Property rights of a nondeclared spouse page3

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Discussion

The Anti-Injunction Act bars the federal courts from entertaining any action filed for the purpose of restraining the assessment or collection of taxes. 26 U.S.C. §7421(a) . The purpose of the act is to permit the government to assess and collect taxes as expeditiously as possible. See Enochs v. Williams Packing & Navigation Company [62-2 ustc ¶9545 ], 370 U.S 1, 7 (1962). Congress, however, has created certain enumerated exceptions. Specifically, "if a levy or sale would irreparably injure the rights in property which the court determines to be superior to rights of the United States in such property, the court may grant an injunction to prohibit the enforcement of such levy or to prohibit such sale." 26 U.S.C. §7426(b)(1) ; Rosenblum v. United States [77-1 ustc ¶9177 ], 549 F.2d 1140, 1144 (8th Cir. 1977). The Supreme Court has also carved out an exception to the literal language of the act. In Enochs v. Williams Packing & Navigation Co., the Court held that federal courts have jurisdiction to entertain an action to enjoin the assessment or collection of taxes where: (1) the government cannot prevail on the merits even if the facts and law are examined in the light most favorable to the government, and (2) irreparable harm exists necessitating equitable relief. Enochs [62-2 ustc ¶9545 ], 370 U.S. at 6-7. The court finds that the court has subject matter jurisdiction to enjoin the government as the requirements of Enochs are satisfied. The court also finds that a consideration of all or the relevant factors necessitates the award of injunctive relief.

A. Likelihood of the Government's Success on the Merits.

The first prong of the Enochs test is that the government will not prevail on the merits. Enochs [62-2 USTC ¶9545 ], 370 U.S. at 6. The government currently holds tax liens against all of Mr. O'Hagan's property and rights to property and has initiated the forced sale of Mr. O'Hagan's interest in the Sunfish Lake, Minnesota homestead property in an effort to satisfy those liabilities. See 26 U.S.C. §6331 ; Phelps v. United States [75-1 USTC ¶9467 ], 421 U.S. 330, 335-337 (1975). In a levy proceeding, the government steps into the taxpayer's shoes and acquires only the rights the taxpayer himself possesses. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 725 (1985). The court must first determine, therefore, what property or rights to property Mr. O'Hagan has under state law in order to determine what rights the government possesses and can exercise. See Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-514 (1960).

In August 1988, Mr. and Mrs. O'Hagan transferred the real property located in Sunfish Lake , Minnesota to themselves as joint tenants. Under Minnesota law, this transfer created an effective joint tenancy with rights of survivorship in both Mr. and Mrs. O'Hagan. As joint tenants, Mr. and Mrs. O'Hagan each owned an equal undivided interest in the whole of the homestead, with the right to inherit the entire property upon the death of the other joint tenant.

In support of its position, the government argues that, under Minnesota law, Mr. O'Hagan could unilaterally sever the joint tenancy and convey the homestead property to a third party without the consent of Mrs. O'Hagan, as either joint tenant or spouse. The government asserts that as Mr. O'Hagan could effectuate the sale, the government can also sell his interest in the homestead property. The court disagrees and finds that the correct construction of Minnesota law, although it may allow the unilateral severance of property held as joint tenants, ² does not allow one spouse to sever and then convey an interest in homestead property. See Minn. Stat. §507.02, para. 2 (1994); Minn. Stat. §500.19, subd. 5 (1994).

Minnesota law allows Mrs. O'Hagan to void any attempt by Mr. O'Hagan to convey an undivided one-half interest in the family home to a third party. See Minn. Stat. §507.02 (1994). The clear purpose of section 507.02 is to prohibit one spouse's conveyance of the homestead without the consent of the other spouse. Any other construction of Minnesota law would frustrate the state's protection of a spouse's marital and property rights in the homestead and undermine established property rights. Accordingly, the court finds that Mrs. O'Hagan has met the first requirement of Enochs, as the government has only acquired the property interest, under state law, of the taxpayer. Minnesota law, as construed, does not allow Mr. O'Hagan the right to convey his homestead property without Mrs. O'Hagan's consent; therefore, the forced sale would exceed the rights the government acquired when it stepped into the shoes of Mr. O'Hagan.

