2011. Appellants filed notice of appeal in this court on December 23, 2011, pursuant to 28 U.S.C. §158(a) and Rule 8001 of the Federal Rules of Bankruptcy Procedure. The appeal has been fully briefed, and the matter is now ripe for decision. For the reasons that follow, the decision below is affirmed.
BACKGROUND
Neither appellants nor appellee object to the bankruptcy court's recitation of the case background. As such, the court incorporates and adopts the same in pertinent part.
On September 17, 2009, [appellants] filed petition for relief under Chapter 13 of the United States Bankruptcy Code. On October 20, 2009, the IRS filed their original proof of claim, Claim No. 6-1, in the amount of $111,645.48. That claim has since been amended four times. On April 21, 2010, the IRS filed their most recent amended proof of claim, Claim No. 6-4 (the “Claim”) in the amount of $88,475.17, for civil penalties related to unpaid employment taxes and for income tax liabilities pursuant to 26 U.S.C. §6672, the Trust Fund Recovery Penalty (the “TFRP”). [Appellants] objected to the Claim on December 15, 2009, asserting that Corletta J. Vaughn (“Ms. Vaughn”) was not a responsible party pursuant to 26 U.S.C. §6672(a) during the relevant time periods and that the TFRP was improperly assessed.
Go Tell It Evangelistic Ministry (“GTI”) failed to remit to the United States payroll taxes for the quarters ending June 30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, and March 31, 2004.
Ms. Vaughn founded GTI. GTI was incorporated in 1984 and is located in Detroit, Michigan. GTI is a 26 U.S.C. §501(c)(3) organization and has no stockholders or owners. GTI was an umbrella entity that had oversight of five different divisions: (1) the Holy Ghost Full Gospel Church (the “Holy Ghost Church”); (2) Go Tell It Evangelistic Ministry; (3) Go Tell It Network; (4) Spread the Word Media; and (5) KFBC School. Ms. Vaughn was actively involved in all five of the divisions and was considered the “face” or spokesperson of GTI.
Ms. Vaughn's father founded the Holy Ghost Missionary Baptist Church in 1972. The Holy Ghost Church is a church that holds services twice a week. Ms. Vaughn became an associate minister of the Holy Ghost Church and her father trained her. Ms. Vaughn's father passed away in 1993. Ms. Vaughn became the Senior Pastor of the Holy Ghost Church. Over time, Ms. Vaughn created the five divisions of GTI as outreach ministries. The five divisions kept separate monetary accounts and forwarded funds to GTI to cover expenses. At all relevant times, GTI's officers were Ms. Vaughn, the President, CEO and Chief Apostle, Gilbert Vaughn, the Chief Financial Officer and Ruth Sinclair, the Comptroller …
In 1999, Ruth Adams (“Ms. Adams”) was appointed as GTI's Fiscal Administrator. Prior to her appointment as Fiscal Administrator, Ms. Adams was a Trustee and Elder of the Holy Ghost Church. She was also involved in the accounting and financial duties of GTI as a volunteer. In 1999, Ms. Adams discovered there was a problem with payroll tax accounting and payments with respect to GTI. It became apparent that the hired employee responsible for payroll had not been remitting the proper amount of employment taxes to the United States. Ms. Adams made Ms. Vaughn aware that the employment taxes were not being paid. In response, Ms. Vaughn created the Fiscal Affairs Department and the Fiscal Administrator position. The Fiscal Affairs Department and the Fiscal Administrator consolidated the accounting and financial functions of the five different divisions under one department. Ms. Adams was to oversee the payroll and accounting functions of GTI and eventually pay off any outstanding tax liabilities. In 2000, GTI entered into a payment Plan with the IRS, regarding GTI's failure to remit employment taxes for the quarter ending March 31, 2002. These quarter payments were paid off in November 2002. Although, GTI paid off the amount owed for the quarter ending March 31, 2002, it failed to pay employment taxes for the second, third and fourth quarters of 2002 and the first and second quarter of 2003.
The Form 941s 1 filed by Ms. Adams for the quarters ending June 30, 2002 through June 30, 2003 showed significant unpaid taxes and little to no payments for any of the quarters.
Ms. Vaughn regularly traveled the country doing speaking engagements for GTI's outreach ministries. On January 6, 2003, Ms. Vaughn's husband became ill. In April, 2003, Ms. Vaughn and her husband moved to North Carolina. In May 2003, Ms. Vaughn resigned as Senior Pastor and began caring for her husband. Throughout this period, Ms. Vaughn remained the CEO and President of GTI.
