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United States v. Lavern Scherping, 98-2009 (1999)

Court: Court of Appeals for the Eighth Circuit Number: 98-2009 Visitors: 7
Filed: Aug. 11, 1999
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals FOR THE EIGHTH CIRCUIT _ No. 98-2009 _ United States of America, * * Appellee, * * v. * Appeal from the United States * District Court for the Laverne Scherping; Loren Scherping; * District of Minnesota Jane Scherping; Epsilon Company; * C.J.S. Ranch, * * Appellants. * _ Submitted: February 9, 1999 Filed: August 11, 1999 _ Before McMILLIAN, LAY and MURPHY, Circuit Judges. _ McMILLIAN, Circuit Judge. Appellants are two brothers, Laverne Scherping and Loren Scherping
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                    United States Court of Appeals
                            FOR THE EIGHTH CIRCUIT
                                  ___________

                                  No. 98-2009
                                  ___________

United States of America,             *
                                      *
            Appellee,                 *
                                      *
       v.                             * Appeal from the United States
                                      * District Court for the
Laverne Scherping; Loren Scherping;   * District of Minnesota
Jane Scherping; Epsilon Company;      *
C.J.S. Ranch,                         *
                                      *
            Appellants.               *
                                 ___________

                             Submitted: February 9, 1999

                                 Filed: August 11, 1999
                                  ___________

Before McMILLIAN, LAY and MURPHY, Circuit Judges.
                           ___________

McMILLIAN, Circuit Judge.


      Appellants are two brothers, Laverne Scherping and Loren Scherping, Loren's
wife, Jane Scherping, and two business trusts, Epsilon Co. and C.J.S. Ranch.
Appellants appeal from a summary judgment entered in the United States District
Court1 for the District of Minnesota in favor of the United States (government), holding
that the government was entitled to foreclose its tax liens upon appellants’ property to
satisfy their tax liabilities. United States v. Scherping, Civil File No. 97-2282
(PAM/JGL) (D. Minn. Mar. 9, 1998) (memorandum and order). For reversal,
appellants argue that the district court erred in: (1) finding the collection action was not
barred by the 6-year statute of limitations, (2) ordering a "reverse pierce" and imposing
liability upon C.J.S. Ranch for tax obligations of the Scherpings, and (3) finding that
the transfer of their property to Epsilon Co. was fraudulent because the transfer did not
render them insolvent. For the reasons discussed below, we affirm the judgment of the
district court.

                                    JURISDICTION

       The district court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1340
(original jurisdiction of civil action arising under any Act of Congress provision for the
Internal Revenue), 1345 (original jurisdiction of all civil actions, suits, or proceedings
commenced by the United States), and 26 U.S.C. § 7402 (action to reduce to judgment
tax assessments and foreclose tax liens against property). This court has appellate
jurisdiction pursuant to 28 U.S.C. § 1291. Appellants timely filed a notice of appeal.
Fed. R. App. P. 4(a)(1).

                             FACTUAL BACKGROUND

       This case has a long, checkered history, involving numerous tax court
proceedings. Laverne Scherping and Loren Scherping (taxpayers), who are brothers,
unsuccessfully appealed the two tax court cases from which this collection action arises
to this court. See Scherping v. Commissioner, 
747 F.2d 478
, 480 (8th Cir. 1984) (per


       1
        The Honorable Paul A. Magnuson, Chief Judge, United States District Court
for the District of Minnesota.

                                            -2-
curiam) (Laverne Scherping); Scherping v. Commissioner, 
725 F.2d 689
(8th Cir. 1983)
(table) (Loren Scherping). This collection action was filed in September 1989; the case
was stayed pending a criminal tax investigation of taxpayers and James Noske and Joan
Noske, involving some of the entities in issue here. Taxpayers were convicted on one
count of conspiracy to evade income taxes with respect to some of the transactions in
issue here, which convictions taxpayers unsuccessfully appealed. United States v.
Noske,, 
117 F.3d 1053
, 1056 (8th Cir.), cert. denied, 
118 S. Ct. 315
, 389 (1997).

       After the completion of the criminal tax proceedings, the government sought to
reduce to judgment taxpayers' tax assessments for tax years 1979 and 1980, and to
foreclose its federal tax liens on property owned by the taxpayers and purportedly
conveyed by them to the two business trusts, Epsilon and C.J.S. Ranch.

