author: WALKER, District Judge.

text:
    The EQUITABLE LIFE ASSURANCE SOCIETY OF the UNITED STATES, Plaintiff, v. ALEXANDER GRANT & CO., Defendant.
    No. 85 Civ. 3595.
    United States District Court, S.D. New York.
    Dec. 19, 1985.

      Werner Weinstock, New York City, for plaintiff.
    Parker Chapin Flattau & Klimpl, New York City (Alvin Stein, Lee W. Stremba, of counsel), for defendant.
   WALKER, District Judge.

Introduction

This matter is currently before the Court on defendant’s motion to dismiss the complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6). Defendant also seeks court-awarded sanctions against plaintiff under Rule 11.

Plaintiff Equitable Life Assurance Society of the United States (Equitable), brings three causes of action against Alexander Grant & Co. (Grant) arising out of the accounting firm’s alleged role as auditor of ESM Group, Inc., its subsidiaries, divisions and affiliates (ESM):

(1) Equitable’s first claim alleges that Grant, in issuing statements on behalf of ESM, violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961 et seq (1970). As a result of that violation, Equitable claims it has been damaged in the amount of $7,000,000 plus interest. Plaintiff also demands trebled damages and attorney’s fees under RICO.

(2) Equitable’s second claim alleges gross negligence on the part of Grant in the performance of its accounting duties for ESM. Equitable seeks $7,000,000 plus interest in damages on this count.

(3) The third count of the complaint alleges fraud by Grant in reporting the financial condition of ESM. Equitable seeks $7,000,000 plus interest in actual damages on this claim and $10,000,000 in punitive damages.

Plaintiff claims that all damages on all counts result from Equitable’s issuing “various policies of life insurance” on “senior officers of ESM.” ¶ 12, 13

The complaint alleges federal jursidication under both RICO, 18 U.S.C. § 1965 and diversity jurisdiction pursuant to 28 U.S.C. § 1332. Paragraph 5 states that Equitable “is a corporation organized and existing under the laws of the State of New York, with an office at 1285 Avenue of the Americas, New York City, New York.” Paragraph 6 states that Grant “is a partnership of certified public accountants organized and existing under the laws of the State of Illinois, and transacts business in its offices in the City, County and State of New York, as well as in various other cities of the United States.”

When considering a motion to dismiss the complaint, the court is required to construe the complaint in the light most favorable to the plaintiff. Indeed, “[f]or the purposes of a motion to dismiss, the material allegations of the complaint are taken as admitted.” Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1849, 23 L.Ed.2d 404 (1969). The complaint should not be dismissed “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

Jurisdiction

Plaintiff’s allegation of diversity jurisdiction is deficient and fails to establish diversity under 28 U.S.C. § 1332.

It is fundamental that a complaint must affirmatively allege subject matter jurisdiction and that absent a properly pleaded basis for federal jurisdiction the complaint must be dismissed. John Birch Society v. National Broadcasting Co., 377 F.2d 194, 197-98 (2d Cir.1967); Martin Hodas, East Coast Cinematics, Inc. v. Lindsay, 431 F.Supp. 637, 640 (S.D.N.Y.1977). Under the law of diversity jurisdiction, a corporation is considered a citizen of both its state of incorporation and the state where it has its principal place of business. 28 U.S.C. § 1332(c).

On the other hand, a partnership is deemed a citizen of every state of which any partner is a citizen. Great Southern Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 456, 20 S.Ct. 690, 693, 44 L.Ed. 842 (1900); Woodward v. D.H. Overmeyer Co., 428 F.2d 880, 883 (2d Cir.1970). Even if a single partner is not diverse to the plaintiff, the action must be dismissed. Cunard Line, Ltd. v. Abney, 540 F.Supp. 657, 660 (S.D.N.Y.1982).

Here, although 11 5 of the complaint alleges that Equitable has “an office” in New York, nowhere is the principal place of business of the corporation alleged. For that reason, plaintiff has failed to properly plead its own citizenship. Moreover, the complaint alleges neither the citizenship of Grant’s partners, nor that whatever their citizenship Equitable’s is diverse. It is apparent that Equitable has not alleged complete diversity between itself and Grant because it cannot do so. Presumably some of the partners in Grant’s New York office are citizens of New York and would therefore be non-diverse to Equitable, a New York company. Thus, plaintiff has failed to adequately plead diversity.

Paragraph 2 of the Complaint alleges an alternate basis for federal jurisdiction under RICO, 18 U.S.C. § 1965 and the principles of pendent jurisdiction. Since the court holds that there has been no adequate allegation of diversity jurisdiction, plaintiff’s entire complaint, the RICO claim and the pendent state claims of gross negligence and fraud, stands or falls together.

The Court holds that since the complaint fails to adequately plead a RICO cause of action, the entire complaint must be dismissed. Moreover, the Court concludes that plaintiff’s common law fraud and gross negligence claims are deficient and would be dismissed even if a basis for federal jurisdiction existed.

RICO

Although it is nowhere explicitly stated in the complaint, plaintiff apparently bases its RICO claim on 18 U.S.C. § 1962(c) which provides:

It shall be unlawful for any person employed by or associated with any enterprise engaged in, or the activities of which affect, interstate or foreign commerce, to conduct or participate, directly or indirectly, in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.

A plaintiff seeking to bring a civil RICO action must allege the following essential elements:

(1) “that the defendant [a ‘person’ in terms of the Act]
(2) through the commission of two or more acts;
(3) constituting a ‘pattern’
(4) of ‘racketeering activity’
(5) directly or indirectly invests in, or maintains an interest in, or participates in
(6) an ‘enterprise’
(7) the activities of which affect interstate commerce or foreign commerce.”
(8) And “that the plaintiff was injured in his business or property ‘by reason of’ the aforementioned activity of the defendant.”

Moss v. Morgan Stanley, Inc., 719 F.2d 5, 17 (2d Cir.1983), cert. denied, 465 U.S. 1025, 104 S.Ct. 1280, 79 L.Ed.2d 684 (1984).

(1) Persons Liable

A “person” is defined in 18 U.S.C. § 1961(3) as “any individual or entity capable of holding a legal or beneficial interest in property.” Equitable has clearly satisfied this pleading element by alleging that “Alexander Grant & Company (“Grant”) is a partnership of certified public accountants organized and existing under the laws of the State of Illinois.” 11 6.

(2) Predicate Acts

The offenses which underlie “racketeering activity” are the predicate acts necessary for a RICO violation. They are defined in 18 U.S.C. § 1961 as acts “indictable” or “punishable” under various federal criminal statutes and acts “chargeable” under certain state criminal laws. These include murder, kidnapping, arson, robbery, bribery, extortion, dealing in narcotics, securities fraud, mail fraud and wire fraud. Civil litigation under RICO typically involves allegations of mail fraud or wire fraud.

Viewed in its most charitable light, the complaint alleges violation of the federal mail fraud statute, 18 U.S.C. § 1341. Construing the disjointed complaint generously, the Court concludes that two paragraphs of the complaint, when combined, constitute a facial pleading of mail fraud as a predicate act.

Although plaintiffs claim for relief under RICO does not mention “fraud”, U 19(a), declared applicable to all claims, appears to allege fraud:

(a)Grant knew or should have known that financial information contained in the Statements was materially false and misleading and would be provided to and relied upon by plaintiff in underwriting the applications for insurance on the lives of the senior officers of ESM; ...

In addition, H 21 accuses Grant of violating § 1962 of RICO “by the use of means and instrumentalities of interstate commerce and of the mails” (emphasis added). Taken together, these paragraphs, on their face plead a violation of the federal mail statute. A separate question is whether the offense has been adequately pleaded under Fed.R.Civ.P. 9(b).

