Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_05-cv-01008/USCOURTS-azd-2_05-cv-01008-1/pdf.json

Nature of Suit Code: 870
Nature of Suit: Tax Suits
Cause of Action: 28:1340 IRS: Custom Duties

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

WO

NOT FOR PUBLICATION

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

United States of America, 

Plaintiff, 

vs.

Barry H. Hart, et al., 

Defendant. 

)

)

)

)

)

)

)

)

)

)

)

)

No. 05-CV-1008-PHX-FJM

ORDER

Plaintiff filed this action to reduce the outstanding tax liabilities of defendants

Mary J. Hart and Barry H. Hart ("defendants") to judgment, and to foreclose federal tax

liens on property titled in the name of MJH Trust, Mary J. Hart, Trustee. The court has

before it plaintiff's motion for summary judgment (doc. 74), and the supporting

memorandum (doc. 75), statement of material facts (doc. 76) and declarations (docs. 77

and 80); defendant Barry H. Hart's response (doc. 87), the supporting memorandum (doc.

89), statement of material facts (doc. 88) and declarations (docs. 90 and 92), and "Mary J.

Hart's Joinder in Barry H. Hart's Response to Plaintiff's Motion for Summary Judgment"

(doc. 93); plaintiff's reply (doc. 96) and the supporting declarations (docs. 97 and 98);

defendant Barry H. Hart's motion for summary judgment (doc. 81), the supporting

memorandum (doc. 82) and declaration (doc. 83), and "Joinder of Mary J. Hart in Motion

for Summary Judgment as to Defendant, Barry H. Hart" (doc. 84); plaintiff's response

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 1 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 2 -

(doc. 85) and the supporting declaration (doc. 86); defendants' reply (doc. 99); "MJH

Trust's Joinder in Barry H. Hart's Response to Plaintiff's Motion for Summary Judgment"

(doc. 94), "MJH Trust's Joinder in Barry H. Hart's Motion for Summary Judgment" (doc.

95) and plaintiff's "Response" (doc. 100) to documents 94 and 95. 

I. Plaintiff's Motion for Summary Judgment

Plaintiff moves for summary judgment on two central issues. First, plaintiff

contends that defendants' tax assessments should be reduced to judgment because the

submitted proof of the assessments' accuracy renders them presumptively valid. Second,

plaintiff argues that a lien should attach to defendants' residence ("Subject Property")

because it is within the reach of the federal tax lien statute, 26 U.S.C. § 6321.

On a motion for summary judgment under Rule 56, Fed. R. Civ. P., the moving

party carries the initial burden of demonstrating the absence of a genuine issue of material

fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 2553 (1986). When

the moving party satisfies this initial burden, the burden then shifts to the nonmoving

party to establish that a genuine issue of material fact exists. Id. at 324, 106 S. Ct. at

2553-54. 

A. Validity of Tax Assessments

"In an action to collect tax, the government bears the burden of proof." United

States v. Stonehill, 702 F.2d 1288, 1293 (9th Cir. 1983). Introduction of the government's

assessment of tax due, supported by a minimal evidentiary foundation demonstrating that

the income used to calculate the tax liabilities was actually received, will satisfy that

burden and establish a prima facie case. Id. at 1293-94. The government may introduce

its tax assessment by way of a Certificate of Assessments, or Form 4340. See Roberts v.

Comm'r, 329 F.3d 1224, 1228 (11th Cir. 2003). Forms 4340 accompanied by the

undisputed existence of an income-generating business and returns filed by the taxpayer

will supply a sufficient evidentiary foundation. See Edwards v. Comm'r, 680 F.2d 1268,

1270-71 (1982). If a taxpayer fails to present evidence contesting the assessment, the

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 2 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 Line 2 of Schedule A directs taxpayers to enter their adjusted gross income, as

reflected on their 1040 forms. See Internal Revenue Service, Prior Year Forms, Instructions

and Publications, available at http://www.irs.gov/formspubs/article/0,,id=98339,00.html.