       By deeds dated December 21, 1972, January 2, 1973, and January 4, 1974,
Lawrence and Laura Scherping, taxpayers' parents, conveyed approximately 200 acres
of farm land property to taxpayers which had a fair market value in excess of $200,000.
On August 7, 1979, taxpayers transferred the same farm property to Epsilon for
consideration of ten dollars ($10.00) and other good and valuable consideration.
Taxpayers received shares in Epsilon. The trustees of Epsilon were taxpayers and their
mother, Laura Scherping. Evidence showed that after the transfer, Loren and Jane
Scherping not only continued to live on the farm property, but also farmed the property
and paid insurance and all of the utility bills. Moreover, the same farm property was
Epsilon's only asset and Epsilon maintained no bank account, financial records, or
balance sheets and filed neither federal or state tax returns.

      In October 1982 the government sent notices to taxpayers of deficiencies for tax
years 1979 and 1980, asserting taxes and penalties in the amount of $94,223 against
Laverne Scherping, against Loren and Jane Scherping for tax year 1979 for $33,683,
and against Loren Scherping for tax year 1980 for $51,418. Taxpayers contested in
tax court each of the notices and their petitions were dismissed for failure to state a

                                          -3-
claim. The tax court noted that taxpayers were part of an unending parade of taxpayers
bent on flooding the tax court's docket with frivolous claims. Thereafter, the tax court
determined the liabilities and additions to the taxes as set forth in the notice of
deficiencies. This court dismissed or affirmed taxpayers' appeals. Scherping v.
Commissioner, 747 F.2d at 480
; Scherping v. Commissioner, 
725 F.2d 689
. These are
the same assessments which the government seeks in this suit to reduce to judgment
and to collect.

      Subsequent to the transfer by taxpayers and their mother of the farm property to
Epsilon on January 13, 1983, taxpayers and Laura Scherping, as trustees of Epsilon,
recorded two deeds dated June 15, 1982, purporting to convey the same farm property
to Epsilon. Finally, by deed, reciting for consideration of $1,000 or less, Epsilon, by
taxpayers and Laura Scherping, purported to convey the same farm property to C.J.S.
Ranch. Epsilon received no consideration for the transfer. C.J.S. Ranch had no other
assets and did not maintain a bank account. Once again, as after the Epsilon
conveyance, Loren and Jane Scherping continued to live on the property, farmed it, and
paid no rent.

       After the completion of the criminal tax cases, the government moved to reopen
this case and for summary judgment, asking the district court to order a sale of the farm
property transferred by taxpayers to C.J.S. Ranch because Epsilon and C.J.S. Ranch
were alter egos of taxpayers and because the transfers of the same farm property to
Epsilon and C.J.S. Ranch were fraudulent under Minn. Stat. §§ 513.25 and 513.26.
Taxpayers filed an opposition to the government’s motion and their own affidavits.
Taxpayers argued that the collection action was untimely, that Minnesota law does not
allow “reverse” piercing of the corporate veil, and that the transfers to the business
trusts were not sham transactions or fraudulent conveyances.

      The district court granted summary judgment in favor of the government and
ordered the property to be sold (not including the 240 acres owned by C.J.S. Ranch

                                          -4-
that had been formerly owned by Laura Scherping) and the proceeds of the sale to be
paid over to the government (and any excess proceeds to be paid to taxpayers after
expenses and costs of sale). The district court rejected the statute of limitations
argument, holding that the liens filed against C.J.S. Ranch were not assessments of tax
against C.J.S. Ranch but against taxpayers and Jane Scherping. See slip op. at 6-7
(noting that the government timely filed a suit against taxpayers and that, once suit is
timely filed, proceeding to judgment was not curtailed by statute of limitations). The
district court also held that, under Minnesota law, the trusts were alter egos of
taxpayers because there was a close identity between taxpayers and the trusts,
taxpayers were not innocent individuals, and application of the alter ego theory would
prevent the very sort of fraud and injustice that the alter ego doctrine seeks to avoid,
and rejected taxpayers’ argument that Minnesota courts would refuse to apply the
“reverse” piercing-the-corporate-veil doctrine under these circumstances. See 
id. at 7-12.
The district court also held, in the alternative, that the transfers by taxpayers to
Epsilon and C.J.S. Ranch in 1979 and 1982, respectively, were fraudulent conveyances
under Minnesota law. See 
id. at 12-15.
This appeal followed.

