(PS) United States of America v. Molen et al, No. 2:2010cv02591 - Document 172 (E.D. Cal. 2014)
Court Description: FINDINGS and RECOMMENDATIONS signed by Magistrate Judge Kendall J. Newman on 5/21/14 RECOMMENDING that Plaintiff's 148 Motion for Partial Summary Judgment be granted; that judgment be entered against James O. Molen in the amount of $194, 025.86 for unpaid federal employment tax and $5,843.85 for frivolous return penalties, plus additional interest and other statutory additions that have accrued since 11/30/13; that judgment be entered against Sandra Molen in the amount of $ 3,867.27 for frivolous return penalties, plus additional interest and other statutory additions that have accrued since 11/30/13; that judgment be entered against the James Orbin Molen Limited Partnership in the amount of $19,092.67 plus additional interest and other statutory additions that have accrued since 11/30/13. Referred to Judge Morrison C. England, Jr.; Objections to F&R due within 14 days after being served with these findings and recommendations. (Meuleman, A)
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1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 UNITED STATES OF AMERICA, 12 Plaintiff, 13 14 No. 2:10-cv-2591 MCE KJN v. FINDINGS AND RECOMMENDATIONS JAMES O. MOLEN, et al., 15 Defendants. 16 Plaintiff United States of America (“plaintiff”) filed this civil action on September 23, 17 18 2010, to reduce to judgment outstanding federal tax assessments and foreclose on real property 19 owned by defendants. (ECF No. 1.) The tax assessments at issue are against defendants James 20 O. Molen, Sandra Molen, and the James Orbin Molen Limited Partnership (collectively 21 “defendants”).1 Defendants are proceeding without counsel in this action.2 22 1 23 24 25 26 27 28 The Black Hole Adventures Trust and John Hugh Van Auken and William E. Baker, the alleged trustees of the Black Hole Adventures Trust, are also named as defendants in this action. However, these parties’ involvement in this case is not directly relevant to the issue presented by the present motion, i.e. whether plaintiff’s tax assessments should be reduced to judgment. In addition, the California Franchise Tax Board, California Employment Development Department, Butte County Assessor, Household Bank S.B. N.A., Advanta Bank Corporation, Citibank South Dakota N.A., MBNA Bank, Asset Acceptance LLC, and Wells Fargo Bank N.A. have also been named as defendants in this action because they may claim an interest in the Molens’ real property that is the subject of this action. Similarly, these interests are not involved in the issue presented by plaintiff’s motion. Accordingly, when the court uses the term “defendants,” for purposes of the present motion, it refers only to James O. Molen, Sandra Molen and the James 1 1 Presently before the court is plaintiff’s motion for partial summary judgment, filed 2 November 22, 2013, which seeks to reduce to judgment federal tax liabilities assessed against 3 defendants.3 (ECF No. 148.) On December 5, 2013, defendants filed a written opposition to 4 plaintiff’s motion arguing, among other things, that the court should dismiss the motion for being 5 untimely filed. (ECF No. 155.) On December 12, 2013, the court ordered plaintiff to show cause 6 why the court should deem plaintiff’s motion timely filed and ordered defendant to file a 7 declaration stating whether he was prejudiced by plaintiff’s delay in filing its motion. (ECF No. 8 156.) Plaintiff filed a response to the court’s December 12, 2013 order and defendants filed a 9 declaration of prejudice. (ECF Nos. 157, 158.) On January 27, 2014, the court discharged its 10 order to show cause, deemed plaintiff’s motion timely filed, and ordered defendants to file an 11 amended opposition that complied with the requirements of Rule 56 of the Federal Rules of Civil 12 Procedure and Local Rule 260(b), including but not limited to the filing of a separate Statement of 13 Disputed Facts. (ECF No. 159.) Defendants filed an amended opposition on February 25, 2014, 14 which primarily consists of arguments recycled from defendants’ previous declaration of 15 prejudice and fails to include a Statement of Disputed Facts. (ECF No. 161.) Plaintiff filed a 16 reply on March 4, 2014. (ECF No. 163.) 17 The court heard this matter on its May 8, 2014 law and motion calendar. Attorney Guy 18 Patrick Jennings appeared on behalf of plaintiff. James Molen, who is proceeding without an 19 attorney, failed to appear at the hearing.4 20 21 Orbin Molen Limited Partnership. 2 22 23 24 25 26 27 28 This action was referred to the undersigned pursuant to Eastern District Local Rule 302(c)(21). (ECF No. 11.) 3 Plaintiff only seeks summary judgment with respect to the issue of whether the tax assessments made against defendants should be reduced to judgment and recognizes that the following two disputed issues remain for trial: “(1) whether James Molen obtained a refund in the first quarter of 2000 by fraud, and (2) whether the federal tax liens may be enforced against the Molen residence, held in the name of Black Hole Adventures Trust, as the nominee, alter ego, or fraudulent transferee of the Molens.” (ECF No. 148-1 at 3.) 4 Defendants’ recent filings reflect that Sandra Molen is deceased. (See ECF Nos. 134, 158, 161, 164 (all noting that Sandra Molen is “deceased” in the party caption).) The effect of her alleged 2 The undersigned has fully considered the parties’ briefs, the parties’ oral arguments, and 1 2 appropriate portions of the record. For the reasons that follow, the undersigned recommends that 3 plaintiff’s motion for partial summary judgment be granted in full. 4 I. Plaintiff’s Motion for Partial Summary Judgment 5 Plaintiff requests entry of summary judgment against defendants for tax liabilities that 6 have accrued against them because of their failure to pay employment taxes due on the wages 7 paid to employees in their flower shop and filing of frivolous tax returns that reported no income. 