- 3 -

government is entitled to judgment for the assessed amount. See Oliver v. United States,

921 F.2d 916, 919 (9th Cir. 1990).

Here, the government introduced Forms 4340 for each of the quarterly and annual

tax periods in which it claims defendants failed to satisfy their tax liabilities. See

Declaration of Amy Matchison in Support of United States' Motion for Summary

Judgment ("Matchison Declaration") Exhibits A-D. It is undisputed that defendant Barry

H. Hart's sole proprietorship, the Law Office of Barry H. Hart, incurred tax liabilities for

the years 1993, 1995, 1996, and 1998, and for various quarterly periods from 1992

through 1999. See id at 2. Furthermore, plaintiff's assessments of defendants' tax

liabilities are based in part on tax returns filed by defendants themselves. See id at 2-3. 

Finally, plaintiff's assessments rely in part on calculations of defendant Barry H. Hart's

adjusted gross income for the years 1995, 1996 and 1997, which are identical to Barry H.

Hart's own calculations. Compare Barry H. Hart Certificate of Assessment for Tax

Periods Dec 1995, Dec 1996 and Dec 1997, Matchison Declaration Exhibit B with Barry

H. Hart Schedule A–Itemized Deductions1

 for the years 1995, 1996 and 1997, Matchison

Declaration Exhibit O. 

To defeat plaintiff's motion, defendants must do more than deny its allegations;

they must present "specific facts showing that there is a genuine issue for trial." Rule

56(e), Fed. R. Civ. P. In their response, defendants first argue that plaintiff has no claim

against defendant Mary J. Hart for defendant Barry H. Hart's unpaid taxes that arose for

periods before July 11, 1992, the date defendants were married. See Memorandum in

Support of Response to Motion for Summary Judgment as to Barry H. Hart and Mary J.

Hart at 2. However, in order to reach community property, which is liable for a spouse's

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 3 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2

 The community is liable "only to the extent of the value of that [debtor] spouse's

contribution to the community property which would have been such spouse's separate

property if single." § 25-215(C). At least one authority contemplates that a debtor spouse's

earnings would qualify as separate property for these purposes. See Thomas A. Jacobs,

Arizona Practice: Community Property Law § 12.3 (3d ed. 2004). However, neither party

raised this issue; therefore, the court need not decide what fraction of the community

property would have been separate property. 

- 4 -

premarital debt, spouses must be joined as party defendants. See A.R.S. §§ 25-215(B),

(D) (2006).2

 

Second, defendants highlight portions of plaintiff's motion, alleging purported

errors in the assessments. See Memorandum in Support of Response to Motion for

Summary Judgment as to Barry H. Hart and Mary J. Hart at 2-4. Yet defendants do not

support their contentions with any specific facts of their own. We therefore conclude

there is no genuine issue of material fact over defendants' tax liability, and grant

plaintiff's' motion for summary judgment on this issue. 

B. Lien Upon Subject Property

The United States has a lien in the amount of tax owed upon "all property and

rights to property" belonging to any person liable for unpaid federal taxes after that

person has refused to pay the taxes after demand. 26 U.S.C. § 6321. The law of the state

in which the property is located determines " 'what rights the taxpayer has in the property

the Government seeks to reach.' " United States v. Craft, 535 U.S. 274, 278, 122 S. Ct.

1414, 1420 (2002) (citation omitted). Therefore, Arizona law determines defendants'

property rights in the Subject Property. 

Plaintiff contends that defendants have a property interest in the Subject Property,

because although the property is ostensibly held by the MJH Trust, that entity is

defendants' alter ego for tax avoidance purposes. Memorandum in Support of the United

States' Motion for Summary Judgment at 3. Defendants argue that the MJH Trust owns

the property interest, and that the trust is a legitimate legal entity created to provide

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 4 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 5 -

"privacy and protection." Memorandum in Support of Response to Motion for Summary

Judgment as to Barry H. Hart and Mary J. Hart at 9. 

Although an alter ego theory is usually used to reach an individual's assets

nominally held by a corporation, see, e.g., Dietel v. Day, 16 Ariz. App. 206, 208 (Ariz.

