Opinion
3:18-cv-01598-AR
07-15-2022
UNITED STATES OF AMERICA, Plaintiff, v. KAREN L. CARLSON; CHARLES HARMAN; YAMHILL COUNTY, OREGON; OCWEN FINANCIAL CORPORATION; OREGON DEPARTMENT OF REVENUE; JULIE M. PETTIT; MARTIN J. STRELECKY; TERESA A. STRELECKY, Defendants.
FINDINGS AND RECOMMENDATION
JEFFREY ARMISTEAD United States Magistrate Judge
The United States brings this action under 26 U.S.C. § 7402(a) to reduce to judgment federal income tax assessments against defendants Karen L. Carlson and Charles Harman, a married couple, and to determine that federal tax liens attach to certain real property (the “subject property”) located in Yamhill County, Oregon. Pl. Mot. for Summ. J. at 2, ECF No. 71. The United States also requests a declaration that it “has valid liens [on the subject property] that can be foreclosed at a later date when appropriate in light of the COVID-19 pandemic.” Id.
The United States moved for summary judgment. After that motion was filed, the court noticed Carlson and Harman, who are proceeding pro se in this action, with an explanation of what Rule 56 of the Federal Rules of Civil Procedure requires in response to the summary judgment motion. Summ. J. Advice Notice, ECF No. 73. Carlson and Harman responded but did not submit any declarations, affidavits, or other evidence to dispute fact underlying their respective tax liabilities. Resp. to Mot. for Summ. J. (“Resp.”), ECF No. 76. Instead, they challenge their legal obligations to pay taxes.
For the following reasons, the court recommends granting summary judgment for the United States.
BACKGROUND
Karen Carlson and Charles Harman are a married couple who, for many years, refused to file federal tax returns and pay federal taxes assessed against them. Dep. of Charles Harman (“Harman Dep.”) 65:11-19, ECF No. 71-12; Decl. of Revenue Officer Ronda Wright (“Wright Decl.”) ¶ 8, Exs. 1-11 (“Certification of Lack of Record” showing that Carlson and Harman did not file tax returns for the years at issue), ECF Nos. 71-2, 71-3, 71-4. In this action, the United States seeks an entry of judgment against Carlson for tax years 2001-2004 and 2010-2011, and against Harman for tax years 2000-2004. Pl. Mot. for Summ. J. at 2. To support that request, the United States has submitted evidence that Carlson and Harman each earned monetary compensation for private-sector work during the respective years at issue. See id. at 13-14.
Except for a gap from 2006 to 2010, Carlson has worked as a mortgage underwriter and in various managerial positions for mortgage underwriting companies since the late 1990s. Dep. of Karen Carlson (“Carlson Dep.”) 23:18-23, ECF No. 71-11. Carlson worked for Eagle Home Mortgage between 2000 and 2004, and for Pinnacle Capital Mortgage Group from 2010 to 2012. Carlson Dep. 23:18-23; 54:23-55:8. Carlson acknowledges that both companies paid her for her work, treated her as an employee, and issued her W-2s. Carlson Depo. 26:3-25; 27:15-18.
Harman worked as a real estate appraiser throughout the 1990s and 2000s. Harman Dep. 22:13-18. For part of 2000, he worked at his own business, Harman & Associates. Harman Dep. 23:15-21. Harman & Associates had over a dozen employees, and Harman frequently performed many appraisals per day, often for mortgage companies. Harman Dep. 39:20-25. Harman & Associates generally charged several hundred dollars per appraisal, and Harman and his company's employees earned commissions on the appraisals. Harman Dep. 55:1-10; 29:1230:10. Harman did not have a salary at Harman & Associates, but he received compensation by taking ownership draws from the business bank account, which was funded from client payments for appraisals. Harman Dep. 55:10-17; 57:18-25.
From late 2000 through 2004, Harman worked as an appraiser for The Measure of Value. Harman Dep. 23:3-21. Like Harman & Associates, the Measure of Value employed appraisers and conducted appraisals for mortgage companies. Harman Dep. 29:12-30:10; 39:19-25. Harman admits that he received monetary compensation for his services at The Measure of Value, but he states that his salary was essentially “non-existent.” Harman Dep. 58:8-15. Although Harman did not own the Measure of Value, he withdrew funds from the business's bank account to compensate himself for his appraisal and management services. Harman Dep. 58:16-19.
