T.C. Memo. 2005-17
UNITED STATES TAX COURT
DORI R. MERRIAM, TRANSFEREE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 26075-92. Filed February 1, 2005.
Patrick E. McGinnis, for petitioner.
John A. Weeda, for respondent.
SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: This case is before the Court on
petitioner’s motion for special leave to file motion to vacate
decision and motion to vacate decision.
*
This Memorandum Findings of Fact and Opinion supplements
Merriam v. Commissioner, T.C. Memo. 1995-432, affd. without
published opinion 107 F.3d 877 (9th Cir. 1997)
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In a prior opinion issued in this case, we held that
petitioner was liable as a transferee for Federal income tax owed
for the year ending September 30, 1986, by Napa Investment Corp.
(Napa). Merriam v. Commissioner, T.C. Memo. 1995-432, affd.
without published opinion 107 F.3d 877 (9th Cir. 1997).
Petitioner was president and sole shareholder of Napa. James
Merriam, petitioner’s then-husband, ran Napa. He signed
petitioner’s name to many Napa documents. Petitioner personally
signed many other Napa documents including a consent to action
which stated that she, as sole director, approved Napa’s lending
substantial sums to her, a promissory note stating that she
borrowed substantial sums from Napa, and Napa checks including
checks payable to her.
James Merriam arranged for his son from a prior marriage,
Ted Merriam, to represent petitioner in that proceeding. The
case was fully stipulated under Rule 122. Petitioner contends
that (1) the stipulation erroneously overstated her role in Napa,
which caused the Court to decide erroneously that she was liable
as a transferee; (2) she had no knowledge of the existence of the
case until after decision was entered; and (3) these
circumstances constitute fraud on the Court.
The sole issue for decision is whether fraud on the Court
occurred in this case. We hold that it did not.
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Unless otherwise indicated, section references are to the
Internal Revenue Code as amended. Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
A. Petitioner
Petitioner was a resident of California when the petition
was filed. Petitioner graduated from the University of Southern
California in 1963 with a degree in psychology.
Petitioner married William D. Lusk (Lusk) in 1966. In 1979,
they were divorced, and petitioner married James Merriam. Also
in 1979, petitioner received her home in Newport Beach,
California, as part of the marital settlement agreement with
Lusk. In 1980, petitioner sold her Newport Beach home for $1.4
million and received net proceeds of $876,936.
In 1981, petitioner and James Merriam paid $1,005,000 to buy
a 7,000-square-foot residence in Tiburon, California (Tiburon
residence). Petitioner paid a deposit of $201,000 and earnest
money of $350,026.28, and she and James Merriam borrowed $550,000
to buy that residence.1 James Merriam signed a quitclaim deed on
March 12, 1981, in which he relinquished any interest that he
might have had in the Tiburon residence.
1
The parties do not explain why payments for the Tiburon
residence do not equal its cost.
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Petitioner and James Merriam lived in the Tiburon residence.
Petitioner ran the family household. James Merriam controlled
their business and tax matters.
B. Ted Merriam
Ted Merriam graduated from law school in 1978. He received
a Master of Laws degree in taxation in 1982 and has practiced tax
law in Denver, Colorado, since then. Ted Merriam and his family
visited James Merriam and petitioner in California three or four
times a year from 1983 to 1999. Ted Merriam did legal work
related to James Merriam’s business activities, but he very
rarely spoke to petitioner about business or tax matters.
Petitioner signed joint individual tax returns that Ted
Merriam prepared for her and James Merriam. Petitioner knew that
Ted Merriam had prepared those returns. Petitioner signed a Form
2848, Power of Attorney, in which she and James Merriam
authorized Ted Merriam to represent them before respondent with
respect to their 1986 joint return. Ted Merriam received several
Forms 2848 purportedly bearing petitioner’s signature,2 including
one relating to petitioner’s transferee liability.
2
James Merriam frequently signed petitioner’s name to
documents. If the record shows that petitioner actually signed a
document, we state that she signed the document. Where the
record indicates that her signature appears on a document but
does not indicate that she signed it, we state that the document
“purportedly” bears her signature.
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C. James Merriam’s Business Activities
1. James Merriam’s Early Businesses
In the late 1960s and 1970s, James Merriam started the Sir
Speedy Printing Centers franchise business and other franchise
businesses. In the early 1980s, he started Texas State Video
Co., which he envisioned would become a nationwide video rental
franchise business. James Merriam raised about $2 million in a
stock offering relating to the video franchise company.
2. James Merriam’s Offices, Office Staff, and Procedures
James Merriam had offices at the Tiburon residence and at
other locations. He had numerous corporations and bank accounts.
