United States v. Harding

Background

The United States sued Alfred Harding, Cheryl Harding, and the California Franchise Tax Board. The government alleged that Alfred Harding failed to timely file federal income tax returns and pay taxes for tax years 2002 through 2013. The complaint sought unpaid joint federal income taxes, plus interest, penalties, and statutory additions. The government later stated that the unpaid balance was $5,402,042.51 as of July 31, 2019.

The government originally sought to foreclose federal tax liens on two parcels of real property owned by Cheryl Harding, but later settled those claims with her. The government had named the California Franchise Tax Board to prevent it from asserting an interest in the property.

The government served Alfred Harding with the summons and complaint, but he did not answer. The Tax Board waived service and also did not answer or otherwise defend itself. The Clerk entered defaults against both defendants. Alfred Harding later moved to set aside the default, but the court denied that motion. He also failed to appear at the hearing on the government’s motion for default judgment. The Tax Board did not appear or defend itself during the proceedings.

Court’s analysis

Under Federal Rule of Civil Procedure 55(b)(2), the court may enter default judgment after the Clerk enters default. The court considered the factors identified in Eitel v. McCool, including prejudice to the plaintiff, the strength and sufficiency of the claims, the amount at stake, the possibility of a factual dispute, whether the default resulted from excusable neglect, and the policy favoring decisions on the merits.

The court found that the factors favored default judgment. It concluded that the government would be prejudiced without a judgment because default judgment was its only stated means of collecting the unpaid tax liability and because the Tax Board might otherwise assert an interest in the property. The court found the complaint sufficiently pleaded the government’s authority to bring the action, the nature and amount of the assessments, and compliance with notice requirements.

The government submitted Internal Revenue Service Forms 4340 and a Revenue Officer’s affidavit. The court found that these materials supported the alleged tax liability and showed that Alfred Harding had received taxable income he did not report. The court also found the claim against the Tax Board meritorious because the Board had not defended its interest in the property. Because the defendants had received notice but failed to answer or defend, the court found no excusable neglect and concluded that their failure to participate prevented a decision on the merits.

Damages and disposition

The court found that the requested damages were supported by the government’s records and awarded the unpaid federal tax liability, plus interest, penalties, and statutory additions. The opinion contains inconsistent figures: it identifies the updated unpaid balance as $5,402,042.51 in the background, but later refers to $5,420,042.51.

The court granted the United States’ motion for default judgment and entered default judgment against Alfred Harding and the California Franchise Tax Board. It also ordered that the Tax Board be bound by the June 28, 2019 settlement agreement between the United States and Cheryl Harding and that the Board may not later assert an interest in the property described in the complaint.