Magistrate Recommends Default Judgment in Lien Foreclosure Case

As an initial matter, the court notes that Mr. Fraughton is appearing pro se. As such, the court will "construe his pleadings liberally and hold the pleadings to a less stringent standard than formal pleadings drafted by lawyers." Riddle v. Mondragon, 83 F.3d 1197, 1202 (10th Cir. 1996). That said, "pro se status does not relieve [a party] of the obligation to comply with procedural rules." Murray v. City of Tahlequah, 312 F.3d 1196, 1199 n.3 (10th Cir. 2002).

On or about April 16, 1999, a Declaration of Land Patent was recorded with the Utah County Recorder representing that Mr. Fraughton patents the Property. On or about June 15, 2006, an Assignment of Land Patent was recorded with the Utah County Recorder purporting to transfer the land patent pertaining to the Property to the Office of Overseer. On or about June 22, 2007, a quit claim deed and a warranty deed were recorded with the Utah County Recorder purporting to transfer the Property from Mr. Fraughton to the Office of Overseer.

The United States alleges that a delegate of the Secretary of the Treasury made various assessments against Mr. Fraughton for tax periods 2000, 2001, 2003, 2004, and 2010 for unpaid federal income taxes, interest, penalties and other statutory additions accruing. According to the United States, the total amount due and owing on the assessments, plus statutory interest pursuant to 26 U.S.C. §§ 6601, 6621, and 6622, and other statutory additions, less any payments and credits, as of April 30, 2013, was $241,048.36. The United States alleges that Mr. Fraughton has neglected, failed, or refused to pay the assessed amounts to the United States.

According to the United States, no entity known as the Office of Overseer has ever filed any tax return or other form with the Internal Revenue Service ("IRS") at any time during or prior to the transfers described above. The Office of Overseer is registered to do business in Nevada. A search of records with the Nevada Secretary of State in 2008 revealed that the only officer listed for the Office of Overseer was Mr. Fraughton. On February 12, 2010, in a telephone interview with an employee of the IRS, Mr. Fraughton admitted that, notwithstanding the purported transfers detailed above, he was the owner of the Property. In addition, the court notes that Mr. Fraughton has used the address of the Property as his personal address for each of the various pleadings he has filed in this case.

An authorized representative of the Office of Overseer was required to appear or otherwise respond in this action no later than April 30, 2014. See Fed. R. Civ. P. 12(a)(1)(A)(i). No authorized representative of that entity has filed an answer or otherwise responded to the complaint. On July 1, 2014, the Clerk of this Court entered a default certificate against the Office of Overseer.

In other words, Mr. Fraughton asserts that (1) a magistrate judge should not rule in this matter, except to dismiss the case; (2) the United States's complaint against him arises under a portion of the Internal Revenue Code relating to the collection of State individual income taxes that has been repealed by Congress, and, as a result (a) this court does not possess subject matter jurisdiction nor (b) does the United States have a viable cause of action against him. The court will construe Mr. Fraughton's motions to dismiss as brought under both rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure.

A. Magistrate Judge Authority

As an initial matter, Mr. Fraughton challenges the referral of this case to a magistrate judge under 28 U.S.C. § 636(b)(1)(B). Under that section, a magistrate judge has the authority "to submit to a [district] judge of the court proposed findings of fact and recommendations for the disposition, by a [district] judge of the court, of any [dispositive] motion." 28 U.S.C. § 636(b)(1)(B). Because this court is merely providing a recommendation to Judge Kimball for the disposition of Mr. Fraughton's motions, it is well within its authority. See Ocelot Oil Corp. v. Sparrow Indus., 847 F.2d 1458, 1462 (10th Cir. 1988) ("While magistrates may hear dispositive motions, they may only make proposed findings of fact and recommendations, and district courts must make de novo determinations as to those matters if a party objects to the magistrate's recommendations."). Therefore, Mr. Fraughton's objections to the referral under § 636(b)(1)(B) are unfounded.

