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United States v. Sanders

United States District Court, S.D. Illinois

October 20, 2016

UNITED STATES OF AMERICA, Plaintiff,
v.
FRANKIE L. SANDERS and STATE OF ILLINOIS DEPARTMENT OF REVENUE, Defendants.

          AMENDED MEMORANDUM AND ORDER [1]

          NANCY J. ROSENSTENGEL United States District Judge.

         Defendant Frankie Sanders is a self-employed farmer. He has not, however, filed a federal income tax return or paid federal income taxes since at least 1991. In fact, it is unclear if he has ever done so. He is a “tax defier” and believes that he has no obligation to pay income taxes. As many tax protestors before him have learned, adherence to this belief, no matter how sincerely held, is unwise and can be costly.[2] That is the case here. The Government filed this collection lawsuit seeking to satisfy, or at least partially satisfy, Mr. Sanders's tax debt by selling the two farms on which three generations of his family have earned their livelihood.

         This matter is currently before the Court on the motion for summary judgment filed by the Government on March 7, 2015 (Doc. 87). The Government seeks a judgment that, for the tax years 1991 through 1997, Mr. Sanders is liable for $441, 845.75 in unpaid federal income taxes, penalties, and interest through January 31, 2015 (Doc. 87). The Government further seeks additional interest and statutory additions accruing from February 1, 2015, to the present (Doc. 87). The Government also seeks a judgment declaring that Mr. Sanders's tax liabilities constitute a valid lien on all property belonging to him-including a farm in Fayette County, Illinois, and a farm in Montgomery County, Illinois-and permitting the Government to enforce those liens by foreclosing on and selling the properties (Doc. 87).

         FACTUAL BACKGROUND

         A. The Audit and Assessments

         As mentioned above, Frankie Sanders has not filed a tax return since at least 1991. The Internal Revenue Service (“IRS”) eventually caught up with him, and, in 1998, the IRS began an audit of Mr. Sanders's financial dealings during the calendar years 1991 through 1997 (Docs. 87-3; 87-4). Mr. Sanders refused to respond to any of the agents' phone calls or letters or otherwise cooperate with them (Doc. 87-3). Without the documents needed to determine his tax liability, the agents attempted to reconstruct Mr. Sanders's income and tax liabilities using information obtained from public records and the records of private businesses with whom Mr. Sanders conducted business (Doc. 87-3; see also Doc. 87-6, ¶3 and pp. 5-50; Doc. 87-7; Doc. 87-8, pp. 1-20). In particular, the IRS agents consulted records from the United States Department of Agriculture and its Farm Services Agencies, from which they learned that Frankie Sanders operated a farm in Fayette County, Illinois (the “Fayette farm”), which was owned by his mother Genevieve Sanders (Doc. 87-6, pp. 43-50; Doc. 87-7, pp. 1-6). The Fayette farm was purchased by Mr. Sanders's parents, Milton and Genevieve, in 1951 when Mr. Sanders was a child (Doc. 87-1, ¶2; Doc. 87-10, pp. 178, 184).[3] Mr. Sanders grew up on the Fayette farm, raised his sons there, [4] and continues to live there to this day (Doc. 87-1, ¶¶1, 3; Doc. 87-4, pp. 34-36; Doc. 87-10, p. 90).

         The IRS also learned that Frankie Sanders owned and operated a second farm in Montgomery County, Illinois (the “Montgomery farm”) (Doc. 87-6, pp. 43-50; Doc. 87-7, pp. 1-6). The Montgomery farm was purchased by Mr. Sanders in 1977 with a loan from the seller pursuant to a land contract (Doc. 87-1, ¶¶6, 9; Doc. 87-10, pp. 124-25, 207- 251). Mr. Sanders made installment payments from 1977 to 1996 that totaled approximately $412, 500 (Doc. 87-1, ¶10; Doc. 87-6, pp. 37, 38). On November 21, 1996, a warranty deed transferring title of the property to Mr. Sanders was recorded in Montgomery County, Illinois (Doc. 87-6, p. 38; Doc. 87-10, p. 218).[5] Six days later, Mr. Sanders gifted about five and a half acres of the Montgomery farm to his son, Eric, and Eric's wife, Karen (Doc. 87-10, pp. 111, 219-20).[6]