In its recent decision in Sedima, S.P.R.I. v. Imrex Co., — U.S.-, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court left open the question of whether more than two predicate acts must be alleged to sustain a RICO claim. We need not reach that issue here, however, because plaintiff appears to allege three separate acts of mail fraud as predicate acts:

10. (a) On or about January 11, 1977, Grant certified the accuracy of and published the Statements of ESM as of December 31, 1976, and plaintiff obtained a copy thereof on or about September 28, 1977.
(b) On or about February 4, 1982, Grant certified the accuracy of and published the Statements of ESM as of December 31, 1981, and plaintiff obtained a copy thereof on or about July 1, 1982.
(c) On or about January 25, 1983, Grant certified the accuracy of and published the Statements of ESM as of December 31, 1982, and plaintiff obtained a copy thereof on or about February 13, 1984.

(3) and (4) “Pattern” of Racketeering Activity

Section 1961 prohibits the use of a “pattern” of predicate acts to play a role in an interstate “enterprise.” The statute does not define a “pattern of racketeering activity” but instead states that a pattern “... requires at least two acts of racketeering activity, one of which occurred after the effective date of this chapter [October 15, 1970] and the last of which occurred within ten years ... after the commission of a prior act of racketeering activity.” 18 U.S.C. § 1961(5).

There has been some conflict in the Circuit Courts as to whether a “pattern” requires that the racketeering predicate acts be related to each other in some way or whether they need only be related to the “enterprise” conducted. The Second Circuit has indicated that no unified scheme among predicate acts is required. See United States v. Weisman, 624 F.2d 1118, 1122-23 (2d Cir.1980). Regardless, the three alleged predicate acts here are closely enough related that the issue need not be reached. As alleged, all three stem from Grant’s audits of ESM and the preparation of financial statements.

(5), (6) and (7) Directly or indirectly invests in, maintains an interest in, or participates in an “enterprise”, the activities of which affect interstate commerce

Apparently in an effort to bring Grant’s actions within the scope of RICO, ¶ 21 of the complaint closely tracks the language of § 1962(c);

Upon information and belief, in connection with the issuance of life insurance by Equitable on the lives of ESM’s officers, Grant, in violation of Section 1962 of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) 18 U.S.C. §§ 1961, et seq., directly or indirectly, by the use of means and instrumentalities of interstate commerce and of the mails, conducted or participated in the conduct of ESM’s affairs through a pattern of racketeering activity.

Thus, plaintiff in this paragraph impliedly alleges that ESM was the “enterprise” in whose affairs Grant participated through unlawful means. But, in 11 6 of the appendix to plaintiff's brief in opposition to the motion to dismiss, plaintiff contends that Grant is the enterprise. The same person may not be both the person employed by the enterprise and the enterprise under RICO. See Haroco, Inc. v. American National Bank & Trust, 747 F.2d 384 (7th Cir.1984); Rae v. Union Bank, 725 F.2d 478 (9th Cir.1984). The language of 1121, however, in following § 1962(c), indicates that plaintiff must have intended ESM to be the “enterprise” and the Court will give plaintiff the benefit of the doubt. Whether or not ¶ 21 accidentally pleads correctly is irrelevant. Plaintiff’s conflicting statements in its appendix merely reflect the lack of understanding of RICO evident throughout the complaint and brief.

Plaintiff has, however, clearly failed to allege that ESM is an enterprise “engaged in, or the activities of which affect, interstate commerce ...” 18 U.S.C. 1962(c). That allegation is required by Moss, supra. The complaint therefore fails to allege an essential element of RICO and the RICO claim must be dismissed under 12(b)(6) for failure to state a claim. The inadequacies of this complaint, however, are even more extensive.

(8) Injured “by reason of' racketeering activity.

The complaint has also failed to set forth any factual or logical connection between the alleged racketeering of defendant and the loss to plaintiff on unspecified life insurance policies. On the basis of plaintiff’s skeletal pleading it is impossible to determine, or even imagine, how a life insurer, issuing life insurance on ESM’s executives, could be injured “by reason of” the alleged mail fraud. Even if plaintiff’s parrotting of the language of injury technically states the necessary element for purposes of 12(b)(6), it still falls far short of the additional pleading requirements of Fed.R.Civ.P. 9(b).

Fed.R.Civ.P. 9(b)
Rule 9(b) provides:
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge and other condition of mind of a person may be averred generally.

This rule applies to allegations under RICO. Moss v. Morgan Stanley, Inc., 719 F.2d 5, 19 (2d Cir.1983); Mauriber v. Shearson/American Express, Inc., 546 F.Supp. 391, 397. (S.D.N.Y.1982). The stringent specificity requirement of 9(b) “stems not only from the desire to minimize the number of strike suits but also more particularly from the desire to protect defendants from the harm that comes to their reputations or to their good will when they are charged with serious wrongdoing.” Segal v. Gordon, 467 F.2d 602, 607 (2d Cir.1970) (citing 5 C. Wright & Miller, Federal Practice and Procedure § 1298, at 413 (1969)). “Rule 9(b) is intended to ensure that each defendant is provided with reasonable detail concerning the nature of his particular involvement in the alleged fraud.” Goldberg v. Meridor, 81 F.R.D. 105, 110 (S.D.N.Y.1979).

The complaint in this action is wholly devoid of the required detail on both the federal mail 'fraud and state common law claims. As pleaded, it is woefully inadequate and smacks of strike suit litigation. As the court in Goldberg stated in words applicable here: “The current complaint so totally lacks the detail necessary to put a defendant on notice of the charges against him as to require wholesale repleading.” Id. at 111.

The plaintiff, having failed to supply the necessary detail in the complaint under 9(b), filed a brief in opposition to this motion containing numerous references to matters outside the pleadings and the scope of this case which detail the misdeeds of Grant and ESM. The defendants have correctly styled this the “me too” approach to litigation. The fact that other people in this country have accused Grant of fraud is irrelevant to the sufficiency of plaintiff’s complaint and does nothing to account for its fatal lack of detail.

In a recent case in this district, Judge Duffy detailed the elements required by 9(b) in a mail fraud claim under RICO. The complaint must specify: “(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) the same, (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants ‘obtained as a consequence of the fraud.’ (citation omitted).” Conan Properties, Inc. v. Mattel, Inc., 619 F.Supp. 1167 (S.D.N.Y.1985) (quoting Todd v. Oppenheimer, 78 F.R.D. 415 (S.D.N.Y.1978)).

The complaint in this case pleads both the federal mail fraud claim and the common law fraud claim on the basis of the same allegations. Both claims fall far short of the specificity required by 9(b).

In ¶ 21 of the complaint, plaintiff states its first cause of action under RICO “upon information and belief.” Such a pleading is entirely inappropriate under 9(b). As the Second Circuit stated in Se-gal, supra, “the general rule [is] that Rule 9(b) pleadings cannot be based ‘on information and belief.’ While the rule is relaxed as to matters peculiarly within the adverse parties’ knowledge, the allegations must then be accompanied by a statement of the facts upon which the belief is founded.” 467 F.2d at 608.

Here, the plaintiff’s brief contends that “[t]he specifics are within defendant’s knowledge.” Pl.mem. p. 4. Whether that is true or not, the plaintiff has provided no facts to support its belief.

To follow the four-part test of Conan, supra:

(1) the complaint gives no indication of “precisely what statements were made in what documents.” Plaintiff simply alleges that Grant published financial statements of ESM “for certain periods, including its fiscal years ending December 31, 1976, 1981 and 1982_” II10. Later in the complaint, plaintiff alleges that “Grant prepared, published, and certified false, misleading, or fraudulent information concerning ESM, including the Statements, for calendar years 1976 through 1982.” ¶ 16. The complaint then ostensibly provides the details of the misstatements:

II17. Upon information and belief, the Statements misstated and failed to disclose the true financial condition of ESM in the following material respects, among others:
(a) The profits reported were materially overstated or did not in fact exist.
(b) ESM’s report of its income and its current assets did not disclose that it had borrowed approximately $400 million. ($400,000,000) more than it had loaned to its customers upon the customers’ collateral securities. # * # * * *
1118 ... They grossly overstated ESM’s assets, revenues and income, and understated ESM’s liabilities and expenses, for each of the years in question and, with the issuance of each such successive Statement, the cumulative distortion caused by the deficiencies in the Statements was increased.

