GOVERNMENT'S LIEN AGAINST COMMUNITY PROPERTY VALID.

                    UNITED STATES DISTRICT COURT

[1] The present motion concerns the relationship between federal tax liens and property held in a revocable trust. ¹ The Court must determine the extent to which a federal tax lien against an individual attaches to community property held by a revocable trust on behalf of the individual and his wife. The Court finds first that, in California, a tax lien can attach to property held within a revocable trust, notwithstanding the fact that the trust nominally holds title to the property. The Court next finds that a tax lien may attach to community property for the tax debts of an individual. Thus, in California, the tax lien may attach to community property that is held on behalf of the individual and his wife by a revocable trust, and the property may be used to satisfy the tax debts of the individual.

[2] As discussed in greater detail below, Emile Stolle II ("Stolle") fraudulently overstated certain expenses on his family's tax returns for 1985, 1986, 1987, 1989, 1990, and 1991, and then significantly underpaid his taxes for those years. In 1992, Stolle was convicted of criminal charges relating to the false tax returns for 1985, 1986, and 1987. In 1992 and 1993, the government calculated the amount of tax that Stolle ought to have paid for the years 1985, 1986, 1987, 1989, 1990, and 1991; the government then served Stolle with a demand that the Stolles pay the difference between what was already paid and what he should have paid (plus interest and penalties). Stolle's debt to the government for his underpayments in 1985, 1986, and 1987 exceeded $400,000, while his debts for the underpayments in 1989, 1990, and 1991 exceeded $10,000. ²

[3] In the current case, the government seeks to validate tax liens filed on four pieces of real property. Stolle and his wife originally owned the four pieces of property as community property in California. In 1989, Stolle and his wife transferred the property to a revocable trust. In 1992 and 1993, the government served Stolle with assessments for amounts owed as a result of Stolle's underpayment of taxes, and Stolle failed to either contest or pay those assessments.

[4] The government contends that Stolle's failure to contest or pay the assessments resulted in a lien against all of Stolle's property. The government further contends that, as viewed by federal tax law, Stolle continued to have an interest in the four pieces of real property. As such, the government contends that Stolle's interest in those four pieces of government property became subject to lien. The government seeks validation of those liens.

[5] As noted above, the Court agrees that under federal tax law Stolle continued to have an interest in the four pieces of property. As such, the government's tax liens attached in 1992 and 1993 to Stolle's interest in the four pieces of property. Finally, because Stolle and his wife held the property in 1992 and 1993 as community property, all of the property became subject to the liens and the liens attached to the entire property. As a result, the liens have continued to exist on the property since 1992 and 1993 and Stolle's subsequent death did not remove the liens.

II. BACKGROUND

[6] On a motion for summary judgment, the Court must resolve all disputed facts in favor of the non-moving party, and draw all reasonable inferences in favor of the non-moving party. In this motion, Stolle's widow Helen Stolle ("Helen Stolle") and the Stolle Revocable Family Trust ("Revocable Trust") are the non-moving parties. As a result, the Court resolves all disputed facts in favor of Helen Stolle and the Revocable Trust, and draws all reasonable inferences in their favor. ³

[7] Under that standard, the relevant facts are as follows:

     A. STOLLE ESTABLISHES A SCHEME TO INFLATE EXPENSES REPORTED ON

[9] Because Stolle claimed higher deductions than he should have, Stolle claimed that his income tax was lower than it should have been. Stolle filed inappropriate deductions on his joint tax returns for 1985, 1986, 1987, 1989, 1990, and 1991, and he significantly underpaid taxes for those years.

