United States of America v. Hawthorne et al

Filing 30

Memorandum of Opinion and Order granting USA's Motion for summary judgment (Related Doc # 25 ); denying Defendants' Cross-Motion Motion for summary judgment (Related Doc # 28 ). Judge Dan Aaron Polster on 5/28/14.(P,R)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION

UNITED STATES OF AMERICA,
Plaintiff,
vs.
NATHANIEL HAWTHORNE, et al.,
Defendant.

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CASE NO. 1:12 CV 3041
JUDGE DAN AARON POLSTER
MEMORANDUM OF OPINION
AND ORDER

This case is before the Court on the United States’ Motion for Summary Judgment (Doc
#: 25 (“Motion”) and Nathaniel Hawthorne’s cross-motion for summary judgment (Doc #: 28)
(“Cross-Motion”). On December 13, 2013, the United States brought this action against
Nathaniel Hawthorne and his wife, Sylvia, to reduce to judgment the federal income tax
assessments against Nathaniel and to foreclose tax liens associated with real property known as
165 Snowshoe Trail, Chagrin Falls, Ohio (“the Snowshoe property”). For the following reasons,
the Motion is GRANTED and the Cross-Motion is DENIED, and the Court exercises its
discretion to enforce the foreclosure of the Snowshoe property.
I.
Pursuant to Rule 56 of the Federal Rules of Civil Procedure, summary judgment is
appropriate if the moving party shows that there is no genuine dispute of material fact. Fed. R.
Civ. Pro. 56(a). In considering a summary judgment motion, the Court must construe the
evidence in favor of the non-moving party. Muncie Power Prod., Inc. v. United Tech Auto Inc.,
328 F.3d 870, 873 (6th Cir. 2003) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio

Corp., 475 U.S. 574, 587 (1986)). However, the court is not “obligated to wade through and
search the entire record for some specific facts that might support the non-moving party’s
claims.” InterRoyal Corp. v. Sponseller, 889 F.2d 108, 111 (6th Cir. 1989). If, after reviewing
the record as a whole, a rational factfinder could not find for the nonmoving party, summary
judgment is appropriate since there is no genuine issue of material fact for determination at trial.
See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
II.
The following material allegations are undisputed. Mr. Hawthorne self-reported tax
liabilities for tax years 2002 and 2006 through 2011 (“subject tax years”), but did not pay the full
amounts owed. The following chart shows the amounts of unpaid federal income taxes,
penalties and interest due as of October 18, 2012, and the dates Mr. Hawthorne was given notice
and demand for payment.
Type of Tax

Tax Period

Assessment Due

Amount Due
Through
(October 18, 2013)

1040

2002

06/23/2003

$344,808.66

1040

2006

11/19/2007

$7,035.51

1040

2007

11/10/2008

$6,555.34

1040

2008

11/23/2009

$11,025.24

1040

2009

2/14/2011

$53,478.86

1040

2010

2/13/2012

$67,564.57

TOTAL:

$490,468.18

The Government recorded notice of its tax liens securing the above liabilities in the real
property records of Geauga County, Ohio, on or about November 17, 2003, February 14, 2008,

January 26, 2009, March 8, 2010, June 13, 2011, and June 4, 2012. The Government also filed
notices of tax liens against Sylvia Hawthorne on May 7, 2004 and September 28, 2012 for the
same tax periods as nominee, transferee, fraudulent conveyee, and/or alter ego of Nathaniel
Hawthorne. As the chart shows, Nathaniel Hawthorne owed the Government $490,468.18 as of
October 18, 2012, along with all interest and statutory additions that accrued from October 18,
2012 until his tax liabilities were paid.
In 1998, Wan Yin Jung conveyed the Snowshoe property to Nathaniel and Sylvia
Hawthorne, as survivorship tenants – meaning that the Hawthornes each owned a fifty percent
interest in the Snowshoe property under O.R.C. § 5320.20. See, e.g., Paternoster v. United
States, 640 F.Supp.2d 983, 990 (S.D. Ohio 2009). As the chart shows, Mr. Hawthorne received
his first notice and demand for tax payment on June 23, 2003. On July 15, 2003, however, he
transferred title to his interest in the Snowshoe Property to his spouse, Sylvia. It is undisputed
that Mr. Hawthorne continues to reside on this property today.1
Based on these allegations, the Government filed the instant action on December 13,
2012, seeking judgment in its favor for the outstanding tax liabilities, asserting that it has a
valid and subsisting federal tax lien on all property and rights to property belonging to
Nathaniel Hawthorne, and seeking to foreclose on his interest in the Snowshoe property.
(Doc #: 1.)
The Court held a Case Management Conference on May 22, 2013, after which the Court
issued a Case Management Plan with a discovery deadline of January 17, 2101 and a
1