This “shotgun” approach to the financial statements is patently insufficient under Rule 9(b). The complaint does not even begin to detail what portions of what statements made what fraudulent, misrepresentations. There is no way for a defendant, who audited a large securities firm over a seven year period, to frame an answer on the basis of this skeletal pleading.

The complaint also alleges misrepresentation by Grant’s senior partner in Miami, Jose Gomez:

On several occasions between 1977 and 1984, Equitable discussed financial information concerning ESM including financial information disclosed in the aforementioned Statements, with Gomez. Gomez reaffirmed the accuracy and reliability of financial information concerning ESM and did not state or suggest that any information in the Statements was materially inaccurate, misleading or unreliable. In issuing said policies, Equitable relied upon the said information provided by Gomez. 1115.

Again, this allegation is improper. The claim extends over seven years, and involves nebulous “financial information” and “statements”. None of the required detail is provided.

(2) As noted, the complaint speaks generally of yearly statements for 1976, 1981 and 1982 as well as statements by Gomez on “several occasions between 1977 and 1984.” II10, 15. This clearly does not satisfy the requirements under 9(b) that “the time and place of each such statement” be specified.

(3)(a) The allegations concerning the annual reports merely claim that the “profits reported were materially overstated or did not in fact exist,” (¶ 17(a)), assets were overreported by approximately $400 million, (¶ 17(b)), and again, “assets, revenues and income” were overstated while “liabilities and expenses” were understated. ¶ 18. With regard to the statements of Gomez, the complaint simply alleges that he “did not state or suggest that any information in the Statement was materially inaccurate, misleading or unreliable.” ¶ 15.

Plaintiff does not provide any detail as to the content of all these statements. It is not enough under 9(b) to state that “profits were materially overstated” or that “assets, revenues and income were overstated.” Decker v. Massey-Ferguson, Ltd., 534 F.Supp. 873, 881 (S.D.N.Y.1981) (“[Plaintiff] has failed to allege the amount or nature of such ‘overstatement,’ and the general allegation that assets were overstated is clearly inadequate.”)

(b) The most bewildering part of an otherwise obtuse complaint is the “manner in which [the statements] misled the plaintiff.” Even assuming that all the other allegations of fraud are sufficient, the failure to adequately allege any causal connection between the alleged fraud and the issuance of life insurance is fatal to the complaint.

Plaintiff alleges that it issued “insurance on the lives of the senior officers of ESM” in reliance on the statements prepared by Grant. ¶ 12. The RICO claim contends that Grant’s racketeering activity induced Equitable to issue those unspecified policies for unspecified individuals. ¶ 21, 22. As a result, Equitable alleges without elaboration, it suffered $7,000,000 in damage. ¶ 23. In ¶ 29, under its claim for common law fraud, plaintiff alleges that in reliance on the fraudulent statements of Grant on behalf of ESM it “was induced to enter into contracts, in issuing said life insurance policies and paying a death claim in the amount of $6.5 million.” Nowhere does the complaint set forth what policies were issued, to whom and for what amount, or how, when and to whom a death benefit was paid.

Most fantastical are plaintiff’s various allegations that it “relied” upon Grant’s statements in issuing life insurance. As noted above in the RICO discussion, no indication is given as to how Equitable relied upon financial statements of ESM to .underwrite life insurance policies or why Grant is liable for a death benefit paid by Equitable. There is no allegation that premiums were not paid; rather the damage to Equitable allegedly occurred when and because a covered individual died. It is difficult to imagine how ESM’s financial statements could be material to the issuance of life insurance on the company’s executives. This Court suspects this to be the reason for the failure of the pleading.

Plaintiff’s failure to adequately allege any “causal connection between that conduct (the asserted ‘pattern of racketeering activity’) and the alleged damage to the plaintiff []” is a fatal defect even under pleading requirements less vigorous than 9(b). Caliber Partners, Ltd. v. Affeld, 583 F.Supp. 1308, 1313 (N.D.Ill.1984).

(4) Finally, the complaint offers no hint of what Grant obtained from its scheme to defraud Equitable. It is not alleged that Grant benefited in any way by inducing Equitable to issue life insurance. This pleading requirement is closely related to the question of how yearly financial statements could possibly be connected to the issuance of life insurance. Perhaps in a second complaint, the plaintiff can enlighten both this Court and the defendant on this score.

Instead of confining itself to a good faith defense of its pleading efforts, Equitable devotes a large part of its opposition brief to reporting statements and action by the Receiver for ESM, the SEC and government regulatory agencies concerning Grant’s involvement with ESM. PI. Mem., pp. 11, 14. Equitable also devotes considerable space in its memorandum to description of an action brought by the City of Toledo, Ohio against Grant. Id. at 7. Apparently, Equitable believes that because unrelated parties have charged Grant with wrongdoing concerning audits of ESM, it need not detail any factual or legal basis for its claims. This Court holds otherwise.

Gross Negligence

In its second cause of action, plaintiff alleges that “Grant was grossly negligent in the performance of its duties ...” ¶25. Defendant seeks to dismiss this claim under Rule 12(b)(6) for failure to state a claim. This Court agrees that there is no basis under New York law for an action in gross negligence against the accounting firm and therefore this claim must be dismissed.

Plaintiff brings this action under “the laws of the State of New York”, (¶ 2), so Judge Cardozo’s seminal opinion in Ultramares Corp. v. Touche, Niven & Co., 255 N.Y. 170, 174 N.E. 441 (1931), as recently reaffirmed in Credit Alliance Corp. v. Arthur Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985), dictates this result. In Ultramares, the Court of Appeals limited the ability of those not in privity with the accountant to recover for negligence:

... [I]f less than [fraud] is proved, if there has been neither reckless misstatement nor insincere profession of an opinion, but only honest blunder, the ensuing liability for negligence is one that is bounded by the contract, and is to be enforced by the parties by whom the contract has been made.

255 N.Y. at 189, 174 N.E. 441.

Ultramares has remained the law of New York, but its legacy has been much discussed in light of an opinion Cardozo had written nine years before Ultramares. In Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922), the court permitted a negligence action against public weighers despite the absence of a contract between the parties because “the plaintiff’s intended reliance, on the information directly transmitted by the weighers, created a bond so closely approaching privity that it was, in practical effect, virtually indistinguishable therefrom.” Credit Alliance Corp., 65 N.Y.2d at 545-546, 493 N.Y.S.2d 435, 483 N.E.2d 110 (emphasis in original).

Thus a gray area remained between the prohibitive rule of Ultramares and the “quasi-privity” formulation of Glanzer. In the Credit Alliance decision this year, however, the Court of Appeals clearly delineated the prerequisites for recovery by a nonprivy against an accountant for negligence. The complaint must allege:

(1) “the accountants knew the identity of the specific nonprivy party who would be relying upon the audit reports ...”

(2) “the accountants’ awareness of a particular purpose for their services;

3) and certain conduct on their part creating an unmistakable relationship with the reliant plaintiff.” 65 N.Y.2d at 554, 493 N.Y.S.2d 435, 483 N.E.2d 110.

In this case, there is no allegation that the parties were bound by contract. Equitable must therefore meet the pleading requirements as set out in Credit Alliance. Equitable alleges that “Grant knew and intended that those Statements as prepared, certified and published would be disseminated to Equitable and would be relied upon by Equitable in issuing said policies.” 04.