In June 2003, Ms. Vaughn returned to Michigan to deal with GTI's significant financial difficulties. During this visit, Ms. Vaughn sent an inter-office memorandum directing that “no disbursements to vendors or to staff are to be made until further notice except to Pastor Clifton Jefferson and myself, effective immediately.” As a result, many of GTI's employees, including Ms. Adams resigned.
Bankruptcy Order, DE # 1-1, 1-4.
Before the bankruptcy court, appellants argued that Ms. Vaughn should have no personal responsibility for the claim because she was not a responsible person under 26 U.S.C. §6672(a) and that even if Ms. Vaughn was found to be a responsible person under the statute, she did not act willfully. Additionally, appellants argued that the TFRP was improperly assessed against Ms. Vaughn because she was denied an administrative appeal of the IRS assessment.
The bankruptcy court conducted hearing on July 27, 2011, and telephonic hearing on October 17, 2011. Before the October 2011, hearing, the bankruptcy court requested and received additional documentation from the parties, including copy of the corporate bylaws of GTI Ministry Worldwide and The Holy Ghost Full Gospel Church as well as an invoice from appellee representing the taxes and penalties assessed against Ms. Vaughn as a responsible person of GTI. In order entered October 17, 2011, the bankrtupcy court overruled appellants' objections to the appellee's claim. The bankruptcy court first concluded that Ms. Vaughn was a “responsible person” pursuant to 26 U.S.C. §6672(a). The bankruptcy court considered the GTI bylaws in making its determination.
The GTI Bylaws provide that the Chief Apostle shall act “as CEO over all spiritual and business matters.” Additionally, the bylaws provide that the Chief Apostle shall be the “Chief Executive Officer of the said organization and shall be a continuing member of all boards and committees.” The Chief Apostle “shall be an ex-officio member of all standing committees, and shall have the general powers and duties of supervision and management usually vested in the office of president of a corporation.”
Bankruptcy Order, DE # 1-1, 3. 2 The bankruptcy court also considered other evidence in finding that Ms. Vaughn was a responsible person, including Ms. Vaughn's own testimony, statements of others, and Ms. Vaughn's actions as Chief Apostle of GTI. Appellants take issue with the bankruptcy court's interpretation of the GTI bylaws.
DISCUSSION
A. Standard of Review
This court has appellate jurisdiction pursuant to 28 U.S.C. §158(a)(1) to review the bankruptcy court's order. “On an appeal [from the bankruptcy court] the district court … may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” Fed. R. Bankr. P. 8013. Findings of fact are reviewed for clear error, and questions of law are reviewed de novo. Bowers v. Atlanta Motor Speedway (In re Southeast Hotel Properties Ltd. Partnership), 99 F.3d 151, 154 (4th Cir. 1996); see also Fed. R. Bankr. P. 8013 (“Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.”).
Appellants have the burden of disproving trust fund assessment liability by a preponderance of the evidence. In re Thorne, No. 09-04515-8-SWH, 2011 WL 1118487, at *2 (Bankr. E.D.N.C. Mar. 24, 2011). Generally, when the debtor has properly objected to the claimant's proof of claim, the claimant has the burden of proof pursuant to 11 U.S.C. §502. Id. In a tax claim matter, however, “the taxpayer has the ‘burden of proving the government's assessment wrong by a preponderance of the evidence.’” Id. (citing United States v. Pomponio, 635 F.2d 293, 297 n. 4 (4th Cir. 1980)).
Federal law requires employers to withhold federal income taxes and social security taxes from employee wages and remit those taxes to the United States. 26 U.S.C. §§3102, 3402, 7501. The employer holds these taxes in trust for the United States. See Slodov v. United States, 436 U.S. 238, 243 (1978). These taxes are often referred to as “trust fund taxes.” Id. The United States has no recourse against individual employees. Therefore, an employer who fails to remit the withheld taxes to the United States, is liable for the taxes which should have been paid. 26 U.S.C. §6672(a).
Section 6672(a) provides:
[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall … be liable to a penalty equal to the total amount of tax evaded, or not collected, or not accounted for and paid over.
26 U.S.C. §6672(a).
Although the employer will remain liable for the unpaid payroll taxes, its officers and agents may incur personal liability for the unpaid payroll taxes. O'Connor v. United States, 956 F.2d 48, 50 (4th Cir. 1992). In order for an individual to be held personally liable under §6672: “(1) the party assessed must be a person required to collect, truthfully account for, and pay over the tax, referred to as a ‘responsible person’; and (2) the responsible person must have willfully failed to insure that the withholding taxes were paid.” Id. at 50 (citing Pomponio, 635 F.2d at 295).