B. Equity Jurisdiction.

Once the court establishes the plaintiff has met her initial burden under Enochs, the court must determine if equity jurisdiction otherwise exists. Enochs [62-2 USTC ¶9545 ], 370 U.S. at 6. The court, as directed by the Eighth Circuit, considers four factors in determining whether to grant the plaintiff's motion for a preliminary injunction:

1. Is there a substantial threat that the plaintiff will suffer irreparable harm if the relief is not granted;

2. Does the irreparable harm to the plaintiff outweigh any potential harm that granting a preliminary injunction may cause the defendant;

3. Is there a substantial probability that the plaintiff will prevail on the merits; and

4. The public interest.

Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 114 (8th Cir. 1981) (en banc). The court balances the four factors to determine whether a preliminary injunction is warranted. Id. at 113; West Publishing Co. v. Mead Data Cent. Inc., 799 F.2d 1219, 1222 (8th Cir. 1986).

1. The Threat of Irreparable Harm.

To meet this element, the plaintiff must prove that harm will result without injunctive relief and the harm will not be compensable by money damages. Dataphase, 640 U.S. at 113. The court finds that Mrs. O'Hagan will suffer irreparable harm if the court denies her request for injunctive relief. The effect of the government's forced sale of Mr. O'Hagan's interest in the joint tenancy homestead is to convert it into a tenancy in common held by Mrs. O'Hagan and the unknown purchaser. The government's severance and conveyance not only destroys Mrs. O'Hagan's survivorship rights should Mr. O'Hagan predecease her, it conveys to a third party the right to exercise all the rights a tenant in common would possess. The third party would have the right to possess Mrs. O'Hagan's home and charge her rent if she continued to reside there. The unknown third party would also have the right to make substantive changes to the property. The sale would substantially diminish Mrs. O'Hagan's value in the property and Mrs. O'Hagan would loose the ability to the unknown purchaser, not a party to her marriage, from her home. The court concludes Mrs. O'Hagan will suffer irreparable harm should the court deny her motion for a preliminary injunction. The court also concludes the injury the forced sale would inflict upon Mrs. O'Hagan cannot be remedied by a monetary award. Accordingly, the court finds the first factor of the Dataphase test weighs in favor of granting Mrs. O'Hagan's requested relief.

2. The Balance of Harm Between the Parties.

The balance of harm must tip decidedly toward the plaintiff to justify issuing a preliminary injunction. See e.g., General Mills, Inc. v. Kellogg Co., 824 F.2d 622, 624 (8th Cir. 1987). The government argues that the issuance of a preliminary injunction will impair its ability to sell Mr. O'Hagan's interest in the property. Of course that is true. On the other hand, Mrs. O'Hagan argues she will lose substantial property rights which are not compensable by monetary damages if the preliminary injunction is denied. The court, upon balancing the harms, concludes that the second factor of the Dataphase test weighs in favor of granting Mrs. O'Hagan's motion.

3. The Likelihood of Success on the Merits.

The third Dataphase factor requires Mrs. O'Hagan to establish a reasonable probability of success on the merits. As discussed, the court finds Mrs. O'Hagan will prevail on the merits of her claim. Under Minnesota law, Mr. O'Hagan could not convey his interest in the jointly-held homestead property without the consent of Mrs. O'Hagan. The government, therefore, cannot conduct a conveyance which would be prohibited under operation of state law. Accordingly, the court concludes that Mrs. O'Hagan will prevail on the merits of her claim.

4. Public Interest.

Public interest favors protecting the property rights of individuals, particularly an individual's property rights in her home. The public interest is also served by the collection of taxes and the government's efforts to protect the nation's financial reserves. Accordingly, the court concludes the fourth Dataphase factor, the public interest, weighs neither in favor of granting nor denying Mrs. O'Hagan's motion for injunctive relief.

