FILED United States Court of Appeals UNITED STATES COURT OF APPEALS Tenth Circuit
FOR THE TENTH CIRCUIT April 18, 2014
Elisabeth A. Shumaker Clerk of Court UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v. No. 13-2014 (D.C. No. 2:09-CV-00752-JCH-WPL) BILLY R. MELOT, (D. N.M.)
Defendant-Appellant,
and
KATHERINE L. MELOT; KLM TRUST; C.D. PROPERTIES, INC.; MELM TRUST; Q.F. MARKETING, INC.; LEIGH CORPORATION; SUZANNE CORPORATION; MIRROR FARMS, INC.; C.D. EXPRESS, INC.,
Defendants.
UNITED STATES OF AMERICA,
v. No. 13-2040 (D.C. No. 2:09-CV-00752-JCH-WPL) KATHERINE L. MELOT, (D. N.M.)
BILLY R. MELOT; C.D. EXPRESS, INC.; MIRROR FARMS, INC.; C.D. PROPERTIES, INC.; Q.F. MARKETING, INC.; LEIGH CORPORATION; KLM TRUST; SUZANNE CORPORATION; MELM TRUST,
ORDER AND JUDGMENT*
Before KELLY, ANDERSON, and MATHESON, Circuit Judges.
Billy R. Melot (Billy) and Katherine L. Melot (Katherine), husband and wife,
separately appeal the district court’s judgment that reduced to judgment the
Government’s income tax assessments against them and its fuel-excise tax
assessments against Billy, and also authorized the foreclosure of its tax liens and the
sale of several real properties to satisfy the liens. We exercise jurisdiction under
28 U.S.C. § 1291 and affirm.
* After examining the briefs and appellate record, this panel has determined unanimously that oral argument would not materially assist the determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case is therefore ordered submitted without oral argument. This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. It may be cited, however, for its persuasive value consistent with Fed. R. App. P. 32.1 and 10th Cir. R. 32.1.
-2- I. BACKGROUND
During the relevant time, the Melots were New Mexico residents. Billy owned
and operated several convenience stores that sold gasoline and groceries in New
Mexico and Texas. From 1987 through 1993, the stores generated sufficient income
to require the Melots to file federal income tax returns and pay taxes. Because New
Mexico is a community-property state, one-half of the income tax was attributable to
Katherine and the other half to Billy. See, e.g., United States v. Mitchell, 403 U.S.
190, 196 (1971) (“[T]he wife is required to report half the community income and . . .
the husband is taxable only on the other half.”). Neither Billy nor Katherine filed
returns or paid taxes for the years in question.
Billy also operated a sole proprietorship known as Melot Oil Company, which
bought, sold, blended, and distributed gasoline and fuel to retail customers through
the convenience stores. These activities required him to file federal fuel-excise tax
returns and to pay excise taxes. But for several quarters from 1989 through 1993, he
failed to file any returns or pay taxes.
Denese Baker, an agent with Internal Revenue Service (IRS), began an
examination of the Melots in 1992. Because they had not maintained adequate
records from which their income tax liabilities could be determined, Agent Baker was
required to reconstruct their income. For 1990, she used the bank-deposits method,
and for the other years she used records obtained from the Melots themselves and
various third parties, including state officials, banks, and suppliers. If records were
-3- unavailable, she extrapolated the income from existing records. As to the fuel-excise
taxes, Agent Baker reconstructed those liabilities by examining Billy’s recipe for
gasoline and his blending practices, along with his use of numerous dummy
corporations and aliases in conducting what was essentially a sole proprietorship.
After Agent Baker completed her work in 1999, the IRS sent separate
“thirty-day letters” to Billy and Katherine that informed them of the proposed
adverse determinations and gave them thirty days to request administrative hearings.
No hearings were requested. In January 2000, the IRS sent three notices to Billy and
three to Katherine, stating deficiencies for 1987 through 1989, 1990, and 1991
through 1993. The notices explained the taxes and penalties due for each year and
how the IRS reconstructed their income. The notices also informed the Melots that
they had ninety days to petition the tax court to contest the methods and/or amounts
of the assessments. No petitions were filed.
In June 2000, the IRS assessed the income taxes and penalties and sent
separate notices of the assessments and demands for payment to Billy and Katherine.
When no payments were forthcoming, in October 2001, the IRS filed notices of
federal tax liens against the Melots and advised them of their rights to request a
collection due process hearing within thirty days. The Melots did not respond until
March 2002 when they raised several discredited tax protestor arguments.