                              STANDARD OF REVIEW

       This court reviews a grant of summary judgment de novo. See, e.g., Dillon v.
Yankton Sioux Tribe Housing Authority, 
144 F.3d 581
, 583 (8th Cir. 1998). Fed. R.
Civ. P. 56(c) provides that summary judgment shall be granted where the record reveals
that there is no genuine issue of material fact and that the moving party is entitled to
judgment as a matter of law. See Celotex Corp. v. Catrett, 
477 U.S. 317
, 322 (1986);
Anderson v. Liberty Lobby, Inc., 
477 U.S. 242
, 246 (1986); Postscript Enterprises v.
City of Bridgeton, 
905 F.2d 223
, 225 (8th Cir. 1990).




                                           -5-
                            STATUTE OF LIMITATIONS

       First, taxpayers argue that the district court erred in holding that this action was
not barred by the 6-year statute of limitations. Title 26 U.S.C. § 6502, as in effect at
the relevant time, provided in pertinent part:

            (a) Length of period. -- Where the assessment of any tax imposed
      by this title has been made within the period of limitation properly
      applicable thereto, such tax may be collected by levy or by a proceeding
      in court, but only if the levy is made or the proceeding begun–

              (1) within 6 years after the assessment of the tax, or
              ....
      If a timely proceeding in court for the collection of a tax is commenced,
      the period during which such tax may be collected by levy shall be
      extended and shall not expire until the liability for the tax (or a judgment
      against the taxpayer arising from such liability) is satisfied or becomes
      unenforceable.


Here, it is undisputed that this collection action was timely filed within the 6-year
statutory period. The government filed the notices of federal tax liens in 1984; this
collection action was filed in 1989, within the 6-year statutory period, although the
government failed to make effective service on C.J.S. Ranch at that time. Eight years
later, in 1992, the government amended its complaint to add C.J.S. Ranch as a party.
Taxpayers argue that C.J.S. Ranch was improperly added as a party because the
collection was not begun against it until 1992, more than 6 years after the assessment
of tax in 1984. Taxpayers argue that because C.J.S. Ranch is allegedly their alter ego,
C.J.S. Ranch stands in their shoes and the government had to file the collection action


                                           -6-
against it within 6 years. For that reason, taxpayers argue that the collection action is
one against C.J.S. Ranch for primary liability and not, as the district court found, for
collateral liability to collect a judgment against taxpayers. We disagree.

       Taxpayers’ reliance on Hall v. United States, 
403 F.2d 344
(5th Cir. 1968), cert.
denied, 
394 U.S. 958
(1969), and United States v. Updike, 
281 U.S. 489
(1930), is
misplaced. We note that Hall expressly holds that § 6502 is inapplicable to bar a suit
against third persons in aid of collecting a judgment against a taxpayer. 
See 403 F.2d at 346
. Here, there is no doubt that C.J.S. Ranch is a third person. Updike held an
action against transferees to be barred by the predecessor statute to § 6502 where no
proceeding to collect the tax had been commenced within the statutory period, relying
on statutory language regarding collection of assessments against transferees of the
taxpayers (in contrast, the assessments here were against the taxpayers, not the
transferees). 
See 403 U.S. at 492-96
. As noted above, in the present case there is no
dispute that the suit against taxpayers was timely filed, so Updike is inapplicable here.
Moreover, neither Hall nor Updike involved an alleged third party which was found to
be an alter ego of the taxpayer against whom a timely suit had been filed. Contrary to
taxpayers’ argument, the government did not seek to reduce to judgment any tax
assessment made against C.J.S. Ranch, nor does the record anywhere include such a
judgment. The district court's order reducing the assessment to judgment states that the
assessments in issue are against Laverne, Loren, and Jane Scherping, and are based
upon the tax court's decisions against those individuals and not against C.J.S. Ranch.

                                      ALTER EGO

       On the merits, taxpayers argue that the district court erred in “reverse” piercing
the corporate veil to hold C.J.S. Ranch liable for their individual tax liabilities.
Taxpayers argue that Minnesota courts would not extend the alter ego doctrine as a
creditor’s remedy beyond its traditional context, that is, to hold the individual liable for
corporate debts. Taxpayers argue that the two Minnesota cases applying the reverse

                                            -7-
piercing doctrine were remedial and limited to the specific facts, citing Roepke v.
Western National Mutual Insurance Co., 
302 N.W.2d 350
(Minn. 1981) (Roepke) (no
fault insurance), and Cargill, Inc. v. Hedge, 
375 N.W.2d 477
(Minn. 1985) (Cargill)
(homestead exemption). Taxpayers also argue that, even assuming Minnesota courts
would extend the reverse piercing doctrine to the collection of tax, the test for
application of the doctrine was not met here because there are no strong policy reasons
to do so, the degree of identity between taxpayers and the trusts is less than 50%, and
application of the doctrine would harm an innocent individual, taxpayers’ mother, Laura
Scherping. We disagree.

