IRENE C. BERGER, District Judge.
On the 2nd day of February, 2015, a bench trial was held in the above-styled matter. Having heard the evidence and having reviewed the exhibits presented at trial, as well as the parties' submissions,
This case involves unpaid tax assessments against Gerard O'Shea, Kathnell O'Shea, and the All About Beauty Trust for tax years 2002, 2003, and 2004. On August 6, 2012, the United States brought suit to reduce those assessments to judgment and to foreclose federal tax liens against four parcels of real property, all in Greenbrier County, West Virginia. The O'Sheas conveyed two parcels to the Genesis Trust in 1997. A third parcel was purchased by Gerard, Kathnell, and Kim O'Shea
The Defendants, proceeding pro se, filed a Motion to Dismiss, or Alternatively for Judgment on the Pleadings (Document 39) on May 29, 2013, asserting that the United States had failed to meet certain technical requirements for bringing suit, purportedly depriving the Court of jurisdiction. The Court denied their motion on October 3, 2013. (Document 56.) The Court permitted the United States to file its First Amended Complaint for Federal Taxes (Document 60) on November 13, 2013. On December 23, 2013, the Defendants moved to dismiss the amended complaint, contending that it contained allegations of fraud and did not comply with Federal Rule of Civil Procedure 9(b). (Document 61.) The Court denied the motion on February 12, 2014, based on the United States' assurances that it was not alleging that the O'Sheas committed fraud. (Document 65.) Defendant Kathnell O'Shea filed a Motion for Summary Judgment (Document 66) on April 30, 2014, contending that the United States had failed to mail her the statutorily required Notices of Deficiency. The United States required several extensions to gather the necessary documents, (see Documents 70, 72, & 74), but ultimately produced evidence that the notices had been properly mailed. (Document 76.) The Court denied Kathnell O'Shea's motion for summary judgment on August 28, 2014. (Document 87.)
The Defendants filed pretrial motions seeking dismissal due to the United States' alleged failure to make pretrial disclosures. The Court denied the motions, finding that both parties had failed to meet discovery obligations and that exclusion of evidence and/or dismissal were more severe sanctions than the facts warranted. During trial, the Defendants contested the authenticity of many of the exhibits presented by the United States. The Court overruled the objections, and noted that all of the documents presented were official records. Further, the case law supports the finding that the forms suffice to establish the Government's case absent contradictory evidence.
The Government's primary witness, Internal Revenue Service (IRS) officer Gregory Yurick, testified that Gerard O'Shea and Kathnell O'Shea had failed to file income tax returns for 2002, 2003 and 2004, and that the All About Beauty Trust had filed returns reflecting a balance of $0. The Government introduced the tax assessments, as memorialized in Form 4340, against each Defendant taxpayer for the years of 2002, 2003, and 2004, as well as the current amounts due, including applicable taxes, penalties, fees, and interest.
For Gerard O'Shea, the IRS assessed taxes owed of $38,840.00 for 2002 (Ex. 1), $74,441.00 for 2003 (Ex. 2), and $66,471.00 for 2004 (Ex. 3). For each year, Mr. Yurick testified, a "ninety day letter" was sent to notify the taxpayers of the deficiency after the IRS filed a "substitute for return" identifying the taxes due. This letter gives the taxpayer an opportunity to challenge the proposed IRS assessment within ninety days. Absent a response from the taxpayer, the assessment becomes final. Defendant Gerard O'Shea did not respond to any of the ninety-day letters.
For Kathnell O'Shea, the IRS assessed taxes owed of $38,840.00 for 2002 (Ex. 4), $73,275.00 for 2003 (Ex. 5), and $62,066.00 for 2004 (Ex. 6). She also failed to respond to the ninety-day letters. For the All About Beauty Trust, the IRS assessed taxes owed of $44,522.00 for 2002 (Ex. 7), $36,172.00 for 2003 (Ex. 8), and of $28,006.00 for 2004 (Ex. 9). There was no response to the ninety-day letters.
Each taxpayer failed to respond to the notices of deficiency, which were sent to the correct mailing address, or to make any appeal of the assessments in tax court. The assessments, therefore, became final. No payments were made after the assessments. Additional fees, penalties, and interest accumulated over the years. The only payments were in the form of a continuous levy against Defendant Gerard O'Shea's social security income, which satisfied the full balance due for his 2002 liability, leaving a credit of $1,317. The payoff calculation for Defendant Gerard O'Shea, as of the trial date of February 2, 2015, was $159,040.11 for 2003 and $154,910.60 for 2004, for a total of $312,633.71. (See Ex. 13.) The payoff calculation for Defendant Kathnell O'Shea was $98,656.14 for 2002, $178,226.41 for 2003, and $144,657.08 for 2004, for a total of $421.539.63. (Id.) The payoff calculation for the All About Beauty Trust was $94,470.58 for 2002, $89,853.89 for 2003, and $62,220.25 for 2004, for a total balance of $246,544.72. (Id.)