The question of who within the company is a “responsible person” required to collect, truthfully account for and pay the payroll taxes to the United States, is a “pragmatic, substance-over form inquiry into whether an officer or employee so ‘participate[d] in decisions concerning payment of creditors and disbursement of funds’ that he effectively had the authority-and hence a duty-to ensure payment of the corporation's payroll taxes.” Plett v. United States, 185 F.3d 216, 219 (4th Cir. 1999) (citing, O'Connor, 956 F.2d at 51). In other words, the “crucial inquiry is whether the person had the effective power to pay the taxes-that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.” Id. (citation and internal quotation omitted).
When making the determination of who is a “responsible person”, courts have considered several factors which are indicative of this authority including whether the employee: (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-today management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees. Plett, 185 F.3d at 219. No single factor is controlling or dispositive in the responsible person inquiry. See Erwin v. United States, 591 F.3d 313, 321 (4th Cir. 2010).
B. Analysis
Appellants raise one argument on appeal, that the bankruptcy court should not have interpreted GTI's bylaws to determine whether Ms. Vaughn was a responsible person pursuant to 26 U.S.C. §6672(a). Appellants do not object to the bankrtupcy court's factual findings, nor do they object to the bankruptcy court's determination that Ms. Vaughn acted willfully pursuant to §6672(a). Appellants also do not object to the bankruptcy court's finding that appellee did not violate Ms. Vaughn's procedural rights.
The instant appeal is limited to a specific question of law, whether the bankruptcy court violated Ms. Vaughn's and GTI's rights under the free exercise clause and the establishment clause of the First Amendment in its analysis of whether or not Ms. Vaughn was a responsibile person within the meaning as set forth in 26 U.S.C. §6672(a). Appellants argue that the bankruptcy court's decision effectively ordered GTI, a religious organization, to operate in a certain way.
The Free Exercise clause of the First Amendment, made applicable to the states through the Fourteenth amendment, provides that “Congress shall make not law … prohibiting the free exercise” of religion. U.S. Const. amend. 1; Goodall by Goodall v. Stafford County School Bd., 60 F.3d 168, 170 (4th Cir. 1995). The Establishment Clause provides that “Congress shall make no law respecting an establishment of religion.” U.S. Const. amend. 1; Child Evangelism Fellowship of Maryland. Inc. v. Montgomery County Public Schools, 373 F.3d 589, 594 (4th Cir. 2004).
The Fourth Circuit has acknowledged that the civil courts of the United States are obliged to play a limited role at times in resolving church disputes, the limited role being premised on First Amendment principles that preclude a court from deciding issues of religious doctrine and practice, or from interfering with internal church government. Dixon v. Edwards, 290 F.3d 699, 714 (4th Cir. 2002). Civil courts lack any authority to resolve disputes arising under religious law and polity. Id. (citing Serbian E. Orthodox Diocese for the United States & Canada v. Milivojevich, 426 U.S. 696, 709 (1976)). First Amendment values are jeopardized when church litigation turns on the resolution by civil courts of controversies over religious doctrine and practice. Id. at 715. Civil courts must therefore avoid resolving underlying controversies over religious doctrine when deciding church property disputes. Id.; see also Presbyterian Church v. Hull Church, 393 U.S. 440, 449 (1969).
In assessing whether to exercise jurisdiction in a civil proceeding involving a church, the Fourth Circuit has held that it is important to determine whether the church is of a “hierarchical” nature. Dixon, 290 F.3d at 715. If the church is hierarchical, a civil court should defer to the final authority within its hierarchy, and must accept “the ecclesiastical decisions of church tribunals as it finds them … on matters of discipline, faith, internal organization, or ecclesiastical rule, custom or law.” Milivoievich, 426 U.S. at 709-10.
Appellants argue that the bankruptcy court's analysis of Ms. Vaughn's role in GTI, specifically, the bankruptcy court's analysis of the GTI bylaws, effectively “establishes a state regulated religion through judicial fiat.” (Appellants' Brief 7). In support of this claim, appellants cite case law, none of which is on point with the issues presented in the instant case. Minker v. Baltimore Annual Conference of United Methodist Church, 894 F.2d 1354, 1356-57 (D.C. Cir. 1990) and Rayburn v. General Conference of Seventh-Day Adventists, 772 F.2d 1164, 1168 (4th Cir. 1985) address the hiring of religious leaders, an issue not presented in the instant appeal. Similarly, N.L.R.B. v. Catholic Bishop of Chicago, 440 U.S. 490 (1979), involved considerations of government interference with religious schools, particularly in considerations of hiring practices and decision making. 440 U.S. at 502.