-4- In July 2009, the United States sued the Melots to reduce the assessments to
judgment and to foreclose its tax liens on their personal and real property.1 It later
amended its complaint to add KLM Trust, C.D. Properties, Inc., MELM Trust, Q.F.
Marketing, Inc., Leigh Corporation, Suzanne Corporation, Mirror Farms, Inc., and
C.D. Express, Inc. as defendants and to obtain additional relief, including a finding
that these entities held title to real property as the Melots’ nominees, and to foreclose
its liens and sell the properties.
Eventually the Government moved for summary judgment. In opposition, the
Melots argued, among other things, there were several genuine issues of material fact
as to the reliability of Agent Baker’s reconstruction of their income, the validity of
the liens, and the Government’s compliance with several other procedural
requirements. The Melots further argued that the court should delay ruling on the
motion until they received all of the documents they had requested in discovery.
While the summary judgment motion was pending, Katherine filed a motion to
dismiss based on the innocent-spouse doctrine.
The district court granted summary judgment and reduced the assessments to
judgment as follows: (1) against Billy for more than $18 million in income taxes,
penalties, and interest, and nearly $7 million in fuel-excise taxes, penalties, and
interest; and (2) against Katherine for more than $9 million in income taxes,
1 As part of the suit, the IRS also sought to reduce a 1996 income tax assessment against Katherine to judgment. The IRS eventually dismissed this claim.
-5- penalties, and interest. In a separate order, the court denied Katherine’s request for
innocent-spouse relief. Several months later, the magistrate judge appointed a
receiver to sell the real properties.
In its order concerning the Melots’ motion to alter or amend the judgment, the
district court determined sua sponte that the Government should re-compute the taxes
without consideration of a potential whipsaw. Originally, the Government calculated
Billy’s income taxes based on all of the community income and Katherine’s taxes
based on one-half of the income. This was done to enable the Government to collect
the full amount owed if Katherine were relieved of liability on her share of the
community income. The court, however, rejected this method of income allocation
and ordered the Government to re-compute the tax liabilities to eliminate the anti-
whipsaw income attribution and also to correct a double-counting error regarding a
penalty.2 It entered a stay of the sale. Once the corrections were made, the court
entered judgment for income taxes of approximately $8.7 million each against Billy
2 An anti-whipsaw allows the IRS “to assert inconsistent positions and to assess deficiencies against more than one person for the same tax liability if there is an accepted legal basis for each assertion.” Gerardo v. Comm’r, 552 F.2d 549, 555 (3d Cir. 1977) (internal quotation marks omitted). It is grounded in the need “to protect the public fisc and insure against a potential ‘whipsaw’ effect.” Id. (internal quotation marks omitted). Although this circuit has recognized the propriety of an anti-whipsaw position in certain circumstances, see, e.g., Wiles v. Comm’r, 490 F.2d 255, 259 (10th Cir. 1974), we need not resolve whether the district court was correct to disallow the anti-whipsaw decision because the Government does not appeal from that decision.
-6- and Katherine, and reaffirmed its order regarding the excise taxes and liens. It also
lifted the stay.3 These appeals followed.
II. ANALYSIS
A. The Amended Complaint
According to the Melots, the district court erred in allowing the United States
to file an amended complaint to add the corporate and trust entities as defendants.
We disagree.
The record discloses the Government contacted the Melots’ lawyer and
obtained his consent to file an amended complaint. Based on that representation, the
magistrate judge granted the motion to amend. See Fed. R. Civ. P. 15(a)(2) (“[A]
party may amend its pleading . . . with the opposing party’s written consent.”). On
appeal, the Melots argue the consent was invalid because they were in the process of
firing their lawyer when he gave his consent. The Melots fail to cite any authority,
however, to countermand the general rule that a client “is bound by the actions of his
lawyer.” Young v. Workman, 383 F.3d 1233, 1240 (10th Cir. 2004). Their failure to
do so or to show the lawyer did not represent them when he consented to the
amendment means we will not consider the argument. See Phillips v. Calhoun,
3 The district court found there were unresolved issues as to two corporate defendants – Q.F. Marketing, Inc. and C.D. Properties, Inc. The court concluded, however, there was no good reason for delay as to the other defendants, and it issued a final judgment as to those parties and claims under Fed. R. Civ. P. 54(b). The Government later dismissed, without prejudice, its claims against these two defendants.