Ct. App. 1972), the same theory is used to reach assets held by a trust because "[t]he

underlying principle is the sham nature of the arrangement." United States v. Lodi, No.

CIV. S-97-1972, 1998 U.S. Dist. LEXIS 13265, at*1, *22 (E.D. Ca. Aug. 14, 1998)

(citing Neely v. United States, 775 F.2d 1092, 1094 (9th Cir. 1985)). Therefore, we apply

Arizona's alter ego theory to the present facts. 

An entity is an individual's alter ego when there is a unity of interest and

ownership between the entity and the individual, such that observing the form of the

entity would work an injustice. See Dietel, 16 Ariz. App. at 208. The material

considerations used to determine whether a trust is an alter ego are similar to those used

to determine a corporation's status. See Deutsche Credit Corp. v. Case Power &

Equipment Co., 179 Ariz. 155, 160-61 (Ariz. Ct. App. 1994) (listing the considerations

material to determining whether a corporation is an alter ego). A court may find that a

trust is an alter ego where the taxpayer treats the trust property as his own,"minimal or no

consideration is paid by the entity in consideration for the property, the taxpayer has

expressed the intent to shelter assets via the trust mechanism, the taxpayer maintains

'active' or 'substantial' control over the operations and decisions of the property, and a

family or close relationship exists between the taxpayer and the holding entity." See

Lodi, 1998 U.S. Dist. LEXIS, at *22-23. 

In support of its alter ego theory, plaintiff argues that defendants have treated the

property as their own by living in the Subject Property without paying rent, paying its

property taxes, using the Subject Property to secure a loan, and including the mortgage

interest paid on the Subject Property as a deduction on defendant Barry H. Hart's 1040

Schedule A form. See Memorandum in Support of the United States' Motion for

Summary Judgment at 16. The MJH Trust paid the grantors ten dollars for the April 6,

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 5 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 6 -

1993 conveyance. See Warranty Deed, Matchison Declaration Exhibit G. Yet on the

same date, defendants executed a $330,000 promissory note in favor of the grantors. See

Promissory Note, Matchison Declaration Exhibit H. Plaintiff additionally contends that

defendants purchased the Subject Property in the name of the MJH Trust so that the

Subject Property would not be used to satisfy defendants' own tax liability. See

Memorandum in Support of the United States' Motion for Summary Judgment at 15. The

warranty deed by which the Subject Property's previous owners conveyed the property to

the MJH Trust lists two grantees: "Mary J. Hart, wife of Barry H. Hart, dealing with her

sole and separate property" and "Mary J. Hart, as Trustee of THE MJH TRUST;"

however, the former is typed over, presumably in favor of the latter. See Warranty Deed,

Matchison Declaration Exhibit G. 

In response, defendants state the following: the Subject Property was not

purchased in anticipation of tax collection as neither defendant had knowledge of the tax

liens at the time the Subject Property was conveyed to the MJH Trust; the MJH Trust

filed a tax return in 1999; the Trust "was not recorded" and "does not have an EIN

number;" several mortgage payments, property tax payments, property insurance

premiums, utility payments and maintenance costs related to the Subject Property were

paid with funds from the MJH bank account by Mary J. Hart as trustee; Barry H. Hart

took mortgage interest deductions on his own tax returns on the advice of his CPA, and

the MJH Trust is the "loss payee" on the Subject Property's homeowners' insurance

policy. Memorandum in Support of Response to Motion for Summary Judgment as to

Barry H. Hart and Mary J. Hart at 5. The evidence offered in support of these arguments

is limited to a Farm Bureau Financial Services Summary Declarations letter addressed to

"The M.J.H. Trust," which indicates the kind of insurance coverage provided under the

policy, the total annual premium, and the policy's effective date, "04-14-2006." 

Declaration of Mary J. Hart in Support of Barry H. Hart's Response to Plaintiff's Motion

for Summary Judgment Exhibit 1. Although the letter states that the insurance policy

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 6 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 7 -

covers household personal property and a dwelling, it does not specifically refer to the

Subject Property. See id. 

