January 24, 1997
This is a case about a tax protester who, despite his two years' incarceration after his conviction for tax evasion in 1987, continues his seventeen-year attempt to evade paying federal income taxes. The case also concerns the protester's wife, who at the eleventh-hour seeks to rescue the marital residence from federal tax lien foreclosure.
As will be seen, in the 1980s the protester built a tangled web in an attempt to shield himself from what is now in excess of a three-quarter million dollar tax obligation. Our resolution of the motions before us will bring this long-delayed day of reckoning much closer.
I. Factual and Procedural Background1
On September 21, 1995, the United States filed this civil action against defendants Joseph E. Klimek ("Klimek"), Nassau Life Insurance Company, Limited ("Nassau"), Dominion Holding Company ("Dominion"), and Colonial Investment Company ("Colonial") to reduce to judgment federal tax assessments against Klimek and foreclose federal tax liens on real property located at 115 Golf Club Drive, Langhorne, Pennsylvania (the "Golf Club Drive property"), which, according to the Government, Klimek equitably owns. According to defendant-intervenor Magdalene M. Klimek ("Mrs. Klimek"), Klimek's wife of over forty years, and as the Government agrees, the Golf Club Drive property is the Klimeks' marital residence.
The Government contends that Nassau, Dominion, and Colonial are fictitious, defunct companies to which Klimek has nominally transferred title to the Golf Club Drive property, as a mechanism by which to shelter the property from his creditors, including the United States. The United States has named these entities as defendants in this suit in order to foreclose any interest they may assert in the Golf Club Drive property.
The Government's tax liens against Klimek's property stem from Klimek's conviction on October 8, 1987 for failing to file federal income tax returns for tax years 1980 through 1983,
in violation of 26 U.S.C. § 7203, for which he was sentenced to two consecutive one-year terms of incarceration and five years of probation. See United States v. Klimek, 1987 U.S. Dist. LEXIS 3857, Cr. No. 87-00165 (E.D. Pa. 1987).
As a condition of his probation, Judge Bechtle of this Court ordered Klimek to fulfill any and all of his outstanding tax liabilities for the period of the criminal indictment, 1980 through 1986. Accordingly, in December of 1987, Klimek, through his attorney, filed with the Internal Revenue Service ("IRS") signed income tax returns on Federal Form 1040 for tax years 1980 through 1986.
Not surprisingly, the IRS audited Klimek's tax returns for these years, and the delegate of the Secretary of the United States Treasury determined that Klimek owed additional taxes, which Klimek has, as of yet, failed to pay. As of November 30, 1996, Klimek, the Government claims, owes the United States, in income tax deficiencies, penalties, and interest, seven hundred fifty-nine thousand four hundred twenty-seven dollars and twenty-one cents. See Decl. of Dennis L. Bohn, IRS Revenue Officer, at P 8.
Not only has Klimek failed to pay his federal income taxes for the past seventeen years, but, ever since the IRS notified Klimek on August 4, 1984 of its criminal investigation (which ultimately concluded with Klimek's conviction by a jury before Judge Bechtle in October of 1987), Klimek has actively worked to evade paying taxes by concealing his assets.
Specifically, on August 23, 1984, Klimek and his wife for no consideration transferred to "Dominion Holding Co., Del. East P.M.B. 11 Grand Turk, Turks and Caicos Island, B.W.I.," title to real property located at 4336 Central Avenue, Ocean City, New Jersey (the "Ocean City property"), which the Klimeks had purchased in December of 1981 for $ 190,000. See Gov't's First Req. for Admissions at Exh. 19 (deed for Ocean City property); Magdalene Klimek Dep. at 53. The Klimeks ultimately sold the Ocean City property for $ 300,000 in September of 1988, but did not pay taxes on the gain realized on the sale. See id. at PP 92-97, 107-08 & Exh. 20 (deed of sale); Magdalene Klimek Dep. at 55.
On August 23, 1984, the Klimeks also transferred title to their then-residence at 35 Woodstock Drive, Newtown, Pennsylvania ("Newtown property") to Nassau as trustee for Dominion. See Decl. of Magdalene Klimek at Exh. B. The Klimeks had purchased the Newtown property in 1969 in their own names. See id. at Exh. A-1. The Klimeks sold the Newtown property in July of 1985 and, a month later, invested the proceeds in the Golf Club Drive property. See id. at Exh. C-1; Magdalene Klimek Dep. at 33.