Carlson and Harman did not pay federal income tax for the years at issue. Wright Decl. ¶ 8, Exs. 1-11. Although Carlson acknowledges that she received monetary compensation for the work that she performed in 2001-2004 and 2010-2011, she claims that she did not receive “wages” or “taxable income” because she did not perform “federally connected work.” Carlson Dep. 56:23-57:18. On that basis, she also challenges the validity of her W-2s for those years, although she admits that the amount of compensation reported on those forms is accurate. Carlson Dep. 59:1-15. Harman likewise acknowledges that, from 2000-2004, he earned money for his appraisal services at Harman & Associates and the Measure of Value, but he claims that this money is not taxable because his work was not “federally connected” and he was not a “federal employee.” Harman Dep. 61:11-17; 62:20-22.
Because Carlson did not file federal tax returns for tax years 2001-2004 and 2010-2011, the IRS conducted an investigation to determine her tax liability, prepared a return in accordance with 26 U.S.C. § 6020(b), and sent her statutory Notices of Deficiency for the years at issue. Wright Decl. ¶ 21, Ex. 16, ECF No. 71-9. Carlson did not timely petition the U.S. Tax Court to challenge these Notices, and a duly authorized delegate of the Secretary of the Treasury made the following tax assessments against her:
26 U.S.C. § 6020(b) provides that “[i]f any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.” Moreover, “[a]ny return so made and subscribed by the Secretary shall be prima facie good and sufficient for all legal purposes.”
| IRS Tax Assessments for Karen Carlson | ||||
| Type of Tax | Tax Period | Assessment Date | Amount and Type of Assessment | |
| Income (1040) | 2001 | 04/23/2007 04/23/2007 04/23/2007 04/23/2007 04/23/2007 | $40,582.00 - Tax $9,130.95 - Failure to file penalty $1,621.80 - Estimate tax penalty $10,145.50 - Failure to pay penalty $17,061.66 - Interest | $108,070.55 |
| Income (1040) | 2002 | 02/21/2005 02/21/2005 02/21/2005 02/21/2005 02/21/2005 | $41,668.00 - Tax $9,375.30 - Failure to file penalty $1,392.41 - Estimate tax penalty $4,791.82 - Failure to pay penalty $4,540.29 - Interest | $30,087.48 |
| Income (1040) | 2003 | 04/23/2007 04/23/2007 04/23/2007 04/23/2007 04/23/2007 | $38,742.00 - Tax $8,716.95 - Failure to file penalty $1,013.87 - Estimated tax penalty $7,167.27 - Failure to pay penalty $10,094.61 - Interest | $119,604.71 |
| Income (1040) | 2004 | 04/23/2007 04/23/2007 04/23/2007 04/23/2007 04/23/2007 | $23,662.90 - Tax $5,324.15 - Failure to file penalty $686.88 - Estimated tax penalty $2,957.86 - Failure to pay penalty $4,524.94 - Interest | $69,141.35 |
| Income (1040) | 2010 | 09/01/2014 09/01/2014 09/01/2014 09/01/2014 09/01/2014 | $12,700.00 - Tax $2,769.53 - Failure to file penalty $263.98 - Estimated tax penalty $2,523.34 - Failure to pay penalty $1,686.50 - Interest | $26,028.00 |
| Income (1040) | 2011 | 03/09/2015 03/09/2015 03/09/2015 03/09/2015 03/09/2015 | $104,304.00 - Tax $23,468.40 - Failure to file penalty $2,065.01 - Estimated tax penalty $18,253.20 - Failure to pay penalty $11,599.73 - Interest | $212,721.02 |
| Total | $565,653.08 |
The outstanding balance amount in this table includes unassessed but accrued taxes, penalties, interest, payments, credits, and other adjustments through February 26, 2021. Wright Decl. ¶¶ 16-17 (“Interest continues to compound daily according to 26 U.S.C. § 6622 and other statutory accruals continue until paid.”).