8 Specifically, plaintiff “requests entry of judgment against James O. Molen in the amount of 9 $194,025.86 for unpaid federal employment tax and $5,843.85 for frivolous return penalties, plus 10 additional interest and other statutory additions that have accrued since November 30, 2013” for 11 the tax periods including all quarters of 2000, 2001, 2002, 2003, the first and fourth quarters of 12 2004, as well as for frivolous return penalties assessed for 1997 through 2004.5 (ECF No. 148-1 13 at 2, 11.) It further “requests entry of judgment against Sandra Molen in the amount of 14 $3,867.27, for frivolous return penalties [assessed against her from 1998 through 2004], plus 15 additional interest and other statutory additions that have accrued since November 30, 2013.” 16 (Id.) Finally, it “requests that judgment be entered against the James Orbin Molen Limited 17 Partnership in the amount of $19,092.67 plus additional interest and other statutory additions that 18 have accrued since November 30, 2013” for non-payment of employment taxes for the second 19 and fourth quarters of 2005, all quarters of 2006, and non-payment of federal unemployment tax 20 (“FUTA tax”) for 2005 and 2006.6 (Id.) 21 recent death on plaintiff’s request for judgment against her is addressed in further detail below. 22 5 23 24 25 26 27 28 This calculation includes a fraud penalty assessed against James O. Molen for the first quarter of 2000. One of the remaining issues for which plaintiff is not seeking summary judgment in the present motion is whether James O. Molen obtained a refund in the first quarter of 2000 by fraud. Plaintiff states in its motion that “if James Molen is found after trial not to have acted with a fraudulent intent in seeking the refund he obtained,” then the court should make an adjustment to the final judgment reflecting the absence of such a penalty. (ECF No. 148-1 at 11.) 6 By minute order issued on May 8, 2014, the court directed plaintiff to file a supplemental brief that included, among other things, an updated statement of the full judgment amount it requests against each defendant as of May 8, 2014, including any interest and other statutory additions that had accrued up until that date. (ECF No. 170.) In compliance with this order, plaintiff filed a 3 1 II. Legal Standards Governing Motions for Summary Judgment Federal Rule of Civil Procedure 56(a) provides that “[a] party may move for summary 2 3 judgment, identifying each claim or defense--or the part of each claim or defense--on which 4 summary judgment is sought.” It further provides that “[t]he court shall grant summary judgment 5 if the movant shows that there is no genuine dispute as to any material fact and the movant is 6 entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).7 A shifting burden of proof 7 governs motions for summary judgment under Rule 56. Nursing Home Pension Fund, Local 144 8 v. Oracle Corp. (In re Oracle Corp. Sec. Litig.), 627 F.3d 376, 387 (9th Cir. 2010). Under 9 summary judgment practice, the moving party always bears the initial responsibility of informing 10 the district court of the basis for its motion, and identifying those portions of “the pleadings, 11 depositions, answers to interrogatories, and admissions on file, together with the affidavits, if 12 any,” which it believes demonstrate the absence of a genuine issue of material fact. 13 Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (quoting then-numbered Fed. R. Civ. P. 14 56(c)). “Where the non-moving party bears the burden of proof at trial, the moving party need 15 16 17 supplemental brief on May 15, 2014 stating that the totals sought against each defendant, including additional interest and other statutory additions, as of May 8, 2014, were as follows: James O. Molen Form 941: $196,948.69 James Orbin Molen Ltd. Partnership: $19,389.05 James O. Molen § 6702: $5,920.67 Sandra L. Molen § 6702: $3,918.11 18 19 20 21 22 23 24 25 26 27 28 (ECF No. 171 at 2.) Plaintiff includes a declaration of Michael Norris, an Advisory Insolvency Advisor for the IRS, to support these totals. (ECF No. 171-1.) Within his declaration, Norris describes the method he utilized to compute the total balances owed by each defendant up through May 8, 2014. (Id. at ¶¶ 6-10.) This declaration also includes a table listing the unpaid balance each defendant owes as of May 8, 2014, with respect to each tax period at issue in this case. (Id.at 3-5.) In addition, plaintiff attaches includes as exhibits reports reflecting the total amounts assessed against each defendant for each tax period at issue broken down by the amounts of interest and penalties assessed. (ECF No. 171-2.) Based on this evidence, plaintiff’s representations appear to accurately reflect the outstanding balances against each defendant as of May 8, 2014. 7 Federal Rule of Civil Procedure 56 was revised and rearranged effective December 10, 2010. However, as stated in the Advisory Committee Notes to the 2010 Amendments to Rule 56, “[t]he standard for granting summary judgment remains unchanged.” 4 1 only prove that there is an absence of evidence to support the non-moving party’s case.” In re 2 Oracle Corp. Sec. Litig., 627 F.3d at 387 (citing Celotex Corp., 477 U.S. at 325); see also Fed. R. 3 Civ. P. 56 advisory committee’s notes to 2010 amendments (recognizing that “a party who does 4 not have the trial burden of production may rely on a showing that a party who does have the trial 5 burden cannot produce admissible evidence to carry its burden as to the fact”). 