         From plat maps and land records maintained by the Recorder of Deeds in Fayette County and in Montgomery County, the agents determined the size and location of the Fayette farm and the Montgomery farm (Doc. 87-6, pp. 37-50; Doc. 87-7, pp. 1-5). The agents then canvassed local grain elevators, livestock dealers, and hauling companies, and, while they were able to identify some of Mr. Sanders's crop revenues, they could not assemble a reasonably complete set of business records for his farm operations (Doc. 87-1, ¶¶ 34, 35; Doc. 87-6, p. 18. See also, e.g., Doc. 87-7, p. 19).

         Left with no other option, the agents calculated Mr. Sanders's tax liability by estimating his gross income, deductions, and exemptions (Doc. 87-1, ¶36). In particular, audit reports submitted by the Government demonstrate that agents estimated grain sales based on the number of acres Mr. Sanders operated and statistical data showing the average grain yields and prices for the general area of Montgomery and Fayette Counties (see Doc. 87-6, pp. 20-22; Doc. 87-7, pp. 19-33).[7] Because the agents did not know the financial arrangement between Mr. Sanders and his mother regarding compensation for operating the Fayette farm, all income estimated from that farm was determined to be compensation paid to Mr. Sanders (Doc. 87-7, pp. 19-33). All income estimated from the Montgomery farm was also attributed to Mr. Sanders (see id.).[8] Also factored into his income were the dividends that Mr. Sanders earned from the Nokomis Equity elevator and the Rosamond Cooperative (Doc. 87-7, pp. 34-35).

         The audit reports further describe how the agents estimated Mr. Sanders's deductible business expenses by using statistical data to estimate his grain production costs (Doc. 87-7, pp. 45-51; Doc. 87-8, pp. 1-15). The agents also included the self-employment tax deduction (Doc. 87-7, pp. 36-41); the standard deduction (Id. at pp. 42- 44); and the personal exemption for each respective year (Doc. 87-8, pp. 16-18). Based on Mr. Sanders's estimated adjusted gross income, the agents calculated Mr. Sanders's tax liabilities and penalties for the years 1991 through 1997 (Doc. 87-1, ¶36; Doc. 87-8, pp. 55-60).

         The IRS then served Mr. Sanders with a statutory Notice of Deficiency dated May 9, 2001, for tax years 1991 through 1997, demanding payment of $130, 908 in back taxes and penalties plus an undisclosed amount in interest (Doc. 87-1, ¶37; Doc. 87-6, ¶4; see Doc. 87-8, pp. 21-83).[9] Mr. Sanders did not challenge the IRS's deficiency determination (Doc. 87-1, ¶38; Doc. 87-6, ¶4). Consequently, on October 15, 2001, Mr. Sanders was assessed with the income tax liabilities, penalties, and interest that had accrued to date (Doc. 87-1, ¶39; Doc. 87-6, ¶5; Doc. 87-8, pp. 85, 97, 103, 109, 115, 122, 227; Doc. 87-9).[10] Years later, in March 2006, Mr. Sanders was assessed with additional penalties (Doc. 87-1, ¶39; Doc. 87-6, ¶5; Doc. 87-8, pp. 85, 97, 103, 109, 115, 122, 227; Doc. 87-9). The Government claims that a notice of the assessment and a demand for payment was mailed to Mr. Sanders on the same day of (or shortly after) each assessment (Doc. 87-1, ¶40; Doc. 87-9). All assessments are contained in the following table:

Tax Year

Assessment Date

Assessment Type

Assessment Amount

1991

10/15/01

Tax by examination

$9, 890.00

1991

10/15/01

IRC §6651(a)(1) failure to file penalty

$2, 472.50

1991

10/15/01

IRC §6654 estimated tax penalty

$565.22

1991

10/15/01

Interest to assessment date

$14, 659.07

1991

03/27/06

IRC § 6651(a)(2)-(3) failure to pay penalty

$2, 472.50

1992

10/15/01

Tax by examination

$13, 997.00

1992

10/15/01

IRC §6651(a)(1) failure to file penalty

$3, 499.25

1992

10/15/01

IRC §6654 estimated tax penalty

$610.49

1992

10/15/01

Interest to assessment date

$18, 002.90

1992

03/27/06

IRC § 6651(a)(2)-(3) failure to pay penalty

$3, 499.25

1993

10/15/01

Tax by examination

$18, 939.00

1993

10/15/01

IRC §6651(a)(1) failure to file penalty

$4, 734.75

1993

10/15/01

IRC §6654 estimated tax penalty

$793.53

1993

10/15/01

Interest to assessment date

$21, 112.20

1993

03/27/06

IRC § 6651(a)(2)-(3) failure to pay penalty

$4, 734.75

1994

10/15/01

Tax by examination

$11, 924.00

1994

10/15/01

IRC §6651(a)(1) failure to file penalty

$2, 981.00

1994

10/15/01

IRC §6654 estimated tax penalty

$618.78

1994

10/15/01

Interest to assessment date

$11, 027.80

1994

03/27/06

IRC § 6651(a)(2)-(3) failure to pay penalty

$2, 981.00

1995

10/15/01

Tax by examination

$15, 027.00

1995

10/15/01

IRC §6651(a)(1) failure to file penalty

$3, 756.75

1995

10/15/01

IRC §6654 estimated tax penalty

$814.82

1995

10/15/01

Interest to assessment date

$11, 029.95

1995

03/27/06

IRC § 6651(a)(2)-(3) failure to pay penalty

$3, 756.75

1996

10/15/01

Tax by examination

$16, 268.00

1996

10/15/01

IRC §6651(a)(1) failure to file penalty

$3, 660.30

1996

10/15/01

IRC §6654 estimated tax penalty

$865.87

1996

10/15/01

IRC § 6651(a)(2)-(3) failure to pay penalty

$4, 067.00

1996

10/15/01

Interest to assessment date

$9, 045.11

1997

10/15/01

Tax by examination

$10, 594.00

1997

10/15/01

IRC §6651(a)(1) failure to file penalty

$2, 383.65

1997

10/15/01

IRC §6654 estimated tax penalty

$566.80

1997

10/15/01

IRC § 6651(a)(2)-(3) failure to pay penalty

$2, 224.74

1997

10/15/01

Interest to assessment date

$4, 273.67

         B. Transfer of Property

         By late 2009, despite multiple notices and demands for payment, Mr. Sanders still refused to either remit payment or to acknowledge the IRS's collection efforts in any manner (Doc. 87-6, ¶5; Doc. 87-9). At that point, the IRS proceeded with collection efforts, including serving Mr. Sanders with a collection summons and then filing a civil action to enforce the summons (Doc. 87-4, ¶¶6, 7 and pp. 11-15; Doc. 87-9). See also United States v. Frankie Sanders, Case No. 10-cv-358-WDS-SCW (S.D. Ill.). As part of the enforcement action, Mr. Sanders was questioned under oath by an IRS agent on August 2, 3, and 16, 2010 (see Doc. 87-4, ¶8 and pp. 19-106, 107-138). Mr. Sanders also produced documents for the IRS agent to examine, including trust documents, bank statements, title documents, and other business records (Doc. 87-4, ¶¶9, 10 and pp. 2, 138-74; Doc. 87-5). While none of those documents shed any light on Mr. Sanders's taxable income from 1991 through 1997, the documents were still of some value-from those documents, the Government learned that, after the IRS began its audit of his finances, ownership of the Fayette farm and the Montgomery farm was transferred into two trusts (Doc. 87-1, ¶51).