Appellants argue that by citing the GTI bylaws, the bankruptcy court is effectively ordering what the President, CEO and Chief Apostle of GTI must do. Even assuming that GTI was hierarchical, appellants do not show how mere citation of the bylaws in the bankruptcy court's order is a challenge to the ecclesiastical decisions or religious customs of GTI in violation of the free exercise or free establishment clauses. In its most favorable light, appellants ask the court to make the logical leap to hold that the mere citation of the church bylaws as part of the responsible person analysis under 26 U.S.C. §6672 is prohibited by the First Amendment. The case law, while limited in this specific context, does not appear to support appellants' argument. See In re Tripplett, 115 B.R. 955, 957 (Bankr. N.D. Ill. 1990) (engaging in similar inquiry as the bankruptcy court did here, yet finding that an individual holding the position of church treasurer and financial secretary was not a responsible person under §6672(a)).
In addition to the lack of support for appellants' First Amendment argument, the bankruptcy court's analysis of the responsible person standard is much broader than appellants suggest. The bankruptcy court focused its analysis on many factors, including Ms. Vaughn's testimony, the GTI bylaws, Ms. Vaughn's actual behavior, and Ms. Adams' testimony. Bankruptcy Order, DE # 1-1, 9-13. The bankruptcy court placed particular emphasis on Ms. Vaughn's actions, including cosigning loans, signing checks on behalf of the corporation, and hiring and firing employees, evidence of what she had actual authority to do. Id. at 12.
Notably, the bankruptcy court's analysis of the GTI bylaws was limited to a few paragraphs in the order overruling appellants' claim objection. Bankruptcy Order, DE # 1-1, 9. The bankruptcy court noted that the bylaws provide that the Chief Apostle shall be the CEO of GTI and a member of all boards and committees and that the Chief Apostle shall execute in the name of GTI deeds, bonds, mortgages, contracts and other documents, and have the powers and duties of supervision and management usually vested in the office of president of a corporation. Appellants' Brief, Ex. 4. The bankruptcy court interpreted the bylaws as authorizing the Chief Apostle to have decision making authority and supervision over business matters. Bankruptcy Order, DE # 1-1, 9. Appellants argue that this interpretation now forces the Chief Apostle of GTI to concern herself with secular affairs. Putting aside the fact that the plain language of the bylaws suggests that the Chief Apostle does concern herself with such affairs, the bankruptcy court did not base its decision on the bylaws alone. Contrarily, close examination of the bankruptcy court's order reveals that it placed great emphasis on what Ms. Vaughn actually did as the Chief Apostle of GTI, including co-signing a $178,000.00 construction loan on behalf of GTI, disbursing and withholding payments to vendors and staff, signing a corporate resolution authorizing a bank account with First Federal Bank of Michigan which authorized Ms. Vaughn to sign checks on behalf of GTI, and hiring and firing employees. Bankruptcy Order, DE # 1-1, 9-13.
Appellants do not contest the bankruptcy court's consideration of Ms. Vaughn's actions, nor doe they contest the documentary evidence showing that she was a responsible person with authority, a person required to collect, truthfully account for, and pay over GTI's taxes. While appellants argue that the bankruptcy court impermissibly interpreted the GTI bylaws in such a way as to infringe upon appellants' First Amendment rights, the court finds no support in the case law that the bankruptcy court's findings or analysis did anything of the kind. As set forth above, appellants' First Amendment argument is not supported by the case law appellants cite, especially in light of the bankruptcy court's consideration of several other significant factors in its analysis finding Ms. Vaughn to be a responsible person.
With no other grounds for appeal presented for this court's consideration, the bankruptcy court's order overruling appellants' claim objection is affirmed.
CONCLUSION
For the foregoing reasons, the court AFFIRMS the bankruptcy court's order overruling appellants' objection to claim. The Clerk is directed to close this case.
SO ORDERED, this the 16 day of July, 2012.
Footnotes
1 Trust fund taxes "are accounted for by the IRS on a quarterly basis through the use of a tax return form known as ‘Form 941.’ Employers must filed Form 941 within one month from the end of the prior quarter, and penalties are assessed for late filings."Farkas v. United States, 57 Fed.Cl. 134, 139 (2003).
2 The bankruptcy court also analyzed the bylaws of the Holy Ghost Church, of which Ms. Vaughn was the senior pastor after her father passed away. As set forth above, the Holy Ghost Church was a division of GTI. Appellants do not raise specific issue regarding the bankruptcy court's consideration of the Holy Ghost Church bylaws.
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Gilbert Vaughn and Corletta J. Vaughn, Appelants v. Internal Revenue Service, Appelee.
U.S. District Court, E.D. North Carolina, East. Div.; 4:11-CV-222-FL, July 24, 2012.