6 If the moving party meets its initial responsibility, the opposing party must establish that a 7 genuine dispute as to any material fact actually exists. See Matsushita Elec. Indus. Co. v. Zenith 8 Radio Corp., 475 U.S. 574, 585-86 (1986). To overcome summary judgment, the opposing party 9 must demonstrate the existence of a factual dispute that is both material, i.e., it affects the 10 outcome of the claim under the governing law, see Anderson v. Liberty Lobby, Inc., 477 U.S. 11 242, 248 (1986); Fortune Dynamic, Inc. v. Victoria’s Secret Stores Brand Mgmt., Inc., 618 F.3d 12 1025, 1031 (9th Cir. 2010), and genuine, i.e., “‘the evidence is such that a reasonable jury could 13 return a verdict for the nonmoving party,’” FreecycleSunnyvale v. Freecycle Network, 626 F.3d 14 509, 514 (9th Cir. 2010) (quoting Anderson, 477 U.S. at 248). A party opposing summary 15 judgment must support the assertion that a genuine dispute of material fact exists by: “(A) citing 16 to particular parts of materials in the record, including depositions, documents, electronically 17 stored information, affidavits or declarations, stipulations . . . , admissions, interrogatory answers, 18 or other materials; or (B) showing that the materials cited do not establish the absence or presence 19 of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the 20 fact.” Fed. R. Civ. P. 56(c)(1)(A)-(B). However, the opposing party “must show more than the 21 mere existence of a scintilla of evidence.” In re Oracle Corp. Sec. Litig., 627 F.3d at 387 (citing 22 Anderson, 477 U.S. at 252). 23 In resolving a motion for summary judgment, the evidence of the opposing party is to be 24 believed. See Anderson, 477 U.S. at 255. Moreover, all reasonable inferences that may be drawn 25 from the facts placed before the court must be viewed in a light most favorable to the opposing 26 party. See Matsushita, 475 U.S. at 587; Walls v. Cent. Contra Costa Transit Auth., 653 F.3d 963, 27 966 (9th Cir. 2011). However, to demonstrate a genuine factual dispute, the opposing party 28 “must do more than simply show that there is some metaphysical doubt as to the material facts . . 5 1 . . Where the record taken as a whole could not lead a rational trier of fact to find for the non- 2 moving party, there is no ‘genuine issue for trial.’” Matsushita, 475 U.S. at 586-87 (citation 3 omitted). 4 III. 5 Undisputed Facts In accordance with Local Rule 260(a), plaintiff filed a Statement of Undisputed Facts 6 (“SUF”) in support of its motion for partial summary judgment. (ECF No.148-2.) Defendants 7 failed to directly respond to plaintiff’s SUF beyond generalized arguments that the documentary 8 evidence plaintiff’s SUF is based on is all impermissible hearsay evidence that was obtained “by 9 threat and duress of contempt of court.”8 (ECF No. 161 at 4.) Moreover, defendants did not file a 10 statement of disputed facts, which violates Local Rule 260(b) and the court’s order requiring 11 defendants to file an opposition and supporting materials that comply with Rule 56 of the Federal 12 Rules of Civil Procedure and Local Rule 260. The procedure prescribed in Local Rule 260 13 contemplates identification of the facts that the parties assert are material, disputed or undisputed. 14 “If the nonmovant does not ‘specifically . . . [controvert duly supported] facts identified in the 15 [movant]’s statement of undisputed facts,’ the nonmovant ‘is deemed to have admitted the 16 validity of the facts contained in the [movant]’s statement.’” United States v. Burrell, 2013 WL 17 4710498 at *1 (E.D. Cal. Aug. 30, 2013) (quoting Beard v. Banks, 548 U.S. 521, 527 (2006)). 18 Accordingly, for purposes of the motion for partial summary judgment, the court accepts 19 plaintiff’s evidence and proposed undisputed facts, outlined below, as the truth. 20 Defendants James O. Molen and Sandra Molen, doing business as Touch of Class Florist, 21 had employees and paid wages and other compensation to those employees. (SUF ¶ 2.) 22 Beginning in the second quarter of 2005, defendants operated their business in a similar fashion 23 under the name “James Orbin Molen Limited Partnership” (“Partnership”). (Id. at ¶¶ 2, 18.) 24 Defendants’ workers were treated the same prior to and after the business was converted to the 25 Partnership. (Id. at ¶ 20; James Molen Depo. (ECF No. 140-1) 120:22-25, 121:1-5.) Defendants’ 26 workers were paid by check at first and later by money order. (SUF ¶ 21.) As employers, 27 28 8 The court addresses these arguments in detail below and finds them unpersuasive. 6 1 defendants were required to file quarterly IRS Form 941 federal employment tax returns reporting 2 employee wages and their employment tax liability, file yearly IRS Form 940 federal 3 unemployment tax returns reporting Federal Unemployment Tax Act (“FUTA”) tax liability, and 4 withhold income and taxes from employees’ wages pursuant to the Federal Income Contribution 5 Act (“FICA”) and pay those taxes to the Internal Revenue Service (“IRS”). (Id.at ¶ 3.) James O. 6 Molen was a general partner under the Partnership and, therefore, is liable for the Partnership’s 7 tax liabilities. (Id. at ¶ 22; Cal. Corp. Code § 16306(a).) 