This appears to allege minimal, but sufficient, knowledge by Grant of the identity of Equitable and the specific purpose for which the Statements would be used.

Equitable has- failed, however, to allege conduct between the parties creating an “unmistakable relationship”. In 1115, it is alleged that Equitable, “[o]n several occasions between 1977 and 1984 ... discussed financial information concerning ESM ... with Gomez.” 1115. The complaint contends that Gomez “did not state or suggest that any information in the Statements was materially inaccurate, misleading or unreliable. In issuing said policies, Equitable relied upon the said information provided by Gomez.” Id. This clearly is not “conduct on the part of the accountants linking them to that party ... which evinces the accountant’s understanding of that party[’s] ... reliance.” 65 N.Y.2d at 551, 493 N.Y.S.2d 435, 483 N.E.2d 110.

The facts of Credit Alliance are illustrative. In that decision, the court actually considered two actions consolidated for appeal. In one, Credit Alliance v. Arthur Andersen, recovery from an accountant was denied and in the second, European American Bank and Trust Co. v. Strauhs & Kaye et al., 102 A.D.2d 146, 477 N.Y.S.2d 146 (1 Dept.1984), it was allowed.

In the second case, the court found that “the facts as alleged by EAB clearly show that S & K was well aware that a primary if not the exclusive end and aim of auditing its client ... was to provide EAB with the financial information it required.” 65 N.Y.2d at 554, 493 N.Y.S.2d 435, 483 N.E.2d 110. The parties “remained in direct communication ... throughout the course of EAB’s lending relationship with [S & K’s client].” Id. The court concluded that the relationship “between the parties was the practical equivalent of privity.” Id. Equitable has not alleged such a relationship here. At most, Equitable spoke to Grant’s partner Gomez on “several occasions” over seven years. And there is no allegation that Gomez ever knew these contacts were related to the issuance of life insurance.

This case more closely parallels that of the first action in Credit Alliance, where the Court of Appeals denied recovery. The court spoke almost directly to this case:

Though the complaint and supporting affidavit do allege that Andersen specifically knew, should have known or was on notice that plaintiffs were being shown the reports by Smith, Andersen’s client, in order to induce their reliance thereon, nevertheless, there is no adequate allegation of either a particular purpose for the reports’ preparation or the prerequisite conduct on the part of the accountants. While the allegations state that Smith sought to induce plaintiffs to extend credit, no claim is made that Andersen was being employed to prepare the reports with that particular purpose in mind_

Equitable has failed to allege a relationship between the parties even approaching one of “practical equivalent of privity.” Therefore, New York law bars recovery on any negligence theory.

Plaintiffs only attempt to contest this issue comes in a single footnote of its memorandum, where it points out that recovery is sought for “gross” negligence, not negligence. In this context, that is a distinction without a difference. Under New York law, grossly negligent misrepresentation is clearly, distinguished from fraudulent misrepresentation. While grossly negligent conduct may lead to an inference of fraud, State Street Trust Co. v. Ernst, 278 N.Y. 104, 112, 15 N.E.2d 416 (1938), there is no independent action for gross negligence against accountants. Plaintiff has already claimed fraud, so to the extent this cause is based on the ability of gross negligence to infer fraud, it is redundant.

Conclusion

Diversity of citizenship was insufficiently pleaded in this case. Accordingly, federal question jurisdiction based upon a properly pleaded RICO claim, coupled with pendent jurisdiction over properly pleaded state law claims, would provide the only possible foundation for sustaining the complaint. However, the RICO claim fails because the underlying fraud was not pleaded in accordance with Rule 9(b) and, in any event, the RICO claim fails to state a claim under Rule 12(b)(6); Equitable has failed to allege that ESM conducted business affecting interstate commerce or that there was any causal connection between the predicate acts of mail fraud and the alleged injury.

Since the RICO claim fails and must be dismissed as improperly pleaded, the pendent state claims must also be dismissed. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 86 S.Ct. 1130, 1139, 16 L.Ed.2d 218 (1966). But even if this Court had jurisdiction over them, either as pendent claims or by virtue of diversity of citizenship — neither being the case — the state claims would fail since they too contain fatal pleading deficiencies. The fraud claim does not satisfy the pleading requirements of Rule 9(b) and the claim of gross negligence must be dismissed under Rule 12(b)(6) because plaintiff has not alleged a sufficient relationship with the defendant to “establish the practical equivalent of privity.”

If plaintiff chooses to pursue this action, it is ordered to file an amended complaint in 30 days. This Court is well aware of the obligations imposed upon parties and attorneys under Rule 11 and of the defendant’s desire to see that Rule enforced with appropriate sanctions. In composing an amended complaint, the plaintiff should carefully consider its duty under Rule 11. The Court will not hesitate to reconsider the motion for fees and sanctions in the event that any amended complaint is as baseless as the first.

So Ordered.

      . See also Westpac Banking Corp. v. Deschamps, 66 N.Y.2d 16, 494 N.Y.S.2d 848, 484 N.E.2d 1351 (1985), and Lumbard v. Maglia, Inc., et at., 621 F.Supp. 1542, 1545 (S.D.N.Y.1985) ("In order to survive a motion to dismiss, the complaint or accompanying affidavits must contain some allegation ‘to demonstrate the existence of a relationship between the parties sufficiently approaching privity.’ ” [citing Credit Alliance, supra ]).

      . It should be noted that the result would be identical even if Florida law applied. See Investment Corporation of Florida v. Buchman, 208 So.2d 291, 295 (Fla.2d D.C.A.1968), where the court dismissed a negligence claim against an accountant with whom the plaintiff had no contract. The court followed New York law in dismissing in the absence of privity because the plaintiff failed to allege "that its use of the certified statement was the ‘end and aim of the transaction.’ ”


source: Caselaw Access Project

author: DONALD E. O’BRIEN, Chief Judge.

license: Public Domain

text:
    UNITED STATES of America, Plaintiff, v. Leonhard and June WODTKE, Individually and as Trustees for Life Science Church of Oto, Iowa, and Order of Almighty God, Oto, Iowa, John Hancock Mutual Life Insurance Company, Defendants.
    No. C 82-4004.
    United States District Court, N.D. Iowa, W.D.
    Dec. 26, 1985.

      Leonhard and June Wodtke, pro se.
    Janet Brown for John Hancock Mut. Life Ins. Co.
    David A. Slacter, Trial Atty., Tax Div., U.S. Dept, of Justice, Washington, D.C., Asher E. Schroeder, Asst. U.S. Atty., Sioux City, Iowa, for U.S.
   FINDINGS OF FACT, CONCLUSIONS OF LAW, MEMORANDUM DECISION AND ORDER

DONALD E. O’BRIEN, Chief Judge.

This matter comes before the Court after a three-day trial to the Court. The Court finds for the plaintiff, United States of America. The Court hereby makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. This matter came on for trial. Plaintiff, the United States, was represented by David A. Slacter and Asher E. Schroeder. Defendants Leonhard and June Wodtke appeared pro se and Defendant John Hancock Mutual Life Insurance Company (John Hancock) was represented by Janet Brown.

2. Plaintiff instituted this action to reduce tax assessments made against Leon-hard and June Wodtke to judgment. The plaintiff also sought to foreclose its tax liens against certain real property, a farm owned by Leonhard and June Wodtke.

3. Leonhard and June Wodtke are husband and wife residing on a 300-acre farm in Oto, Iowa, in the county of Woodbury.

4. The Wodtkes purchased this farm in 1954. (Plaintiff’s Exh. 10).

5. The Wodtkes obtained a mortgage from John Hancock in order to purchase the farm. (Defendants’ Exh. 102). As of the day prior to trial, the outstanding balance due on the mortgage with interest and attorneys’ fees was $20,557.75. Interest continues to accrue on this amount.