The Internal Revenue Service (“IRS”) timely gave notice to Carlson of the assessments against her and demanded she pay them. Wright Decl. ¶¶ 6, Exs. 1-6, ECF No. 71-3. As required by federal statute, the IRS also issued collection due process (“CDP”) notices to Carlson for proposed levies and tax liens arising from its tax assessments.
26 U.S.C. §§ 6320 and 6330 direct the Secretary of the Treasury to comply with various notice requirements before recording a lien or levying any property or right to property.
On October 8, 2009, Carlson timely requested a CDP hearing for the lien and levy notices for tax years 2001-2004. See Carlson v. C.I.R., T.C. Memo 2012-76, Case No. 10633-10L, 2012 WL 947161 at *1 (T.C. March 20, 2012). Following a hearing, the IRS Office of Appeals issued a Notice of Determination sustaining the tax liens and proposed levies for the collection of her unpaid tax liabilities. Id. at *2. Carlson timely petitioned the U.S. Tax Court for review of that decision. Id. at *1.
On March 20, 2012, the Tax Court issued its opinion upholding the tax liability amount for 2001-2004 and sustaining the proposed collection. Id. at *3-4. In reaching this decision, the Tax Court noted that Carlson “ha[d] not disputed any specific item of income” nor “denied receiving compensation during the years at issue.” Id. at *3. Instead, the Tax Court found that she “raised only frivolous and groundless arguments,” including assertions that “her income is not taxable because she is not incorporated, and that her wages are not taxable because the third-party information returns did not correctly apply the definition of wages and employment.” Id. at *2. The Tax Court “strongly warn[ed]” Carlson against continuing to pursue those arguments, and eventually imposed a penalty for frivolous filings. Id. at *3. Carlson appealed to the Ninth Circuit. See Carlson v. C.I.R., 604 Fed.Appx. 628, 629 (9th Cir. 2015). In a brief opinion, the Ninth Circuit explained that “[contrary to Carlson's contentions, the Tax Court correctly concluded that [she] had received taxable income” for tax years 2001-2004. Id. The Ninth Circuit affirmed the Tax Court's decision on May 13, 2015. Id.
26 U.S.C. § 6502(a) imposes a ten-year statute of limitations for the collection of unpaid taxes after an assessment. However, if a hearing is requested regarding the collection action, this limitations period is “suspended for the period during which such hearing, and appeals therein, are pending.” 26 U.S.C. § 6303(e). Consequently, the ten-year statute of limitations on this collection action was tolled from the October 8, 2009-the day Carlson requested a CDP hearing-until the Ninth Circuit rendered its decision on May 12, 2015: a period of five years, seven months, and five days. Thus, the current action is brought within the statute of limitations.
Because Harman did not file federal tax returns for tax years 2000-2004, the IRS conducted an investigation to determine his tax liability, prepared a return in accordance with 26 U.S.C. § 6020(b), and sent him statutory Notices of Deficiency for those years. Wright Decl. ¶¶ 18-19, Exs. 15-16, ECF Nos. 71-8, 71-9. Harman did not timely petition the U.S. Tax Court, so a duly authorized delegate of the Secretary of the Treasury made the following timely assessments against him:
| IRS Tax Assessments for Charles Harman | ||||
| Type of Tax | Tax Period | Assessment Date | Amount and Type of Assessment | |
| Income (1040) | 2000 | 9/15/2008 9/15/2008 9/15/2008 9/15/2008 9/15/2008 | $107,837.00 - Tax $24,263.33 - Failure to file penalty $5,799.99 - Estimated tax penalty $26,959.25 - Failure to pay penalty $76,954.24 - Interest | $379,510.96 |
| Income (1040) | 2001 | 9/15/2008 9/15/2008 9/15/2008 9/15/2008 9/15/2008 | $39,997.00 - Tax $8,999.33 - Failure to file penalty $1,598.42 - Estimated tax penalty $9,999.25 - Failure to pay penalty $23,596.59 - Interest | $135,952.29 |
| Income (1040) | 2002 | 9/15/2008 9/15/2008 9/15/2008 9/15/2008 9/15/2008 | $14,070.00 - Tax $3,165.75 - Failure to file penalty $470.19 - Estimated tax penalty $3,517.50 - Failure to pay penalty $6,883.00 - Interest | $45,386.75 |
| Income (1040) | 2003 | 9/15/2008 9/15/2008 9/15/2008 9/15/2008 9/15/2008 | $26,184.00 - Tax $5,891.40 - Failure to file penalty $675.60 - Estimated tax penalty $6,546.00 - Failure to pay penalty $10,830.33 - Interest | $80,946.39 |
| Income (1040) | 2004 | 9/15/2008 9/15/2008 9/15/2008 9/15/2008 9/15/2008 | $17,617.00 - Tax $3,963.83 - Failure to file penalty $504.83 - Estimated tax penalty $3,611.48 - Failure to pay penalty $5,939.48 - Interest | $52,280.92 |
| Total | $694,077.31 |
Again, the outstanding balance amount in this table includes unassessed but accrued taxes, penalties, interest, payments, credits, and other adjustments through February 26, 2021. Wright Decl. ¶ 16.