James Merriam and members of his office staff received and
sorted mail delivered to the Tiburon residence. James Merriam
gave petitioner mail not related to his businesses or taxes.
James Merriam told his staff not to give petitioner any
information about his businesses.
3. Napa
Ted Merriam incorporated Merriam Investment Corp. (MIC) in
Colorado in 1983 and was its registered agent. MIC was Napa’s
predecessor. Initially, the members of the MIC board of
directors were James Merriam, Ted Merriam, and petitioner. James
and Ted Merriam resigned as directors shortly after MIC was
incorporated and before MIC changed its name to Napa.
Thereafter, petitioner was the president, sole shareholder, and
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only director of Napa. James Merriam ran Napa and made all of
the decisions for Napa. Napa, a holding company, owned 12
million shares of Hammer Technologies Inc.
Ted Merriam prepared Napa’s corporate minutes, resolutions
and other legal documents and kept track of distributions from
Napa bank accounts. Napa conducted business through consents to
action.3 Ted Merriam prepared hundreds of Napa documents for
petitioner to sign and mailed them in envelopes addressed either
to her or to James Merriam. Those documents were returned to him
purportedly bearing petitioner’s signature.
Petitioner personally signed the following Napa documents:
(a) A promissory note dated March 31, 1986, in which she promised
to pay Napa $421,843.22 on demand but no later than March 31,
1992; (b) a consent to action in which she, as sole director of
Napa, approved loans from Napa to her from April through June
1986 totaling $702,503.904 in exchange for her promissory note to
Napa in that amount; and (c) at least 54 Napa checks, including
12 payable to her. On two of the checks dated in February 1985
and made payable to her, petitioner wrote “Napa Investment
Corporation” above her signature.
3
A consent to action is a document signed by the directors
of a corporation in lieu of a board meeting.
4
The parties erroneously stipulated that this amount was
$703,503.90 in the underlying case. The discrepancy does not
affect our decision to deny petitioner’s motion to vacate
decision.
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Petitioner signed several checks made payable to the IRS on
which appeared Napa’s taxpayer identification number. Petitioner
also signed some Napa checks payable to lawyers and to James
Merriam’s bookkeeper. James Merriam frequently signed
petitioner’s name on Napa documents, including checks.
Ted Merriam prepared articles of dissolution for Napa on
October 17, 1986. Petitioner’s signature as president and Ted
Merriam’s signature as secretary on this document were notarized
by Diane Lalosh (Lalosh), an administrative assistant of James
Merriam. Ted Merriam did not talk to petitioner about the
decision to liquidate Napa.
James Merriam was a party to many lawsuits in which it was
alleged that he had violated securities laws. Petitioner knew
that James Merriam was a party to many lawsuits. Petitioner,
James Merriam, and Napa were defendants in a lawsuit in which
Burton Finkelstein (Finkelstein), an attorney, represented
petitioner and James Merriam. Petitioner signed a $25,000 Napa
check payable to Finkelstein to retain him for legal services.
Finkelstein represented petitioner in a deposition taken in that
case.
Petitioner received substantial amounts each month from
Napa, totaling about $1.5 million in a 2-year period before
September 30, 1986. In June 1986, about 3 months before Napa
liquidated, petitioner bought a Rolls Royce automobile.
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D. The Tax Court Case
Napa reported an unpaid tax liability of $474,363 on its
corporate income tax return for its year ending September 30,
1986. Respondent determined that petitioner was liable as a
transferee of Napa. Respondent sent a notice of transferee
liability to petitioner’s Tiburon residence and a copy to Ted
Merriam in Colorado.
James Merriam asked Ted Merriam to represent petitioner in
this case, and Ted Merriam agreed. James Merriam told Ted
Merriam to send the legal bills related to this case to James
Merriam.
Ted Merriam timely filed a petition in this case in 1992.
He sent copies of all documents related to the case in envelopes
addressed to James Merriam or petitioner. He designated Denver
as the place of trial, and he listed petitioner as a witness in
his pretrial memorandum.
The case was submitted fully stipulated under Rule 122 in
1994. Ted Merriam signed the stipulation of facts without
discussing it with petitioner. In an opinion filed in this case
on September 6, 1995, we found that petitioner was the sole
director and shareholder of Napa, James Merriam made all
decisions for her regarding Napa, she had borrowed money from
Napa as shown by promissory notes bearing her signature, she
caused Napa to be liquidated, and, as part of the liquidation,
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she distributed to herself cash and a note and canceled
promissory notes that she had signed. We held that petitioner
was a transferee of Napa under former Colo. Rev. Stat. sec. 7-5-
114(1)(c) (1986) (Director Dissolution Statute) because she
caused the corporation to liquidate, and she distributed
corporate assets to herself. Merriam v. Commissioner, T.C. Memo.