Conclusion

The court concludes that Mrs. O'Hagan has satisfied the requirements of the judicially created exception to the Anti-Injunction Act and that she has satisfied her burden under Dataphase. Accordingly, IT IS HEREBY ORDERED that:

1. Mrs. O'Hagan's motion for a preliminary injunction is granted;

2. The government is prohibited from conducting the forced sale of Mr. O'Hagan's interest in the homestead property in Sunfish Lake , Minnesota ; and

3. The court denies the government's request that Mrs. O'Hagan post a bond.

¹ Plaintiff brought a motion for a temporary restraining order, as well as a motion seeking preliminary injunctive relief. The defendant received notice prior to the hearing and both sides have had the opportunity to present affidavits and legal arguments regarding the issuance of a preliminary injunction. At the hearing, both parties agreed that the court should consider the motion as one for a preliminary injunction. Accordingly, the court treats plaintiff's motion as one seeking a preliminary injunction.

² Section 500.19 provides that any severance of joint tenancy is only effective where: (1) the instrument of severance is recorded in the office of the country recorder or the registrar of titles in the county where the real estate is situated; or (2) the instrument of severance is executed by all of the joint tenants; or (3) the severance is ordered by a court of competent jurisdiction; or (4) a severance is effected pursuant to bankruptcy of a joint tenant. Minn. Stat. §500.19, subd. 5 (1994). Accordingly, Minnesota law allows the severance of a joint tenancy.

 

James M. Elfelt, Joseph P. Elfelt, Anthony J. Elfelt, Lawrence W. Elfelt, Paul G. Elfelt, David C. Elfelt, and Steven M. Elfelt, Plaintiffs-Respondents-Cross Appellants v. Albina Cooper, Defendant-Appellant-Cross Respondent-Petitioner, Dale T. Cooper, Defendant

Wisconsin Supreme Court, 90-1326, 6/17/92, 485 NW2d 56

[Code Sec. 6331 ]

Levy and distraint: Ownership: Real estate: State law.--The IRS lacked authority to sell a taxpayer's undivided one-half interest in homestead property. Under state ( Wisconsin ) law, homestead property was held by spouses as joint tenants and was inalienable, absent the consent of both spouses or court action.

CECI, Justice: This case is before the court on a petition for review of a published decision of the court of appeals, Elfelt v. Cooper, 163 Wis. 2d 484, 471 N.W.2d 303 (Ct. App. 1991). The court of appeals affirmed the judgment of the circuit court for Waukesha County, Clair Voss, Circuit Judge, which declared, after a jury trial, that the plaintiffs (the Elfelts) were owners of an undivided one-half interest in the home of the defendant Albina Cooper (Mrs. Cooper) as tenants in common. The judgment ordered a sheriff's sale of the property and determined an amount of rent due from Mrs. Cooper to the Elfelts.

The issue presented for review is whether §6331 of the Internal Revenue Code, 26 U.S.C. §6331 (I.R.C. §6331 ), ¹ gives the Internal Revenue Service (IRS) the authority to sell Dale Cooper's (Mr. Cooper) undivided one-half interest in Mr. and Mrs. Cooper's homestead held in joint tenancy. We hold that without Mrs. Cooper's consent, and in the absence of court action, I.R.C. §6331 does not give the IRS the authority to sell Mr. Cooper's interest in the homestead, and we therefore reverse the court of appeals and remand to the circuit court with directions to enter judgment declaring Mrs. Cooper to be the sole owner of the property in fee simple absolute.

The facts are as follows. In 1963, the Coopers purchased the property at 38050 Dolmar Park Road , Dousman , Wisconsin , as husband and wife. ² In 1969, construction of a home on the property was completed, and the Coopers moved in. As of the time the briefs in this case were filed, Mrs. Cooper was age 70 and had lived in the homestead for over 21 years.

