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United States of America v. Chris Capriotti

April 12, 2013

UNITED STATES OF AMERICA,
PLAINTIFF,
v.
CHRIS CAPRIOTTI, ET AL.,
DEFENDANTS.



ORDER ON THE PARTIES' MOTIONS FOR SUMMARY JUDGMENT (ECF Nos. 87, 88, 89, 91, 92, 95, 96, 97, 99, 100, 101, 103, 104, 105, 106, 108, 109)

I. INTRODUCTION

Plaintiff United States of America filed this civil action to reduce to judgment outstanding federal tax assessments and foreclose on real property on May 23, 2011. The tax assessments at issue are against Defendants Chris and Carrie Capriotti ("the Capriottis") and their alleged alter egos Oakview Trust and the Chris and Carrie Capriotti Family Trust ("Family Trust"). (ECF No. 1.) Currently pending before the Court are Plaintiff's motion for summary judgment and Defendants Oakview Trust and Family Trust's motion for summary judgment, each filed January 18, 2013. (ECF Nos. 87-92.)

Plaintiff's motion for summary judgment seeks to reduce to judgment individual tax liabilities for tax years 1997 through and including 2002; to have Defendants Oakview Trust and Family Trust declared to be sham trusts created to avoid federal taxes or, in the alternative, that the transfer of the property into the trusts was a fraudulent transfer; and an order of judicial sale entered to enforce the federal tax liens on the Capriottis' residence. (ECF No. 87.) Defendants Oakview Trust and Family Trust filed an opposition on February 14, 2013, arguing that Plaintiff has offered no evidence that would prove the Capriottis engaged in a fraudulent transfer of their residence; the Family Trust is a revocable trust which no longer contains the subject property so the claim is moot as to this trust; and the property is now held by Oakview Trust, an irrevocable trust, which is not a sham trust, nominee or alter ego of the Capriottis, so the assets cannot be reached by a creditor. (ECF No. 95.) The Capriottis filed an opposition on February 20, 2013, asserting that Plaintiff's motion relies on inadmissible evidence, fails to address a disputed jurisdictional issue, and lacks factual and legal support. (ECF No. 96.)

Defendants Oakview Trust and Family Trust move for partial summary judgment on the ground that there is no genuine issue of material fact to support the contention that Global Administrative Services ("GAS"), as administrator of the trusts, is a sham trustee, nominee, or alter ego for Defendants nor is there any genuine issue of material fact to support the government's claims that the trust is a sham or that the transfer of the property was fraudulent.*fn1 (ECF No. 92.) Plaintiff responds that Defendants misapprehend the issues involved in this litigation as the arguments set forth regarding the legal status of GAS is not dispositive as to the right to foreclose on the federal tax liens. Further, the arguments that GAS has a distinct and separate existence supports the arguments made in support of Plaintiff's motion for summary judgment. (ECF No. 97.)

The Court heard oral arguments on March 6, 2013. Counsel William McPike appeared for the Capriottis, counsel John William Phillips appeared for Oakview Trust, Family Trust, and GSA, and counsel Richard Schwartz appeared for the United States. The parties were granted leave to file supplemental briefing on the issues of the intent required for a fraudulent transfer and the interest charges assessed to the Capriottis. The final briefing was filed on March 28, 2013. (ECF Nos. 108, 109.) Having considered the moving, opposition, reply papers, and supplemental briefs, the declarations and exhibits attached thereto, and arguments presented at the March 6, 2013 hearing, as well as the Court's file, the Court issues the following order.

For the reasons discussed below, the Court shall grant Plaintiff's motion for summary judgment and deny Defendant GAS' motion for summary judgment.

II. FACTUAL BACKGROUND

A. Undisputed Facts Asserted by the United States

1. The Tax Liabilities of Chris and Carrie Capriotti Chris Capriotti has owned and run a heating and air conditioning business known as Capriotti Air Conditioning and Heating in the Fresno area for over 18 years.*fn2 Chris and Carrie Capriotti filed a joint federal income tax return for 1996. This return became the subject of an audit examination by the Internal Revenue Service ("IRS"). The IRS expanded its examination of Chris and Carrie Capriotti's income tax liabilities to include the years 1996, 1997, 1998, and 1999.