B. Subject Matter Jurisdiction

Mr. Fraughton asserts that this court lacks subject matter jurisdiction on the grounds that Congress repealed the authority of the IRS to collect federal income taxes. Motions to dismiss for lack of subject matter jurisdiction are generally based upon "(1) a facial attack on the sufficiency of the complaint's allegations as to subject matter jurisdiction; or (2) a challenge to the actual facts upon which subject matter jurisdiction is based." Ruiz v. McDonnell, 299 F.3d 1173, 1180 (10th Cir. 2002). Mr. Fraughton's motion is a facial attack on the United States's basis for jurisdiction.

The portion of the Internal Revenue Code that Congress repealed was the Federal-State Tax Collection Act of 1972, Subchapter E of Chapter 64 ("Act"). See 26 U.S.C. §§ 6361 to 6365 (repealed). Prior to repeal, the Act permitted States to enter into an agreement with the United States to have their assessed individual income taxes collected and administered by the federal government. See 26 U.S.C. § 6363 (repealed). In the Omnibus Budget Reconciliation of 1990, Congress repealed the Act thereby removing the authority of the IRS to collect individual income taxes assessed by States. However, the repeal of the Act had no effect on the authority of the IRS to collect federal income tax liabilities. The action against Mr. Fraughton involves the collection of his federal income tax liabilities. As such, the repeal of the Act has no impact on this court's subject matter jurisdiction in the case against Mr. Fraughton. Accordingly, Mr. Fraughton's arguments regarding subject matter jurisdiction fail and his motion to dismiss should be DENIED.

C. Failure to State a Claim

Mr. Fraughton asserts that the United States has "No Cause of Action" against him because it relies upon a repealed portion of the Internal Revenue Code in its claim.¹⁰ "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A court should "assume the factual allegations are true and ask whether it is plausible that the plaintiff is entitled to relief." Gallagher v. Shelton, 587 F.3d 1063, 1068 (10th Cir. 2009).

As noted above, the United States has not relied upon the Act in its case against Mr. Fraughton. This action is brought pursuant to 26 U.S.C. §§ 7401 and 7403. Section 7401 provides that an action for the collection of taxes may only be commenced upon the authorization of the Secretary of the Treasury and at the direction of the Attorney General of the United States. See 26 U.S.C. § 7401. Section 7403 sets forth the process for the filing of a civil action to enforce a lien against property to satisfy a tax liability. See id. § 7403. The United States has set forth facts alleging that Mr. Fraughton has failed to meet his federal tax obligations. Assuming the truth of the factual allegations set forth in the complaint, the United States has properly stated a claim against Mr. Fraughton. As such, Mr. Fraughton's motion to dismiss should be DENIED.

The United States objects to Mr. Fraughton's motion on the grounds that it is untimely and it does not adequately provide a basis for relief. The court agrees. Under rule 12(e) of the Federal Rules of Civil Procedure, a motion for a more definite statement "must be made before filing a responsive pleading and must point out the defects complained of and the details desired." Fed. R. Civ. P. 12(e). Mr. Fraughton has already filed an answer and two motions to dismiss, and he filed the instant motion nearly five months after filing his answer. Thus, the court concludes that the instant motion is untimely.

Even if Mr. Fraughton's motion was timely, he has not demonstrated that the allegations in the complaint are "so vague or ambiguous that [he] cannot reasonably prepare a response." Fed. R. Civ. P. 12(e). In fact, Mr. Fraughton has responded to the complaint repeatedly, and in those responses, has demonstrated that he merely disagrees with the allegations in the complaint. This, however, does not provide a basis for relief under the instant motion. As this court concluded above, the United States has alleged facts sufficient to set forth the general elements of its claims. Accordingly, Mr. Fraughton's rule 12(e) motion is without merit. Because Mr. Fraughton's motion for a more definite statement is untimely and without merit, it is hereby recommended that his motion be DENIED.