The IRS timely gave notice to Harman of the assessments against him and demanded payment of them. Wright Decl. ¶ 7, Exs. 7-11. The IRS also issued CDP notices to Harman for proposed levies and tax liens arising from its tax assessments. Id. Harman did not timely request a CDP hearing, and the assessments against him remain unpaid.
Federal tax liens in favor of the United States arose on the dates of the tax assessments against Carlson and Harman. 26 U.S.C. §§ 6321, 6322. The liens attached to property and property rights held by each on the dates of assessment, as well as to property and property rights acquired after that date. See Wright Decl. ¶ 22, Ex. 17, ECF No. 71-10 (federal tax liens against Carlson recorded by the IRS); Id. ¶ 20, Ex. 15, ECF No. 71-8 (federal tax liens against Harman recorded by the IRS). To provide notice of the liens to third parties, the IRS filed Notices of Federal Tax Liens with the Yamhill County Recorder's Office:
“If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” 26 U.S.C. § 6321. “Unless another date is specifically fixed by law, the lien . . . shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.” 26 U.S.C. § 6322.
| Taxpayer | Tax Year(s) | Recording Date |
| Karen Carlson | 2001, 2002, 2003, 2004 | 09/15/2009 |
| Charles Harman | 2000, 2001, 2002, 2003, 2004 | 10/30/2009 |
| Karen Carlson | 2010 | 11/12/2014 |
| Karen Carlson | 2011 | 03/20/2015 |
The United States contends that those federal tax liens are enforceable against three parcels of real estate (the “subject property”) formerly owned by Carlson and presently titled in Harman's name. Carlson purchased the subject property for $695,000 by statutory warranty deed on December 13, 2005. Harman Dep. 120:11-16, Ex. 24. On September 25, 2012, after the Tax Court had adjudicated Carlson's 2001-2004 tax liabilities, Carlson conveyed the subject property to Harman by bargain and sale deed for “$1.00 plus other good and valuable consideration.” Harman Dep. 124:6-14, Ex. 26.
The parcels are numbered 71834/R331700302, 71843/R331700303, and 71816/R331700300. See Harman Dep. 64:9-18, Ex. 24, ECF 71-12 (Statutory Warranty Deed containing legal description of each parcel); Stipulation for Non-Monetary Judgment at 1 (legal description of each parcel).
The first parcel of the subject property is Carlson and Harman's residential address, where they have lived since approximately 2007. See Harman Dep. 65:11-19. The second parcel is adjacent to the first and contains a separately-addressed guest house. Harman Dep. 64:24-65:9. The third parcel is a road that Carlson and Harman share with their neighbors, Martin and Teresa Strelecky. Harman Dep. 64:8-18. In December 2019, the United States, Carlson and Harman, and the Streleckys stipulated to a nonmonetary judgment, agreeing that “whoever the Court determines is the owner of the Subject Property shall deed an undivided [one-half] interest in Parcel III to Strelecky while maintaining their own [one-half] interest.” See Stipulation for NonMonetary Judgment ¶¶ 6, 9, ECF No. 53. Consequently, any judgment in this action will encompass only an undivided one-half interest in the third parcel. Id. Outside of that narrow issue, the Streleckys have no further interest in this action.