8 For the first quarter of 2000, James O. Molen submitted a refund claim under a Form 9 941C that requested a refund for the taxes paid on wages reported for 1997, 1998, and 1999. (Id. 10 at ¶ 5; Stacy Decl. (ECF No. 148-5) ¶ 9.) On November 20, 2000, the IRS erroneously refunded 11 $30,005.29 to James O. Molen after he engaged in what was determined to be a fraudulent 12 scheme. (SUF ¶ 5; Stacy Decl. ¶ 9.) On March 29, 2004, the liability relating to the erroneous 13 refund was assessed against James O. Molen along with a fraud penalty. (SUF ¶ 5.) 14 IRS Revenue Agent Patricia Stacy prepared the assessments in the defendants’ case for 15 the 2000 tax year. (SUF ¶ 6; Stacy Decl. ¶ 5.) She estimated the wages paid by defendants for 16 2000 by looking back at the defendants’ accounts for 1999 and assuming the same wage amount 17 was paid for 2000. (Stacy Decl. ¶ 5.) It was on this basis that she calculated the employment tax 18 defendants owed. (SUF ¶ 6; Stacy Decl. ¶ 5.) 19 After Stacy made her assessments, defendants filed numerous Forms 941 for many 20 periods in a single large batch in 2004. (SUF ¶ 7.) These tax returns were signed by Sandra 21 Molen and a Certified Public Accountant. (Id.) Stacy adjusted the 2000 year assessments to 22 reflect the amounts defendants reported on the tax returns they signed and filed in 2004 with the 23 exception of the return filed for the first quarter of 2000 due to the fraud penalty assessed against 24 James O. Molen during that period. (Id.; Stacy Decl. ¶¶ 7, 9.) Defendants’ tax returns filed in 25 2004 were forwarded to the Service Center for processing. (SUF ¶ 8.) The assessments for 2001, 26 2002, and 2003 match the returns filed by the Molens. (Id.) However, defendants submitted false 27 amended Forms 941 for all four quarters of 2004 and 2005, inaccurately reporting that they paid 28 no wages subject to Social Security or Medicare taxes. (Id. at ¶ 9; Order of Permanent Injunction, 7 1 Exhibit 1 (ECF No. 140) at ¶ 4.) 2 Defendants did not submit their required IRS Forms 940 and 941 by the mandated 3 deadlines, nor did they make timely Form 941 tax deposits. (SUF ¶ 10; Exhibit 1 at ¶ 5.) 4 Furthermore, defendants provided their employees false IRS Forms W-2 and failed to report 5 Social Security and Medicare wages and taxes. (SUF ¶ 11; Exhibit 1 at ¶ 6.) Defendants 6 attempted to justify their refusal to meet these legal obligations by making the patently frivolous 7 arguments that the compensation they pay employees did not constitute wages and that the federal 8 courts cannot enforce federal tax laws outside of the District of Columbia. (SUF ¶ 12; Exhibit 1 9 at ¶ 7.) As a result, defendants have accrued Form 941 employment tax liabilities, including 10 interest and penalties, for the periods ending March 31, 2000, through June 30, 2006, and Form 11 940 liabilities for tax years 2000 through 2005. (SUF ¶ 13; Exhibit 1 at ¶ 8, n.1.) This total 12 liability includes the $30,698.03 erroneous refund the IRS issued in 2000 after the Molens filed 13 false amended IRS Forms 941 for the years 1997 through 1999. (SUF ¶ 14; Exhibit 1 at ¶ 8, n.1.) 14 For the taxable years ending December 31, 1997, through December 31, 2004, defendants James 15 O. Molen and Sandra Molen jointly filed frivolous returns reporting zero income, which resulted 16 in the IRS assessing frivolous return penalties against them pursuant to 26 U.S.C. § 6702. (SUF 17 ¶¶ 23-24; Exhibits 35-58.) In July 2005, defendants submitted an “International Bill of Exchange” to the IRS in a 18 19 supposed attempt to pay their tax liabilities, but this did not decrease defendants’ tax liability 20 because it was not valid legal tender. (SUF ¶ 15.) On October 11, 2006, a permanent injunction 21 was issued against defendants, which, inter alia, enjoined defendants from failing to file accurate 22 and timely IRS Forms 941 and 940 returns and from failing to timely withhold and pay over to 23 the IRS all FICA and FUTA taxes required by law. (Exhibit 1 at 3-4.) After the Order of 24 Permanent Injunction issued, defendants filed Forms 941 prepared by a CPA but did not pay the 25 amounts shown due; defendants’ accounts were mostly adjusted to match these returns. (SUF ¶ 26 16.) 27 In the amounts, and for the tax periods set forth below, a duly authorized delegate of the 28 Secretary of Treasury made assessments against defendants for unpaid federal employment and 8 1 FUTA taxes, frivolous return penalties, interest, and other statutory additions as follows: 2 3 Tax Period Tax Type Taxpayer 4 1st Q. 2000 941 James O. Molen 5 2[nd] Q. 2000 941 James O. Molen 6 3[rd] Q. 2000 941 James O. Molen 4[th] Q. 2000 941 James O. Molen 1st Q. 2001 941 James O. Molen 2[nd] Q. 2001 941 James O. Molen 3[rd] Q. 2001 941 James O. Molen 4[th] Q. 2001 941 James O. Molen 1st Q. 2002 941 James O. Molen 2[nd] Q. 2002 941 James O. Molen 3[rd] Q. 2002 941 James O. Molen 4[th] Q. 2002 941 James O. Molen 1st Q. 2003 941 James O. Molen 2[nd] Q. 2003 941 James O. Molen 3[rd] Q. 2003 941 James O. Molen 4[th] Q. 2003 941 James O. Molen 1st Q. 2004 941 James O. Molen 4th Q. 2004 941 James O. Molen 2001 940 James O. Molen 2001 940 James O. Molen 2001 940 James O. Molen 2001 940 James O. Molen 2nd Q. 2005 941 JOM Ltd Ptrship. 4th Q. 2005 941 JOM Ltd Ptrship. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 Unpaid Balance As of 11/30/2013 $115,481.08 14,169.87 1,263.02 4,707.63 5,753.37 4,937.48 3,320.26 3,866.76 5,747.05 4,702.88 3,331.45 3,730.86 6,934.24 4,826.07 2,157.46 $3,409.34 419.19 484.59 621.13 695.90 2,054.54 1,411.69 3,449.08 3,884.75 1 1st Q. 2006 941 JOM Ltd Ptrship. 2nd Q. 2006 941 JOM Ltd Ptrship. 3rd Q. 2006 941 JOM Ltd Ptrship. 4th Q. 2006 941 JOM Ltd Ptrship. 2005 940 JOM Ltd Ptrship. 2006 940 JOM Ltd Ptrship. 