Opinion ID: 775246
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Heading: Did Jepsen Give the Property to His Children?

Text: 5 By broadly defining the federal tax lien in 26 U.S.C. § 6321, Congress meant to reach every interest in property that a taxpayer might have. United States v. Nat'l Bank of Commerce, 472 U.S. 713, 719-20 (1985). In applying that statute, [w]e look initially to state law to determine what rights the taxpayer has in the property the Government seeks to reach, then to federal law to determine whether the taxpayer's state-delineated rights qualify as 'property' or 'rights to property' within the compass of the federal tax lien legislation. Drye v. United States, 528 U.S. 49, 58 (1999). Here, Jepsen argues he gave the vacation home to his children in August 1989 and therefore had no interest in that property when the tax lien came into existence in 1994. He concedes that the note and mortgage would be property for purposes of § 6321 if the transaction was a sale. Whether the transaction was a gift or a sale is an issue of state law. 6 Under Arkansas law, proof of a gift requires clear and convincing evidence that the donor delivered the property intending to make an immediate and final gift and to release unconditionally all future dominion and control over the property. See O'Fallon v. O'Fallon ex rel. Ngar, 14 S.W.3d 506, 508 (Ark. 2000). Arkansas law presumes a gift when the donor registers legal title in a family member's name. Perrin v. Perrin, 656 S.W.2d 245, 248 (Ark. App. 1983); see Festinger v. Kantor, 616 S.W.2d 455, 463-64 (Ark. 1981). The district court nonetheless concluded that the August 1989 transfer was a sale, and that no gift of Jack's property interest in the resulting note and mortgage occurred before the April 1994 tax assessment. We review these findings for clear error. See Bishop v. Bishop, 961 S.W.2d 770, 773 (Ark. App. 1998). The following is a summary of the relevant underlying events. 7 Jepsen conveyed the property to Kris and Karen by a warranty deed dated August 15, 1989. Jepsen's lawyer, George Carberry, prepared the transaction documents. Carberry filed the deed and mortgage in Baxter County, Arkansas in October 1989. He then sent the document originals to Robert Bailie, vice president of finance of Jepsen of Illinois, with a letter stating: 8 Enclosed are the original, recorded warranty deed and real estate mortgage relative to Jack's sale of the Arkansas real estate to Kris and Karen. These documents should be kept along with Jack's other real estate documents. 9 I am also returning the original promissory note which Jack should keep. 10 In August, Kris and Karen each gave Jepsen a check in the amount of $10,000 as a down payment on the property. The parties knew, however, that the children had insufficient funds to cover the checks, and Jepsen never presented them for payment. In December, Jepsen returned the $10,000 down payment checks to the children with a letter stating, I have decided to give you the down payment required on the purchase of the Arkansas property. 11 The promissory note bore interest at nine-and-a-half percent, payable annually, with the entire principal due on August 15, 1992. Neither Kris nor Karen made any interest or principal payments on the note, nor did Jepsen ever demand any payment. The original of the note cannot be found; Jack assumes he destroyed it. During discovery, Bailie produced a copy of the note and the other documents Carberry had sent him. 12 In April 1995, Kris applied for a bank loan secured in part by the Arkansas property. The bank did a title search and discovered the 1989 mortgage to Jepsen. Kris brought the mortgage to Jepsen's attention, and he released it for no consideration. At about this time, Karen executed a quit claim deed conveying her interest in the property to Kris. Jepsen's release and Karen's quit claim deed were recorded in Baxter County in April 1995. 13 At trial, Jepsen testified that he intended the August 1989 transfer to be a gift but left the documentation to Carberry and Bailie. His memory of the details was hazy eleven years later. Kris testified: 14 In August of 1989 I wanted to purchase the property from my father. At that time I could not afford to.... 15 Around the time [Jepsen] returned the [$10,000] check to me, he discussed that he was just going to, you know, give me and Karen the property. I think he realized we couldn't afford to buy the property so he decided to give it to us. 16 Karen and Carberry had no recollection of the 1989 transaction. Bailie testified that he would only have acted at the direction of Jepsen. 17 On this record, the district court's finding that the August 1989 transaction was not a gift is not clearly erroneous. To prove the conveyance was a gift, Jepsen needed clear and convincing evidence that he intended to make an immediate and final gift at that time. Clear and convincing evidence is evidence by a credible witness whose memory of the facts about which he testifies is distinct, whose narration of the details is exact... and whose testimony is so... convincing as to enable the fact-finder to come to a clear conviction... of the truth of the facts related. Bishop, 961 S.W.2d at 773. Jepsen's memory of the August 1989 transaction was indistinct and inexact, the contemporary documents were all consistent with a sale, and even Kris testified that he intended to purchase the property in August 1989. 18 Jepsen attempts to rescue his position by arguing that even if the August 15 transaction were a sale, he later changed his mind and gave the property to his children when he returned their down payment checks in December 1989. But as the district court noted, the letter accompanying the returned checks states that Jepsen was giving each child the $10,000 check, not his entire property interest in the note and mortgage. The trial testimony did not provide clear and convincing evidence to the contrary. 19 Alternatively, Jepsen argues in his reply brief that the promissory note was discharged and his interest in the mortgage extinguished when he destroyed the note. He relies on § 3-604 of the Uniform Commercial Code as adopted in Illinois, 2 which would govern this issue under Arkansas choice-of-law principles. But Jepsen did not argue this theory to the district court, nor did he present clear and convincing evidence that he destroyed the note with the requisite intent to discharge his children's obligation to pay the instrument. In these circumstances, we decline to depart from our normal rule that we do not consider issues first raised in a reply brief. See, e.g., United States v. Darden, 70 F.3d 1507, 1549 n.18 (8th Cir. 1995), cert. denied, 517 U.S. 1149 (1996). 20 Jepsen further argues that his release of the mortgage in April 1995 extinguished the government's right to foreclose its tax lien on this property. The district court concluded that release of the mortgage did not affect the government's pre-existing tax lien, citing cases holding that once a lien has attached to an interest in property, the lien cannot be extinguished... simply by a transfer or conveyance of the interest. United States v. Rodgers, 461 U.S. 677, 691 n.16 (1983). On appeal, Jepsen argues that the government merely acquired Jepsen's right to reinstate the released mortgage under Arkansas law. But the survival of a federal tax lien is a question of federal law, and Jepsen cites no authority for the proposition that a taxpayer may defeat an existing lien by releasing a mortgage. In general, Congress did not intend that taxpayers have the prerogative to relinquish rights in property in favor of avoiding tax liability. Drye Family 1995 Trust v. United States, 152 F.3d 892, 899 (8th Cir. 1998), aff'd, 528 U.S. 49 (1999). 21 Finally, citing McKay v. Capital Resources Co., 940 S.W.2d 869 (Ark. 1997), Jepsen argues that the United States may not foreclose on the note and mortgage because Arkansas law requires a creditor either to produce the original promissory note or to comply with the requirements of the Uniform Commercial Code relating to lost, stolen, or destroyed negotiable instruments. See ARK. STAT. ANN. § 4-3-309. But these authorities deal with a creditor suing as holder of the note, not with the enforcement of a federal tax lien. The United States presented convincing evidence as to the terms of the note and the fact that Jepsen was the holder of the note when it was lost or destroyed. Jepsen cites no authority suggesting that this evidence was insufficient to establish a property interest against which the tax lien may be enforced. 22