Defendants' contentions are insufficient to rebut plaintiff's alter ego theory. Even

if there is a genuine issue of fact as to whether defendants created the trust solely for the

purposes of a tax shelter, that factor is insufficient to change the analysis or the outcome. 

On the undisputed evidence, the MJH Trust's ownership of the Subject Property is a sham

arrangement. It is obvious that the MJH Trust is the alter ego of the individual

defendants. 

Similarly, defendants' attempt to characterize the MJH Trust as a "separate and

distinct entity" capable of purchasing the Subject Property cannot shield the property

from a lien. Memorandum in Support of Response to Motion for Summary Judgment as

to Barry H. Hart and Mary J. Hart at 8. Defendants acquired an interest in the Subject

Property, under the alter ego theory described above, or under the alternative theory

described below, after defendants were married. See Declaration of Barry H. Hart in

Support of Barry H. Hart's Response to Plaintiff's Motion for Summary Judgment (stating

that defendants were married on July 11, 1992). Therefore, the Subject Property is

community property. See A.R.S. § 25-211; Evans v. Evans, 79 Ariz. 284, 286 (1955). 

Community property may be used to satisfy both debts incurred by one spouse before the

marriage, as discussed infra, and those incurred during the marriage. See Lorenz-Auxier

Fin. Group v. Bidewell, 160 Ariz. 218, 220 (Ariz. Ct. App. 1989). 

Because defendants have failed to set forth specific facts showing that the MJH

Trust is anything other than a sham entity, we grant plaintiff's motion on this issue. See

Fed. R. Civ. P. 56(e). 

Alternatively, we conclude that defendant Mary J. Hart has a property interest in

the Subject Property notwithstanding the status of the MJH Trust. Both parties agree that

defendant Mary J. Hart is the sole beneficiary of the MJH Trust and that the Subject

Property is the trust's property. Restatement (Third) of Trusts § 3 cmt. b (2003) ("The

term 'trust property' denotes things or the interests in things that are held in trust."). The

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 7 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 8 -

beneficiary of a trust has a property interest in the things held in the trust. See id. at § 49

Reporter's Notes. Therefore, defendant Mary J. Hart's right to the Subject Property is a

property interest recognized under Arizona law and one upon which a federal tax lien

may be levied. 

II. Defendants' Motion for Summary Judgment

Defendants move for summary judgment on two issues. First, defendants contend

that plaintiff lacks the required authorization to pursue this action. Second, defendants

argue that the tax assessed for the period ending on June 30, 1992, is time-barred. 

Civil actions for the collection of taxes and enforcement of liens must be instituted

at the direction of delegates of the Attorney General and after authorization or sanction by

the Secretary of the Treasury. See 26 U.S.C. § 7401; Palmer v. United States, 116 F.3d

1309, 1311 (9th Cir. 1997). "The presumption of regularity supports the official acts of

public officers and, in the absence of clear evidence to the contrary, courts presume that

they have properly discharged their official duties." United States v. Chem. Found., Inc.,

272 U.S. 1, 14-15, 47 S. Ct. 1, 6 (1926). Here, a delegate of the Internal Revenue

Service's Office of Chief Counsel directed an Assistant Attorney General to bring this

action against defendants. See Declaration of Amy Matchison in Support of the United

States' Response to Motion for Summary Judgment as to Defendants Barry H. Hart and

Mary J. Hart Exhibit A. Plaintiff was authorized and directed to file the Amended

Complaint in this action by a delegate of the Attorney General. See id. at Exhibit B. 