At some point in 1996, the Capriottis set about creating documents purporting to place all of their property in trusts, including their real property. At that time, the Capriottis created the BAR Trust, Trans Trust, CFCS Trust and the Chris and Carrie Capriotti Family Trust. The Capriottis opened checking accounts in the names of the Oakview Trust, the Trans Trust, the CFCS Trust, and the BAR Trust, with themselves as signatories. The funds in the various trust accounts came from the business of Chris Capriotti and were passed through the BAR Trust to pay the Capriottis' personal expenses. GAS has not and does not maintain any of these bank accounts.

At the completion of this process, all of the Capriottis' property was held in one or another of the various trusts. The Capriottis testified that they have filed no federal individual income tax returns since the 1998 tax year through at least 2002, based on their belief that they had no "income" under federal law. Chris Capriotti asserted his Fifth Amendment right and declined to answer any questions regarding whether or not he has filed any federal income tax returns since 2002.

The IRS examination identified trusts that were created by Chris and Carrie Capriotti, including the Chris and Carrie Capriotti Family Trust, the Oakview Trust, the Trans Trust, the CFCS Trust, and the BAR Trust (collectively, "the Capriotti trusts"). The IRS assessed deficiencies, asserting that the trusts should be disregarded and their income imputed to the Capriottis for federal tax purposes. The IRS determined that the Capriottis putting all of their properties in the names of the various trusts constituted what is commonly referred to as a "flow-through" or "focus" trust arrangement, with Bar Trust as the "focus trust."*fn3

During the course of the examination, the Capriottis obtained the representation of Monty Schultz, CPA. Schultz believed that the Capriottis' trust scheme was unsupportable and typical of "suspect" trust schemes designed to "eliminate your income tax" that were being promoted in the area at the time. The Capriottis failed to cooperate with the IRS examination in any substantive way, but rather sent a number of letters to the IRS asserting that they were not subject to federal income tax and espousing various tax avoidance arguments. The Capriottis were given the opportunity to accept the audit results or bring an administrative challenge and failed to do either. The Capriottis now assert that they have no documentation of their income earning activity during the relevant period.

The IRS collected information from numerous third party sources in order to reconstruct the Capriottis' income for the 1996 through 1999 tax years, including bank records for a bank deposit analysis. Brooks performed a bank deposit analysis with these records. The Capriottis' taxable income for the tax year 1996 was increased by $145,441, for both Chris and Carrie Capriotti, as a result of the audit deficiency determination. Additional deficiencies were assessed for the 1997 through 1999 tax years. For the years 2000 through 2002, periods in which the Capriottis filed no federal income tax returns, the IRS determined the Capriottis' tax liabilities using deficiency procedures pursuant to 26 U.S.C. §§ 6212-13.

2. Assessments and Current Liabilities

On the dates, in the amounts, and for the tax periods set forth below, a duly authorized delegate of the Secretary of Treasury made assessments against Chris Capriotti for unpaid federal income taxes, penalties, interest, and other statutory additions as follows:

Tax Tax Assessment Tax Interest Penalty Balance due as of Type Period Date Assessed Assessed Assessed 11/01/12, including unassessed interest and accruals

1040 1998 10/07/2002 $203,321 $74,756.02 $50,830.25 $624,901.54

(late filing penalty) 10/7/2002 $50,245.24

(failure to pay penalty) 10/31/2005 $24.00 (fees) 1040 1999 10/07/2002 $141,501 $36,448.75 $35375.25 (late $411,446.75

10/07/2002 filing penalty)

$35,375.24 10/31/2005 (failure to pay penalty)

1040 2000 12/20/2004 $1,601 $441.20 $360.23 (late $4,347.66 filing penalty)

12/20/2004 $360.22 (failure to pay penalty) $40.03 (failure

10/30/2006 to pay penalty)

$64.00 (fees)