The only dispute between the parties is whether Nathaniel Hawthorne transferred his
interest in the Snowshoe property to hinder the collection efforts of the IRS (the Government’s
position) or for some other reason (the Hawthornes’ position). As will be shown below, the answer
to this fact question is immaterial based on uncontroverted case law.

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dispositive motion deadline of March 18, 2014. (Doc #: 19.) On June 10, 2013, the
Government filed a First Amended Complaint to add the income tax liabilities for the 2011 tax
year recently assessed to the amounts asserted due and owing in the original complaint. (Doc
#: 20.) The assessment for 2011 was $23,247.15, bringing the amount due through May 20,
2013 $518,362.15. (Id.)
On March 6, 2014, Nathaniel and Sylvia Hawthorne filed an unopposed motion for a
30-day extension of the deadlines set forth in the Case Management Plan so that they could
complete the process of putting together a formal settlement offer to present to the Government.
(Doc #: 24.) The Court granted the motion.
On April 17, 2014, the Government filed the pending Motion for Summary Judgment.
(Doc #: 25.) The Hawthornes filed a response and an untimely Cross-Motion for Summary
Judgment (Doc #: 28). The Government filed a reply in support of its Motion and an
opposition to the Cross-Motion. (Doc #: 29). The Hawthornes have not filed a reply in support
of their Cross-Motion.
III.
An assessment of tax by the IRS is presumptively correct. Affiliated Foods, Inc. v.
Commissioner, 154 F.3d 527, 530 (5th Cir. 1998); U.S. v. Brandt, No. 1:12 cv 1132, 2014 WL
1266849, at *2 (S.D. Ohio Mar. 26, 2014) (citing Sinder v. United States, 655 F.2d 729, 731
(6th Cir. 1981)). In order to overcome the presumption of correctness, the taxpayer bears the
burden of proving by a preponderance of the evidence that, in fact, the assessment is incorrect.
Kinnie v. United States, 994 F.2d 279, 283 (6th Cir. 1993). Here, however, the tax liabilities are
undisputed as Mr. Hawthorne reported the tax liabilities himself. It is also undisputed that, if

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tax liabilities are not paid on or before the statutory date for payment, interest accrues on the
underpayment from the due date until paid; and interest accrues with respect to any additions to
the tax. Respectively, 26 U.S.C. §§ 6601(a), 6601(e)(2).
26 U.S.C. § 6321 provides that, after assessment, notice and demand, a lien arises in
favor of the United States in the amount of the assessment. This statutory lien attaches to all
property and rights to property of the taxpayer on the date of the assessment and continues until
the liability for the amount assessed is satisfied. 26 U.S.C. § 6322. The Supreme Court has
held that § 6321 is broad in scope and applies to every interest the taxpayer has in property.
United States v. National Bank of Commerce, 472 U.S. 713, 719-20 (1985).
The first assessment against Mr. Hawthorne for the amount owed for the 2002 tax year
occurred on June 23, 2003. Pursuant to §§ 6321 and 6322, a statutory lien attached to all
property and rights to property owned by Mr. Hawthorne on that date. Among the property
owned by Mr. Hawthorne on June 23, 2003 was his one-half interest in the Snowshoe property.
Federal law determines the relative priority of federal tax liens and any competing liens.
Aquilino v. United States, 363 U.S. 509, 513-14 (1960). In the absence of statutory authority to
the contrary, “priority for the purposes of federal law is governed by the common-law principle
that ‘first in time is the first in right.’” United States v. McDermott, 507 U.S. 447, 449 (1993).
The statutory lien against Nathaniel Hawthorne attached to the Snowshoe property on June 23,
2003. Therefore, any transfer of Nathaniel Hawthorne’s property to his wife after that date was
subject to the prior federal tax lien. Because Nathaniel Hawthorne transferred title to his
interest in the Snowshoe property three weeks after the assessment, that transfer “passe[d] cum
onere, or with the lien attached.” United States v. Bess, 357 U.S. 51, 57 (1958). And there is