ORDER
FLANAGAN, United States District Judge: This matter is before the court on appeal from order of the United States Bankruptcy Court, dated October 17, 2011. Appellants filed notice of appeal in this court on December 23, 2011, pursuant to 28 U.S.C. §158(a) and Rule 8001 of the Federal Rules of Bankruptcy Procedure. The appeal has been fully briefed, and the matter is now ripe for decision. For the reasons that follow, the decision below is affirmed.
BACKGROUND
Neither appellants nor appellee object to the bankruptcy court's recitation of the case background. As such, the court incorporates and adopts the same in pertinent part.
On September 17, 2009, [appellants] filed petition for relief under Chapter 13 of the United States Bankruptcy Code. On October 20, 2009, the IRS filed their original proof of claim, Claim No. 6-1, in the amount of $111,645.48. That claim has since been amended four times. On April 21, 2010, the IRS filed their most recent amended proof of claim, Claim No. 6-4 (the “Claim”) in the amount of $88,475.17, for civil penalties related to unpaid employment taxes and for income tax liabilities pursuant to 26 U.S.C. §6672, the Trust Fund Recovery Penalty (the “TFRP”). [Appellants] objected to the Claim on December 15, 2009, asserting that Corletta J. Vaughn (“Ms. Vaughn”) was not a responsible party pursuant to 26 U.S.C. §6672(a) during the relevant time periods and that the TFRP was improperly assessed.
Go Tell It Evangelistic Ministry (“GTI”) failed to remit to the United States payroll taxes for the quarters ending June 30, 2002, September 30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003, December 31, 2003, and March 31, 2004.
Ms. Vaughn founded GTI. GTI was incorporated in 1984 and is located in Detroit, Michigan. GTI is a 26 U.S.C. §501(c)(3) organization and has no stockholders or owners. GTI was an umbrella entity that had oversight of five different divisions: (1) the Holy Ghost Full Gospel Church (the “Holy Ghost Church”); (2) Go Tell It Evangelistic Ministry; (3) Go Tell It Network; (4) Spread the Word Media; and (5) KFBC School. Ms. Vaughn was actively involved in all five of the divisions and was considered the “face” or spokesperson of GTI.
Ms. Vaughn's father founded the Holy Ghost Missionary Baptist Church in 1972. The Holy Ghost Church is a church that holds services twice a week. Ms. Vaughn became an associate minister of the Holy Ghost Church and her father trained her. Ms. Vaughn's father passed away in 1993. Ms. Vaughn became the Senior Pastor of the Holy Ghost Church. Over time, Ms. Vaughn created the five divisions of GTI as outreach ministries. The five divisions kept separate monetary accounts and forwarded funds to GTI to cover expenses. At all relevant times, GTI's officers were Ms. Vaughn, the President, CEO and Chief Apostle, Gilbert Vaughn, the Chief Financial Officer and Ruth Sinclair, the Comptroller …
In 1999, Ruth Adams (“Ms. Adams”) was appointed as GTI's Fiscal Administrator. Prior to her appointment as Fiscal Administrator, Ms. Adams was a Trustee and Elder of the Holy Ghost Church. She was also involved in the accounting and financial duties of GTI as a volunteer. In 1999, Ms. Adams discovered there was a problem with payroll tax accounting and payments with respect to GTI. It became apparent that the hired employee responsible for payroll had not been remitting the proper amount of employment taxes to the United States. Ms. Adams made Ms. Vaughn aware that the employment taxes were not being paid. In response, Ms. Vaughn created the Fiscal Affairs Department and the Fiscal Administrator position. The Fiscal Affairs Department and the Fiscal Administrator consolidated the accounting and financial functions of the five different divisions under one department. Ms. Adams was to oversee the payroll and accounting functions of GTI and eventually pay off any outstanding tax liabilities. In 2000, GTI entered into a payment Plan with the IRS, regarding GTI's failure to remit employment taxes for the quarter ending March 31, 2002. These quarter payments were paid off in November 2002. Although, GTI paid off the amount owed for the quarter ending March 31, 2002, it failed to pay employment taxes for the second, third and fourth quarters of 2002 and the first and second quarter of 2003.
The Form 941s 1 filed by Ms. Adams for the quarters ending June 30, 2002 through June 30, 2003 showed significant unpaid taxes and little to no payments for any of the quarters.
Ms. Vaughn regularly traveled the country doing speaking engagements for GTI's outreach ministries. On January 6, 2003, Ms. Vaughn's husband became ill. In April, 2003, Ms. Vaughn and her husband moved to North Carolina. In May 2003, Ms. Vaughn resigned as Senior Pastor and began caring for her husband. Throughout this period, Ms. Vaughn remained the CEO and President of GTI.