1997 § 6702 James O. Molen 1998 § 6702 James O. Molen 1999 § 6702 James O. Molen 2000 § 6702 James O. Molen 2001 § 6702 James O. Molen 2002 § 6702 James O. Molen 2003 § 6702 James O. Molen 2004 § 6702 James O. Molen 1998 § 6702 Sandra L. Molen 1999 § 6702 Sandra L. Molen 18 2000 § 6702 Sandra L. Molen 19 2001 § 6702 Sandra L. Molen 20 2002 § 6702 Sandra L. Molen 21 2003 § 6702 Sandra L. Molen 22 2004 § 6702 Sandra L. Molen 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 23 3,094.92 2,611.30 497.07 987.76 4,494.69 73.10 767.85 730.26 730.26 730.26 730.26 730.26 730.26 694.44 0.00 251.79 730.26 730.26 730.26 730.26 694.44 (Decl. of Paul Enjalran, ECF No. 148-6, at 5-6.)9 Proper notice has been given and demand made for payment of the assessments set forth 24 25 above against defendants. Despite timely notice and demand for payment of the assessments, 26 9 27 28 As part of its supplemental brief, plaintiff includes a declaration by Michael Norris that includes an updated table reflecting the unpaid balance for each of these tax periods through May 8, 2014, which includes the amounts of interest and other additions that have accrued since November 30, 2013. (ECF No. 171-1 at 3-5.) 10 1 defendants have neglected, failed or refused to fully pay these assessments, which remain due and 2 owing, plus statutory interest and other additions allowed by law from November 30, 2013. 3 IV. 4 Discussion The United States bears the initial burden of proof in an action to collect taxes. United 5 States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983). The government’s burden can be met by 6 the presentation of federal tax assessments. Id.; Rocovich v. United States, 933 F.2d 991, 994 7 (Fed. Cir. 1991) (“A Certificate of Assessments and Payments is routinely used to prove that a tax 8 assessment has in fact been made.”). “Normally, a presumption of correctness attaches to the 9 assessment, and its introduction establishes a prima facie case.” Stonehill, 702 F.2d at 1293 10 (citing Welch v. Helvering, 290 U.S. 111, 115 (1933)); Cracchiola v. Comm’r of Internal 11 Revenue, 643 F.2d 1383, 1386 (9th Cir. 1981) (“[The Government’s] method of calculating . . . 12 income is presumptively correct and will be affirmed as long as it is rationally based.”); United 13 States v. Molitor, 337 F.2d 917, 922 (9th Cir. 1964)). 14 However, “[t]he presumption does not arise unless it is supported by a minimal 15 evidentiary foundation.” Id. (citing Weimerskirch v. Comm’r, 596 F.2d 358, 360 (9th Cir. 16 1979)). A tax payer may rebut the presumption of correctness by demonstrating that the 17 assessments are “arbitrary and capricious,” meaning that the assessments contain errors as to the 18 amounts assessed. Stonehill, 702 F.2d at 1294 (citing Helvering v. Taylor, 293 U.S. 507, 515 19 (1935)). If an assessment is based upon multiple items, then the presumption of correctness 20 attaches to every item. Id. Proof of error as to one item destroys its individual presumption, but 21 the presumption of correctness that attached to the other items remains. Id. 22 “[I]n the absence of contrary evidence, [a Certificate of Assessment is] sufficient to 23 establish that notices and assessments were properly made.” Hansen v. United States, 7 F.3d 137, 24 138 (9th Cir. 1993). “A certificate of Assessments and Payments, or Form 4340, is admissible, 25 highly probative evidence demonstrating that notices and assessments were properly made.” 26 United States v. Cowan, 535 F. Supp. 2d 1135, 1143 (D. Haw. 2008) (citing Hughes v. United 27 States, 953 F.2d 531, 539-40 (9th Cir. 1992). Forms 4340 are admissible as self-authenticating 28 official government records. Hughes, 953 F.2d at 540; Fed. R. Evid. 902(1). Furthermore, they 11 1 “qualify as ‘[r]ecords, reports, . . . or data compilations, in any form, of public offices or agencies, 2 setting forth . . . matters observed pursuant to duty imposed by law as to which matters there was 3 a duty to report,’ thus meeting one of the definitions of public records set forth in Fed. R. Evid. 4 803(8).” Hughes, 953 F.2d at 540. 5 Plaintiff has met its initial burden, meeting the applicable standard by submitting 6 affidavits consisting of the Form 4340 Certificates of Assessments and Payments generated under 7 seal and signed by an authorized delegate of the Secretary of the Treasury.10 The submission of 8 these documents by the United States adequately evidences defendants’ tax liability. Specifically, 9 this evidence shows that James O. Molen is liable in the amount of $194,025.86 for unpaid 10 federal employment tax plus additional interest and other statutory additions that have accrued 11 since November 30, 2013, for the tax periods including all quarters of 2000, 2001, 2002, 2003, 12 and the first and fourth quarters of 2004, in addition to $5,843.85 plus additional interest and 13 other statutory additions that have accrued since November 30, 2013, for frivolous return 14 penalties assessed for 1997 through 2004. (See Exhibits 3-24, 34-42.) The evidence further 15 shows that Sandra Molen is liable in the amount of $3,867.27 for frivolous return penalties 16 assessed against her from 1998 through 2004, plus additional interest and other statutory 17 additions that have accrued since November 30, 2013. (See Exhibits, 43-48, 50.) Finally, it 18 shows that James Orbin Molen Limited Partnership is liable in the amount of $19,092.67 plus 19 additional interest and other statutory additions that have accrued since November 30, 2013, for 20 non-payment of employment taxes for the second and fourth quarters of 2005, all quarters of 21 2006, and non-payment of FUTA taxes for 2005 and 2006. (See Exhibits, 27-34.) Because the 22 United States’ showing exceeds the minimal factual foundation necessary, the assessments 23 receive a presumption of correctness and the burden of proof shifts to defendants to demonstrate 24 any error. 