1995-432.
We entered decision that petitioner was liable as a
transferee for Napa’s 1986 income tax and additions to tax for
1986 in the amount of $1,154,034.56. The case was appealed to
and affirmed without published opinion by the U.S. Court of
Appeals for the Ninth Circuit. Ted Merriam discussed collection
alternatives with James Merriam after the decision became final.
Ted Merriam never spoke to petitioner about the case. He
believed that: (a) Petitioner had signed Napa corporate
documents; (b) petitioner knew that she was a shareholder,
director, and officer of Napa; (c) James Merriam kept petitioner
informed of important business and tax matters; and (d)
petitioner had expressly authorized James Merriam to act on her
behalf in this case.
E. Sale of the Tiburon Residence
On February 22, 1996, IRS agent Michael Buttress (Buttress)
went to the Tiburon residence and gave petitioner some
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paperwork.5 Petitioner gave the paperwork to James Merriam.
Buttress went to the Tiburon residence many times. Petitioner
never spoke to him about respondent’s sale of the Tiburon
residence; however, she knew that Ted Merriam had been
communicating with respondent about selling the Tiburon
residence, and she believed that Ted Merriam was representing her
regarding respondent’s sale of the house.
On July 19, 1996, petitioner wrote a letter to Buttress in
which she said that Ted Merriam had told petitioner and James
Merriam that their real estate agent was advertising the sale of
the house, the proceeds from which they could use to pay
delinquent taxes.
On February 25, 1997, Buttress visited the Tiburon residence
and gave petitioner some paperwork including a notice of seizure
and a minimum bid worksheet that listed petitioner as the
taxpayer with a liability of $1,800,451.32 and the Tiburon
residence as the subject property. James Merriam was not at home
at the time. Petitioner called Ted Merriam. Ted Merriam told
petitioner to fax the paperwork to him. Later that day,
petitioner faxed that paperwork to Ted Merriam with a transmittal
letter that included the following:
Mike Buttress was just here and gave me the
following minimum bid worksheet.
5
Petitioner testified that this was the first time that
she knew about her transferee liability.
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He asked if we were going to have the house
appraised again and I told him that we would be talking
to you and let him know.
Jim is up in Roseville today, returning this
evening.
Looking forward to seeing you on Saturday!!
On that day, James Merriam took the paperwork from petitioner and
told her that he would take care of it.
The Tiburon residence was sold on August 6, 1999.
Respondent received $1,815,539 from the sale, which fully paid
petitioner’s transferee liability.
F. Later Events
James Merriam began serving a sentence in Federal prison in
January 2002 for securities crimes not related to this case.
Petitioner filed for divorce from James Merriam in 2002.
Petitioner retained her current counsel in this case in
August 2002. Petitioner filed her motion for special leave to
file motion to vacate decision on July 31, 2003.
OPINION
A. Petitioner’s Contentions
Petitioner moves to vacate the decision in this case on the
grounds that it resulted from fraud on the Court by James Merriam
and Ted Merriam. Petitioner contends that James Merriam and Ted
Merriam conspired to hold her liable for Napa’s income tax
liability. She also contends that the stipulation of facts
submitted by Ted Merriam is almost entirely false and is based on
documents bearing her forged signature, and that she did not
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retain Ted Merriam to represent her in this case or authorize
anyone else to retain him.
B. Whether the Decision Was Entered as a Result of Fraud on the
Court
1. Background
Generally, we lack jurisdiction to vacate a decision once it
becomes final. Abatti v. Commissioner, 859 F.2d 115, 117-118
(9th Cir. 1988), affg. 86 T.C. 1319 (1986); Cinema '84 v.
Commissioner, 122 T.C. 264, 270 (2004). However, we have
jurisdiction to set aside a decision obtained by fraud on the
Court. Toscano v. Commissioner, 441 F.2d 930, 933-934 (9th Cir.
1971), vacating 52 T.C. 295 (1969).
Fraud on the court is an unconscionable plan or scheme which
is designed to improperly influence the court in its decisions.
Abatti v. Commissioner, supra at 118. With specific facts which
plainly impugn the official record, the moving party must
establish by clear and convincing evidence that decision resulted
from fraud on the court. Drobny v. Commissioner, 113 F.3d 670,
677 (7th Cir. 1997) (quoting Kenner v. Commissioner, 387 F.2d
689, 691 (7th Cir. 1968)), affg. T.C. Memo. 1995-209; England v.
Doyle, 281 F.2d 304, 309-310 (9th Cir. 1960); Atchison, Topeka &
Santa Fe Ry. Co. v. Barrett, 246 F.2d 846, 849 (9th Cir. 1957).