The United States asserts that the purported transfers of the Property to the Office of Overseer were fraudulent, and, assuming the Office of Overseer holds an interest in the Property, it is only as the nominee or alter ego of Mr. Fraughton. Specifically, the United States seeks entry of judgment that (1) assuming the Office of Overseer holds title to the Property, it is only as a nominee or alter ego of Mr. Fraughton; (2) the actions of the parties in the purported transfer of the Property to the Office of Overseer created a resulting trust in which Mr. Fraughton maintains a 100% beneficial interest; (3) the purported transfer of the Property constituted a fraudulent conveyance; and (4) the Office of Overseer has no claim to the Property.

This court concludes that based on the facts presented by the United States, entry of default judgment is appropriate on each of these grounds. As noted above, Mr. Fraughton has admitted to an employee of the IRS that he is the true owner of the Property. Thus, by Mr. Fraughton's own admission, the Office of Overseer has no interest in the Property. However, even assuming it retains some interest in the Property, the United States has provided sufficient evidence that the Office of Overseer is merely a nominee of Mr. Fraughton. In evaluating whether property in Utah is held in the name of a nominee, the Tenth Circuit has enumerated the following factors:

Furthermore, the United States notes that the Uniform Fraudulent Conveyance Act, at Utah Code Ann. § 25-6-5(1)(a), establishes that a transfer of property is fraudulent if it is made "with actual intent to hinder, delay, or defraud any creditor of the debtor." This court has previously held that fraudulent conveyances of land made to defeat taxes must be set aside. See United States v. Christensen, 751 F. Supp. 1532 (D. Utah 1990). Thus, the court agrees with the Untied States that it may be considered a creditor of Mr. Fraughton and that the transfer of the Property to the Office of Overseer was fraudulent as to the United States. At the time of the purported transfer of the Property to the Office of Overseer, Mr. Fraughton was aware that he had outstanding tax liabilities to the IRS. Therefore, the transfers to the Office of Overseer can reasonably be considered to have been made in anticipation of litigation or other collection action concerning his federal tax debts. And the transfer was made to an entity controlled by Mr. Fraughton, and he retained possession of the Property after the purported transfer. Therefore, this court concludes that the United States has demonstrated that the transfer of the Property was fraudulent as to the United States, and the United States is entitled to an attachment of its tax liens against the Property.

The court concludes that the United States has also demonstrated that the actions of the parties created a resulting trust in which Mr. Fraughton was at all times the beneficial owner of 100% of the Property. Under Utah law, when title to real property is held in one person's name but the purchase price is paid by another, the general presumption is that a resulting trust is created, with the person paying the purchase price obtaining a beneficial interest in the property. See Parks v. Zions First Nat'l Bank, 673 P.2d 590 (Utah 1983). Under facts similar to this case, the Tenth Circuit has determined that the transferor intended to retain the beneficial ownership of the real property, and that the transferred property could be reached by creditors. See McGavin v. Segal, 189 F.3d 1215, 1218 (10th Cir. 1999). Finally, Mr. Fraughton has admitted to an IRS employee that he is the true owner of the real property. Therefore, this court concludes that the actions of the parties created a resulting trust in which Mr. Fraughton retained a 100% beneficial interest in the real property after the purported transfers to the Office of Overseer.

Based on the foregoing, this court concludes that default judgment should be entered against the Office of Overseer. As such, this court recommends that the United States's motion be GRANTED.

IT IS SO ORDERED.

DATED this 6th day of February, 2015.

²See docket no. 13.

³See docket no. 31.

⁴See docket no. 32.

⁵See docket no. 39.

⁶ Docket no. 13 at 2.

⁷Id. at 1.

⁸ Docket no. 31 at 1.

⁹Id.

¹⁰ Docket no. 13 at 1.

¹¹See docket nos. 13 and 31.

¹²See docket no. 32.

¹³See docket no. 39.