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United States v. Kraus

United States District Court, W.D. Washington, Tacoma

April 3, 2018

UNITED STATES OF AMERICA, Plaintiff,
v.
DORAN R. KRAUS, et al, Defendants.

          ORDER GRANTING IN PART AND RENOTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION

          BENJAMIN H. SETTLE, UNITED STATES DISTRICT JUDGE.

         This matter comes before the Court on Plaintiff the United States of America's (the “Government”) motion for summary judgment and Defendant Doran R. Kraus's (“Kraus”) motion to dismiss. Dkts. 68, 69. The Court has considered the pleadings filed in support of and in opposition to the motions and the remainder of the file and hereby (1) grants in part and renotes the Government's motion and (2) denies Kraus's motion.

         I. PROCEDURAL HISTORY

         On June 8, 2016, the Government filed its complaint against Kraus to reduce to judgment tax assessments for the years 2001-2004. Dkt. 1. On December 14, 2016, the Government moved to amend its complaint in order to add additional tax assessments for the years 2001-2007, foreclose federal tax liens on real property, and name additional parties, including Defendant Leanne V. Lao (“Lao”), who may claim an interest to the foreclosure as defendants. Dkt. 18. On January 26, 2017, the Court granted leave to amend. Dkt. 22. On January 27, 2017, the Government filed its amended complaint. Dkt. 23.

         On June 29, 2017, Kraus filed a motion to dismiss. Dkt. 57. On June 14, 2017, the Government responded. Dkt. 60. On July 27, 2017, Kraus filed an updated motion to dismiss. Dkt. 61. On August 11, 2017, the Government responded. Dkt. 62. On August 16, 2017, the Court entered an order denying Kraus's motions to dismiss. Dkt. 63.

         On January 31, 2018, the Government moved for summary judgment. Dkt. 68. Also on January 31, 2018, Kraus filed a cross-motion for summary judgment, which he titled a “Dispositive Motion for Settlement.” Dkt. 69. On February 16, 2018, the Government responded to Kraus's motion. Dkt. 71. On February 20, 2018, Kraus replied on his motion and responded to the Government's motion. Dkts. 72, 73. On February 21, Lao responded to the Government's motion. Dkt. 74. On February 27, 2018, the Government replied to Lao's response. Dkt. 78. On March 21, 2018, Kraus filed a “revamped-updated” response to the Government's motion. Dkt. 79.

         On March 26, 2018, the Government filed a notice of a reduction in the amount in tax assessments it seeks to reduce to judgment for the years 2001-2004. Dkt. 80.

         II. FACTUAL BACKGROUND

         Kraus and Lao married in 1988. They divorced in 2010. They have three children who are 16, 24, and 27 years old. For most of the marriage, Kraus provided the marriage's only income. Lao stopped working around 1991 after the birth of their first child. Throughout the marriage, Kraus handled all of the family's finances. They had a joint bank account, and Kraus had a credit card, but Lao did not have her own bank account or credit cards or write checks. Kraus gave cash to Lao to pay for household expenses.

         Kraus also handled all tax matters during the marriage. Lao discovered Kraus had not been paying taxes when the IRS delivered letters to their house. Kraus told Lao that he would “take care of it” and Lao never tried to contact the IRS herself.

         From the mid-1980s until 2006, Kraus was an equal partner with his brother Tad Kraus in running a retail jewelry store, Kraus Diamond Specialty, located in Lakewood, Washington. After the store closed in 2006, Kraus began making money through various temporary jobs.

         Kraus stopped filing tax returns in 1999. He has claimed that tax returns are voluntary and only persons who are employed by the federal government or fill out a Form 1040 are required to pay taxes. Kraus did not file federal income tax returns for the years 2001-2004. Kraus Diamond Specialty did not file federal partnership returns for the years 2001-2004.

         In 2003, Kraus and Lao sold their primary residence and moved to the subject property in this lawsuit: 590116th Street Court NE, Tacoma, Washington 98422, also known as Pierce County Parcel Number 602296-003-0, with a legal description as indicated in the Amended Complaint. They bought the subject property for $280, 000 in 2003. They paid $116, 000 using proceeds from the sale of their previous residence and Kraus payed an additional down payment with money earned from Kraus Diamond Specialty. The deed conveyed the subject property to “Doran Kraus and Leanne Kraus, Husband and Wife.”

         On April 8, 2005, Kraus and Lao signed a Land Trust Agreement that purported to create Trust No. K9L7K5D3-48-89999-B with “G. Michael” as trustee. The trust agreement stated that Mr. Kraus and Lao were each 50 percent beneficiaries of the trust. Kraus and Lao also signed a quitclaim deed conveying the subject property to the trust, which was recorded with the county auditor on April 19, 2005.

         On July 26, 2005, Kraus and Lao executed an assignment of a beneficial interest in the trust purporting to assign their beneficial interest to “Fairview, a private contractual company.” Fairview's listed address was the same as that of the subject property. Larell H. Baldwin signed the document on Fairview's behalf as the “Authorized Signatory for Sentinel Systems, Curator for Fairview.” The assignment was never recorded.

         Neither the trust nor Fairview paid anything in exchange for the transfers of interest in the subject property, while Kraus and Lao retained the “benefit” of residing there. At deposition, Baldwin testified that the transfers were Kraus's idea and he simply assisted Kraus by assembling the paperwork. Baldwin also testified that he would reconvey the property to Kraus at any time upon request. Kraus continued to make all decisions related to the property and pay all associated bills. The transfers placed no restrictions on Kraus or Lao's use of the property. Kraus and Lao have continued to live at the property and their children also continue to reside there.

         It was Kraus who suggested that the subject property should be placed in the names of the trust and Fairview. While Lao signed the documents, she did not understand them and signed only because Kraus asked her to do so. Lao did not inquire as to why. At deposition, Kraus and Lao say the transfers were for ...


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