Defendants contest the validity of the official action on two grounds. First, they

argue that plaintiff lacks authorization to bring this action because the letter directing the

Assistant Attorney General to bring this action was written by a delegate of the Secretary

of the Treasury, and not the Secretary himself. In support of this argument, defendants

note that a 1976 amendment to Section 7401 substituted the word "Secretary" for the

words "Secretary or his delegate," implying that only the Secretary himself may authorize

a tax collection action. Reply in Support of Motion for Summary Judgment as to

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 8 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 9 -

Defendant Barry H. Hart at 2 n.1. However, a treasury regulation interpreting Section

7401 states that "a Chief Counsel for the Internal Revenue Service or his delegate" may

authorize or sanction the commencement of a civil action like this. 26 C.F.R. § 301.7401-

1. Defendants have not shown that the regulation is an unreasonable reading of the

statute. See Ross v. Comm'r, 652 F.2d 1365, 1368 (9th Cir. 1981) (stating that "[t]reasury

regulations must be sustained unless unreasonable and plainly inconsistent with the

revenue statutes (in) that they constitute contemporaneous constructions by those charged

with administration of these statutes which should not be overruled except for weighty

reasons") (citing Comm'r v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S. Ct. 695,

698 (1948)).

Next, defendants contend that the letter in which the Assistant Attorney General

directed a United States Attorney to commence this action is insufficient under Section

7401, which requires that "the Attorney General or his delegate direct[] that the action be

commenced." Specifically, defendants characterize the letter as "self serving" and

"fatally flawed on its face." Reply in Support of Motion for Summary Judgment as to

Defendant Barry H. Hart at 3. Defendants also question the authenticity of one of

plaintiff's exhibit, and highlight other immaterial details. Id. at 3-4. 

The defendants' unsupported arguments fail to provide the affirmative evidence

required to discredit the official action in this case. The actions of the delegates of the

Secretary and the Attorney General complied with the requirements of 26 U.S.C. § 7401,

and therefore we deny defendants' motion as to this issue. 

Second, defendants argue that the tax assessed for the period ending on June 30, 1992,

is time-barred. Defendants contend that a May 29, 1992 bankruptcy action cannot toll the

statute of limitations on collection of those taxes because some of the taxes accrued before

the bankruptcy action was filed. See Memorandum in Support of Motion for Summary

Judgment as to Defendant Barry H. Hart at 3. However, the statute of limitations begins to

run in a tax collection action 10 years after the date of assessment, not the date of accrual.

See 26 U.S.C. § 6502(a)(1). We have already established, and the parties do not dispute, that

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 9 of 10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

- 10 -

the taxes for the period ending on June 30, 1992, were assessed on September 27, 1993; that

without tolling, the claim regarding that period would be barred after September 27, 2003;

that the limitation period on the claim was tolled for 546 days after September 27, 2003, until

March 26, 2005, as a result of a CDP hearing, and that without tolling for the bankruptcy

action, the June 30, 1992 claim would be time-barred. See Order of December 15, 2005

(doc. 42) at 4. 

The bankruptcy action lasted 865 days (May 29, 1992 through October 11, 1994). Id.

at 3. However, the bankruptcy action tolled the claim only during the period in which the

statute was running; that is, after September 27, 1993. Therefore, the statute of limitations

was tolled from September 27, 1993, through October 11, 1994, and for an additional 6

months thereafter. See 26 U.S.C. § 6503. Without the applicable tolling for the bankruptcy

action, this claim would have been barred after March 26, 2005. However, the statute of

limitations was suspended for an additional 379 days, and another six months thereafter, until

October 10, 2006, pursuant to Section 6503. Because the tax liability claim for the period

ending June 30, 1992, is not time-barred, defendants' motion is denied as to this issue. 

III. Defendant MJH Trust's Joinders

Plaintiff argues that both of the MJH Trust's joinders should be found untimely. See

United States' Response to MJH Trust's Joinder in Barry H. Hart's Motion for Summary

Judgment and MJH Trust's Joinder in Barry H. Hart's Response to Plaintiff's Motion for

Summary Judgment at 2. In light of our ruling, the issue is moot.

IT IS ORDERED GRANTING plaintiff's motion for summary judgment

(doc. 74) and DENYING defendants' motion for summary judgment (doc. 81). 

 DATED this 19th day of October, 2006.

Case 2:05-cv-01008-FJM Document 104 Filed 10/23/06 Page 10 of 10