In June 2003, Ms. Vaughn returned to Michigan to deal with GTI's significant financial difficulties. During this visit, Ms. Vaughn sent an inter-office memorandum directing that “no disbursements to vendors or to staff are to be made until further notice except to Pastor Clifton Jefferson and myself, effective immediately.” As a result, many of GTI's employees, including Ms. Adams resigned.
Bankruptcy Order, DE # 1-1, 1-4.
Before the bankruptcy court, appellants argued that Ms. Vaughn should have no personal responsibility for the claim because she was not a responsible person under 26 U.S.C. §6672(a) and that even if Ms. Vaughn was found to be a responsible person under the statute, she did not act willfully. Additionally, appellants argued that the TFRP was improperly assessed against Ms. Vaughn because she was denied an administrative appeal of the IRS assessment.
The bankruptcy court conducted hearing on July 27, 2011, and telephonic hearing on October 17, 2011. Before the October 2011, hearing, the bankruptcy court requested and received additional documentation from the parties, including copy of the corporate bylaws of GTI Ministry Worldwide and The Holy Ghost Full Gospel Church as well as an invoice from appellee representing the taxes and penalties assessed against Ms. Vaughn as a responsible person of GTI. In order entered October 17, 2011, the bankrtupcy court overruled appellants' objections to the appellee's claim. The bankruptcy court first concluded that Ms. Vaughn was a “responsible person” pursuant to 26 U.S.C. §6672(a). The bankruptcy court considered the GTI bylaws in making its determination.
The GTI Bylaws provide that the Chief Apostle shall act “as CEO over all spiritual and business matters.” Additionally, the bylaws provide that the Chief Apostle shall be the “Chief Executive Officer of the said organization and shall be a continuing member of all boards and committees.” The Chief Apostle “shall be an ex-officio member of all standing committees, and shall have the general powers and duties of supervision and management usually vested in the office of president of a corporation.”
Bankruptcy Order, DE # 1-1, 3. 2 The bankruptcy court also considered other evidence in finding that Ms. Vaughn was a responsible person, including Ms. Vaughn's own testimony, statements of others, and Ms. Vaughn's actions as Chief Apostle of GTI. Appellants take issue with the bankruptcy court's interpretation of the GTI bylaws.
DISCUSSION
A. Standard of Review
This court has appellate jurisdiction pursuant to 28 U.S.C. §158(a)(1) to review the bankruptcy court's order. “On an appeal [from the bankruptcy court] the district court … may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” Fed. R. Bankr. P. 8013. Findings of fact are reviewed for clear error, and questions of law are reviewed de novo. Bowers v. Atlanta Motor Speedway (In re Southeast Hotel Properties Ltd. Partnership), 99 F.3d 151, 154 (4th Cir. 1996); see also Fed. R. Bankr. P. 8013 (“Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.”).
Appellants have the burden of disproving trust fund assessment liability by a preponderance of the evidence. In re Thorne, No. 09-04515-8-SWH, 2011 WL 1118487, at *2 (Bankr. E.D.N.C. Mar. 24, 2011). Generally, when the debtor has properly objected to the claimant's proof of claim, the claimant has the burden of proof pursuant to 11 U.S.C. §502. Id. In a tax claim matter, however, “the taxpayer has the ‘burden of proving the government's assessment wrong by a preponderance of the evidence.’” Id. (citing United States v. Pomponio, 635 F.2d 293, 297 n. 4 (4th Cir. 1980)).
Federal law requires employers to withhold federal income taxes and social security taxes from employee wages and remit those taxes to the United States. 26 U.S.C. §§3102, 3402, 7501. The employer holds these taxes in trust for the United States. See Slodov v. United States, 436 U.S. 238, 243 (1978). These taxes are often referred to as “trust fund taxes.” Id. The United States has no recourse against individual employees. Therefore, an employer who fails to remit the withheld taxes to the United States, is liable for the taxes which should have been paid. 26 U.S.C. §6672(a).
Section 6672(a) provides:
[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall … be liable to a penalty equal to the total amount of tax evaded, or not collected, or not accounted for and paid over.
26 U.S.C. §6672(a).
Although the employer will remain liable for the unpaid payroll taxes, its officers and agents may incur personal liability for the unpaid payroll taxes. O'Connor v. United States, 956 F.2d 48, 50 (4th Cir. 1992). In order for an individual to be held personally liable under §6672: “(1) the party assessed must be a person required to collect, truthfully account for, and pay over the tax, referred to as a ‘responsible person’; and (2) the responsible person must have willfully failed to insure that the withholding taxes were paid.” Id. at 50 (citing Pomponio, 635 F.2d at 295).