1040 2001 12/20/2004 $2,732 $478.78 $6,915.08

12/20/2004 $108.11

(estimated tax penalty) 12/20/2004 $614.70 (late filing penalty) 12/20/2004 $450.78 (failure to pay penalty) 1040 2002 12/20/2004 $818 $79.76 184.05 (late $1902.38 filing penalty) $85.89 (failure to pay penalty) Total $1,049,513.41

Proper notice has been given and demand made for payment of the assessments set forth on Chris Capriotti. Despite timely notice and demand for payment of the assessments, Chris Capriotti has neglected, failed or refused to fully pay these assessments for tax years 1998, 1999, 2000, 2001, and 2002, which remain due and owing with an unpaid balance of $1,049,513.41 for Chris Capriotti, plus statutory interest and other additions allowed by law from November 1, 2012.

On the dates, in the amounts, and for the tax periods set forth below, a duly authorized delegate of the Secretary of Treasury made assessments against Carrie Capriotti for unpaid federal income taxes, penalties, interest, and other statutory additions as follows:

Tax Tax Assessment Tax Interest Penalty Balance due as of Type Period Date Assessed Assessed Assessed 11/01/12, including unassessed interest and accruals 1040 1998 10/07/2002 $203,321 $78,087.14 $50,830.25 $634,769.44

(late filing penalty) 10/7/2002 $50,820.17

(failure to pay penalty)

1040 1999 10/07/2002 $141,501 $36,448.75 $411,553.69

10/07/2002 $35,375.25

(late filing penalty) 10/24/2005 $35,375.24

(failure to pay penalty)

24.00 (fees)

Total $1,046.323.13

Proper notice has been given and demand made for payment of the assessments on Carrie Capriotti. Despite timely notice and demand for payment of the assessments, Carrie Capriotti has neglected, failed or refused to fully pay these assessments for tax years 1998 and 1999, which remain due and owing as with an unpaid balance of $1,046,323.13*fn4 for Carrie Capriotti, plus statutory interest and other additions allowed by law from November 1, 2012. On the dates, in the amounts, and for the tax periods set forth below, a duly authorized delegate of the Secretary of Treasury made assessments against Chris Capriotti and Carrie Capriotti, jointly and severally, for unpaid federal income taxes, penalties, interest, and other statutory additions as follows:

Tax Tax Assessment Tax Interest Penalty Balance due as of Type Period Date Assessed Assessed Assessed 11/01/12, including unassessed interest and accruals

1040 1997 06/08/1998 $2,338 $37,456.93 $22,376.80 $359,446.30

(misc. penalty) 04/30/2001 $111,884 $27,971.00

(failure to pay penalty) 04/30/2001 $24.00 (fees) 10/31/2005 $24.00 (fees)

Proper notice has been given and demand made for payment of the assessments set forth on Defendants Chris and Carrie Capriotti. Despite timely notice and demand for payment of the assessments, Chris and Carrie Capriotti have neglected, failed or refused to fully pay these assessments for tax year 1997, which remain due and owing as with an unpaid balance of $359,446.30 for Carrie Capriotti, plus statutory interest and other additions allowed by law from November 1, 2012.

3. The Property

The Capriottis acquired the property at 27484 Oak Flat Lane, Clovis, California from Mary Capriotti, Chris Capriotti's mother, by way of a Grant Deed recorded on April 24, 1987. At some point in 1996, the Capriottis signed documents purporting to place all of their property in trusts, including their real property. The Capriottis executed a Trust Transfer Deed, naming themselves as grantors and The Chris and Carrie Capriotti Family Trust as grantee, recorded with the Fresno County Recorder's Office on October 14, 1996. According to the original document transferring the property to the Chris and Carrie Capriotti Family Trust, the Family Trust was revocable at the discretion of the Grantors. Chris Capriotti and Carrie Capriotti were trustees of the Family Trust. In deposition testimony, neither Chris nor Carrie Capriotti were able to identify any other trustees.