The Government seeks to enforce federal tax liens against four parcels of property. Parcel One, located at 191 Hartsook Road, Clintonville, West Virginia, is numbered 18 51003800000000.
Parcel One is currently deeded to Kathnell and Gerard O'Shea as Trustees of the Genesis Trust. (Ex. 27.)
The Government recorded Notices of Federal Tax Liens with the Clerk of the County Commission in Greenbrier County, West Virginia, against Gerard and Kathnell O'Shea and the All About Beauty Trust for tax years 2002, 2003, and 2004. (Ex. 14, 15, 16.) In addition, the Government recorded Notices of Federal Tax Liens against the Genesis Trust as nominee and/or alter ego of Kathnell O'Shea and of Gerard O'Shea to attach to residential and farm property, parcel number 18 51003800000000. (Ex. 17 and 18.) Notices of Federal Tax Liens were recorded against Gand K Trust as nominee and/or alter ego of Gerard and Kathnell O'Shea to attach to mixed residential and commercial real estate, parcel 10 19014600000000. (Ex. 19 and 20.)
Mr. Yurick explained that certain facts about the properties and the O'Sheas' use of the Trusts suggested to him that they may be sham trusts, warranting further investigation. Following further review, he concluded that the Genesis Trust and the Gand K Trust were, in fact, sham trusts and alter ego/nominees for the Defendants, Gerard and Kathnell O'Shea. Gerard O'Shea signed a check payable to James Dilullo and admitted to meeting with him.
Under relevant law, the Court finds that the Government has met its burden of proof required to reduce the tax liabilities to judgments and to enforce the resulting federal tax liens. When Defendants Gerard O'Shea and Kathnell O'Shea failed to file tax returns, the IRS properly prepared substitutes for returns. 26 U.S.C. § 6020(b)(1). When the All About Beauty Trust filed tax returns reflecting a zero balance, the IRS properly investigated and prepared a substitute return with accurate information. Id. Upon finding deficiencies, the IRS complied with 26 U.S.C. § 6212 by sending statutory notices of deficiency to the last known address of the taxpayer defendants.
Pursuant to § 6213, the O'Sheas had the opportunity to "file a petition with the Tax Court for a redetermination of the deficiency" within ninety days after the mailing of the notices of deficiency. 26 U.S.C. § 6213(a). "If the taxpayer does not file a petition with the Tax Court within the time prescribed in subsection (a), the deficiency. . .shall be assessed, and shall be paid upon notice and demand from the Secretary." 26 U.S.C. § 6213(c). Although the O'Sheas now suggest that the assessments are inaccurate, the time for such contentions is long past. (Def.'s Proposed Findings of Fact and Conclusions of Law, 2-3.)
Because the Defendants failed to satisfy the deficiency after receiving notice and demand for payment, "the amount. . .shall be a lien in favor of the United States upon all property and rights to property. . .belonging to such person." 26 U.S.C. § 6321. In turn, § 7403 gives the United States authority to bring an action in federal district court to enforce the liens. 26 U.S.C. § 7403. All property belonging to the taxpayer Defendants is accordingly subject to seizure. That includes property held by a nominee owner or alter ego for the taxpayers. G. M. Leasing Corp. v. United States, 429 U.S. 338, 350-51 (1977).
Courts consider the totality of the circumstances in determining nominee/alter ego status. For nominee status, the factors to be considered include:
United States v. Holland, 637 F.Supp.2d 315, 320 (E.D.N.C. 2009) amended on reconsideration on unrelated grounds, No. 5:07-CV-445-BO, 2009 WL 3166852 (E.D.N.C. Aug. 13, 2009) aff'd, 396 F. App'x 937 (4th Cir. 2010) (quoting United States v. Greer, 383 F.Supp.2d 861, 868 (W.D.N.C.2005)). The West Virginia Supreme Court has established a similar totality of the circumstances test, with a set of factors to be considered, for determining whether to pierce the corporate veil. Laya v. Erin Homes, Inc., 177 352 S.E.2d 93, 98-99 (W. Va. 1986).
The only testimony offered by the Defendants, beyond a brief examination of Defendant Gerard O'Shea by the Government, consisted of statements by Defendant Kathnell O'Shea regarding the establishment of the trusts. She explained that they were unaware that the trusts were fraudulent and their intent had only been to protect what they owned. None of the Defendants contested the fact that they continued to control the properties or indicated that the trusts served any purpose beyond insulating the family's assets. As found above, the properties were transferred to the Trusts for nominal consideration. The O'Sheas continued to use the properties for their residence and their business, and continued to enjoy the benefits and burdens of ownership. In short, the Gand K and Genesis Trusts existed solely to hold legal title to properties that the O'Sheas continued to control. Accordingly, the Court finds that the Gand K and Genesis Trusts are the alter egos and nominees of Gerard and Kathnell O'Shea, and should be set aside for federal income tax purposes.
The Court further
The Court