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Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 

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United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 03-2662

___________

Larry Armstrong; Coleen Armstrong, *

*

 Appellants, *

* Appeal from the United States

v. * District Court for the

* District of North Dakota.

United States of America, *

*

 Appellee. *

___________

Submitted: March 8, 2004

Filed: May 3, 2004

___________

Before MURPHY, HEANEY, and SMITH, Circuit Judges.

___________

HEANEY, Circuit Judge.

In 1995, the Internal Revenue Service (IRS) issued Larry D. and Coleen

Armstrong a Notice of Deficiency for underpayment of taxes in 1989 and 1991. In

1999, the Armstrongs satisfied this debt with a payment of $156,142, the amount that

remained due at that time. In 2001, they filed an amended tax return, seeking a

refund of $149,871 plus interest for the 1989 calendar year, contending that the IRS’s

assessment of tax underpayment was erroneous. When the IRS did not respond to

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The Honorable Daniel L. Hovland, Chief United States District Judge for the

District of North Dakota.

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their request for a refund, the Armstrongs began this action in district court.1

 The

district court held that the IRS properly concluded the Armstrongs’ actions in 1989

created a taxable situation for which they owed a deficiency, and thus granted

summary judgment in favor of the IRS. The Armstrongs now appeal, and we affirm.

BACKGROUND

This matter reaches us on appeal from a grant of summary judgment in favor

of the IRS; we thus recite the facts in the light most favorable to the Armstrongs. Ia.

80 Group, Inc. v. United States, 347 F.3d 1067, 1071 (8th Cir. 2003). In the fall of

1989, Larry Armstrong sought to arrange a short-term loan to help pay his children’s

educational costs. He discussed the matter with Midwest Federal Saving Bank

(Midwest Federal), where he had other loans and a longstanding relationship.

Thomas F. Gietzen, who was then assistant vice president at Midwest Federal,

informed Armstrong that Midwest Federal could make him the loan, and Armstrong

agreed to provide life insurance as collateral. According to Gietzen, Armstrong was

in a hurry due to an out-of-state business trip, so Armstrong signed blank loan

documents that they agreed Gietzen would fill in later. Gietzen agreed to pick up

Armstrong’s life insurance policies from Armstrong’s office in order to fill out the

loan documents with the accurate collateral information.

When Gietzen went to Armstrong’s office, he was given the wrong documents.

Instead of providing two life insurance contracts, one of Armstrong’s employees

mistakenly gave Gietzen two retirement plan annuity contracts. These annuity

contracts were issued by UNUM Life Insurance Company of America, and owned by

National Marketing Company, Inc. (National Marketing), Armstrong’s corporation.

Unaware of any mistake, Gietzen filled in the loan documents listing the annuity

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contracts as collateral. These documents included the promissory note and two

collateral receipts, which Armstrong had already signed, as well as forms assigning

Armstrong’s interest in the annuity contracts to Midwest Federal. The assignment

forms were signed by Judy Ballantyne, Secretary-Treasurer of National Marketing,

and witnessed by Susan Armstrong, the Armstrongs’ daughter. Gietzen forwarded

the assignment forms to UNUM, which recorded them and sent a letter, dated

November 9, 1989, confirming the assignment to Armstrong’s office. On

November 15, 1989, Midwest Federal funded the loan for the full amount

requested–$134,000. 

At this point, the loan agreement appeared fully executed, with Midwest

Federal granting a loan to Armstrong which was due November 15, 1990, and

Armstrong assigning two annuity contracts as collateral for the loan. The loan

agreement, collateral receipts, assignment forms, and confirmation of assignment

letter all consistently listed the annuity contracts as collateral for the loan. Shortly

after the loan had been funded, Gietzen sent Armstrong a Corporate Authorization

Resolution to execute, since the annuity contracts were owned by Armstrong’s

corporation. At that time, Armstrong realized that the annuity contracts had been

listed as collateral, rather than the agreed-upon life insurance policies. He contacted

Gietzen, stating that he did not intend to pledge the annuity contracts as collateral,

and offered to return the loan proceeds. Armstrong claims that Gietzen then assured

him that the assignment would not be valid without a fully executed Corporate

Authorization Resolution, that Armstrong could keep the funds from the loan, and

that the bank would consider the loan unsecured. None of the loan documents were

modified to reflect this conversation, nor was UNUM instructed to void the

assignment of the annuity contracts. All of the relevant documents continued to show

that the loan was secured by an interest in the annuity contracts.

The next year, the Resolution Trust Corporation (RTC) took over Midwest

Federal. When the loan came due on November 15, 1990, Armstrong defaulted. In

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By the time the Armstrongs completed paying for their 1989 and 1991

deficiencies, interest and penalties had accrued at such a rate that their taxes on the

additional income actually matched the amount of that income.

3

The Armstrongs have not pursued their claim for the 1991 refund on appeal.