25 26 27 28 Defendants appear to argue in their opposition that the documentary evidence plaintiff relies on in support of its motion, i.e. the Form 4340 Certificates of Assessments and Payments 10 Plaintiff has also included tax returns prepared by defendants for the relevant tax return periods. (See Exhibits 51-96.) 12 1 and defendants’ signed tax returns, constitutes impermissible hearsay. However, this argument is 2 without merit. The Certificates of Assessments and Payments fall within Fed. R. Evid. 803(8)’s 3 public records exception to the hearsay rule. Hughes, 953 F.2d at 540. Furthermore, defendants’ 4 signed tax returns are not hearsay because they are statements made by defendants being offered 5 as evidence against defendants. Fed. R. Evid. 801(d)(2) (Opposing Party’s Statement); Robson v. 6 C.I.R., 79 T.C.M. (CCH) 2225 (T.C. 2000) (“Statements on a Federal tax return are admissions 7 under rule 801(d)(2) of the Federal Rules of Evidence and will not be overcome without cogent 8 evidence that they are wrong.”); Lare v. Commissioner, 62 T.C. 739, 750 (1974) (“Statements 9 made in a tax return signed by a taxpayer may be treated as admissions.”). 10 Defendants further argue that plaintiff cannot use their tax returns as evidence against 11 them because they “were acquired by threat and duress of contempt of [a] court order.” (ECF No. 12 161 at 4.) However, “it is not duress for the IRS to use or to notify the taxpayer that it intends to 13 use all lawful means either to assess or collect a tax.” United States v. Toyota of Visalia, 772 F. 14 Supp. 481, 487 (E.D. Cal. 1991) aff’d sub nom. United States v. Toyota of Visalia, Inc., 988 F.2d 15 126 (9th Cir. 1993); see also George v. Commissioner, 139 T.C. 508, 515 (2012) (holding that the 16 threat of judicial contempt for not complying with a court order to sign Form 8332 does not 17 constitute duress); Ballard v. Commissioner, 54 T.C.M. (CCH) 580, 582 (1987). Accordingly, 18 defendants’ duress argument is not credible due to the absence of any showing that plaintiff 19 obtained or threatened to obtain these records via unlawful means. 20 For the reasons stated above, plaintiff provides evidence sufficient to meet its initial 21 burden of proof in this action and defendants have not come forward with any admissible 22 evidence or made any arguments sufficient to rebut this record. There is no genuine dispute of 23 material fact as to the issue of whether defendants are liable for the taxes in the amounts assessed 24 above. Accordingly, plaintiff’s motion for partial summary judgment should be granted in full. 25 V. 26 Effect of Sandra Molen’s Apparent Death on the Judgment Against Her It appears from defendants’ recent filings that defendant Sandra Molen has recently died 27 and has yet to be either dismissed from this case or replaced with an appropriate party. (See ECF 28 Nos. 134, 158, 161, 164 (all noting that Sandra Molen is “deceased” in the party caption).) The 13 1 court discussed this apparent fact with plaintiff’s counsel during the hearing on the present 2 motion for partial summary judgment and ordered plaintiff to file a supplemental brief discussing 3 the impact of this ostensible event on the judgment sought against Sandra Molen. (ECF No. 170.) 4 Plaintiff filed its supplemental brief in compliance with this order on May 15, 2014. (ECF No. 5 171.) Rule 25(a)(1) provides that if “a party dies and the claim is not thereby extinguished, the 6 7 court may order substitution of the proper parties.” Fed.R.Civ.P. 25(a)(1). Therefore, before a 8 party can substitute a new party pursuant to Rule 25(a)(1), the court must establish that the 9 substantive law controlling the suit permits survival of the cause of action. If the cause of action 10 does not survive the death of a party, no substitution may be made. Plaintiff’s claims against Sandra Molen are for frivolous tax return penalties assessed 11 12 pursuant to 26 U.S.C. § 6702. Accordingly, federal substantive law determines whether these 13 claims survive Sandra Molen’s death. Generally, to determine whether a federal cause of action 14 survives the death of a defendant, the court must first determine whether the claim asserted 15 against that defendant is civil or penal in nature. Reiserer v. United States, 479 F.3d 1160, 1162 16 (9th Cir. 2007) (citing United States v. $84,740.00 Currency, 981 F.2d 1110, 1113 (9th Cir. 17 1992)). “It is ‘a well-settled rule that actions upon penal statutes do not survive the death’ of a 18 party.” Id. (quoting United States v. Oberlin, 718 F.2d 894, 896 (9th Cir. 1983)). 19 Some statutes expressly state that an action survives upon the death of a party; however, 20 many statutes, such as the one at issue here, do not include such express language. Accordingly, 21 courts must determine whether the statute in question is civil or penal in nature by resorting to the 22 two-part test articulated by the United States Supreme Court in Hudson v. United States, 552 U.S. 23 93 (1997). This test requires the court to first inquire into whether “the legislature has indicated 24 an intention to establish a civil penalty.” Reiserer, 479 F.3d at 1163 (quoting Hudson, 552 U.S. at 25 99). Second, the court must determine “whether the statutory scheme [is] so punitive either in 26 purpose or effect, as to transform what was clearly intended as a civil remedy into a criminal 27 penalty.” Id. 28 //// 14 1 Plaintiff cites to no case law in its supplemental brief directly addressing the issue of 2 whether a penalty assessed under 26 U.S.C. § 6702 is a civil remedy or a criminal penalty, and 3 the court is aware of none. This appears to be an issue of first impression. 