The concept of fraud on the court applies narrowly in the
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interest of preserving the finality of judgments. Toscano v.
Commissioner, supra at 934.6
2. Whether Fraud on the Court Occurred in This Case
a. Whether the Decision Was Based on a False
Stipulation of Facts
Petitioner contends that James Merriam and Ted Merriam
submitted a false stipulation of facts. Petitioner contends
that, contrary to the stipulation of facts, the following
statements are true: (i) She was not the president and sole
shareholder of Napa; (ii) she did not borrow money from Napa; and
(iii) she did not know anything about Napa except that it was one
of James Merriam’s companies.
At the hearing on her motion, petitioner testified on direct
examination that she had no role in Napa, she did not know
anything about Napa except that it was one of James Merriam’s
companies, and she did not sign promissory notes or any other
Napa documents. She testified that she first learned that
promissory notes with her signature existed in April 2002. She
testified that she never borrowed money from Napa. She testified
and contends that she was not involved with Napa, including the
decision to liquidate it.
6
We reach this result without requiring petitioner to show
prejudice. See Dixon v. Commissioner, 316 F.3d 1041, 1046 (9th
Cir. 2003), revg. T.C. Memo. 1999-101.
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We decide whether a witness is credible on the basis of
objective facts, the reasonableness of the testimony, and the
demeanor of the witness. Quock Ting v. United States, 140 U.S.
417, 420-421 (1891); Wood v. Commissioner, 338 F.2d 602, 605 (9th
Cir. 1964), affg. 41 T.C. 593 (1964); Pinder v. United States,
330 F.2d 119, 124-125 (5th Cir. 1964); Concord Consumers Hous.
Coop. v. Commissioner, 89 T.C. 105, 124 n. 21 (1987).
On cross-examination, when presented with documents offered
to impeach her testimony, petitioner admitted that she had signed
(1) a promissory note in which she promised to pay Napa
$421,843.22; (2) a consent to action in which she, as sole
director, approved loans from Napa to her totaling $702,503.90 in
exchange for her promissory note; and (3) at least 54 Napa
checks, including 12 payable to her.
Petitioner is a college graduate. We believe that
petitioner knew that she could not sign a corporate check without
authority from Napa. Petitioner denied knowing anything about
Napa’s liquidation and testified that she did not sign the Napa
liquidation document. However, her signature on that document
was notarized. Although the notarization was made by Lalosh, an
employee who worked in James Merriam’s office, Lalosh testified
in this case on matters other than the notarization, and we have
no reason to doubt her integrity or the validity of the
notarization.
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Petitioner contends that Lalosh testified that petitioner
had no role in Napa. We disagree. Lalosh testified about James
Merriam’s office procedures, that petitioner signed several Napa
checks, and that James Merriam signed Napa documents. Lalosh did
not testify that petitioner had no role in Napa.
Petitioner denies receiving substantial sums from Napa. Our
bases for finding that she received about $1.5 million in a 2-
year period are that: (a) Petitioner said that she received
monthly payments from Napa for household expenses; and (b) Ted
Merriam testified that (i) James Merriam wanted petitioner to
receive at least $20,000 to $30,000 per month for that purpose;
(ii) Napa gave petitioner $1.5 million in a 2-year period; and
(iii) petitioner gave Napa $1.5 million in notes during that
period. The hearing record for petitioner’s motion includes the
three Napa checks payable to and signed by petitioner: $9,000 on
April 15, 1985, $9,000 on April 22, 1985, and $5,000 on April 24,
1985. These checks, the consent to action, and the promissory
note that petitioner admitted that she signed show that
petitioner received substantial sums from Napa. We are not
convinced that the submission to the Court of the stipulation of
facts was fraud on the Court.
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b. Whether Ted Merriam Filed the Petition in This
Case Without Authority
Petitioner contends that Ted Merriam failed to inform her
about the case because he and James Merriam conspired to have her
held liable as a transferee. We disagree.
The tax year in issue is 1986. We do not believe that James
Merriam and Ted Merriam conspired to make petitioner liable as a
transferee for 1986. Petitioner and James Merriam had been
married for 7 years in 1986 and remained married another 16
years. Petitioner and James Merriam remained married 8 years
after the stipulation was filed. We do not believe that James
Merriam, who lived at the Tiburon residence with petitioner until
it was sold in 1999, conspired to lose that residence to the tax
collector. If Ted Merriam had not filed the petition, respondent
could have assessed the proposed transferee liability and begun
collection activity in 1992 rather than 1996.
We are not convinced that James Merriam and Ted Merriam
sought to have petitioner held liable as a transferee.
C. Conclusion
We conclude that petitioner has not shown by clear and
convincing evidence that fraud on the Court occurred in this
case.
An appropriate order
will be issued.