     B. STOLLE AND HIS WIFE ESTABLISH A REVOCABLE LIVING TRUST AND

          1. STOLLE AND HIS WIFE RETAIN TOTAL CONTROL OF THE ASSETS

          2. STOLLE AND HIS WIFE TRANSFER FOUR PARCELS OF COMMUNITY

[13] The first four items listed in Schedule A are: "Real property located at 4900 Briggs Avenue, La Crescenta, California 91214," "Real property located at 3651 Foothill Blvd., La Crecenta, California 91214," "Real property located at 3852 Vista Court, La Crescenta, California, 91214," and "Real property located at 2910 Sycamore, La Crescenta, California 91214."

[14] There is no indication that any of this property was separate property of either spouse, and consequently it appears undisputed that the property was community property at the time of the transfer to the trust.

[15] At the same time that the Stolles executed the Revocable Trust, they signed and subsequently filed quitclaim deeds for the four properties, transferring their interest in the properties to the Revocable Trust. ⁵ The fact that both Stolles signed the quitclaim deeds reinforces the conclusion that the properties were held by the Stolles as community property.

          3. THE TRUST MAINTAINS COMMUNITY PROPERTY AS PROPERTY

     C. STOLLE IS CRIMINALLY CONVICTED FOR FILING FALSE RETURNS IN

     D. THE GOVERNMENT SENDS STOLLE AND HIS WIFE NOTICES OF JEOPARDY

[19] On September 11, 1992, the government sent Stolle and his wife a notice of deficiency, allowing them to challenge the July 15, 1992 assessment in front of the tax court. The Stolles did not challenge or contest the jeopardy assessment.

[20] On September 11, 1992, the government seized approximately $397,884 from bank accounts controlled by Stolle and his wife. These funds were applied to the July 15, 1992 jeopardy assessments, leaving a balance of $30,245.

2. NOTICES RELATED TO TAX YEARS 1989, 1990, AND 1991

[21] On April 9, 1993, the government sent the Stolles a notice of deficiency arising out of Stolle's underpayment of his family's taxes for the years 1989, 1990, and 1991. This notice assessed taxes and penalties totaling $12,226 for the tax years 1989, 1990 and 1991. ⁷ The Stolles did not challenge or contest this notice of deficiency.

[22] On September 7, 1993 and September 27, 1993, following the Stolles' default on the April 9, 1993 notice of deficiency, the government assessed additional taxes and penalties against the Stolles such that the total amounted to $12,371 for the tax years 1989, 1990, and 1991.

E. THE GOVERNMENT FILES NOTICES OF FEDERAL TAX LIEN

[23] On July 16, 1992 and April 6, 1994, the government filed Notices of Federal Tax lien in connection with the assessments noted above. These Notices indicated the existence of a lien against all property and all rights to property belonging to the taxpayers and were filed in the County Recorder's office for Los Angeles County, California.

F. EMILE STOLLE II PASSES AWAY

[24] On December 16, 1994, Stolle passed away. Stolle's interest in community property presumably passed to his wife, Helen Stolle, subject to any appropriate claims on the property that existed at the time of Stolle's death on December 16, 1994. ⁸

     G. THE GOVERNMENT BRINGS THIS ACTION TO SEEK TO VALIDATE LIENS

III. LEGAL ANALYSIS

A. STANDARD FOR SUMMARY JUDGMENT

[26] Under the Federal Rules of Civil Procedure, summary judgment is proper only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party has the burden of demonstrating the absence of a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S. Ct. 2505, 2514 (1986). If the moving party satisfies the burden, the party opposing the motion must set forth specific facts showing that there remains a genuine issue for trial. Id.; see Fed. R. Civ. P. 56(e). Summary judgment may be granted on part of an action, Lewis v. Anderson, 615 F.2d. 778 (9th Cir 1979), FRCP 56(a) (plaintiff may seek summary judgment upon all or any part of an action), including questions of liability. KMLA Broadcasting v. Twentieth Century Cigarette Vendors, 264 F.Supp 35 (C.D. Cal. 1967).