4 Plaintiff cites to the Ninth Circuit Court of Appeals’ decision in Reiserer in support of its 5 assertion that an action pursuant to 26 U.S.C. § 6702 is civil in nature, therefore surviving the 6 death of a defendant. In Reiserer, the Ninth Circuit Court of Appeals addressed the issue of 7 whether an action for civil tax shelter promoter penalties under 26 U.S.C. §§ 6700, 6701 survived 8 the death of the defendant and held that the penalties under these statutes were sufficiently civil in 9 nature that the action survived the defendant’s death. Reiserer, 479 F.3d at 1164. Notably, in 10 coming to the conclusion that the penalties under these statutes were not punitive in nature, the 11 court reasoned that the fact that “[t]he statutes are found in Internal Revenue Code Chapter 68, 12 titled ‘Additions to the Tax, Additional Amounts, and Assessable Penalties,’ rather than Chapter 13 75, titled ‘Crimes, Other Offenses, and Forfeitures,’ were a clear indication “that the legislature 14 intended the penalties in question to be civil.” Id. at 1663. Title 26 U.S.C. § 6702, the statute at 15 issue in this case, also appears in Chapter 68 of the Internal Revenue Code, thus indicating that 16 the legislature intended for the penalties assessed pursuant to it to be civil in nature. 17 However, the fact that the legislature intended the statute to be civil in nature is only the 18 first step in the inquiry because a statute may be “so punitive either in purpose or effect, as to 19 transform what was clearly intended as a civil remedy into a criminal penalty.” Reiserer, 479 20 F.3d at 1163. Plaintiff argues that the penalty assessed under 26 U.S.C. § 6702 is not so onerous 21 as to raise it to the level of a criminal sanction. In support of this argument, plaintiff cites to 22 Estate of Rau v. Commissioner, 301 F.2d 51 (9th Cir. 1962), where the Ninth Circuit Court of 23 Appeals “held that a fifty percent addition to tax for fraud did not abate at the [defendant] 24 taxpayer’s death.” Reiserer, 479 F.3d at 1164 (citing Estate of Rau, 301 F.2d at 56-57.) While 25 Estate of Rau predates the United States Supreme Court’s holding in Hudson and, therefore, did 26 not analyze the issue of whether the cause of action was extinguished upon the defendant 27 taxpayer’s death under Hudson’s two-part test, the Ninth Circuit Court of Appeals determined in 28 Reiserer that the holding and reasoning Estate of Rau was in line with subsequent Supreme Court 15 1 precedent because “its reasoning rests in part on the same precedent as that relied on in Hudson.” 2 Reiserer, 479 F.3d at 1164 (citing Estate of Rau, 301 F.2d at 55); see also Louis v. Comm’r, 170 3 F.3d 1232, 1235 (9th Cir. 1999). 4 Plaintiff asserts that the penalty assessed against Sandra Molen under 26 U.S.C. § 6702, 5 which was $500 for each violation,11 is far less onerous than the penalty assessing a fifty-percent 6 addition to tax for fraud that was held to be civil in nature in Estate of Rau, or the tax shelter 7 promoter penalty that was held to survive the death of the defendant taxpayer in Reiserer. The 8 court agrees. A flat $500 penalty for each frivolous return appears to be far less onerous in the 9 typical case than the penalties deemed to be civil in nature in both Estate of Rau and Reiserer. 10 Accordingly, the court finds that the frivolous return penalties assessed against Sandra Molen 11 under 26 U.S.C. § 6702 survive her death. 12 Because plaintiff’s claims against Sandra Molen under 26 U.S.C. § 6702 are not 13 extinguished by her death, the court may order pursuant to Rule 25(a)(1) that she be substituted 14 by a proper party. Furthermore, any party or Sandra Molen’s successor or representative may 15 make a motion for her substitution. Fed. R. Civ. P. 25(a)(1). However, if such a motion is not 16 made within 90 days after service of a “statement noting [Sandra Molen’s] death, the action . . . 17 against [her] must be dismissed.” Id. Defendants have listed Sandra Molen as “deceased” within the party caption in their 18 19 recent filings in this case, starting with the filing made on July 11, 2013. (See ECF Nos. 134, 20 158, 161, 164.) If these filings were to constitute a statement of death for purposes of Rule 25, 21 then plaintiffs’ claims Sandra Molen would have to be dismissed from this action because more 22 than 90 days has passed without the filing of a motion for substitution. See Fed. R. Civ. P. 23 24 25 26 27 28 11 For the years the assessments under Section 6702 were made against Sandra Molen, 1998 through 2004, the penalty for a frivolous return was $500 for each violation. This statute has since been amended and now imposes a $5,000 penalty on a person for filing a frivolous return. See 26 U.S.C. § 6702(a). The above analysis as to the issue of whether the civil penalty imposed by this statute is so onerous as to be criminal in effect is only with respect to the version of the statute under which the penalties at issue in this case were assessed against Sandra Molen. Accordingly, the court provides no opinion on whether the larger $5,000 penalty under the current version of this statute is so onerous that it is considered a criminal penalty under the Hudson test. 16 1 25(a)(1). However, in order for the 90 day period to commence, the statement of death must be 2 more than a mere reference to the deceased party’s death in a pleading or other filing and must 3 conform to certain presentation requirements. E.E.O.C. v. Timeless Investments, Inc., 734 