         The first trust, the Y&K Leasing Trust, was created on September 16, 1999 (Doc. 87-1, ¶52, Doc. 87-4, pp. 139-174). Mr. Sanders obtained the trust documents from Thomas Magro, a fellow tax protestor (Doc. 87-1, ¶51; Doc. 87-4, p. 102).[11] The documents purportedly created something called a “Pure Trust” through which a citizen can elect to be governed by common law and to be exempt from legislative enactments like the Internal Revenue Code (“IRC”) (Doc. 87-1, ¶55; Doc. 87-4, pp. 139- 74; Doc. 87-5, pp. 1-65). Mr. Sanders and his two sons, Eric and Jeffrey, were named trustees of the Trust (Doc. 87-4, pp. 146, 165, 169-172). No beneficiaries were named (see Id. at pp. 139-174). It appears that at the time the trust documents were executed, only personal property items were placed in trust (Id. at p. 167).[12] No real estate was placed in trust (Id. at p. 166). Approximately two weeks after the trust was created, however, Mr. Sanders recorded a deed in Montgomery County, Illinois, purporting to transfer ownership of the Montgomery farm from himself to the Y&K Leasing Trust (Doc. 87-1, ¶53; Doc. 87-10, p. 221).

         The second trust, the Triple S Family Trust, was created by Genevieve Sanders, on November 8, 2002, with the assistance of attorney Jerold Barringer, a tax protestor who routinely represents other tax protestors (Doc. 87-1, ¶60; Doc. 87-5, pp. 66-90).[13]The documents purportedly created a “Pure Common Law Trust Organization” that is exempt from the laws and regulations applicable to a corporation, partnership, trust, grantor trust, or any other type, class, or form of business organization or entity (Doc. 87-5, pp. 68-69). Under the terms of the trust, the Fayette farm was to be held in trust (Doc. 87-5, p. 87). The same day the trust was created, Genevieve Sanders recorded a deed in Fayette County, Illinois, transferring ownership of the Fayette farm from herself to the Triple S Family Trust (Doc. 87-1, ¶60; Doc. 87-10, pp. 195-96).

         Frankie Sanders was named as a trustee of the Triple S Family Trust, and Eric and Jeffrey Sanders were named as his successor trustees (Doc. 87-1, ¶61; Doc. 87-5, pp. 84, 89). Genevieve was also named as a trustee, but no successor trustees were named for her (Doc. 87-1, ¶61; see Doc. 87-5, pp. 85, 89).[14] According to the trust instrument, the trustees held all legal and equitable title and had complete management and control of the property held in trust (Doc. 87-5, pp. 68-69, 73-74); they were the “absolute owners of” the trust property (Id. at p. 73). The trust instrument also authorized the issuance of 1, 000 trust units to investors, to be evidenced by Trust Certificates for a given number of units (Id. at pp. 75-76). The Certificate holders did not have “any legal or equitable title in or to” the trust property, and they did not “have any right to manage or control the destiny, property, affairs, or business” of the trust (Id. at pp. 76, 77). Instead, the Certificate holders were entitled to a portion of the income or surplus earned, and those payments were made as the trustees deemed it “proper and advisable” (Id. at p. 77). All 1, 000 trust certificate units were purchased by Frankie Sanders for $10 (Id. at p. 83).

         C. The Tax Liens

         In August 2010, the Government recorded a federal tax lien in Montgomery County, Illinois, with respect to the Montgomery farm (Doc. 87-10, p. 223). This notice identified Frankie Sanders as the taxpayer (Id.). By then Mr. Sanders's tax liability had grown to $237, 913 (Id.). Two other notices were filed against the Montgomery farm in April 2011 identifying the taxpayers as “Eric and Karen Sanders as Nominees of Frankie Sanders” and Y&K Leasing; Frankie Sanders, Trustee; Frankie Sanders, Beneficiary; as Nominee of Frankie Sanders” (Doc. 87-10, pp. 224, 225). All three notices were refiled in October 2011 (Doc. 87-10, pp. 226-35).

         In April 2011, the Government also recorded a federal tax lien in Fayette County, Illinois, with respect to the Fayette farm in the amount of $237, 949 (Doc. 87-10, p. 202). This notice identified the taxpayers as “Triple S Family Trust; Frankie Sanders, Trustee; Frankie Sanders, Beneficiary; as Nominee of Frankie Sanders” (Id.). This notice was refiled in October 2011 as two separate notices-one for $217, 907 and one for $20, 043 (Doc. 87-10 pp. 203-06).