On August 30, 1985, the Klimeks, in the names of Nassau and Dominion, purchased the Golf Club Drive property -- their current marital residence. See Magdalene Klimek Dep. at 33; Gov't's First Req. for Admissions at Exh. 26 (deed). On March 27, 1986, as a further means of shielding the Golf Club Drive property from the IRS, Klimek had Dominion grant a mortgage on the Golf Club Drive property to Colonial, see id. at P 126; Magdalene Klimek Decl. at Exh. D-6. The Government claims this is a sham mortgage since Klimek neither owed Colonial any money, see Gov't's First Req. for Admissions at P 127, nor ever made any mortgage payments thereafter, see Magdalene Klimek Dep. at 48-49. Since 1990, the Government has filed and recorded notices of the federal tax liens in the Bucks County Prothonotary's Office (the Golf Club Drive property is located in Bucks County, Pennsylvania) against Klimek and against the corporate defendants named here.
Nassau, Dominion, and Colonial, which are not domestic or foreign corporations doing business in the Commonwealth of Pennsylvania, are, the Government maintains, fictitious, defunct entities, which Klimek controls as their president and/or "president/agent," see Gov't's First Req. for Admissions at PP 128-31, and on behalf of which he has signed many legal documents, see id. at P 128. Mrs. Klimek is the Secretary Agent of Colonial and an officer of Dominion. See Magdalene Klimek Dep. at 24 & 33.
On October 19, 1995, less than a month after the Government initiated this civil case, Klimek filed a voluntary petition for relief under Chapter Thirteen of the United States Bankruptcy Code. By virtue of Klimek's bankruptcy filing, this civil action was stayed as a matter of law, see 11 U.S.C. § 362(a), pending the resolution of the bankruptcy proceeding. See November 9, 1995 Order (ordering Clerk to place case in the Civil Suspense File). On December 28, 1995, Judge Fox of the Bankruptcy Court granted Klimek's praecipe for voluntary dismissal, pursuant to 11 U.S.C. § 1307(b), of the bankruptcy proceeding Klimek had, less than a month earlier, begun. The voluntary dismissal of the bankruptcy case was without prejudice and did not discharge Klimek's debts to the Government. See 11 U.S.C. § 349(a).
Consequently, on January 26, 1996, we ordered that this matter be transferred once again to our active docket. See January 26, 1996 Order; Docket Entry No. 5 (Klimek's objections). In response, Klimek filed a document entitled, "Refusal for Cause Without Prejudice UCC 3-501," where he asserted that "I, Joseph Edmond, Klimek, herein-after Aggrieved Party, have timely noticed STEWART DALZELL, JUDGE OF THE DISTRICT COURT OF EASTERN PENNSYLVANIA of my Refusal and return to sender Without Dishonor that said Case has been Discharged and is RES JUDICATA!" Docket Entry No. 7.
The Government on February 17, 1996, personally served process upon Klimek, in his individual capacity, and on behalf of each of the other named defendants.
Klimek, however, returned the summons and complaint to the Government, stamped "Refusal For Cause Without Dishonor UCC 3-501." See Docket Entry No. 12.
On March 1, 1996, Robert Samuel Chappell, who, at the time was (and, presumably, remains) incarcerated in the New Mexico State Penitentiary in Sante Fe, New Mexico,
represented himself to be defendant Nassau's "founder and president," and moved for summary judgment on behalf of Nassau and the other defendants in this case. See Docket Entry No. 10. We held that the motion was a nullity because Chappell is not a licensed attorney and thus could not represent Nassau or any of the other corporate defendants here. See April 1, 1996 Order at PP b & c (citing Rowland v. California Men's Colony, 506 U.S. 194, 113 S. Ct. 716, 721, 121 L. Ed. 2d 656 (1993) & 28 U.S.C. § 1655).
The Government, pursuant to Fed. R. Civ. P. 15(a), amended the complaint in this case on April 1, 1996. See Docket Entry No. 16. Count I of the amended complaint seeks a judgment in favor of the United States in the amount of Klimek's currently unpaid federal tax assessments which, as of November 30, 1996, totalled seven hundred fifty-nine thousand four hundred twenty-seven dollars and twenty-one cents. See Bohn Decl. at P 8. Count II seeks a declaratory judgment that (a) the federal tax liens are valid and subsisting those tax liens upon Klimek's property or right to any property, (b) Nassau and Dominion are nominees of Klimek with respect to the Golf Club Drive property, and (c) Colonial's mortgage on the Golf Club Drive property is a sham. In addition, Count II seeks a Court Order that (a) the federal tax liens be foreclosed upon all of Klimek's property and rights to property, including the Golf Club Drive property, and (b) the Golf Drive Club Drive property be sold and the proceeds from that sale be distributed to cover the administrative costs of the sale, with the balance remitted to the United States.
Thereafter, Klimek returned the Government's amended complaint, attaching to it a document styled, "Refusal for Cause Without Dishonor," which, in relevant part, asserted that:
This Refusal For Cause is made timely as all Liabilities whether Real or Fictions were Discharged in the Bankruptcy Court of the Eastern District of Pennsylvania on December 22, 1995 by Judge BRUCE I. FOX. (see 95-18275).