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a letter dated March 21, 1991, RTC wrote to Armstrong informing him that his loan

was more than four months past due and was continuing to accrue interest. When

Armstrong had not paid back his loan by June of 1991, RTC withdrew $159,375.53

from Armstrong’s annuity contracts, which were still listed as collateral on the loan.

In January of 1992, UNUM advised Armstrong and the IRS of the withdrawal from

the retirement policies, which the Armstrongs had never reported as taxable income,

by way of a Form 1099.

After an examination of the Armstrongs’ financial circumstances, the IRS

determined that the collateral assignment of the annuity contracts for the 1989 loan

made them taxable income. It increased the Armstrongs’ 1989 income by

$149,871–the 1989 market value of the annuity contracts, and increased their 1991

income by $9,505–the additional value that the contracts had gained by the time of

the RTC’s withdrawal in 1991. In 1995, the IRS issued the Armstrongs a Notice of

Deficiency for taxes due on their additional income for 1989 and 1991. By 1999, the

Armstrongs had paid the remainder of the taxes owed for these years, and filed

amended returns for 1989 and 1991 seeking refunds of $149,871 and $9,505,

respectively.2

 The IRS did not respond to the refund request within six months, so

the Armstrongs properly brought this suit in district court seeking refunds for the

1989 and 1991 payments. The IRS moved for summary judgment with respect to the

1991 refund, which the Armstrongs conceded was barred by the applicable statute of

limitations.3

 Thereafter, both parties moved for summary judgment as to the 1989

refund. The district court found that the annuity contracts were assigned, perhaps

mistakenly, as collateral for Larry Armstrong’s loan, making them taxable income.

It further held that although the Armstrongs contend that the assignment was not

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In pertinent part, § 72(p)(1) reads as follows:

(1) Treatment as distributions.– 

(A) Loans.– If during any taxable year a participant or beneficiary

receives (directly or indirectly) any amount as a loan from a qualified

employer plan, such amount shall be treated as having been received by

such individual as a distribution under such plan.

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valid, they did not take adequate steps to modify or rescind the loan. Thus, despite

the Armstrongs’ protestations of mistake, the district court held that the “realities of

the transactions” at issue exhibited that the Armstrongs collaterally assigned annuity

contracts in 1989, converting the contracts to taxable income. The district court

rendered judgment in favor of the IRS, and this appeal followed.

ANALYSIS

We review the district court’s decision to grant summary judgment de novo.

Thom v. United States, 283 F.3d 939, 942 (8th Cir. 2002). Summary judgment is

appropriate when there are no genuine issues of material fact and the movant is

entitled to judgment as a matter of law. Fed. R. Civ. P. 56. As such, we view the

facts in the light most favorable to the non-moving party in order to determine

whether summary judgment in favor of the movant is warranted. Ia. 80 Group, Inc.

v. United States, 347 F.3d 1067, 1071 (8th Cir. 2003). In a taxpayer refund suit, the

taxpayer bears the ultimate burden of proving that the taxpayer overpaid his tax. Id.

The IRS based its determination of liability on 26 U.S.C. § 72, which governs

the tax treatment of retirement plan annuities such as the ones in this case. According

to § 72(p)(1), assignments or pledges of an employee’s interest in a plan such as

National Marketing’s will be treated the same as a taxable distribution from that

plan.4

 The Armstrongs concede, as they must, that if there was a valid collateral

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(B) Assignments or pledges.– If during any taxable year a

participant or beneficiary assigns (or agrees to assign) or pledges (or

agrees to pledge) any portion of his interest in a qualified employer plan,

such portion shall be treated as having been received by such individual

as a loan from such plan.

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assignment of Larry Armstrong’s annuity contracts for his 1989 loan, § 72(p)(1)

would treat the assignment as a taxable distribution from the plan. Citing both North

Dakota law and the bylaws of National Marketing, however, the Armstrongs contend

that the collateral assignment of the annuity contracts was not valid and therefore

should not be taxed. They argue that the assignment was the product of a mutual

mistake on behalf of Larry Armstrong and Midwest Federal, that National

Marketing’s board of directors never authorized the assignment, and as a result the

assignment was void and unenforceable.

We are guided by the “established tax principle that a transaction is to be given

its tax effect in accord with what actually occurred and not in accord with what might

have occurred.” Comm’r v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134,

148 (1974). In this case, the facts establish that Midwest Federal loaned Larry

Armstrong $134,000 in 1989, and that Armstrong signed documents assigning his

interest in the annuity contracts as collateral for the loan. Armstrong complains that

he never intended to do this. By the paper trail, though, the transaction appears to be

an unequivocal assignment of the annuity contracts: Armstrong agreed in the loan

agreement to collaterally assign the annuity contracts for a $134,000 loan; he signed

receipts acknowledging the annuity contracts would be used as collateral; he received

the $134,000 in loan proceeds; his office received notice from UNUM that the

contracts had been collaterally assigned to Midwest Federal; and lastly, when he

defaulted on the loan, the debt was satisfied through the annuity contracts. 