B. THE COURT MUST ACCEPT THE VALIDITY OF THE TAX ASSESSMENTS

[27] The United States has presented this Court with a certified transcript indicating that timely notice and demand for the outstanding assessments has been made and that there remains an unpaid balance. The certified transcript is prima facie evidence that the assessments therein are valid, meaning that the transcript will constitute sufficient evidence of the validity of the assessments unless Defendants provide evidence that would show an error in the assessments. Welch v. Helvering, 290 U.S. 111, 114 (1933); Hughes v. United States, 953 F.2d 531, 535 (9th Cir. 1992).

[28] As noted in the factual discussion, Defendants have not provided any evidence to challenge the validity of the assessments. As such, the Court must accept the validity of the tax assessments.

     C. EMILE STOLLE II WAS JOINTLY AND SEVERALLY LIABLE FOR THE

[30] In certain instances, one spouse may be an "innocent spouse." See 26 U.S.C. section 6015(b). In those circumstances, the United States may be precluded from pursuing the "innocent spouse" for the full amount of the tax liability.

[31] However, even if one spouse is an innocent spouse, the culpable spouse remains individually liable for the full amount of the tax liability. In this case, Emile Stolle II was not an innocent spouse, and Stolle was therefore liable for the full amount of the tax liability.

     D. A LIEN AROSE UNDER 26 U.S.C. SECTION 6321 ON STOLLE'S

[33] As the United States Supreme Court reaffirmed last December in Drye v. United States, the language of section 6321 is broad and "'reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.'" Drye, 120 S.Ct. 474, 480 (1999) (quoting United States v. National Bank of Commerce, 472 U.S. 713, 719-20 (1985)).

[34] In determining whether a taxpayer possesses property or rights to property, the Court begins by looking to state law to determine what rights the taxpayer has in the property. In this case, Stolle and his wife had a right under the Revocable Trust to withdraw all four parcels from the Revocable Trust, and indeed they had the absolute right to dissolve the Revocable Trust at any time. Stolle and his wife were not only the settlors of the trust, but also the trustees and beneficial owners with the right to dispossess any other beneficial interest. As California law recognizes, Stolle and his wife effectively owned the property. See, e.g., Gagan v. Gouyd, 73 Cal.App.4th 835, 642 (1999) (noting that creditors may reach property held in revocable trust); Dawes v. Rich, 60 Cal.App.4th 24 (1997) (holding that creditors of husband may reach community property held in family trust).

[35] Having determined whether a taxpayer could have a right to the property under state law, the Court then applies federal law to determine whether such a right constitutes property or a right to property under section 6321. Drye, 120 S.Ct. at 481. Given the broad scope of section 6321, the Court has little difficulty concluding that Emile Stolle II and his wife owned the property within the Stolle Revocable Trust within the meaning of federal tax law. Don Gastineau Equity Trust v. United States, 687 F. Supp. 1422, 1426 (C.D. Cal. 1987) (holding that taxpayers owned property within Revocable Trust where third parties held rights in trust but taxpayers could unilaterally ignore and eliminate the rights of the third parties); see also Neely v. United Sates, 775 F.2d 1092 (9th Cir. 1985) (holding that income of trust can be attributed to individual taxpayer); Belshe v. Hope, 33 Cal.App.4th 161, 175 (1995) (holding that decedent's revocable inter vivos trust constituted "estate" for purposes of federal Medicaid act allowing reimbursement to state from decedents "estate").

[36] In short, because Stolle and his wife had effective dominion at all times over the property, the federal lien statute simply treats the property as though it belonged to Stolle and his wife. As such, liens arose against that property for the tax liabilities of Stolle and his wife when they were presented with the notices of deficiency and failed to pay.

[37] Moreover, the Court notes that the Stolles clearly expressed their intention that said property be community property: it was community property at the inception of the Revocable Trust, and it was intended to be maintained as community property during the existence of the trust.

     E. THE GOVERNMENT MAY REACH THE ENTIRE COMMUNITY PROPERTY TO

[39] In other words, community property is available to satisfy a debt from either spouse, even if the other spouse is not responsible for the debt.