The question of who within the company is a “responsible person” required to collect, truthfully account for and pay the payroll taxes to the United States, is a “pragmatic, substance-over form inquiry into whether an officer or employee so ‘participate[d] in decisions concerning payment of creditors and disbursement of funds’ that he effectively had the authority-and hence a duty-to ensure payment of the corporation's payroll taxes.” Plett v. United States, 185 F.3d 216, 219 (4th Cir. 1999) (citing, O'Connor, 956 F.2d at 51). In other words, the “crucial inquiry is whether the person had the effective power to pay the taxes-that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.” Id. (citation and internal quotation omitted).
When making the determination of who is a “responsible person”, courts have considered several factors which are indicative of this authority including whether the employee: (1) served as an officer of the company or as a member of its board of directors; (2) controlled the company's payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the day-today management of the corporation; (5) possessed the power to write checks; and (6) had the ability to hire and fire employees. Plett, 185 F.3d at 219. No single factor is controlling or dispositive in the responsible person inquiry. See Erwin v. United States, 591 F.3d 313, 321 (4th Cir. 2010).
B. Analysis
Appellants raise one argument on appeal, that the bankruptcy court should not have interpreted GTI's bylaws to determine whether Ms. Vaughn was a responsible person pursuant to 26 U.S.C. §6672(a). Appellants do not object to the bankrtupcy court's factual findings, nor do they object to the bankruptcy court's determination that Ms. Vaughn acted willfully pursuant to §6672(a). Appellants also do not object to the bankruptcy court's finding that appellee did not violate Ms. Vaughn's procedural rights.
The instant appeal is limited to a specific question of law, whether the bankruptcy court violated Ms. Vaughn's and GTI's rights under the free exercise clause and the establishment clause of the First Amendment in its analysis of whether or not Ms. Vaughn was a responsibile person within the meaning as set forth in 26 U.S.C. §6672(a). Appellants argue that the bankruptcy court's decision effectively ordered GTI, a religious organization, to operate in a certain way.
The Free Exercise clause of the First Amendment, made applicable to the states through the Fourteenth amendment, provides that “Congress shall make not law … prohibiting the free exercise” of religion. U.S. Const. amend. 1; Goodall by Goodall v. Stafford County School Bd., 60 F.3d 168, 170 (4th Cir. 1995). The Establishment Clause provides that “Congress shall make no law respecting an establishment of religion.” U.S. Const. amend. 1; Child Evangelism Fellowship of Maryland. Inc. v. Montgomery County Public Schools, 373 F.3d 589, 594 (4th Cir. 2004).
The Fourth Circuit has acknowledged that the civil courts of the United States are obliged to play a limited role at times in resolving church disputes, the limited role being premised on First Amendment principles that preclude a court from deciding issues of religious doctrine and practice, or from interfering with internal church government. Dixon v. Edwards, 290 F.3d 699, 714 (4th Cir. 2002). Civil courts lack any authority to resolve disputes arising under religious law and polity. Id. (citing Serbian E. Orthodox Diocese for the United States & Canada v. Milivojevich, 426 U.S. 696, 709 (1976)). First Amendment values are jeopardized when church litigation turns on the resolution by civil courts of controversies over religious doctrine and practice. Id. at 715. Civil courts must therefore avoid resolving underlying controversies over religious doctrine when deciding church property disputes. Id.; see also Presbyterian Church v. Hull Church, 393 U.S. 440, 449 (1969).
In assessing whether to exercise jurisdiction in a civil proceeding involving a church, the Fourth Circuit has held that it is important to determine whether the church is of a “hierarchical” nature. Dixon, 290 F.3d at 715. If the church is hierarchical, a civil court should defer to the final authority within its hierarchy, and must accept “the ecclesiastical decisions of church tribunals as it finds them … on matters of discipline, faith, internal organization, or ecclesiastical rule, custom or law.” Milivoievich, 426 U.S. at 709-10.
Appellants argue that the bankruptcy court's analysis of Ms. Vaughn's role in GTI, specifically, the bankruptcy court's analysis of the GTI bylaws, effectively “establishes a state regulated religion through judicial fiat.” (Appellants' Brief 7). In support of this claim, appellants cite case law, none of which is on point with the issues presented in the instant case. Minker v. Baltimore Annual Conference of United Methodist Church, 894 F.2d 1354, 1356-57 (D.C. Cir. 1990) and Rayburn v. General Conference of Seventh-Day Adventists, 772 F.2d 1164, 1168 (4th Cir. 1985) address the hiring of religious leaders, an issue not presented in the instant appeal. Similarly, N.L.R.B. v. Catholic Bishop of Chicago, 440 U.S. 490 (1979), involved considerations of government interference with religious schools, particularly in considerations of hiring practices and decision making. 440 U.S. at 502.