F. 4 Supp. 2d 1035, 1056 (E.D. Cal. 2010) (quoting Grandbouche v. Lovell, 913 F.2d 835, 836 (10th 5 Cir. 1990) (“The 90 day time period is not triggered ‘unless a formal suggestion of death is made 6 on the record, regardless of whether the parties have knowledge of a party’s death,’ and the ‘mere 7 reference to a party’s death in court proceedings or pleadings is not sufficient.’”); Barlow v. 8 Ground, 39 F.3d 231, 233 (9th Cir. 1994) (party must serve the nonparty successors or 9 representatives of the deceased with a suggestion of death in compliance with the requirements 10 set out in Rule 4 of the Federal Rules of Civil Procedure); Colon v. Home Depot, U.S.A., Inc., 11 22009 WL 4158783 (E.D. Cal. Nov. 18, 2009) (finding that the mere reference to plaintiff’s death 12 in a joint status report filed with the court was insufficient to trigger the 90 day period under Rule 13 25(a)(1)); Fed. R. Civ. P. 25(a)(3) (requiring a statement noting death to be served on parties a 14 provided in Rule 5 of the Federal Rules of Civil Procedure). Accordingly, defendants’ mentions 15 of Sandra Molen’s alleged death up until the present have been insufficient to trigger the 90 day 16 period under Rule 25(a)(1).12 17 As noted above, no party has filed a motion requesting the substitution of Sandra Molen 18 with a proper party. Under Rule 25(a)(1), the court may order a such a substitution. However, 19 the court is not required to do so and may proceed to judgment with the original named parties 20 when no party has moved for substitution. See 6 Moore’s Fed. Practice 3d § 25.12(5) (citing 21 Ciccone v. Secretary of Dept of Health & Human Servs. of U.S., 861 F.2d 14, 15 (2d Cir. 1988), 22 Fariss v. Lynchburg Foundry, 769 F.2d 958, 962-63 (4th Cir. 1985), and Copier By & Through 23 Lindsey v. Smith & Wesson Corp., 138 F.3d 833, 835 (10th Cir. 1998)). Plaintiff requests that 24 the court enter judgment in this case against the currently-named defendants, including Sandra 25 12 26 27 28 Plaintiff, in its supplemental brief, requests that the court grant it an extension of time to file a motion to substitute parties up until the date of trial in the event that defendants do file a formal statement of death that meets the requirements of Rule 25. (ECF No. 171 at 5-6.) While it is premature to grant such a request, the court informs plaintiff that it is amenable to such a future request in the event that defendants do file a formal statement of death. 17 1 Molen, because plaintiff is presently unable to ascertain who the successor in interest or executor 2 of her estate may be, or whether Sandra Molen has an estate beyond the property already before 3 the court. (ECF No. 171 at 6.) Furthermore, plaintiff believes that defendant James O. Molen 4 may be the successor in interest or executor of Sandra Molen’s estate, thus negating the need for a 5 substitution of an outside party. Finally, plaintiff asserts that facts clarifying the above issues can 6 be ascertained during trial and a proper substitution, if necessary, can then be made at that time. 7 The court agrees. Therefore, Sandra Molen should not be substituted at this time and judgment 8 should be entered against her to the extent requested in plaintiff’s motion for partial summary 9 judgment. 10 VI. Conclusion 11 Based on the foregoing, IT IS HEREBY RECOMMENDED that: 12 1. Plaintiff’s Motion for Partial Summary Judgment (ECF No. 148) be GRANTED. 13 2. Judgment be entered against James O. Molen in the amount of $194,025.86 for unpaid 14 federal employment tax and $5,843.85 for frivolous return penalties, plus additional interest and 15 other statutory additions that have accrued since November 30, 2013.13 16 3. Judgment be entered against Sandra Molen in the amount of $3,867.27 for frivolous 17 return penalties, plus additional interest and other statutory additions that have accrued since 18 November 30, 2013.14 19 4. Judgment be entered against the James Orbin Molen Limited Partnership in the amount 20 of $19,092.67 plus additional interest and other statutory additions that have accrued since 21 November 30, 2013.15 22 //// 23 24 25 13 As of May 8, 2014, when additional interest and other statutory additions are taken into account, this judgment amount is $196,948.69 for unpaid federal employment tax and $5,920.67 for frivolous return penalties. 14 26 27 28 As of May 8, 2014, when additional interest and other statutory additions are taken into account, this judgment amount is $3,918.11 for frivolous return penalties. 15 As of May 8, 2014, when additional interest and other statutory additions are taken into account, this judgment amount is $19,389.05. 18 1 These findings and recommendations are submitted to the United States District Judge 2 assigned to the case, pursuant to the provisions of 28 U.S.C. § 636(b)(l). Within fourteen (14) 3 days after being served with these findings and recommendations, any party may file written 4 objections with the court and serve a copy on all parties. Such a document should be captioned 5 “Objections to Magistrate Judge’s Findings and Recommendations.” Any reply to the objections 6 shall be served on all parties and filed with the court within fourteen (14) days after service of the 7 objections. The parties are advised that failure to file objections within the specified time may 8 waive the right to appeal the District Court’s order. Turner v. Duncan, 158 F.3d 449, 455 (9th 9 Cir. 1998); Martinez v. Ylst, 951 F.2d 1153, 1156-57 (9th Cir. 1991). 10 11 IT IS SO RECOMMENDED. Dated: May 21, 2014 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 19
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