         By January 31, 2015, due to accruing interest on the unpaid taxes and penalties, Mr. Sanders's total tax liability for the years 1991 through 1997 had ballooned to $441, 845.75 (Doc. 87-6; Doc. 87-8, pp. 131-37). To date, he has not made any voluntary payments towards his tax liability (Doc. 87-6, ¶5).

Tax Year

Balance Due as of January 19, 2012

1991

$47, 813.68

1992

$75, 475.74

1993

$94, 633.66

1994

$55, 462.59

1995

$64, 457.28

1996

$65, 097.98

1997

$38, 904.82

TOTAL

$441, 845.75

         PROCEDURAL HISTORY

         The Government filed this collection lawsuit on October 11, 2011 (Docs. 1, 2). Mr. Sanders was initially represented by attorney Jerold Barringer. Mr. Barringer was terminated as Mr. Sanders's attorney in December 2012, however, because he was suspended from practicing in this district (Doc. 35). Since then, Mr. Sanders has represented himself. For over four years, this case languished on the Court's docket due almost exclusively to Mr. Barringer and Mr. Sanders's obstructionist behavior that is classic of the tax-protestor movement: they made ever-changing, nonsensical arguments as to why Mr. Sanders does not have to pay taxes, they resisted discovery then made empty promises to produce documents, they refused to answer the Government's questions with any candor, and they refused to obey orders of this Court.[15]

         The Court wants to highlight a few of Mr. Sanders's actions, which are of particular consequence at this stage of the litigation for reasons that will become apparent later in this Order. First, during the course of discovery, the Government requested and the Court ordered Mr. Sanders to produce financial records for the Fayette farm, the Montgomery farm, the Y&K Leasing Trust, and the Triple S Family Trust (Doc. 87-10, ¶¶3, 5 and pp. 5-27; Doc. 58; Doc. 65; Doc. 68). To date, Mr. Sanders has produced nothing responsive to the Court's order.

         On March 26, 2012, the Government also served Mr. Sanders with requests to admit the accuracy of the income tax assessments for 1991 through 1997 (Doc. 87-10, ¶¶6-10 and pp. 58-70). On October 9, 2012, five months after the response deadline had expired, Mr. Barringer sent responses to the Government via electronic mail (Id.). Mr. Barringer had not, however, requested an extension of time to respond, and the Government had not consented in writing to service by electronic means (Id.). In the responses, Mr. Barringer denies that the Government “had the authority to make such assessment[s]” and asserts that the assessments are “not accurate” (Id.).

         The Government served Mr. Sanders on January 24, 2013, with a second set of requests to admit that he is the sole owner of the Fayette farm and the Montgomery farm (Doc. 87-10, ¶¶11-13 and pp. 71-74). To date, Mr. Sanders has not responded (Id.).

         On March 7, 2015, the Government filed a motion for summary judgment seeking the relief described above. See supra p. 2. Mr. Sanders's response to the motion for summary judgment was originally due on April 9, 2015, but he was given two extensions of time totaling four months (Docs. 87, 91, 93). Mr. Sanders then requested an additional ninety days to respond because he did not have an attorney and he needed more time to process the 700-plus pages of evidence submitted by the Government (Doc. 94). His request was denied because his reasons for needing the extension of time were disingenuous, and the undersigned was out of patience with his delay tactics (Doc. 96). Shortly thereafter, Mr. Sanders filed a one-page response in which he claimed that he had completed “a Revocation of Election and removed himself from any claims by the IRS that he is a taxpayer” (Doc. 99). The attached thirty-page “Revocation of Election” declares that Mr. Sanders has revoked his status as a taxpayer (Doc. 99-1).

         DISCUSSION

         A. Summary Judgment Standard

         The standard applied to summary judgment motions under Federal Rule of Civil Procedure 56 is well-settled and has ...


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