On January 11, 1985, the IRS filed a lien notice against the real estate of Mr. Cooper in Waukesha County . The lien was in the amount of $13,283.22 and was for unpaid income taxes for the year 1982. It is undisputed that Mrs. Cooper was not liable for any taxes unpaid by Mr. Cooper. On November 15, 1985, after Mr. Cooper did not pay the amount in dispute, the IRS mailed notice to Mr. Cooper that the IRS had seized Mr. Cooper's interest in the homestead on Dolmar Park Road . The Coopers continued to live in the home after the seizure.

On June 25, 1986, the IRS conducted a tax sale of Mr. Cooper's interest in the home. The successful bidders were John and Stacey Elfelt. On January 1, 1987, John Elfelt made a written demand upon Mrs. Cooper for a proportionate share of the reasonable rental value of the property. On January 5, 1987, the IRS district director issued a quitclaim deed for the interest of Mr. Cooper to John and Stacey Elfelt. John and Stacey Elfelt issued a quitclaim deed to their seven sons, the plaintiffs in this matter.

On March 28, 1988, the Elfelts filed a summons and complaint, which was later amended, requesting that the court declare the Elfelts owners of an undivided one-half interest in the property with Mrs. Cooper as tenants in common, requesting a partition of the property by its sale with one-half of the proceeds to go to the Elfelts, plus rent in the amount of one-half the reasonable rental value of the property subsequent to January 1, 1987. The Coopers both filed pro se motions to dismiss. After a hearing on March 13, 1989, the circuit court denied the Coopers' motions to dismiss. On April 1, 1989, Mr. Cooper died.

Mrs. Cooper filed a pro se answer and a motion to dismiss on April 25, 1989. The Elfelts responded with a motion for summary judgment. Mrs. Cooper retained counsel, and, after a hearing, the circuit court denied both parties' motions.

On September 6, 1989, Mrs. Cooper filed a third-party summons and complaint, an amended answer, affirmative defenses, and a counterclaim for quiet title. The third-party complaint was dismissed by stipulation of the parties. The amended answer and affirmative defenses alleged that the IRS failed to follow certain procedures mandated by the I.R.C., that the seizure and sale was invalid, and that the quitclaim deed to John and Stacey Elfelt was therefore invalid.

The case was finally tried in April, 1990, to an advisory jury. The court reserved for itself the legal question of whether the IRS had the legal authority to sell Mr. Cooper's interest in the homestead in the manner and form accomplished. The jury was asked to answer one verdict question:

Did the Internal Revenue Service comply with the legal requirements in selling to John and Stacey Elfelt all of Dale T. Cooper's interest in the real property located at 38050 Dolmar Park Road , Dousman , Wisconsin ?

The jury's answer was "They (the Internal Revenue Service) did comply." Mrs. Cooper filed a motion for judgment notwithstanding the verdict, which was denied. The court entered judgment for the Elfelts, finding that the IRS had legally sold Mr. Cooper's interest in the homestead to the Elfelts; declaring the Elfelts and Mrs. Cooper to be tenants in common, each owning in fee simple an undivided one-half interest in the property; ordering a sheriff's sale to partition the property; and ordering Mrs. Cooper to pay rent to the Elfelts.

The court of appeals affirmed the circuit court judgment and remanded for further findings. Elfelt, 163 Wis. 2d at 501-02. We granted Mrs. Cooper's petition for review.

The issue presented by this case, whether I.R.C. §6331 gives the IRS the authority to sell Mr. Cooper's undivided one-half interest in Mr. and Mrs. Cooper's homestead, involves the application of a statute to an undisputed set of facts. Statutory interpretation is a question of law which we review without deference to the lower courts. Pulsfus Farms v. Town of Leeds , 149 Wis. 2d 797, 803-04, 440 N.W.2d 329 (1989). The jury's verdict in this case, which was advisory only, found that the IRS had complied with the legal requirements in selling Mr. Cooper's interest to John and Stacey Elfelt. We do not review that verdict.