-7- 956 F.2d 949, 953 (10th Cir. 1992) (holding that this court will not consider an
argument that “has not been even minimally supported by legal argument or
authority”).
B. Discovery
In their lengthy opposition to the Government’s summary judgment motion,
the Melots requested denial of the motion as premature. Fed. R. Civ. P. 56(d). They
said the Government had not provided them with the documents they requested
concerning the methodology used by Agent Baker to reconstruct their income, and
therefore they could not adequately respond.
Rule 56(d) provides that “[i]f a nonmovant shows by affidavit or declaration
that, for specified reasons, it cannot present facts essential to justify its opposition [to
a motion for summary judgment], the court may: (1) defer considering the motion or
deny it; (2) allow time to obtain affidavits or declarations or to take discovery; or
(3) issue any other appropriate order.” Our review of a decision to deny a motion for
discovery is “for abuse of discretion. . . . [and] [w]e will not reverse unless the
district court’s decision to deny discovery exceeded the bounds of the rationally
available choices given the facts and the applicable law in the case at hand.” FDIC v.
Arciero, 741 F.3d 1111, 1116 (10th Cir. 2013) (citation, brackets and internal
quotation marks omitted).
In December 2010, the Government sent documents to the Melots. The
scheduling order provided that discovery motions were due no later than July 7,
-8- 2011. At no time between December 2010 and July 11, 2011, when the Government
filed its motion for summary judgment, did the Melots claim that the Government
had not complied with its discovery obligations.
Moreover, the Melots presented detailed arguments concerning Agent Baker’s
methodology and calculations, using various documents, most of which were
provided to them in discovery. Also, they have not shown the Government failed to
comply with discovery. The Government produced two boxes of documents that
included the IRS’s administrative and collection files for 1987 through 1993, along
with Agent Baker’s work papers and supporting materials.
More than two months after the Melots filed their response in opposition to
summary judgment, they filed a motion to compel, which the magistrate judge
denied. The district court overruled the Melots’ objections, in part, because the
Government “clearly explained the four instances in which it has already provided
the same or substantially similar material to the [Melots].” R. Vol. 5 at 120. The
district court did not abuse its discretion.
C. Summary Judgment
“We review de novo the grant of summary judgment to determine whether any
genuine issues of material fact were in dispute and, if not, whether the district court
correctly applied the substantive law at issue.” Zurich Am. Ins. Co. v. O’Hara Reg’l
Ctr. For Rehab., 529 F.3d 916, 920 (10th Cir. 2008). Summary judgment “shall” be
granted when “there is no genuine dispute as to any material fact and the movant is
-9- entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “In applying this
standard, we view the evidence and draw reasonable inferences in the light most
favorable to the nonmoving party. Zurich, 529 F.3d at 920 (internal quotation marks
omitted).
The Melots advance several arguments of error concerning the district court’s
order on summary judgment. We reject them because they lack factual or legal
support, or both.
1. Zero Income Tax Returns
The Melots argue that because Katherine filed tax returns for 1987 through
1993, the IRS did not need to reconstruct their income and file substitute returns.
We disagree. Katherine filed “zero income tax returns,” which reported her income
as zero. These returns do not qualify as tax returns. See United States v. Rickman,
638 F.2d 182, 184 (10th Cir. 1980) (holding that a document that does not provide
information from which a tax can be computed is not a return).
2. Due Process Collection Hearing
The Melots’ failure to pay the assessments created a tax lien on all of their
property in favor of the United States. To perfect the liens, the Government filed
notices in the appropriate counties and informed the Melots of the filings and their
right to request a due process collection hearing within thirty days. The Melots never
asked for a hearing; instead, they responded well past the thirty-day deadline with
arguments. They now assert that because the IRS did not schedule a hearing, they
- 10 - were “lead[] . . . to believe that their challenge was accepted as true.” Billy R. Melot
Opening Br. (13-2014) at 15; Katherine L. Melot Opening Br. (13-2040) at 15.
The Melots seem to suggest the IRS’s failure to schedule a hearing precluded
summary judgment. But, they never explain why the IRS was obligated to schedule a
hearing in response to an untimely protest letter. In short, the Melots’ position lacks
any merit. See Phillips, 956 F.2d at 953.