[40] In this case, even if Helen Stolle were to be treated as an "innocent spouse," Emile Stole [sic] II would still have been responsible for the entirety of the debt, and all of his separate and community assets would have been subject to lien to satisfy that debt. See Dawes v. Rich, 60 Cal.App.4th 24 (1997) (holding that creditors of husband may reach community property held in family trust). As noted above, the four parcels of property were held as as community assets, and as assets of the community, they were available to satisfy the debts of Emile Stolle II.

          2. WHETHER HELEN STOLLE IS AN "INNOCENT SPOUSE" IS

[42] Unfortunately, the property could only belong to Helen Stolle to the extent that it is free of the liens of the United States. It helps to remember that a lien is like a mortgage. If Emile and Helen had mortgaged one of the properties to a bank, the bank would have a mortgage on the property to secure payment. Emile and Helen's equity in the property would exist only to the extent that the value of the property were to exceed the value of the mortgage. If Emile were to die, the property might pass to Helen as sole owner -- but the mortgage would still exist on the property. Helen's interest in the property would still exist only to the extent that her equity exceeded the value of the mortgage.

[43] In 1992 and 1993, the government served the Stolles with notices of deficiency. When the Stolles failed to pay, both of them became individually liable for that debt, and liens arose against each of their property.

[44] Even if Helen Stolle were an innocent spouse, the liens still arose against all of Emile's property, and all of the community property available to satisfy Emile's debt. See Dawes v. Rich, 60 Cal.App.4th (1997). The federal government therefore had liens on the properties in 1992 and 1993 to guarantee that Emile would pay the debts he owed. The liens acted like mortgage, in the sense that the value of the liens diminished the value of the properties left in the hands of the owners. Emile and Helen only owned equity in the properties to the extent that the value of the properties exceeded the value of the liens.

[45] When Emile died in 1994, the properties presumably became Helen's sole property. However, she did not receive the properties free and clear. She received the properties subject to the government's lien, just as she would have received the properties subject to a mortgage. Her interest in the property amounts only to the equity that existed beyond the value of the liens on December 16, 1994.

[46] Nothing in the language or the case law suggests that the "innocent spouse" provisions of the Internal Revenue Code prevents the government from collecting against community property in accordance with state law. ⁹ Rather, the innocent spouse provisions of 26 U.S.C. section 6015 are designed to prevent the government from pursuing an individual independently for tax liability that arose out of a joint return. At the present time, the government is not pursuing Helen Stolle individually, but is rather seeking to confirm the validity of liens that arose against the assets of Emile Stolle II while he was alive. His death no more removes those previously valid liens than his death would remove a previously valid mortgage. Emile's debts to the IRS were secured by an interest in the property, and the property passed to his heirs subject to that interest. ¹⁰

IV. CONCLUSION

[47] For the reasons discussed above, the motion of Plaintiff United States for Partial Summary Judgment is GRANTED and the Court confirms that valid tax liens arose against the community property of Emile Stolle II.

[48] IT IS SO ORDERED.

DATED: February 14, 2000 Judge Gary Allen Feess

Because Emile III had indicated that his mother was very elderly and infirm, the logical solution would have been for Mrs. Stolle (or her children, acting on her behalf) to have retained counsel for her.

The hope that logic would prevail was dashed when the matter came again for hearing on February 14, 2000. Having ignored the two possibilities explained at the prior hearing, Emile III announced that he had brought his mother "as the Court had asked." The Court did not in fact ask him to bring his mother, but had merely informed him of the two possibilities available under Jons: Mrs. Stolle could represent herself or Mrs. Stolle could retain counsel. Although Emile III sought to represent his mother, the Court again explained that HE COULD NOT SPEAK ON HER BEHALF.