       The government may collect the tax debts of a taxpayer from assets of the
taxpayer’s nominee, instrumentality, or "alter ego." See G.M. Leasing Corp. v. United
States, 
429 U.S. 338
, 350-51 (1977); Horton Dairy, Inc. v. United States, 
986 F.2d 286
, 291 (8th Cir. 1993); F.P.P. Enterprises v. United States, 
830 F.2d 114
, 117-18 (8th
Cir. 1987). In determining the economic reality of a transaction, courts must analyze
the substance of a transaction and are not restricted by its form. See, e.g., Gregory v.
Helvering, 
293 U.S. 465
, 469-70 (1935); Estate of Sachs v. Commissioner, 
856 F.2d 1158
, 1164 (8th Cir. 1988). While taxpayers are permitted to reduce their tax burden
by any lawful means available, they are not permitted “to construct paper entities to
avoid taxation when those entities are without economic substance.” Chase v.
Commissioner, 
59 T.C.M. 261
, 264 (1990) (citations omitted), aff'd, 
926 F.2d 737
(8th Cir. 1991).

      When an entity is without economic substance, it may be deemed to be the “alter
ego” of the taxpayer. “Alter ego means ‘other self’ – where one person or entity acts
like, or, for another to the extent that they may be considered identical.” Loving
Saviour Church v. United States, 
556 F. Supp. 688
, 691 (D.S.D. 1983), aff'd, 
728 F.2d 1085
(8th Cir. 1983) (per curiam). “Property held in the name of an entity which is the
alter ego of a taxpayer may be levied on to satisfy the tax liabilities of the taxpayer.”
F.F.P. 
Enterprises, 830 F.2d at 118
(upholding finding that trusts created by taxpayers

                                          -8-
were the alter egos of taxpayers, and therefore not separate persons apart from
taxpayers).

        Generally, federal courts will look to state law to determine whether an entity is
an alter ego of a taxpayer. See Loving Saviour 
Church, 728 F.2d at 1086
(citing
Aquilino v. United States, 
363 U.S. 509
, 512-13 (1960)). In Victoria Elevator Co. v.
Meriden Grain Co., 
283 N.W.2d 509
, 513 (Minn. 1979) (Victoria Elevator), the court
held that where a shareholder “did not treat the corporation as a separate legal entity,
he should not be entitled to its protection against personal liability.” In determining
whether an entity is the alter ego of an individual, Minnesota courts, since Victoria
Elevator, have employed a two-step analysis. In the first step, the court considers the
relationship between the individual and the entity (typically a corporation), focusing on
such factors as the “failure to observe corporate formalities, nonpayment of
dividends, . . . siphoning of funds [by the individual], . . . absence of . . . records [for
the entity], and the existence of [the entity] as merely a facade for [the individual].”
White v. Jorgenson, 
322 N.W.2d 607
, 608 (Minn. 1982). “Disregard of the corporate
entity requires not only that a number of these factors be present, but also that there be
an element of injustice or fundamental unfairness.” Victoria 
Elevator, 283 N.W.2d at 512
. Thus, in the second step, the court considers the relationship between the entity
and the party that seeks to disregard it; only if the entity has operated in a fraudulent
or unjust manner toward that party will the entity be disregarded. See BBCA, Inc. v.
United States, 
630 F. Supp. 349
, 351 (D. Minn. 1986) (BBCA) (noting that proof of
strict common law fraud is not required) (citing White v. 
Jorgenson, 322 N.W.2d at 608
). “[W]here the formalities of corporate [or, as in the present case, trust] existence
are disregarded by one seeking to use it, . . . [the] existence [of the corporation or trust]
cannot be allowed to shield the individual from liability for damages incurred by those
dealing with the corporation [or for taxes owed by the individual].” Victoria 
Elevator, 283 N.W.2d at 512
.