3. Additional Procedural Defects
The Melots additional arguments about procedural errors lack factual or legal
support. First, they claim never receiving the “thirty-day letters” from the IRS, but
they did. R. Vol. 4 at 268-69, 274-75. Moreover, the IRS is not required to send
them because “[d]ue process does not require a hearing at the initial state or at any
particular point of an administrative proceeding.” Rosenberg v. Comm’r, 450 F.2d
529, 533 (10th Cir. 1971).
The Melots next argue they never received the notices of deficiencies that
triggered their obligation to petition the tax court within ninety days for a
redetermination of the deficiencies. But actual receipt of a “ninety-day letter” is not
required. Instead, notice is sufficient if it is sent to the taxpayer’s last known
address, which was done in this case. 26 U.S.C. § 6212(b)(1); Armstrong v. Comm’r,
15 F.3d 970, 973 (10th Cir. 1994).
The Melots also argue the IRS should not have mailed them the notices of
assessments and demands for payments on the same day as the assessments were
- 11 - made. There is no merit to this argument because 26 U.S.C. § 6303(a) allows the IRS
to do this.
4. Reconstruction of Income
The Melots argue there were several genuine disputes of material fact
regarding Agent Baker’s methodology to reconstruct their income. They did not,
however, present sufficient evidence to overcome the presumption the assessments
were correct.
“An ‘assessment’ amounts to an IRS determination that a taxpayer owes the
Federal Government a certain amount of unpaid taxes. It is well established in the
tax law that an assessment is entitled to a legal presumption of correctness—a
presumption that can help the Government prove its case against a taxpayer in court.”
United States v. Fior D’Italia, Inc., 536 U.S. 238, 242 (2002). In an IRS collection
suit, “the statutory notice of deficiency is presumed correct; the burden rests on the
taxpayer to establish that the determination of income is erroneous.” United States v.
Gosnell, 961 F.2d 1518, 1520 (10th Cir. 1992) (internal quotation marks omitted).
The presumption continues when, as here, the deficiencies ripen into assessments
after the taxpayer fails to file a petition challenging the deficiencies. See United
States v. Mullin, 948 F.2d 1188, 1192 (10th Cir. 1991). Only “if the taxpayer proves
that the IRS assessment is arbitrary and unsupportable, [does] the burden . . . shift[]
back to the IRS to prove what the correct amount of tax should be.” Dye v. United
States, 121 F.3d 1399, 1408 n.10 (10th Cir. 1997).
- 12 - Summary judgment was proper because the Melots failed to produce any
evidence to overcome the presumption of correctness. For example, they presented
no evidence to support their argument that Agent Baker used incorrect profit margins
and figures from large corporations like Walmart to reconstruct their income. To the
contrary, Agent Baker explained in her affidavit that, except for 1990 when she used
the bank-deposits method, she reconstructed the Melots’ income by using records of
their actual purchases and sales – not by using profit margins or records for other
businesses. Also, despite their contention otherwise, the Government provided the
Melots with the documents Agent Baker used to reconstruct their income.
5. Temporary Release of Liens
The Melots argue that because the IRS mistakenly filed certificates to release
the tax liens, the liens are invalid and unenforceable. We disagree. When, as here,
the IRS determines that a lien has been released by mistake, it can revoke the release
and reinstate the lien, 26 U.S.C. § 6325(f)(2), which it did.
6. Federal Fuel-Excise Taxes
Billy argues he does not owe any federal fuel-excise taxes because the State of
Texas was unable to obtain a criminal conviction against him for failure to pay state
fuel-excise taxes. This argument lacks merit for two reasons. First, an unsuccessful
criminal prosecution does not mean Billy no longer owes the unpaid state taxes.
Second, even if Billy were to satisfy his state fuel tax obligations, he is separately
liable for federal fuel-excise taxes. See 26 U.S.C. § 4081.
- 13 - 7. KLM Trust
The Melots contest foreclosure on the property held by the KLM Trust.
Because the KLM Trust did not file a notice of appeal, we lack jurisdiction to
consider whether the district court erred in holding that the IRS could foreclose on
the Trust’s property. See Bowles v. Russell, 551 U.S. 205, 214 (2007) (“[T]he timely
filing of a notice of appeal in a civil case is a jurisdictional requirement.”).
8. The Order to Re-Calculate the Judgment
In its order concerning the Melots’ motion to alter or amend the judgment, the
district court determined sua sponte the Government should re-compute the income
taxes owed by Billy and Katherine individually. In particular, the court ordered the
Government to abandon the anti-whipsaw position that it had taken in computing
Billy’s taxes and to correct a double-counting error regarding a penalty. The
Government submitted new calculations. After the Melots filed their objections, the
court entered a final judgment.