Mrs. Cooper argues that the IRS did not have the authority to transfer ownership of Mr. Cooper's ownership interest in the Coopers' homestead to the Elfelts in the manner and form accomplished: that because the property was a jointly held homestead, it may only be sold with Mrs. Cooper's consent or by a court order in the absence of Mrs. Cooper's consent. Mrs. Cooper also argues that homestead property is indivisible and that therefore, under I.R.C. §6335 , it was improper to sell Mr. Cooper's interest without selling the property in its entirety. Finally, Mrs. Cooper argues that I.R.C. §6331 is unconstitutional as applied because it does not require that the IRS give notice to all parties having an interest in property before the property is sold.

The Elfelts respond that the IRS did have the authority, under I.R.C. §§6331 , 6335 , 6338 , and 6339 , to sell Mr. Cooper's undivided one-half interest in the homestead without Mrs. Cooper's consent. In addition, the Elfelts argue that Mrs. Cooper was given remedies by I.R.C. §§6337 , 6343 , and 7426 that she failed to use, that the constitutionality of I.R.C. §6331 has long been settled, and that state court is not the proper forum for Mrs. Cooper's arguments.

We first note that the state court was a proper forum for this action and for Mrs. Cooper's defense to the action. The Elfelts, not Mrs. Cooper, commenced this action in the state court, seeking to enforce whatever interest they obtained from the IRS, seeking rent from Mr. and Mrs. Cooper, and seeking to have the home sold. The Elfelts should not now complain about Mrs. Cooper presenting her defenses to the action in a forum that the Elfelts chose. In addition, due to Mrs. Cooper's counterclaim, we view this as a quiet title action. As stated by the U.S. Court of Appeals for the 7th Circuit in a case concerning federal tax sales of parcels of land located in Wisconsin :

Controversies over title to land within a state are particularly appropriate for determination by the courts of that state. We find nothing anywhere to imply that state courts lack power to decide such questions in a quiet title action on the ground that the conveyances were governed by federal law and were an exercise of federal power.

Popp v. Eberlein [69-1 USTC ¶9331 ], 409 F.2d 309, 311 (7th Cir. 1969). This controversy is properly in the state court system.

The I.R.C. provides the IRS at least three methods of enforcing collection of unpaid taxes. First, the government may sue for the unpaid amount and, if it obtains a judgment, may exercise the usual rights of a judgment creditor. United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 682 (1983) (citing I.R.C. §§6502(a) , 7401 , and 7402(a) ).

A second method is a lien foreclosure suit, authorized by I.R.C. §7403 . The suit is a civil action brought in federal district court "to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." I.R.C. §7403(a) . Pursuant to I.R.C. §7403(b) , "[a]ll persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto." The suit is a plenary action which requires the court to "adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property." I.R.C. §7403(c) .

A third method that the IRS has for enforcing collection of unpaid taxes is the administrative levy, authorized by I.R.C. §6331 . Under I.R.C. §6331 , the IRS may levy upon and sell the property of a delinquent taxpayer in order to satisfy the tax liability of that taxpayer. As opposed to the plenary nature of a lien foreclosure suit, the levy and distraint authorized by I.R.C. §6331 is only a provisional method that typically does not require judicial intervention. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720 (1985). In addition, "§6331 , unlike §7403 , does not 'implicate the rights of third parties,' because an administrative levy, unlike a judicial lien-foreclosure action, does not determine the ownership rights to the property." Id. at 731. If parties other than the delinquent taxpayer claim rights in the levied property, they may assert those rights in a postseizure administrative or judicial proceeding under I.R.C. §6343 or §7426 . Id. at 728-29. Parties proceeding under I.R.C. §§6343 and 7426 have nine months from the time of the levy to assert their property rights in the levied property. Id. at 736 (Powell, J., dissenting). In addition, property that is sold after it is levied upon may be redeemed by the property owners or any person having an interest therein at any time within 180 days after the sale of the property. I.R.C. §6337(b) .