The United States also named as party-defendants Julie Petit, Yamhill County, Ocwen Financial Corporation, and the Oregon Department of Revenue. See 26 U.S.C. §7403(b) (directing the United States to include “[a]ll persons having liens upon or claiming interest in the [subject] property”). Petit has since disclaimed any interest in the subject property and been dismissed with prejudice from this action. Order on Stipulation of Dismissal, ECF No. 10. Yamhill County, Ocwen Financial Corporation, and the Oregon Department of Revenue still claim interests in the subject property, and the United States and those parties have stipulated to priority as to those interests. Stipulation and Request for Order Regarding Lien Priority, ECF No. 45. The court approved that stipulation and excused Yamhill County, Ocwen Financial Corporation, and the Oregon Department of Revenue from further participation in this litigation. Order Approving Priority Stipulation, ECF No. 46.
Carlson and Harman have not fully paid the balances assessed against them. In August 2018, the United States commenced this action to recover those assessments. Am. Compl. ¶ 1, ECF No. 3. Carlson and Harman moved to dismiss, which the court denied. Order, ECF No. 47 (adopting F&R that recommended denial of the motion to dismiss, ECF No. 43).
LEGAL STANDARD
Summary judgment is appropriate if “there is no genuine dispute as to any material fact” and “the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). The party moving for summary judgment bears the initial responsibility of informing the court of the basis for the motion and identifying portions of the pleadings, depositions, answers to interrogatories, admissions, or affidavits that demonstrate the absence of a triable issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
If the moving party shows the absence of a genuine issue of material fact, the nonmoving party must go beyond the pleadings and identify facts which show a genuine issue for trial. Id. at 324 (citing FED. R. CIV. P. 56(e)). A nonmoving party cannot defeat summary judgment by relying on the allegations in the complaint, or with unsupported conjecture or conclusory statements. Hernandez v. Spacelabs Medical, Inc., 343 F.3d 1107, 1112 (9th Cir. 2003). Thus, summary judgment should be entered against “a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial.” Celotex Corp., 477 U.S. at 322.
The court must view the evidence in the light most favorable to the nonmoving party. Bell v. Cameron Meadows Land Co., 669 F.2d 1278, 1284 (9th Cir. 1982). However, deference to the nonmoving party has limits. A party asserting that a fact cannot be true or is genuinely disputed must support the assertion with admissible evidence. FED. R. CIV. P. 56(c). Therefore, where “the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.” Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (internal quotations omitted).
DISCUSSION
The United States contends that there are no disputes of material fact that Carlson and Harman earned taxable income for the years at issue and that the IRS properly executed federal tax assessments and issued penalties against them. Pl. Mot. for Summ. J. at 12. The United States also asserts that it has valid tax liens on the subject property and requests a declaration authorizing it to foreclose on the property at a future date. Id. at 20. For the reasons that follow, the court agrees.
A. Carlson and Harman's Liability for Federal Income Taxes, Interest, and Penalties
In an action to reduce tax assessments to judgment under 26 U.S.C. § 7402(a), the government bears the burden of proof. Palmer v. Int'l Revenue Serv., 116 F.3d 1309, 1312 (9th Cir. 1997). The government can usually carry its initial burden, however, “merely by introducing its assessment of tax due.” United States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983). Where the IRS bases its assessment on allegations of unreported income, a presumption of correctness attaches to the assessment if it is supported by “a minimal evidentiary foundation.” Id. This foundation is established when “some substantive evidence is introduced demonstrating that the taxpayer received unreported income” during the tax years at issue. Id.
If the government carries its initial burden, the burden then shifts to the taxpayer to rebut the presumption by a preponderance of the evidence. Rapp v. Comm'r, 774 F.2d 932, 935 (9th Cir. 1985). “[W]hen a taxpayer has overcome the presumption by competent and relevant evidence, the presumption disappears and drops out of the case. Thus, the burden of proving the deficiency reverts to the government.” Keogh v. Comm'r, 713 F.2d 496, 501 (9th Cir. 1983).