The Capriottis then filed a Trust Transfer Deed recorded on June 28, 1999, naming the Chris and Carrie Capriotti Family Trust as grantor and Oakview Trust as grantee. The grant deed recorded on October 14, 1996, reflects that the transfer from the Capriottis to the Family Trust was made without consideration. The grant deed recorded on June 28, 1999 did not recite any consideration for the transfer from the Family Trust to Oakview Trust. Testimony by Chris Capriotti, Carrie Capriotti, and John Harvey confirm that no money was ever exchanged or paid for either transfer. The Capriottis opened various bank accounts in the names of the Capriotti trusts, to which they were signatories with individual signatory authority. Global Business Services*fn5 ("GBS")/GAS did not open any of these bank accounts.

The Capriottis continued to pay all home-related expenses, including a mortgage in the name of Chris and Carrie Capriotti on the property during the period in question. The Capriottis transferred money through the accounts of Oakview Trust or its trustee to pay for the property taxes. The Capriottis paid the property taxes on the Oak Flat Lane property either directly or through monies they controlled through the Capriottis' trusts. At least as late as 1999, the property tax records of Fresno County reflected that the Chris and Carrie Capriotti were the owners of the Oak Flat Lane property.*fn6

After the formation of the trusts, Chris Capriotti continued to run his business and the Capriottis continued to live in and maintain their home on Oak Flat Lane.

4. Oakview Trust

Chris Capriotti testified that, after the Capriottis executed a transfer of title to their real property from the Family Trust to Oakview Trust in 1999, Chris Capriotti initiated an association with GBS, then trustee of Oakview Trust, a position which he describes as "protector." In that capacity, he had the authority to remove and replace trustees.

John Harvey and Kurt Kistler, the latter operating under the d/b/a name "KKP," were the trustees indicated on the grant deed purporting to transfer title from the Chris and Carrie Capriotti Family Trust to Oakview Trust. John Harvey is identified as trustee in Oakview Trust documents.

According to Mr. Kistler, he "never handled any money," and was not aware of any sale purportedly moving the Oak Flat Lane property into the name of Oakview Trust. Rather, he "just changed" names on the documents. According to Mr. Kistler, as a trustee of Oakview Trust, he had no oversight or control over the property in trust, stating, "[t]he only thing I knew was that the property was now under my name and another trustee's name." Mr. Kistler resigned immediately upon becoming aware that the IRS was investigating Oakview Trust, asserting that he "wasn't doing anything" with respect to the trusts.

Mr. Harvey took no "active roll" in the management of the trust or performed any actual supervision over the property purportedly held by the trust. Oakview Trust "does no business, has no income[,]" holds no money, collects no rent from the Capriottis, does not pay bills related to the maintenance of trust property or pay for services related to the property. Chris and Carrie Capriotti were designated as managers of Oakview Trust. Chris and Carrie Capriotti had signatory authority over bank accounts held in the name of Oakview Trust and/or GBS. Oakview Trust's current trustee and successor to GBS, is GAS. The Capriottis are the source of funding for legal counsel for Oakview Trust in this matter.

5. The Federal Tax Liens

On the dates listed below, in order to provide notice to third parties of statutory liens in compliance with 26 U.S.C. § 6323, the IRS filed notices of federal tax lien with the Fresno County Recorder against Chris and Carrie Capriotti for the individual income tax liabilities for the tax periods set forth below:

Tax Period Ending Taxpayer(s) Date(s) Recorded 12/31/1996 Chris Capriotti 05/01/2001

Carrie Capriotti 05/01/2001

Oakview Trust 05/01/2001, 07/23/2007 12/31/1997 Chris Capriotti 12/29/2003

Oakview Trust 07/23/2007

Carrie Capriotti 04/04/2010 12/31/1998 Carrie Capriotti 12/09/2003

Chris Capriotti 01/20/2004

Oakview Trust 07/23/2007 12/31/1999 Chris Capriotti 12/09/2003

Carrie Capriotti 01/20/2004 12/31/2000 Chris Capriotti 09/26/2005 12/31/2001 Chris Capriotti 09/26/2005 12/31/2002 Chris Capriotti 09/26/2005

B. Undisputed Facts Asserted By Global Administrative Services

This is an action brought by the United States to collect taxes owed by Chris and Carrie Capriotti, in part by foreclosing against property held in the name of Oakview Trust, of which GAS is the named trustee.*fn7 The United States is not ...


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