There is incongruity between how the Armstrongs ask us to treat the

assignment in this tax matter, and how they have treated it for purposes of the

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The Armstrongs claim that they did not institute any legal action because all

parties to the loan agreement believed the annuity assignments were not enforceable,

making any further action by them superfluous. While this may have been the case

with Midwest Federal, clearly when RTC took over it believed the assignments were

valid, since it eventually used the funds from the annuities to satisfy the loan. Thus,

the contention that there was simply no use for any legal action since all parties

agreed what the loan documents meant is meritless.

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underlying loan agreement. Larry Armstrong signed documents assigning the annuity

polices as collateral for the loan, and has never disavowed those documents through

any court proceeding or by modifying the loan contract. When RTC withdrew funds

from the annuity contracts to satisfy the defaulted loan, the Armstrongs did not pursue

any legal action to assert that the assignment was not valid. In fact, the record is

devoid of evidence that the Armstrongs ever asked a court to consider the assignment

unenforceable until now, in this collateral tax proceeding. They claim that they have

consistently argued that the assignment was invalid by way of telephone calls to bank

representatives, meetings with congressmen, and other informal methods. Assuming

the truth of these assertions, we find it puzzling that the Armstrongs could believe the

assignments were invalid for over a decade, yet take no action to reform the contract

or seek judicial clarification, see, e.g., Ell v. Ell, 295 N.W.2d 143, 150 (N.D. 1980)

(holding judicial reformation of contract is an appropriate remedy when the contract

was the product of a mutual mistake); N.D. Cent. Code § 32-04-17 (permitting North

Dakota courts to grant specific relief of revising contract that was the product of a

mutual mistake), even after funds were withdrawn from the annuity contracts based

on those assignments.5

 Given the Armstrongs’ own acquiescence to the use of the

annuities as collateral, we cannot fault the IRS for treating the assignment of the

annuities as a taxable event.

Although we agree with the district court that this case “is a tax refund suit .

. . not an action in contract,” (Appellants’ Add. at 9), we briefly address the

Armstrongs’ claims that the assignment is void and unenforceable as a contract since

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tax consequences may flow from that determination. North Dakota Century Code

section 32-04-17 permits revision of a contract based on the mutual mistake of the

parties “on the application of a party aggrieved.” See also Mau v. Schwan, 460

N.W.2d 131, 135 (N.D. 1990). In limited circumstances, the court maintains the

ability to rescind a contract based on mutual mistake. N.D. Cent. Code §§ 9-09-02,

32-04-22; Romanyshyn v. Fredericks, 597 N.W.2d 420, 423 (N.D. 1999). It is not,

however, required to do so. Accord N.D. Cent. Code §§ 32-04-17, -22. A contract

based on a mistake of fact is thus voidable, not void, and the aggrieved party is

charged with the responsibility of taking action to correct the contract. N.D. Cent.

Code § 32-04-17. The Armstrongs have failed to take the steps required to void or

modify the contract, and it thus remains in force as originally written despite the

alleged mistake. 

The Armstrongs next contend that the assignment was void because National

Marketing did not formally approve the assignment through its board of directors.

North Dakota permits corporations to pledge their assets as security for another

person if the transaction is approved by the corporation’s board of directors. N.D.

Cent. Code § 10-19.1-89(1). We are skeptical of the claim that Larry Armstrong

acted without board approval when he signed documents assigning the annuity

contracts to Midwest Federal; he was one of National Marketing’s three directors.

Judy Ballantyne, another director, signed forms assigning the annuity contracts as

collateral for the loan. In other words, two of National Marketing’s three directors

documented their agreement to the assignment of the annuity contracts. Moreover,

Larry Armstrong was the president and sole shareholder of National Marketing, and

did nothing to disavow the contract which he now ironically claims he had no

authority to enter into on behalf of his corporation. Although National Marketing’s

own bylaws may not have been followed, this does not render the contract void. At

most, the circumstances here may present a contract that may have been voidable

through appropriate action by an aggrieved party, such as the corporation itself. No

such action has been taken.

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CONCLUSION

In this tax case, the Armstrongs ask this court to hold that a 1989 assignment

of Larry Armstrong’s annuity contracts as collateral for a loan was void and thus not

taxable. To do so, we would necessarily turn a blind eye to what the district court

termed the “reality of the transactions,” since the Armstrongs themselves have not

challenged the legality of the assignment through any other proceeding, and, in fact,

have enjoyed the benefits of using the assignment as collateral for the loan. We

refuse to permit the Armstrongs to collaterally attack a contract when they have

neglected to do so directly, and thus affirm the district court.

______________________________ 

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