The United States has met its burden to establish the validity of federal income tax assessments against Carlson and Harman for the years at issue. First, the United States provided presumptive proof that the taxes against Carlson and Harman were validly assessed by submitting IRS Forms 4340 for each defendant. The Ninth Circuit has consistently recognized that Forms 4340, which show the dates and amounts of taxes assessed against a defendant, “provide[] at least presumptive evidence that a tax has been validly assessed.” Huff v. United States, 10 F.3d 1440, 1445 (9th Cir. 1993). Here, the United States submitted the Forms 4340 that were sent to Carlson for tax years 2001-2004 and 2010-2011 and sent to Harman for tax years 2000-2004. Those forms-as well as the statutory notices of deficiency and supporting documents submitted alongside them-are summarized in the tables above, and presumptively establish that the IRS validly assessed taxes against Carlson and Harman for those years.
Second, to the extent the tax assessments against Carlson and Harman were based on unreported income, their depositions establish a “minimum evidentiary foundation” supporting the correctness of those assessments. In their depositions, both Carlson and Harman admit to working and earning monetary compensation for the tax years at issue. For instance, Carlson indicated that both Eagle Home Mortgage and Pinnacle Capital Mortgage paid her for her work, treated her as an employee, and issued her W-2s. Although Carlson raises a frivolous legal argument that this income was not taxable because her work was not “federally connected,” she challenges neither the fact that she earned compensation during this period nor the monetary amounts listed on her W-2s. Similarly, Harman admits that, between 2000-2004, he was compensated for his appraisal work through commissions and by taking regular draws from the business' bank accounts. Given these admissions, the court finds that Carlson and Harman earned taxable income for the years at issue. This evidence is sufficient to attach a presumption of correctness to the tax assessments against each defendant.
Moreover, Carlson and Harman do not rebut the facts giving rise to the presumption that the tax assessments against them are valid and correct. See FED. R. CIV. P. 56(c); LR 56-1 (“A party's factual positions must be supported by citations, by page and line as appropriate, to the particular parts of materials in the record.”). Instead, they challenge their legal obligation to pay taxes by reasserting arguments that they have repeatedly been warned are frivolous. Specifically, they contend that any income earned during the years at issue was not taxable because they were not “employees” earning “wages” within the meaning of 26 U.S.C. § 3401. This argument is irrelevant because § 3401 defines the terms “employment” and “wages” for the purposes of determining whether an employer must withhold taxes from payments to a worker-not for determining whether such payments are taxable. See Lindberg v. Comm'r, T.C. Memo 2010-67, 2010 WL 1330343 (T.C. April 6, 2010) (sustaining penalty for reporting zero wages based on frivolous argument that W-2 did not correctly apply definition of wages under § 3401).
“For purposes of [Chapter 24], the term ‘wages' means all remuneration . . . for services performed by an employee for his employer, including the case value of all remuneration (including benefits) paid in any medium other than cash” with limited exceptions. 26 U.S.C. § 3401(a). “Employee” is defined to “include[] an officer, employee, or elected official of the United States. . . and an officer of a corporation.” 26 U.S.C. § 3401(c).
In any event, Carlson may not challenge the validity of tax assessments against her for 2001-2004 because the Tax Court already found her liable for those years. See In re Baker, 74 F.3d 906, 910 (9th Cir. 1996) (“In the tax context, once a taxpayer's liability for a particular year is litigated, “a judgment on the merits is res judicata as to any subsequent proceeding involving the same claim and the same tax year.”) (Quoting Comm'r v. Sunnen, 333 U.S. 591, 598 (1948)).
Carlson and Harman have not disputed the facts underpinning their respective tax liabilities and therefore have not rebutted the presumption that that tax assessments against them are valid and correct. Consequently, the court should find that, as a matter of law, Carlson is liable for federal income tax for tax years 2001-2004 and 2010-2011 and Harman is liable for federal income tax for tax years 2000-2004.
Carlson and Harman are also liable for interest and penalties accruing on their tax liabilities. When federal income tax liability is unpaid or underpaid, mandatory interest accrues beginning on the date the return is due and continuing until the liability is paid in full. See 26 U.S.C. § 6601(a)(b)(e) (accrual period and interest treated as tax). The interest compounds daily and is determined by reference to a floating interest rate. 26 U.S.C. §§ 6621-6622. Here, the undisputed evidence demonstrates that Carlson and Harman have not fully paid their tax liabilities. Therefore, interest continues to accrue daily on their respective tax liability.