                                            -9-
       We hold that the district court properly concluded, based on the undisputed facts,
that Epsilon and C.J.S. Ranch were sham entities created on behalf of and used by
taxpayers to evade payment of their federal income tax liabilities. Indeed, taxpayers
even admitted in their depositions that they, together with their mother, Laura
Scherping, were trustees of Epsilon; that they received no compensation for the
transfers other than shares in the trust; that Epsilon received no compensation
whatsoever for the transfer to C.J.S. Ranch; that Loren and Jane Scherping continued
to live on the property and taxpayers continued to farm the property, after both
transfers; and that neither Epsilon nor C.J.S. Ranch had any other assets or maintained
separate checking accounts.

       Although taxpayers were not trustees of C.J.S. Ranch, they, together with their
mother, Laura Scherping, held 100% of the beneficial interest in that trust. The trustees
of C.J.S. were two South Dakota non-profit corporations, Parnell, Inc., and
Armageddon, Inc., that have been repeatedly recognized as vehicles for the promotion
of abusive tax shelters. See Paulson v. Commissioner, 
992 F.2d 789
, 790-91 (8th Cir.
1993) (per curiam) (Armageddon and Parnell were trustees of entity determined to be
a sham where at trial the presidents of Armageddon and Parnell testified they had never
heard of either entity and had not performed any act for these entities); Xemas, Inc. v.
United States, 
689 F. Supp. 917
, 921 (D. Minn. 1988) (Xemas) (Armageddon and
Parnell recognized as vehicles for the promotion of abusive tax shelters), aff'd, 
889 F.2d 1081
(8th Cir. 1989) (table), cert. denied, 
494 U.S. 1027
(1990). We note that
taxpayers’ criminal convictions, which related to their efforts and to the efforts of their
related entities to operate in a fraudulent manner by conspiring to evade the payment
of federal income taxes, combined with the tax court’s holding that taxpayers’ other
vehicle for tax avoidance, Imperial Investment, Inc., was a sham trust, and the facts
outlined above which are based on taxpayers' own statements in depositions,
overwhelmingly demonstrated that Epsilon and C.J.S. Ranch were sham entities
operated in a fraudulent manner vis-a-vis the government and should therefore be
disregarded. See Scherping v. Commissioner, 
58 T.C.M. 1046
, 1047 (1989)

                                           -10-
(finding Imperial was a sham entity and taxpayers’ alleged transfers of asserts to
Imperial was a sham).

       Taxpayers next argue that the reverse piercing of the corporate veil unfairly
penalized the trusts for acts over which the trusts had no control. This argument,
however, ignores the fact that the district court found that the trusts were the alter egos
of taxpayers, and thus not separate entities. As the Fifth Circuit explained in Zahra
Spiritual Trust v. United States, 
910 F.2d 240
, 243-44 (1990), “[t]he ultimate goal in
a reverse piercing case is unique; rather than merely disregarding the corporate fiction
and holding the shareholders accountable, the court treats the individual and the
corporation as ‘one and the same.’” See also F.P.P. 
Enterprises, 830 F.2d at 118
(upholding finding that trusts created by taxpayers were the alter egos of taxpayers, and
therefore not separate persons apart from taxpayers). Taxpayers acknowledge that the
present case involves reverse piercing, but they argue that the Minnesota courts would
not extend the alter ego doctrine as a creditor’s remedy beyond its traditional context,
that is, to hold the individual liable for corporate debts. Taxpayers cite numerous
cases in which Minnesota courts have rejected attempts to apply the reverse piercing
doctrine as a creditor’s remedy.

       The government argues correctly that reverse piercing is a well-established
theory in the federal tax realm. See, e.g., Zahra Spiritual Trust v. United 
States, 910 F.2d at 243
(applying Texas law); Shades Ridge Holding Co. v. United States, 
888 F.2d 725
, 728 (11th Cir. 1989), cert. denied, 
494 U.S. 1027
(1990); Loving Saviour
Church, 728 F.2d at 1086
(holding that the IRS could levy on church property to satisfy
the tax liabilities of its members in appropriate circumstances); Cargill, 
375 N.W.2d 477
(applying Minnesota law to reverse pierce in case involving homestead
exemption); Roepke, 
302 N.W.2d 350
(applying Minnesota law to reverse pierce to
provide an equitable result in case involving no fault insurance). In Cargill, the issue
was whether the owner-occupants of a farm, by placing their land in a family farm
corporation, were entitled to use a reverse pierce of the corporate entity to assert a