The Melots argue they were entitled to a trial because the district court ordered
the Government to recalculate the taxes without the anti-whipsaw tax attribution.
According to the Melots, this “created genuine issue(s) requiring the District Court to
vacate it[]s [summary judgment order] and set the matter for [t]rial.” Billy R. Melot
Opening Br. (13-2014) at 28; Katherine L. Melot Opening Br. (13-2040) at 28. Once
again, the Melots have failed to identify any genuine dispute of material fact that
- 14 - should have precluded summary judgment. Instead, they simply repeat their
arguments about Agent Baker’s methodology to reconstruct their income.
9. Recalculation of Income Taxes and Penalties
The Melots argue that the IRS was required to recompute their taxes by
dividing the full amount of the community income by two. We do not consider an
argument when, as here, it “has not been even minimally supported by legal
argument or authority.” Phillips, 956 F.2d at 953. And although the Melots contest
the IRS’s calculation of penalties and interest, they fail to identify any specific flaws
in the calculations. Finally, they present no evidence to support their contention they
did not receive full credit for payments received from a levy issued to a business that
owed the Melots money.
10. Double Recovery
The Melots argue that because Billy must pay restitution to the United States
as the victim in his criminal case, an adverse judgment for the Government in this
case would wrongly require them to pay the same taxes to the same party twice. But
18 U.S.C. § 3664(j)(2) resolves this issue. It provides: “Any amount paid to a victim
under an order of restitution shall be reduced by any amount later recovered as
compensatory damages for the same loss by the victim in – [] any Federal civil
proceeding.”
- 15 - D. Innocent Spouse
Katherine argues the district court should have granted her relief as an
innocent spouse. The district court rejected her request under 26 U.S.C. § 66(c)
because she knew or had reason to know of the community income.
Because New Mexico is a community property state, Katherine is liable for the
taxes due on one-half of the income of the marital community. See Mitchell,
403 U.S. at 196. It does not matter that Katherine was a stay-at-home mother, as she
argues, or that she was not criminally charged along with her husband for any
tax-related offenses.
In response to the Government’s motion for summary judgment, Katherine
admitted she and Billy operated several businesses during the relevant years, and she
was also aware that Billy operated the Melot Oil Company. Additionally, the
Government produced evidence that Katherine participated in these businesses by
writing checks, making cash deposits, obtaining cashiers’ checks, and arranging wire
transfers. By contrast, Katherine offered nothing more than conclusory denials that
she had knowledge of any income or business affairs. Because the evidence showed
Katherine knew or had reason to know of the community income,4 the district court
properly concluded that she “has not met her burden of establishing that she meets
4 Katherine also argued it was inequitable to attribute the community income to her, which is one of four criteria under 26 U.S.C. § 66(c)(4). We do not consider this issue because she failed to establish the third criterion, lack of knowledge of the community property income.
- 16 - each element of the defense and [is therefore] not entitled to innocent spouse relief
under 26 U.S.C. § 66.” R. Vol. 5 at 300.
E. The Receiver
In conjunction with its memorandum order for summary judgment, the district
court entered a judgment that the real property be sold unopposed or through a
receiver. The magistrate judge appointed Bobby Shaw as receiver. A few months
later, the district court set aside the judgment of sale pending the Government’s
recalculation of the income taxes without its anti-whipsaw position. It also ordered a
stay of the sale. When the Government’s new computations were complete, the court
issued a final judgment that included the sale and lifted the stay. The Melots’
argument there is no order of sale is plainly wrong.
The Melots further argue that Mr. Shaw should be removed as receiver
because he serves as a city planner for Hobbs, New Mexico. They rely on 28 U.S.C.
§ 958, which prohibits a person employed by the federal government from being
appointed a receiver in a federal court case. Mr. Shaw is employed by a local
government not the federal government. As such, the argument lacks merit.
- 17 - III. CONCLUSION
The judgment of the district court is affirmed. We deny Billy’s motion to
proceed in forma pauperis in Appeal No. 13-2014. We deny Katherine’s motion to
proceed in forma pauperis in Appeal No. 13-2040.
ENTERED FOR THE COURT,
Scott M. Matheson, Jr. Circuit Judge
- 18 -