Furthermore, the IRS also assessed multiple penalties against Carlson and Harman for failing to file federal tax returns, to pay federal tax liabilities on time, and to make estimated quarterly income payments. See 26 U.S.C. § 6651 (penalty for failure to file tax return or to pay tax); 26 U.S.C. § 6654 (failure to pay estimated income tax). When the IRS assesses penalties for underpayment due to negligence or intentional disregard of the rules and regulations, its determination “is presumptively correct and must stand unless the taxpayer can establish that he was not negligent.” Hall v. Comm'r, 729 F.2d 632, 635 (9th Cir. 1984) (citing Axelrod v. Comm'r, 56 T.C. 248, 258 (1971)). Thus, the penalties assessed by the IRS-which are summarized in the tables above-are presumptively valid. Carlson and Harman fail to present evidence to refute that presumption, and the court finds that the IRS properly imposed penalties against Carlson and Harman.
B. The United States' Federal Tax Liens against the Subject Property
When a person neglects or refuses to pay taxes that are due, federal tax liens arise on the date of the IRS tax assessments and attach to “all property and rights to property, whether real or personal, belonging to such person,” including property acquired after the lien arose. 26 U.S.C. §§ 6321, 6322. The Supreme Court has reasoned that, through this mechanism, “Congress meant to reach every interest in property that a taxpayer might have.” U.S. v. Nat'l Bank of Com., 472 U.S. 713, 720 (1985). To that end, transferring the property from one owner to another owner does not extinguish a properly recorded tax lien. See 26 U.S.C. § 6323(a), (f); see also U.S. v. Bess, 357 U.S. 51, 57 (1958) (“The transfer of property subsequent to the attachment of the lien does not affect the lien, for it is of the very nature and essence of a lien, that no matter into whose hands he property goes, it passes [subject to the burden].” (Internal quotation marks and citations omitted)).
The United States has established that Carlson and Harman are indebted to the federal government because of properly assessed income taxes, penalties, and interest. Thus, federal tax liens in favor of the United States arose against Harman on September 15, 2008 (for tax years 2000-2004), and against Carlson on February 21, 2005 (for tax year 2002); April 23, 2007 (for tax years 2001, 2003, and 2004); September 1, 2014 (for tax year 2010); and March 9, 2015 (for tax year 2011). The United States properly recorded these tax liens with the Yamhill County Recorder's office.
Each of these liens are attached to the subject property. First, the 2002 tax lien against Carlson, which arose in 2005 and 2007, attached to the subject property when she acquired it on December 12, 2005. The tax liens for 2001, 2003, and 2004 arose on April 23, 2007, and attached to the property on that date. Second, the 2000-2004 tax liens against Harman, which arose on September 15, 2008, attached when he acquired title to the subject property on September 25, 2012. See U.S. v. McDermott, 507 U.S. 447, 448 (1993) (lien attached to afteracquired property). This transfer did not extinguish the 2001-2004 tax liens against Carlson because those liens had attached and been recorded well before Carlson transferred the property to Harman.
Third, although the 2010-2011 tax liens against Carlson arose after she had transferred the subject property to Harman, the liens should be deemed attached to the subject property because the transfer to Harman was fraudulent. Under Oregon law, a transfer made “by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made . . . if a debtor made the transfer . . . [w]ith actual intent to hinder, delay, or defraud” the creditor. ORS § 95.230(1)(a). To determine whether the debtor had “actual intent” to defraud the creditor, the court considers several factors, including whether the transfer was to an insider; whether the debtor retained possession or control of the transferred property; whether, before the transfer was made, the debtor was sued or threatened with suit; whether the transfer was substantially all of the debtor's assets; and whether the value of consideration received for the transfer was “reasonably equivalent to the value of the asset.” See ORS § 95.230(2)(a)-(h). If a transfer is fraudulent, the court may deem as a remedy that the creditor has “[a]n attachment . . . against the asset transferred or other property of the transferee.” ORS § 95.260(1)(b).