                                           -11-
homestead exemption from judgment creditors. While declining to adopt an equitable
interest theory, the court allowed a reverse pierce to protect the owner-occupants’
homestead exemption, holding that “the approach of a reverse pierce of the corporate
veil may be 
used.” 375 N.W.2d at 478
, citing Roepke, 
302 N.W.2d 350
. The court
emphasized the strong policy reason for a reverse pierce, namely, “the importance,
notwithstanding the just demands of creditors, for a debtor’s home to be a ‘sanctuary.’”
Id. at 479.
In Roepke the court disregarded the corporate entity to further the purposes
of no fault insurance. “Although title to six motor vehicles was in a corporation,
. . . [the court] treated the vehicles as if they had been owned by the deceased, sole
shareholder of the corporation, so that the decedent could be deemed an ‘insured’
under the no-fault policy for the purpose of survivors’ benefits.” 
Id. (discussing Roepke).
       We believe that the present case meets the standards established in Cargill and
Roepke. Contrary to taxpayers’ argument, there are strong policy reasons for reverse
piercing the corporate veil in the present case, that is, avoiding fraud and collecting
delinquent federal taxes. In addition, contrary to taxpayers’ argument, there is a strong
degree of identity between the “guilty” individuals and the entities to be disregarded.
The trusts in issue here did nothing other than hold title to real property. The district
court properly looked only to the real property transferred to the trusts by taxpayers,
who were hardly innocent individuals needing protection. The interests of taxpayers’
mother are not harmed because, in addition to the language in the district court's order,
there is an agreement in effect in which the government has agreed not to seek to
collect taxpayers’ liability from the property transferred by her. Thus, contrary to
taxpayers' contention, the reverse pierce here does not harm any innocent individual.




                                          -12-
                          FRAUDULENT CONVEYANCE

       Finally, we consider taxpayers’ argument that the district court erred in holding
that the transfers of the property to Epsilon and C.J.S. Ranch were fraudulent under
Minnesota law. Taxpayers argue that the transfers could not have been fraudulent
because they were not insolvent at the time of the transfers. Whether a conveyance
may be set aside as fraudulent must be determined in accordance with state law. See
Loving Saviour 
Church, 556 F. Supp. at 691
. The Minnesota Uniform Fraudulent
Conveyance Act in effect at the time of the alleged transfers to Epsilon in 1979 and to
C.J.S. Ranch in 1982 was contained in Minn. Stat. §§ 513.20-.32.11 (These sections
were repealed in 1986 and replaced in part with Minn. Stat. § 513.44.)

       Minnesota Uniform Fraudulent Conveyance Act provided several alternative
theories under which a creditor may set aside a fraudulent conveyance. The
government argues that it did not seek to prove that the transfers were fraudulent
conveyances under the section that required proof of insolvency, Minn. Stat. § 513.23;
rather, the government (and the district court) relied on two sections, § 513.25
(conveyance by a person about to incur debt),2 and § 513.26 (conveyance made with




      2
        Minn. Stat. § 513.25 provided: “Every conveyance made and every obligation
incurred without fair consideration when the person making the conveyance or entering
into the obligation intends or believes that he [or she] will incur debts beyond his [or
her] ability to pay as they mature, is fraudulent as to both present and future creditors.”

                                           -13-
intent to defraud),3 in which insolvency was just one factor to be considered in
determining whether a transfer was made with actual intent to defraud.

       As the district court properly noted, actual intent for the purpose of § 513.26 may
not be presumed. See slip op. at 13. One may establish actual intent through the
examination of circumstantial evidence or “badges of fraud.” Citizens State Bank v.
Leth, 
450 N.W.2d 923
, 927 (Minn. Ct. App. 1990) (Leth) (applying Minn. Stat.
§ 513.44). Under Minnesota law, although the creditor bears the initial burden of
proving fraud, if a creditor demonstrates sufficient badges of fraud, the burden of
production shifts to the party contending that a fraudulent conveyance has not occurred.
See Argonaut Insurance Co. v. Cooper, 
395 N.W.2d 119
, 121-22 (Minn. Ct. App.
1986) (Argonaut) (applying Minn. Stat. § 513.26); accord 
Xemas, 689 F. Supp. at 922
(applying Minn. Stat. §§ 513.23, 26). The badges of fraud which courts are to consider
when determining actual intent include, but are not limited to: “adequacy of
consideration, confidential relationship between grantor and grantee, . . . retention of
possession of the property by the debtor, failure to testify or produce available
explanatory or rebutting evidence when circumstances attending to transfer are
suspicious,” 
Argonaut, 395 N.W.2d at 122
, failure to record the transfer or conveyance
documents, prospective debts or threats of suit, and the insolvency of the debtor either
before or as a result of the transaction. See 
Leth, 450 N.W.2d at 927
. Minn. Stat. §
513.44(b) lists as factors to be considered whether before the transfer was made or
obligation was incurred, the debtor had been sued or threatened with suit (id. §
513.44(b)(4)); whether the transfer was of substantially all of the debtor’s assets (id.
§ 513.44(b)(5)); and whether the transfer occurred shortly before or shortly after a
substantial debt was incurred (id. § 513.44(b)(10)).