6. During the years 1973 and 1974, the Wodtkes derived income from their farm and a gasoline service station operated by Leonhard Wodtke.

7. The Wodtkes filed timely tax returns for 1973 and 1974 and paid the amount of tax shown to be due and owing on these returns. (Plaintiffs Exhs. 6 and 7).

8. In January of 1975, Revenue Agent John Mansfield of the Sioux City, Iowa office of the Internal Revenue Service was assigned to audit the Wodtkes’ tax returns for the years 1973 and 1974.

9. Mansfield began working on the audit in early July of 1975 at which time he wrote a letter to the Wodtkes informing them of the audit.

10. Mansfield began his audit shortly thereafter. The Wodtkes refused to supply substantiation for the deductions they claimed on their tax returns.

11. Because Mansfield had to leave Sioux City for additional training, the audit was taken over by Revenue Agent Robert Ackerman, also of the Sioux City Internal Revenue Service office.

12. Mr. Ackerman served an Internal Revenue Service summons on the Wodtkes which asked them to produce all records and other documents which substantiated the deductions claimed on their tax returns for 1973 and 1974.

13. The Wodtkes refused to comply with the summons based on Fifth Amendment grounds. The United States District Court for the Northern District of Iowa ultimately determined that the Wodtkes had interposed the Fifth Amendment in good faith and they therefore did not have to produce any records.

14. Mansfield returned from training by the time the summons issue was decided. In order to complete his audit he used the information left that was available. This information included a letter from Standard Oil listing the amount expended by the Wodtkes during 1973 and 1974 for gasoline and other products and for rent. Mansfield also had some employment tax forms which were produced by the Wodtkes.

15. Because the Wodtkes refused to supply any further substantiation of expenses, Mansfield disallowed all deductions claimed by the Wodtkes on their tax returns for these two years other than the deductions substantiated by the documents he did have.

16. Mansfield authored a report which set forth the results of his audit. This report broke down each of the two years into farm and service station expenses. In each area, Mansfield disallowed all business deductions claimed by the Wodtkes other than those substantiated by written documentation. Mansfield’s stated reason for so doing was the Wodtkes’ failure to produce any written substantiation for their deductions. (Plaintiff's Exh. 2).

17. Mansfield’s audit report was incorporated into a notice of deficiency mailed to the Wodtkes by certified mail on March 21, 1977. (Plaintiff’s Exh. 1).

18. The notice of deficiency proposed deficiencies for the years 1973 and 1974 as follows:

Year Addition to Tax Negligence Penalty
1973 $70,787.60 $3,539.38
1974 95,865.62 4,793.28

The notice of deficiency was essentially the same as Mansfield’s audit report except that certain math errors were corrected and a penalty for negligence or intentional disregard for rules and regulations was imposed pursuant to § 6653(a) of the Internal Revenue Code.

19. Mr. Wodtke filed a timely petition with the United States Tax Court to contest the audit determination of the Internal Revenue Service.

20. Mrs. Wodtke did not petition the Tax Court.

21. The Internal Revenue Service is precluded by statute from assessing taxes proposed in a notice of deficiency for 90 days after mailing of the notice. This is to give a taxpayer time to petition the Tax Court. If a petition is filed, the taxes cannot be assessed until after the Tax Court decision is final.

22. The Interna] Revenue Service assessed the taxes proposed in the notice of deficiency against Mrs. Wodtke after the expiration of the 90-day period on August 24, 1977 as follows:

Year Tax Penalty Interest Lien Fees
1973 $70,787.60 $3,539.38 $16,621.99 $12.00
1974 95,865.62 4,793.28 16,758.75 —

23. Later, because there was some confusion as to whether Mrs. Wodtke had also filed a petition with the Tax Court or whether Mr. Wodtke’s petition included Mrs. Wodtke, the Internal Revenue Service abated the taxes assessed against Mrs. Wodtke. This abatement occurred on July 19, 1977.

24. Later, the Internal Revenue Service determined that the petition filed by Mr. Wodtke only covered Mr. Wodtke’s liability and not that of Mrs. Wodtke. The Internal Revenue Service then reassessed the taxes against Mrs. Wodtke on August 24, 1977. (Plaintiff’s Exh. 4).

25. Mr. Wodtke was accorded a hearing by the Tax Court in Des Moines, Iowa. Mrs. Wodtke, Revenue Agent Mansfield and others were present.

26. By decision dated November 21, 1978 the Tax Court upheld the notice of deficiency. The Eighth Circuit affirmed on appeal in an unpublished opinion. (Plaintiff’s Exh. 3).

27. The Internal Revenue Service assessed taxes against Mr. Wodtke on August 10, 1979 for the years 1973 and 1974 as follows:

Year Tax Penalty Interest Lien Fees
1973 $70,787.60 $3,539.38 $22,545.85 $12.00
1974 95,865.62 4,793.28 24,781.27 —

(Plaintiff’s Exh. 5).

28. The Internal Revenue Service filed notices of federal tax liens against all property and rights to property belonging to the Wodtkes with the Office of the Recorder for Woodbury County. A tax lien was filed with respect to Mrs. Wodtke on February 20, 1980 and against Mr. Wodtke on the same day. A second tax lien was filed with respect to Mr. Wodtke on July 31, 1980 to correct the spelling of his first name.

29. As of July 29, 1985, Mr. Wodtke was indebted to the United States in the amount of $442,625.08. This amount includes the amount of his assessment, plus interest of $101,812.71 for 1973 and $137,-601.73 for 1974 together with penalties for each year.

30. As of July 29, 1985, Mrs. Wodtke was indebted to the United States in the amount of $447,031.75. This total includes the amount of her assessment, plus interest of $103,517.77 for 1973 and $139.910.87 for 1974 together with penalties for each year.

31. Interest continues to accrue on the amounts by which the Wodtkes are indebted to the United States at the rate specified by law.

32. On December 7, 1976, Mr. Wodtke executed a “vow of poverty” by which he purported to give all of his present and future possessions and all income to an Order of the Life Science Church called The Order of Almighty God, Alpha Chapter. The gift stated it was irrevocable except provided that all property would revert to the donor if certain events occurred. (Defendants’ Exh. B, p. 1).

33. Approximately one year later, on December 27, 1977, Mrs. Wodtke executed a similar “vow.” By her vow, Mrs. Wodtke purported to give “all” of her property to The Order of Almighty God 904, Chapter. (Defendants’ Exh. B, p. 2).

34. The Wodtkes testified that these various names were all synonyms for the Life Science Church of Oto, Iowa.

35. The Wodtkes each testified that the Church had documents describing its existence and purpose but declined to produce such documents or state where such documents were located. The Court concludes that the Church has never been incorporated.

36. The Wodtkes testified that the Church was run by a board of directors and a number of trustees. However, the Wodtkes declined to name any of these individuals. The only names ever appearing on documents relating to the Church are Leonhard and June Wodtke.

37. By two quit claim deeds dated December 31, 1977, the Wodtkes purportedly transferred to themselves as Trustees of the Life Science Church of Oto, Iowa, and the Order of Almighty God, a portion of their 300-acre farm for the recited consideration of $1.00. There was no other consideration for the transfer; therefore, the transaction lacked sufficient consideration. (Plaintiff’s Exh. 9, p. 1).

38. By quit claim deed dated September 13, 1978, the remainder of the farm purportedly was transferred to the Church and Order. Again, the deed recited token consideration of $1.00; there was insufficient consideration for the transfer. (Plaintiffs Exh. 9, p. 3).

39. The three deeds affecting title to the farm were recorded in the Woodbury County Recorder’s office on September 14, 1978. (Plaintiff’s Exh. 9).