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no evidence, let alone assertion, that Sylvia meets any of the narrowly limited exceptions set
forth in § 6323 to federal tax lien priority.
Mr. Hawthorne, a lawyer, does not dispute this fundamental tax law. Rather, he relies
on a self-serving affidavit that outlines a history of marital discord completely irrelevant to
these proceedings and contends simply that the Government must prove that he intended to
defraud the IRS. Even if there was no intent to defraud the IRS, it does not change the
undisputed fact that the unpaid taxes were assessed and demand was made for them in June
2003 – one month prior to the transfer made to Sylvia – and that any transfer of his property to
Sylvia after that date was subject to the prior federal tax lien. Bess, 357 U.S. at 57; United
States v. Cache Valley Bank, 866 F.2d 1242, 1245 (10th Cir. 1989).
In any event, the undisputed facts paint a compelling picture of fraud. They show that
Mr. Hawthorne (who, again, is a lawyer) transferred his interest in the Snowshoe property to
his wife after he knew that he owed the IRS over $340,000 (having reported the amount owed
and paying only part of that amount) and after the IRS sent him notice and demand for that
amount; the transfer was made to a family member; there is no evidence that his wife gave him
any consideration for this transfer of interest; and Mr. Hawthorne continues to reside on that
property today – eleven years after transferring his interest to his wife. See Cardiovascular &
Thoracic Surgery, Inc. v. DiMazzio, 37 Ohio App.3d 162 (Ohio Ct. App. 1987) (identifying
badges or indicia of fraud and explaining that these are circumstances from which courts can
presume that a transaction is fraudulent). Furthermore, the evidence shows that, in the same
month he transferred his interest in the Snowshoe property to Sylvia, Nathaniel Hawthorne
began transferring money to Sylvia’s business account (which money she used to open an

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account at First Third Bank and considered her personal money to be used as she wished) and
to her account at Key Bank (which money she used to pay household expenses). In 2006,
Sylvia Hawthorne unsuccessfully sued the Government for wrongful levy of those two bank
accounts. See Sylvia Hawthorne v. United States, No. 1:06 CV 1590, Doc #: 32 (N.D. Ohio
Sep. 10, 2007). There, she argued that because the money was placed in her accounts, state law
dictated that her husband no longer had an interest in the property. As Magistrate Judge
Hemann pointed out, however, “state law cannot trump federal tax law. If it did, delinquent
taxpayers would be beyond the reach of the federal government with a stroke of the deposit
slip. Such is not legally or logically the case.” Id. at 7.
Finally, the Hawthornes argue that the Government has essentially waived its right to
foreclose on Mr. Hawthorne’s interest in the Snowshoe property because it failed to file a
counterclaim for foreclosure in Mrs. Hawthorne’s 2006 case. However, there is no law
requiring the United States to file a counterclaim to pursue the collection of federal taxes. See,
e.g., Patzkowski v. United States, 576 F.2d 134 (8th Cir. 1978) (explaining that “the Government
may, of course, asserts its collection action as a counterclaim; alternatively, however, it may
file a separate collection action.”); Caleshu v. United States, 50 F.2d 711, 714 (8th Cir. 1978)
(agreeing with the Government’s position that “the nature and the purpose of the statutes
authorizing collection suits demonstrate Congress’ intent that such suits were not to be
compulsory counterclaims). Accord Arch Mineral Corp. v. Lujan, 911 F.2d 408 (10th Cir.
1990); Russell v. United States, 592 F.2d 1069, 1073 (9th Cir. 1979).
In sum, based on the undisputed facts and law, the transfer of Mr. Hawthorne’s interest
in the Snowshoe property to Sylvia Hawthorne was subject to the prior federal tax lien. United