Appellants argue that by citing the GTI bylaws, the bankruptcy court is effectively ordering what the President, CEO and Chief Apostle of GTI must do. Even assuming that GTI was hierarchical, appellants do not show how mere citation of the bylaws in the bankruptcy court's order is a challenge to the ecclesiastical decisions or religious customs of GTI in violation of the free exercise or free establishment clauses. In its most favorable light, appellants ask the court to make the logical leap to hold that the mere citation of the church bylaws as part of the responsible person analysis under 26 U.S.C. §6672 is prohibited by the First Amendment. The case law, while limited in this specific context, does not appear to support appellants' argument. See In re Tripplett, 115 B.R. 955, 957 (Bankr. N.D. Ill. 1990) (engaging in similar inquiry as the bankruptcy court did here, yet finding that an individual holding the position of church treasurer and financial secretary was not a responsible person under §6672(a)).
In addition to the lack of support for appellants' First Amendment argument, the bankruptcy court's analysis of the responsible person standard is much broader than appellants suggest. The bankruptcy court focused its analysis on many factors, including Ms. Vaughn's testimony, the GTI bylaws, Ms. Vaughn's actual behavior, and Ms. Adams' testimony. Bankruptcy Order, DE # 1-1, 9-13. The bankruptcy court placed particular emphasis on Ms. Vaughn's actions, including cosigning loans, signing checks on behalf of the corporation, and hiring and firing employees, evidence of what she had actual authority to do. Id. at 12.
Notably, the bankruptcy court's analysis of the GTI bylaws was limited to a few paragraphs in the order overruling appellants' claim objection. Bankruptcy Order, DE # 1-1, 9. The bankruptcy court noted that the bylaws provide that the Chief Apostle shall be the CEO of GTI and a member of all boards and committees and that the Chief Apostle shall execute in the name of GTI deeds, bonds, mortgages, contracts and other documents, and have the powers and duties of supervision and management usually vested in the office of president of a corporation. Appellants' Brief, Ex. 4. The bankruptcy court interpreted the bylaws as authorizing the Chief Apostle to have decision making authority and supervision over business matters. Bankruptcy Order, DE # 1-1, 9. Appellants argue that this interpretation now forces the Chief Apostle of GTI to concern herself with secular affairs. Putting aside the fact that the plain language of the bylaws suggests that the Chief Apostle does concern herself with such affairs, the bankruptcy court did not base its decision on the bylaws alone. Contrarily, close examination of the bankruptcy court's order reveals that it placed great emphasis on what Ms. Vaughn actually did as the Chief Apostle of GTI, including co-signing a $178,000.00 construction loan on behalf of GTI, disbursing and withholding payments to vendors and staff, signing a corporate resolution authorizing a bank account with First Federal Bank of Michigan which authorized Ms. Vaughn to sign checks on behalf of GTI, and hiring and firing employees. Bankruptcy Order, DE # 1-1, 9-13.
Appellants do not contest the bankruptcy court's consideration of Ms. Vaughn's actions, nor doe they contest the documentary evidence showing that she was a responsible person with authority, a person required to collect, truthfully account for, and pay over GTI's taxes. While appellants argue that the bankruptcy court impermissibly interpreted the GTI bylaws in such a way as to infringe upon appellants' First Amendment rights, the court finds no support in the case law that the bankruptcy court's findings or analysis did anything of the kind. As set forth above, appellants' First Amendment argument is not supported by the case law appellants cite, especially in light of the bankruptcy court's consideration of several other significant factors in its analysis finding Ms. Vaughn to be a responsible person.
With no other grounds for appeal presented for this court's consideration, the bankruptcy court's order overruling appellants' claim objection is affirmed.
CONCLUSION
For the foregoing reasons, the court AFFIRMS the bankruptcy court's order overruling appellants' objection to claim. The Clerk is directed to close this case.
SO ORDERED, this the 16 day of July, 2012.
Footnotes
1 Trust fund taxes "are accounted for by the IRS on a quarterly basis through the use of a tax return form known as ‘Form 941.’ Employers must filed Form 941 within one month from the end of the prior quarter, and penalties are assessed for late filings."Farkas v. United States, 57 Fed.Cl. 134, 139 (2003).
2 The bankruptcy court also analyzed the bylaws of the Holy Ghost Church, of which Ms. Vaughn was the senior pastor after her father passed away. As set forth above, the Holy Ghost Church was a division of GTI. Appellants do not raise specific issue regarding the bankruptcy court's consideration of the Holy Ghost Church bylaws.
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