40. In August of 1978, Special Agent James Whelan of the Internal Revenue Service attended a seminar in Sioux City. The speaker discussed setting up one’s own church and taking a vow of poverty in order to avoid payment of income taxes.

41. Mr. Whelan was present pursuant to an investigation of a third party. By coincidence, he happened to sit next to Mr> Wodtke. At the end of the seminar, Mr.\ and Mrs. Wodtke encouraged Mr. Whelan to set up his own church and take a vow of poverty in order to avoid payment of federal taxes. Mr. Wodtke represented that he had done those very things in order to avoid payment of taxes.

. 42. The Wodtkes’ residence is located on the farm. They continued to reside there both before and after the purported conveyance to the Church and live there at the present time. Throughout this proceeding, the Wodtkes referred to the property as the “Wodtke farm.”

43. Both before and after the purported conveyance to the Church, the Wodtkes and their family made all decisions affecting the farm. These decisions included what to plant, how much of each crop to plant, when to plant, when to harvest and when to sell.

44. After the transfer, the Wodtkes testified that a board of directors controlled the farm. The Wodtkes would not testify who these board of directors were although they did admit that initially they alone controlled the farm.

45. No individuals other than the Wodtkes are identified as having a say in Church affairs. The Court concludes that the Wodtkes have failed to persuade the Court that anyone but themselves operate the farm.

46. Both prior to and after the purported transfer of the farm, the Wodtkes belonged to the National Farmers Organization (NFO), a group that assists farmers in selling their crops. The NFO sells the crops and remits the proceeds to the farmer. Both prior to and after the purported transfer, Leonhard Wodtke continued receiving payment in his own name. This only changed after June Wodtke began working for the NFO in November of 1977. Initially, Mrs. Wodtke, as a signatory on checks written by the NFO, wrote checks payable to Leonhard Wodtke individually. This continued through November of 1979. Thereafter, she wrote checks out to the Life Science Church. (Plaintiff’s Exh. 16).

47. Through December of 1977, Mr. Wodtke endorsed the NFO checks in his own name. Thereafter, whether made payable to him or the Church, the checks were endorsed “Life Science Church” except in those instances where the checks were endorsed over to third parties in which case Mr. Wodtke signed his own name. (Plaintiff’s Exh. 16).

48. The Wodtkes deposited the NFO checks in a Life Science Church account at Mapleton Trust and Savings Bank. Leon-hard and June Wodtke were the only individuals with signature authority on this account. (Plaintiff’s Exh. 17).

49. Both prior to and after the conveyance, the Wodtkes controlled the farm and enjoyed the fruits of their labors. The proceeds of farm crops went to the benefit of the Wodtkes and their family.

50. After the Wodtkes purportedly transferred all of their real and personal property to themselves as Trustees for the Life Science Church, they continued to retain beneficial enjoyment of all the property purportedly transferred.

51. The Wodtkes control all disbursements from the income earned by the farm. They have controlled such disbursements from the time of the purported conveyance until the present.

52. The Wodtkes use funds purportedly belonging to the Church to provide all of their necessities, including food, heat, electricity and clothing. Food and clothing is paid for out of a so-called $100.00 monthly allowance given the Wodtkes from the Church. The Church funds come from funds earned by the Wodtkes in their farming operation.

53. After the purported conveyance to the Church in 1977, Mr. Wodtke applied for and received from at least 1975 to 1981 crop insurance through the Federal Crop Insurance Corporation (FCIC) in his own name. At all times the farm was listed as being owned by Leonhard and June Wodtke. The Wodtkes never notified the FCIC of a change in ownership. Mr. Wodtke made repeated contract changes throughout the years in his own name. On January 17, 1981, the FCIC mailed Mr. Wodtke a check for $1,929.17 for a 1980 crop year loss he suffered. Previously, Mr. Wodtke had failed a claim for indemnity in his own name. (Plaintiff’s Exh. 15).

54. Mr. Wodtke also participated in a program sponsored by the Agricultural Stabilization and Conservation Service (ASCS). Under this program, farmers received payments for low yields. Mr. Wodtke submitted crop yield information to the ASCS from 1975 through 1981 although he only participated in the ASCS program in 1980. ASCS records list Leon-hard Wodtke as the owner and operator of the farm. In 1981, Mr. Wodtke received a check in his own name for $196.73 from the ASCS because of his low yields for the 1980 crop year. (Plaintiffs Exh. 14).

55. Mr. Wodtke also farmed some property owned by Edna Kloster during pertinent years. Mr. Wodtke paid cash rent for use of the property. ASCS records list Leonhard Wodtke as the operator of this farm but show Edna Kloster as the owner. Because of low yields on this farm, Mr. Wodtke was mailed a check by ASCS for $917.89 in his own name.

56. The Wodtkes claimed and received a homestead exemption in their own names with the county assessor’s office through 1981. This resulted in a lower tax bill for each year the exemption was claimed. Although the Wodtkes claim their home and farm is a church and a church exemption would be a total exemption, they had never claimed a church exemption with the assessor’s office. (Testimony of Harold Zar).

57. The Wodtkes never notified John Hancock of a change in ownership of the farm. John Hancock sent all notices relating to the mortgage to Leonhard and June Wodtke and continues, through the present, to look to them for payment.

58. On April 20, 1982, the Wodtkes caused to be recorded a purported mortgage in the amount of $375,000.00 from International Trust and Mortgage Ltd., an entity in the British West Indies. (Plaintiff’s Exh. 11). The mortgage purportedly encumbered the Wodtkes’ farm. Although the Wodtkes signed the mortgage as Trustees of the Life Science Church, they claim to have no knowledge of where the mortgage money has gone or whether the mortgage is being repaid. The Wodtkes stated that the other directors of the Church, whom they refused to name, have knowledge of the mortgage. No appraisal of the property was made prior to the recording of the purported mortgage.

59. The above-mentioned purported mortgage is, based on the evidence, a sham, filed in an attempt to cloud title to the farm and is of no force and effect. It is unlikely that any lender would loan such a large amount without an appraisal and with tax liens encumbering the property. It is also unlikely that the Wodtkes would not know anything about the mortgage even if one actually had been executed.

60. The purported transfer of the farm and other property occurred at a time when the Wodtkes knew they were facing a significant tax liability for 1973 and 1974.

61. The purported transfer of the farm and other property occurred at a time when the Wodtkes knew they did not file tax returns for 1975 and 1976, even though they had continued to earn, income and were liable for federal income taxes. At the time of the purported transfer, the Wodtkes had no intention of filing any future tax returns or paying income taxes.

62. The purported transfer was made for no consideration.

63. Mrs. Wodtke made the purported transfer after she had received the notice of deficiency and after she had been assessed for 1973 and 1974 taxes.

64. Although Mr. Wodtke took his “vow of poverty” prior to receiving the notice of deficiency, the vow did not actually “convey” the real property. The “conveyance”, if it occurred at all, took place when the quit claim deeds were executed and filed. The quit claim deeds were filed after the notice of deficiency was sent and after Mr. Wodtke had filed a petition with the Tax Court. .

65. The Wodtkes attempted to place all of their assets beyond the reach of the United States by their purported transfer of property to themselves as Trustees of the Life Science Church of Oto, Iowa.

66. The Wodtkes attempted to avoid paying their tax liabilities by the purported transfer.

67. The purported transfer was made with actual intent to hinder, defraud or otherwise delay the United States from collecting taxes owed to it.

68. The Wodtkes purposefully attempted to render themselves insolvent by their purported transfer. The purported transfer left them with little or no assets in their own names. Their remaining assets were insufficient to pay their then existing and anticipated debts.

69. The purported transfer of the Wodtkes’ property was fraudulent as to the United States and should be set aside in order to allow the United States to foreclose its tax liens.