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States v. Cache Valley Bank, 866 F.2d at 1245. Accordingly, the Court grants judgment in
favor of the Government and against the Hawthornes.
The next question is whether the Court should exercise its discretion to enforce the lien
via foreclosure. Pursuant to 26 U.S.C. § 7403, the United States may enforce its tax liens by
foreclosing upon and selling the property subject to the federal tax lien.
The Supreme Court has set forth the following factors the district court must consider
when deciding whether real property, held by both a delinquent taxpayer (Mr. Hawthorne) and
a third-party (Mrs. Hawthorne), should be forcibly sold by foreclosing the attached federal tax
lien: (1) the economic prejudice to the United States of the sale of a partial interest in the
property; (2) the third-party’s legal expectations that the property will be protected from a
forced sale; (3) the likely prejudice to the third-party, both in personal dislocation costs and
potential undercompensation; and (4) the comparative property interests of the delinquent
taxpayer and the third party. United States v. Rodgers, 461 U.S. 677, 710-11 (1983).
As to the first consideration, the Government contends that it would suffer economic
prejudice if it were required to sell only Mr. Hawthorne’s one-half interest in the Snowshoe
property because no reasonable buyer would purchase an interest in a residence where the other
owner currently resides. The Hawthornes have failed to respond to this position. As such, the
Court finds that this factor weighs in favor of the United States.
As to the second consideration, the Government contends that Mrs. Hawthorne has no
legal expectation that the Snowshoe property is protected from foreclosure to satisfy her
husband’s tax debt because this is the second time the Hawthornes have worked together to
avoid collection by the Government, citing Mrs. Hawthorne’s 2006 case. Mrs. Hawthorne

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suggests that the Government has waived its right to foreclose on the Snowshoe property
because she raised the question of the Snowshoe property in her 2006 case and “[w]hen the
lawyer taking my deposition raised the issue of my ownership of the house, I recall the Judge
said that [ ] she was not going to talk about the house.” (S. Hawthorne Aff. ¶¶ 1-2.) The Sixth
Circuit has recognized, however, that property transfers “specifically contemplated to frustrate
the United States’ tax collection efforts” eliminate the weight normally given to the second
Rodgers factor. United States v. Barr, 617F.3d 370, 375-76 (6th Cir. 2010). Thus, the Court
finds that this factor also weighs in favor of the Government.
As to the third consideration, if the Court orders foreclosure, there is no doubt that Mrs.
Hawthorne will suffer some prejudice through being required to vacate her residence and find
alternative housing. However, the Sixth Circuit has held that the “hardship of having to leave a
home with enormous sentimental value” is insufficient to weigh against foreclosure of the
entire property. United States v. Winsper, 680 F.3d 482, 492 (6th Cir. 2012). The question is
whether Mrs. Hawthorne’s personal dislocation costs would be greater than in any other
foreclosure action against a residence, and whether there might be the potential for undercompensation for the property interest. United States v. Bierbrauer, 936 F.2d 373, 375-76 (8th
Cir. 1991). If “the inherent indignity and inequity of being removed from one’s home” alone
were sufficient to “tip the scales in favor of the non-liable third party, then the government
could never foreclose against a jointly owned residence – a result clearly untenable under §
7403.” Id. at 376. The Government asserts that Mrs. Hawthorne will receive 50% of the net
proceeds from the sale of the residence, which amount will provide her with a sum to relocate
and pay for alternative housing without sacrificing the Government’s interest in collecting on
the tax liabilities of Mr. Hawthorne (who continues to live in the home despite the enormous
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tax debt he owes to the IRS). Because neither of the Hawthornes have addressed this particular
consideration, the Court concludes that the Government’s legitimate interest in collecting Mr.
Hawthorne’s debt dwarfs the prejudice to Sylvia Hawthorne from a forced sale. Thus, the
Court finds that this factor weighs in favor of the United States.
As to the fourth consideration, the Government asserts that Mr. and Mrs. Hawthorne
each have a 50% interest in the Snowshoe property. No matter how you look at it – whether
Mr. Hawthorne failed to lawfully convey his 50% interest to his wife in July 2003, or whether
the interest he conveyed was subject to a prior federal tax lien – Sylvia Hawthorne retains her
50% interest in the property. The Court finds that this factor is neutral.
Because the Rodgers factors weigh heavily in favor of the Government, and because the
Court has given the Hawthornes plenty of time to resolve this matter without through some
vehicle other than foreclosure, the Court hereby exercises it discretion to enforce the sale of the
Snowshoe property.
IV.
Based on the foregoing, the Court GRANTS the United States’ Motion for Summary
Judgment (Doc #: 25) and DENIES the Hawthornes’ Cross-Motion for Summary Judgment
(Doc #: 28); reduces to judgment the federal income tax liabilities of Nathaniel Hawthorne for
the income tax years 2002 and 2006 through 2011; concludes that the federal tax lien for the
2002 income tax year attached to the Snowshoe property; and orders foreclosure of that
property to satisfy the lien.
IT IS SO ORDERED.
/s/ Dan A. Polster May 28, 2014
Dan Aaron Polster
United States District Judge
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