      3
        Minn. Stat. § 513.26 provided: “Every conveyance made and every obligation
incurred with actual intent, as distinguished from intent presumed in law, to hinder,
delay, or defraud either present or future creditors, is fraudulent as to both present and
future creditors.”

                                          -14-
       Here, we agree with the district court that there was sufficient circumstantial
evidence that the transfers were fraudulent. It is undisputed that both transfers were
made for inadequate consideration. Furthermore, taxpayers admitted that they
continued to farm the property after each transfer and that Loren and Jane Scherping
continued to live on the property after each transfer. As discussed above, the district
court correctly found that both Epsilon and C.J.S. Ranch were taxpayers’ alter egos.
Thus, it is clear that taxpayers retained control over the property. See slip op. at 14.
The trusts did not maintain separate financial records or bank accounts. In addition,
as noted above, taxpayers made deliberate efforts to evade tax and they were found
guilty of conspiracy for tax evasion. See 
id. Likewise, we
note that the undisputed facts show that both transfers occurred
shortly before or shortly after taxpayers acquired substantial debts. It is well
established that, regardless of when federal taxes are actually assessed, the United
States is a creditor on the date a return is due to be filed and the taxes are required to
be paid for each period. See, e.g., Hartman v. Lauchli, 
238 F.2d 881
, 887 (8th Cir.
1956), cert. denied, 
353 U.S. 965
(1957). The tax liabilities in issue here were those
for tax years 1979 and 1980. Thus, taxpayers incurred the indebtedness in issue as of
April 15, 1980, and April 15, 1981, that is, shortly after the initial transfer of the
property to Epsilon and shortly before the second transfer to C.J.S. Ranch. Moreover,
we note that taxpayers admit that they did not file the trust agreement for Epsilon,
which is the trust they contend owned the property after 1979, with the Minnesota
Secretary of State until June 1982, shortly after incurring those debts. The assessments
were made on September 27, 1983, shortly after the date of the alleged transfer to
C.J.S. Ranch, and shortly before the recording of the deed. Moreover, the sham
transfer of taxpayers’ remaining assets to Imperial took place on May 24, 1983, shortly
after the Tax Court dismissed taxpayers' petition for the tax years in issue here. See
Scherping v. 
Commissioner, 58 T.C.M. at 1047
. Thus, on the undisputed facts,
taxpayers engaged in an extensive pattern of transferring all of their assets shortly


                                          -15-
before or shortly after various events occurred relating to their accumulation of
substantial tax debts.

        Finally, the assets that taxpayers point to to show that they were not insolvent
after the transfers were their cattle and farm equipment, which they transferred to a
third sham entity, Imperial, at approximately the same time of the second transfer to
C.J.S. Ranch. Consequently, taxpayers were insolvent at the conclusion of all the
transfers, and they were rendered insolvent by the transfer to C.J.S. Ranch. See Minn.
Stat. § 513.42(d) (for purposes of determining the solvency or insolvency of a debtor,
assets that have been fraudulently transferred are not included in the calculation of
assets); FDIC v. United States, 
654 F. Supp. 794
, 810 (N.D. Ga. 1986) (assets hidden
from creditors not available to creditors and may not be considered in support of
solvency claim). Thus, taxpayers had no remaining assets after the transfers to the two
trusts.

       In sum, we hold that the present collection action was not barred by the 6-year
statute of limitations, the trusts were the alter egos of taxpayers and were liable for
taxpayers’ tax liabilities under the reverse pierce doctrine, and the transfers to the trusts
were fraudulent conveyances under Minnesota law.

       Accordingly, we affirm the judgment of the district court.

       A true copy.

              Attest:

                 CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                            -16-

Source:  CourtListener

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