70. The purported transfer of the Wodtkes’ property is a nullity because both before and after the purported conveyance, the Wodtkes enjoyed the beneficial use of such property and controlled the use of such property.

71. The purported transfer is of no force and effect because the evidence before the Court is persuasive that the Church has no existence separate and apart from the Wodtkes. No competent evidence to the contrary was produced. The Church is the alter ego of the Wodtkes. In essence, the Wodtkes conveyed the property to themselves.

CONCLUSIONS OF LAW

The Court has jurisdiction over this mat- . ter pursuant to 28 U.S.C. §§ 1340 and 1345 and 26 U.S.C. § 7402.

Defendants contend that Title 26 is not positive law and therefore this Court has no jurisdiction. Title 1, United States Code, Section 204(a) states:

United States Code. — The matters set forth in the edition of the Code of Laws of the United States current at any time shall, together with the then current supplement, if any, establish prima facie the laws of the United States, general and permanent in their nature ... provided, however, That whenever titles of such Code shall have been enacted into positive law, the test thereof shall be legal evidence of the laws therein contained, in all the courts of the United States....

Id. (Emphasis in original). If construction of a section of the United States Code which has not been enacted into positive law is necessary, recourse must be had to the original statutes themselves. United States v. Welden, 377 U.S. 95, 84 S.Ct. 1082, 12 L.Ed.2d 152 (1964). Under § 204, the United States Code cannot prevail over the statutes at large if the two are inconsistent. Stephan v. United States, 319 U.S. 423, 63 S.Ct. 1135, 87 L.Ed. 1490 (1943). The Wodtkes have not identified specific code sections which they challenge. They have not cited a single instance wherein any portion of Title 26 differs from the Internal Revenue Code as passed and amended. The Court therefore rejects defendants’ contention that Title 26 is not law.

The Wodtkes contend that the Sixteenth Amendment to the Constitution was not properly ratified. Because the federal income tax laws are derived from the Sixteenth Amendment, the Defendants Wodtke reason that they have no tax liability.

The validity of the enactment of a constitutional amendment is not a justiciable issue. It is a political question upon which the courts cannot rule. Coleman v. Miller, 307 U.S. 433, 447-451, 59 S.Ct. 972, 979-981, 83 L.Ed. 1385 (1939); Luther v. Borden, 48 U.S. (7 How.) 1, 38-39, 12 L.Ed. 581 (1849).

The validity of the Sixteenth Amendment was first upheld nearly seventy years ago in Brushaber v. Union Pacific Railroad Co., 240 U.S. 1, 36 S.Ct. 236, 60 L.Ed. 493 (1916). Recent decisions have been no different. Parker v. Commissioner, 724 F.2d 469, 471 (5th Cir.1984); Baker v. Commissioner, 37 T.C.M. (CCH) 307, 309 (1978) aff'd without published opinion, 639 F.2d 787 (9th Cir.1980), cert. denied, 451 U.S. 1018, 101 S.Ct. 3008, 69 L.Ed.2d 390 (1981); Ginter v. Southern, 611 F.2d 1226, 1229 (8th Cir.1979). The defendants’ argument that the Sixteenth Amendment is a nullity is rejected.

The Wodtkes have moved to dismiss this civil matter claiming that it is really a criminal case. Part of this case involves an alleged fraudulent conveyance. However, this is a civil fraud, not criminal fraud. See Rouse v. Rouse, 174 N.W.2d 660 (Iowa 1970).

This case involves the Wodtkes’ tax liabilities for the years 1973 and 1974. There is no possibility of the Wodtkes being prosecuted for a tax offense relating to these years as the statute of limitations for offenses arising under the internal revenue laws has passed. (26 U.S.C. § 6531.) Section 6531 prescribes three-year and six-year periods for certain offenses. The Government has taken the position that the period in which the Government could have sought to indict the Wodtkes for tax offenses occurring in 1973 and 1974 has expired.

The Wodtkes have argued that the Government cannot foreclose its tax liens as these liens have expired. This argument is unpersuasive. Section 6321 of the Internal Revenue Code (26 U.S.C.) provides for a lien in favor of the United States against all property and rights to property belonging to a taxpayer. This lien arose at the time the taxes were assessed and continues until the liability is satisfied or becomes unenforceable because of lapse of time. Section 6502(a) provides for a six-year period for tax collection. However, the six-year period is extended if the Government commences suit to reduce the liability to judgment within that period. The suit tolls the statutory period, United States v. Ettelson, 159 F.2d 193, 196 (7th Cir.1947), the obtaining of a judgment will keep the time for collection open indefinitely, United States v. Overman, 424 F.2d 1142 (9th Cir.1970), and will correspondingly extend the life of the lien. § 6322. The lien is effective against the taxpayer even if not filed. United States v. Trilling, 328 F.2d 699, 702 (7th Cir.1964).

The Wodtkes referred the Court to § 6323(g) which provides that tax liens must be refiled within six years and one month of the assessment. They then argue that the liens have expired because they were not refiled. Defendants ignore that § 6323 provides for the filing of tax liens in order to protect certain classes of individuals which include purchases, holders of security interests, mechanics liens and judgment lien creditors. § 6323(a). These terms are defined in § 6323(h). Neither the Wodtkes nor their Church meet the definition of a protected party.

So long as the persons being foreclosed are not one of the enumerated classes, the Government can foreclose its tax liens arising by virtue of § 6321 even if no tax lien was ever filed. United States v. Trilling, supra. The § 6321 liens arise by operation of law and continue so long as the period for collection remains open. By filing this suit, the Government has extended the collection period. Thus, the tax liens remain in effect and may be foreclosed if appropriate.

It is true, of course, that because the tax liens were not refiled, a purchaser, holder of a security interest or other enumerated person could acquire priority over the tax lien. Whether such a person could be a bona fide purchaser in the face of the notices of lis pendens filed by the Government is a separate question. Nevertheless, since there are no parties present claiming protected status, further discussion of the point is moot.

The assessment of taxes against Mr. Wodtke was based on a decision by the United States Tax Court and affirmed by the Eighth Circuit Court of Appeals. The liability of Mr. Wodtke is therefore fixed and must be accepted as valid and correct. Commissioner v. Sunnen, 333 U.S. 691, 597-602, 68 S.Ct. 715, 719-721, 92 L.Ed. 898 (1948); United States v. Annis, 634 F.2d 1270, 1272 (10th Cir.1980); Russell v. United States, 592 F.2d 1069, 1071 (9th Cir.1979).

Because Mrs. Wodtke did not petition the Tax Court, she may litigate her tax liability in this case. Mrs. Wodtke moved for a jury trial on this issue but waived her right to a jury prior to trial. The United States agreed to this waiver and accordingly this issue was tried to the Court. Rule 38(d), Federal Rules of Civil Procedure.

An assessment of taxes is presumptively correct. A taxpayer has the burden of proving the assessment is in error and proving his or her correct tax liability. United States v. Janis, 428 U.S. 433, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976); Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212 (1933).

Every person who may owe a tax is required to keep records which will enable a correct tax return to be filed. A taxpayer is obligated to make these records available to the Government so that a reported tax liability may be verified. 26 U.S.C. § 6001; Carr Enterprises, Inc. v. United States, 698 F.2d 952 (8th Cir.1983); Lukovsky v. Commissioner, 692 F.2d 527 (8th Cir.1982). Taxpayers are not exempt from this record-keeping requirement because they are farmers. See 26 C.F.R. § 1.6001-l(b).

A taxpayer has the burden of proving his entitlement to a tax deduction. Burnet v. Houston, 283 U.S. 223, 51 S.Ct. 413, 75 L.Ed. 991 (1931); Lukovsky v. Commissioner, supra at 528.