The fact that Emile III could not speak for his mother in this case should have been apparent from the January 24, 2000 hearing. It appears to the Court that Emile brought his mother (who is wheelchair bound and appears quite infirm) for the sole purpose of putting her on display. The Court wishes at this point to express its disappointment that neither Mrs. Stolle nor her children (as her representative) retained counsel for her to handle this tax case on her behalf.

At the February 14, 2000 hearing, the Court very briefly attempted to conduct the hearing with Helen Stolle but it was immediately apparent that Mrs. Stolle could not meaningfully participate because she could not even hear the Court. At that point, the Court asked the government to report on the status of the settlement negotiations that the Court had ordered at the last hearing. Government counsel began by stating that Emile III had made an offer to settle, but Emile III began violently shaking his head back and forth indicating that no offer had been made. By that time, it was apparent that nothing productive could be accomplished at the hearing and the Court took the matter under submission.

² In 1992, the federal government seized over $397,000 from bank accounts controlled by Stolle and his wife to satisfy the assessments for taxes underpaid for 1985, 1986, and 1987.

³ Although the Court resolves all DISPUTED facts in favor of Helen Stolle and the Revocable Trust, the Court must accept all undisputed facts supported by competent evidence. In other words, once the government has established a fact, the fact will be accepted unless Helen Stolle and/or the Revocable Trust provide contrary evidence.

In this case, neither Helen Stolle nor the Revocable Trust have provided any contrary evidence. Quite the opposite, in fact: Helen Stolle has attested that she has "no knowledge of these matters" and that she is "unable to rebut, correct, respond or otherwise defend this matter properly." The entirety of her affidavit amounts to a declaration that she was in total ignorance of the events at issue and that she cannot provide any evidence on the subject. As a result, there is no contrary evidence that could create disputed issue of fact, and the evidence must be evaluated as presented by the government.

As a final matter, the Court notes that Helen Stolle did request the Court to delay resolution of this motion pursuant to Rule 56(f) because she has not yet received the answers to unspecified interrogatories served on the government after the government's original motion. Although Helen Stolle did, not use the proper form for making a Rule 56(f) motion, she is pro se and the Court will consider her request as though it were a formal Rule 56(f) motion.

To prevail upon a Rule 56(f) motion, a party must identify specific facts that established that evidence may exist on an important fact, the reasons why evidence cannot be presented at the current time, and the steps that the party has taken to obtain the evidence.

In this instance, Helen Stolle has failed to identify any specific facts that suggest that the government possesses evidence that might help her. In fact, Helen Stolle attests that the government's response "may or MAY NOT enlighten" her. As such, the Court denies her request to postpone consideration pursuant to Rule 56(f). Terrell v. Brewer, 935 F.2d 1015, 1018 (9th Cir. 1991); Brae Transportation, Inc. v. Coopers & Lybrand, 790 F.2d 1439, 1443 (9th Cir. 1986).

⁴ Because Stolle executed liens in favor of the offshore trusts on the property at issue in this suit, the trusts were originally named as defendants in the current suit as parties with potential interests in the real property at issue. The offshore trusts failed to appear despite appropriate service, and the Court granted summary judgment against the offshore trusts in an earlier summary judgment motion. Any interests that the offshore trusts may have had in the real property at issue has thus been extinguished and the Court's discussion of the facts will largely omit facts related to any interests purportedly held by the offshore trusts.

⁵ In its briefing and in its proposed Statement of Uncontroverted Facts and Conclusions of Law, the United States indicates that the Stolles signed the quitclaim deeds in favor of the Revocable Trust in July, 1989. This is both nonsensical, because the Revocable Trust did not exist until August, 1989, and flatly contradicted by the deeds themselves which are dated August 23, 1989.

This is but one of several indicia of carelessness in the government's briefing. (See also Plaintiff's Mem. of P&A at 17 (citing 26 U.S.C. section 6621 rather than 26 U.S.C. section 6321). The Court strongly cautions counsel against unprofessional behavior.

