Justia U.S. 7th Circuit Court of Appeals Opinion Summaries

In 2004 the bank made a loan secured by a mortgage and all rents from the property. Three years later the borrower defaulted. The IRS filed a tax lien against the property. A receiver, appointed at the request of the bank, rented the property and collected $82,675. The district court held that the IRS lien had priority. The Seventh Circuit reversed and remanded. The bank had perfected its security interest in the rents under Indiana law; 26.U.S.C. 6323 gives such an interest priority over a federal tax lien if the property subject to the interest was "in existence" when the federal tax lien was filed. The property at issue is the real estate, not the rental income, and was in existence at the time the lien was filed.

The Seventh Circuit affirmed the Tax Court holding that the Coles omitted income from their 2001 return and imposed a fraud penalty. Because the Coles had not maintained adequate records of income from a "confusing maze of entities and financial dealings," the IRS reconstructed their income. The Coles did not rebut the presumption of accuracy with respect to the reconstruction. An argument that certain entity income was not attributable to the Coles was "spurious," according to the court, and a claim that the Coles did not benefit from certain loans was a "nonstarter." The court particularly noted the Coles' control over the entities at issue. There was clear and convincing evidence of fraud: Jennifer Cole has worked as an accountant and Scott is a licensed attorney, yet they failed to keep records, commingled funds, and funneled assets into entities that had no business purpose.