A tax deduction is a matter of legislative grace. Congress could choose, if it desired, to impose a tax on gross income without allowance of deductions. A taxpayer who claims a deduction has the burden of showing that he is entitled to the deduction and the exact amount of the deduction. Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 148-49, 94 S.Ct. 2129, 2136-37, 40 L.Ed.2d 717 (1974); Interstate Transit Lines v. Commissioner, 319 U.S. 590, 593, 63 S.Ct. 1279, 1281, 87 L.Ed. 1607 (1943).

Mrs. Wodtke was uncooperative with the audit and failed to provide any proof of the amount of her deductions. Where a taxpayer fails or refuses to provide documentation, the Internal Revenue Service must disallow every deduction taken. Accordingly, the assessment of taxes made against her is valid and correct. Burnet v. Houston, supra; Oliver v. Commissioner, 364 F.2d 575 (8th Cir.1966); Roberts v. Commissioner, 62 T.C. 834 (1974).

The abatement of the first tax assessment made against Mrs. Wodtke does not render the subsequent assessment invalid so long as the subsequent assessment was made in a timely manner. Schildhaus v. Commissioner, 28 T.C.M. (CCH) 1463, 1475 (1969), aff'd, 442 F.2d 1343 (2d Cir.1971) (per curiam).

The statute of limitations for assessing taxes for 1973 normally would have expired on April 15, 1977. However, if a notice of deficiency is issued, the statute of limitations is suspended for 90 days during which time the taxpayer can file a petition with the United States Tax Court. If no petition is filed, the limitation period is extended for an additional sixty days, plus however much time was left remaining between the date of the notice and the original statute of limitations date. 26 U.S.C. § 6503(a); Ramirez v. United States, 538 F.2d 888, 210 Ct.Cl. 537 (1976), cert. denied, 429 U.S. 1024, 97 S.Ct. 642, 50 L.Ed.2d 625 (1976).

The notice of deficiency was mailed March 21, 1977. For the next 90 days, the Service was precluded from assessing taxes against the Wodtkes. After this 90-day period expires, the Service has 60 days, plus whatever time was left on the three-year limitation period. Because the notice of deficiency was mailed 25 days prior to April 15, 1977, the Service had 90 days, plus 60 days, plus 25 days to assess Mrs. Wodtke for 1973 taxes.

The assessment of taxes made against Mrs. Wodtke on August 24, 1977 was made in a timely manner. Taxes for 1973 could have been assessed against her through September 12, 1977. Ramirez v. United States, supra; 26 C.F.R. § 301.6503(a)-1(a)(2).

As of July 29, 1985, Mrs. Wodtke was indebted to the United States for federal income taxes, interest, penalties and lien fees in the amount of $182,495.57 for 1973 and $264,536.18 for 1974. Interest continues to accrue on those amounts at the rate specified in 26 U.S.C. § 6621, compounded daily only on those amounts accruing after December 31, 1982. (§ 6622.)

As of July 29, 1985, Mr. Wodtke was indebted to the United States for federal income taxes, interest, penalties and lien fees in the amount of $180,398.84 for 1973 and $262,227.04 for 1974. Interest continues to accrue on these amounts at the rate specified in 26 U.S.C. § 6621, compounded daily only on interest accruing after December 31, 1982. § 6622.

As of the dates of the assessments against Mr. and Mrs. Wodtke, tax liens arose against all of their property and interests in property. 26 U.S.C. § 6322.

The vows of poverty taken by the Wodtkes were not sufficient to transfer their real property under Iowa law since the purported vows contained no description of the land affected. Iowa Code § 558.19; Leighton v. Leighton, 196 Iowa 1191, 194 N.W. 276, 282 (1923).

The purported conveyance of the farm from the Wodtkes to themselves as Trustees of Life Science Church of Oto, Iowa, by quit claim deeds recorded on September 14, 1978 was subject to the tax lien against Mrs. Wodtke which arose on August 24, 1977, the date of her tax assessment. 26 U.S.C. § 6323(a) and (h)(6); District Divine Science Church of Allen County v. United States, 80-1 U.S.T.C., ¶ 9119 (N.D.Ind. Dec. 4, 1979).

The Life Science Church of Oto, Iowa held all property purportedly transferred from the Wodtkes as their nominee. From its inception, the Church has been the alter ego of Leonhard and June Wodtke; the evidence failed to demonstrate that it has any existence separate and apart from the Wodtkes. Therefore, the real and personal property purportedly transferred remained subject to federal tax liens against the Wodtkes and could be levied on to satisfy the Defendant Wodtkes’ tax liabilities. Loving Savior Church v. United States, 728 F.2d 1085 (8th Cir.1984).

“Unbridled discretionary powers in a trustee negative the existence of a trust relationship.” Hansen v. Birmingham, 92 F.Supp. 33, 42 (N.D.Iowa 1950). The purported transfers of property from the Wodtkes to themselves as Trustees of the Life Science Church of Oto, Iowa were ineffective to transfer ownership, since the grantors also were trustees of the property and retained beneficial interest to the property and unrestricted control of the assets.

Chapter 504A of the Iowa Code contains the Iowa Nonprofit Corporation Act. The Act permits nonprofit organizations, including religious organizations, to be incorporated under its terms. To comply with the Act, an organization must perform certain acts which include adopting bylaws and adopting articles of incorporation which must be filed with the Secretary of State. A qualifying nonprofit corporation may sue and be sued and can own and receive property. Iowa Code §§ 504A.4.2, 504A.4.4. The Life Science Church of Oto, Iowa is an unincorporated organization which has not complied with the requirements of the Act.

Iowa law does not require that religious organization comply with the Nonprofit Corporation Act. However, a religious organization that does not incorporate has no legal existence, can neither sue nor be sued and cannot hold property in its own name. Iowa Code ch. 504A; Presbyterian Church of Osceola v. Harken, 177 Iowa 195, 158 N.W. 692, 694 (1916). Because the Life Science Church of Oto, Iowa has no legal existence, the purported transfer of real and personal property to it by the Wodtkes did not transfer title. Title to all the purportedly transferred property remains with the Wodtkes.

In summary, the purported transfers of real and personal property by the Wodtkes were fraudulent as to the United States. The transfers were made with knowledge of their outstanding tax liabilities and in an attempt to avoid the payment of such taxes. The transfers were made in an attempt to leave themselves with no assets to pay their present and future tax liabilities. The purported transfers were without consideration and the Wodtkes retained possession, control and full use of the property purportedly transferred. Rouse v. Rouse, 174 N.W.2d 660, 667 (1970).

The tax liens of the United States are prior to all other interests in the property with the exception of the outstanding balance of the mortgage and other fees owed to John Hancock.

The farm shall be sold by an officer of the Court with proceeds first being applied to costs of sale and thereafter to John Hancock in the total amount of the Wodtkes’ indebtedness to it and thereafter to the United States in satisfaction of the tax liabilities of the Wodtkes. Excess proceeds, if any, shall be paid to the Wodtkes.

Because the Court determines that the conveyance of the property to the church was ineffective and the Wodtkes have had the beneficial use of the farmland from which they earn income, there is no evidence of pauper status. The Court taxes costs of this action to the Defendant Wodtkes.

Accordingly,

IT IS ORDERED that the Government shall prepare a judgment consistent with this Memorandum Decision and Order with updated tax liability figures for Leonhard and June Wodtke to be filed effective January 15, 1986.

      . Lien fee assessed February 19, 1980 when lien was prepared.

      . Lien fee assessed February 19, 1980 when lien was prepared.

      .No additional lien fee was assessed on this second tax lien.

      . All Motions to Dismiss by the Wodtkes are denied.

      . The matter of Hancock’s entitlement to other fees will be addressed in a later order only if it is shown that resolution of that matter is necessary to clear title and there is a dispute concerning them.