The summary judgment record reflects that Carlson transferred the subject property to Harman with the actual intent to hinder, delay, or defraud the United States from collecting taxes assessed against her. Carlson transferred the property to her husband, an insider, and retained possession and control over the property by continuing to reside there following the conveyance. The record suggests-and Carlson does not dispute-that the subject property was her primary substantial asset. Moreover, Carlson transferred the subject property in September 2012, several months after the Tax Court had adjudicated her tax liability for tax years 2001-2004. This timing strongly suggests that Carlson transferred the property to her husband to evade her taxpaying responsibilities. Finally, the transfer was made for one dollar, and therefore, was not supported by consideration “reasonably equivalent” to the value of the subject property. Accordingly, the court finds that this transfer was made with fraudulent intent and recommend that tax liens against Carlson for tax years 2010-2011 be deemed attached to the subject property.
In summary, the court should find that the United States has valid federal tax liens against Carlson for tax years 2001-2004 and 2010-2011 and against Harman for tax years 2000-2004 that may be enforced against the subject property.
C. The United States' Entitlement to Foreclosure of its Tax Liens on the Subject Property
The United States asks the court to declare that it has valid liens on the subject property that can be foreclosed when appropriate (considering the COVID-19 pandemic). The court recommends granting this request.
Under 26 U.S.C. § 7403, once the court determines that the United States has valid federal tax liens on the real property of a taxpayer, the court “may decree a sale of such property . . . and a distribution of the proceeds of such sale” according to its findings. 26 U.S.C. § 7403(c); see also U.S. v. Rodgers, 461 U.S. 677, 709 (noting that, although the standard is discretionary, a district court may not refuse to authorize a sale “simply to protect the interests of the delinquent taxpayer”). “All persons having liens up on or claiming an interest in the property involved in such action” must be made parties to the action. 26 U.S.C. § 7403(b).
As described above, the United States has valid federal tax liens against Carlson for tax years 2001-2004 and 2010-2011 and against Harman for tax years 2000-2004, which are attached to the subject property and properly recorded. Further, the United States has included as party-defendants all persons or entities claiming an interest in the subject property and has stipulated as to priority or dismissal with each of these party-defendants. See Stipulation for Non-Monetary Judgment, ECF No. 53 (Martin and Teresa Strelecky); Order Approving Priority Stipulation, ECF No. 46 (Yamhill County, Ocwen Financial Corporation, and Oregon Department of Revenue); Order on Stipulation of Dismissal, ECF No. 10 (Julie Petit). The court's recommended judgment encompasses those stipulations.
CONCLUSION
Based on the foregoing, the court recommends the GRANTING the United States' motion for summary judgment (ECF No. 71) and entering judgment as follows:
A. against Karen Carlson, for tax years 2001-2004 and 2010-2011, in the amount of $565,653.08, plus interest under 28 U.S.C. § 1961(c)(1) and 26 U.S.C. §§ 6601, 6621, and 6622, penalties, and other statutory additions according to law from February 26, 2021, until the judgment is paid;
B. against Charles Harman, for tax years 2000-2004, in the amount of $694,077.31, plus interest under 28 U.S.C. § 1961(c) and 26 U.S.C. §§ 6601, 6621, and 6622, penalties, and other statutory additions according to law from February 26, 2021, until the judgment is paid;
C. the United States has valid and subsisting federal tax liens which attach to all property and rights to property of Charles Harman and Karen Carlson, both real and personal, tangible and intangible, including their interest in the real property located at parcel numbers 71834/R331700302, 71843/R331700303, and 71816/R331700300 (“the subject property”);
D. the United States is to submit a status report 120 days from this judgment to inform the court of its collection plans at that time and whether entering an order of sale with respect to the subject property is appropriate.
SCHEDULING ORDER
The Findings and Recommendation will be referred to Judge Hernandez. Objections, if any, are due within fourteen days. If no objections are filed, the Findings and Recommendation will go under advisement on that date. If objections are filed, a response is due within fourteen days. When the response is due or filed, whichever date is earlier, the Findings and Recommendation will go under advisement.