⁶ The criminal case also did not constitute an attempt by the government to collect on Stolle's underpayment of taxes. Helen Stolle argues in her opposition papers that the current action violates the protection of double jeopardy because she believes that the government is further attempting to punish Stolle for his underpayment. However, Stolle committed a crime when he filed false tax statements, and his criminal conviction represented the punishment for the mere fact of filing false statements. Stolle ALSO owed the government money because he paid less than he should have. The sums assessed by the government constitute the money that Stolle should have paid, plus interest and penalties. In this respect, the government behaves no differently than a credit card company or other private entity: failure to pay the government money you owe results in a balance to be paid, plus accrued penalties and interest. Collection of delinquent taxes along with penalties and interest on those delinquent taxes is not punishment for the crime of filing a false statement and does not constitute double jeopardy after conviction of the crime. This principle was established by the Supreme Court in 1938 in Helvering v. Mitchell, 303 U.S. 391, 404 (1938) and has been recently reaffirmed by the Supreme Court in Hudson v. United States 522, U.S. 93 (1997). See also I & O Publishing Co, Inc. v. Commissioner of Internal Revenue, 131 F.3d 1314, 1416 (9th Cir. 1997); United States v. Alt, 83 F.3d 779, 781 (6th Cir. 1996); Thomas v. C.I.R., 62 F.3d 97, 100-02 (4th Cir. 1995).

⁷ The notice also assessed $24,194 in taxes and penalties for tax year 1998, but that year is not at issue in this current motion.

⁸ The terms of the Revocable Trust may have modified the normal course of inheritance. Those modifications are not relevant to the current motion, inasmuch as the government seeks only to confirm the validity of liens that arose on the community property assets before Stolle's death. Any lien validly existing on the property at the date of Stolle's death remains on the property unless satisfied or otherwise expunged.

⁹ Section 6015(b) DOES indicate that community property should be ignored in determining what income should be attributed to an individual for the purpose of determining their tax. In other words, since Helen Stolle apparently had no income herself during this period, and assuming WITHOUT DECIDING that she were an innocent spouse, the IRS could not attribute half of Emile Stolle II's income to her and request that she pay tax on that income.

¹⁰ The Court at this time concludes only that the government has valid tax liens on the properties to secure the debt owed by Emile Stolle II at the time of his death. The Court does NOT address the question of whether those liens continued to grow after his death. In other words, although the debt of Emile Stolle II may have continued to accrue interest, it is not clear to the Court that the liens on the properties continue to grow after Stolle's death in 1994 because the remainder of the equity became separate property upon Emile Stolle's death. It is therefore possible that any additional interest remains a debt of Emile Stolle II but NOT a lien against his wife's equity in the property. The Court expressly reserves this question, concluding today only that valid tax liens arose in favor of the United States for the full value of Emile Stolle's debts up to the day he died. At the very least, therefore, the government CURRENTLY has valid liens on the property for the value of Stolle's tax debt as of the date of his death.

At this juncture, it appears to the Court that both parties would benefit from another attempt to settle this case. Although the government has prevailed in this motion and demonstrated that tax liens currently exist for at least the value of Stolle's tax debts at the time of his death, the government will have to continue to litigate this case to determine whether or not the tax liens continued to grow. This should provide SOME incentive for the government to settle.

From Helen Stolle's perspective, the benefits to resolving this situation should be evident. If the government can be satisfied with the moneys from one or two of the properties, the tax liens on the other properties can be removed. Moreover, Mrs. Stolle may not even have to surrender any of the properties if she can get a loan on one or more of the properties to settle the case. The existence of the tax liens should not be an impediment to getting a loan if the banks know that the proceeds of the loan will go to remove the tax lien as part of the loan transaction. By contrast, if Mrs. Stolle continues to litigate, all four properties will continue to be subject to the tax liens and she runs the risk that interest will keep accruing against the properties.