Mrs. Cooper did not avail herself of the procedures provided in I.R.C. §§6337(b) , 6343 , or 7426 . If she had, this case would probably not be before us today. Instead, Mrs. Cooper argues that the IRS did not have the authority to sell Mr. Cooper's interest in the homestead property without Mrs. Cooper's consent and that the sale is, therefore, invalid. We agree. ³

In applying the I.R.C., state law determines the nature of the legal interest which the taxpayer had in the homestead property. National Bank [85-2 USTC ¶9482 ], 472 U.S. at 722. This is because the I.R.C. does not create any property rights, but merely attaches federally defined consequences to rights which are created under state law. Id. Once state law has been used to determine the nature and existence of a property interest, further state law is inoperative, and the tax consequences thenceforth are dictated by federal law. Id. (citing United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 56-57 (1958)). In a levy proceeding, the IRS " 'steps into the taxpayer's shoes' . . . [and] acquires whatever rights the taxpayer himself possesses." Id. at 725 (citations omitted).

In National Bank, the delinquent taxpayer was a codepositor in two jointly held bank accounts. Id. at 716. Relevant state law provisions, as well as the taxpayer's contract with the bank, gave the taxpayer the unqualified right to withdraw the full amounts on deposit in the joint accounts without notice to his codepositors. Id. at 723. The Court stated:

'[I]t is inconceivable that Congress . . . intended to prohibit the Government from levying on that which is plainly accessible to the delinquent taxpayer-depositor.' . . . The taxpayer's right to withdraw is analogous in this sense to the IRS's right to levy on the property and secure the funds. Both actions are similarly provisional and subject to a later claim by a codepositor that the money in fact belongs to him or her.

Id. at 726 (citations and footnote omitted). In a footnote to the above quote, the Court stated:

We stress the narrow nature of our holding. By finding that the right to withdraw funds from a joint bank account is a right to property subject to administrative levy under §6331 , we express no opinion concerning the federal characterization of other kinds of state-law created forms of joint ownership. This case concerns the right to levy only upon joint bank accounts.

Id. at 726 n.10.

Following National Bank, we must first look to state law to determine the nature and existence of Mr. Cooper's property right in the homestead. Once that is determined, further state law consequences are inoperative, and we must turn to federal law. We bear in mind that the IRS cannot gain an interest superior to that which Mr. Cooper himself held.

Under Wisconsin law, the nature of homestead property held in joint tenancy between husband and wife is such that it is indivisible by one spouse without the consent of the other. Sec. 706.02(1)(f), Stats. ⁴ The policy objectives of the homestead statute have been long recognized as laudable, providing to each spouse absolutely inalienable rights:

The policy of the statute indicated is not to give the wife a mere personal right for her personal benefit which she may waive, or be estopped by her conduct from insisting upon, but to protect the home for the benefit of the family and every member of it,--a beneficent policy of the highest character, calling for a broad, liberal application of the statute, so as to carry it out, fully, in letter and spirit. If it should be held that the homestead right is a mere privilege which the wife may waive, or which may be lost under the rules of equitable estoppel, a very efficient way would be open to evade and nullify the statute. Such right is placed high above the reach of any dangers by the absolute disability to alienate the homestead in any manner, except by a joint conveyance of some kind, signed by the husband and wife. The disability of the husband to otherwise convey the homestead is as complete as if it were not alienable at all, and of the wife to otherwise consent to such alienation, as if she were a minor.

Cumps v. Kiyo, 104 Wis. 656, 662, 80 N.W. 937 (1899). While the above-quoted language is dated, it illustrates the nature of the property right that a spouse owns in a homestead in Wisconsin : it is absolutely inalienable without the consent of both spouses and is therefore worthless to one spouse acting alone without the consent of the other.

There is no way to convey any interest in a jointly held spousal homestead in Wisconsin without both spouses' consent except through court proceedings, such as a divorce, bankruptcy, or lien foreclosure. This requirement of spousal consent for the extrajudicial conveyance of any interest in jointly held homestead property is not a mere consequence of a property interest that becomes inoperative under federal law, as the court of appeals incorrectly determined. Elfelt, 163 Wis.2d at 493, 497. Rather, the statutory requirement of spousal consent illustrates that the nature of the property interest owned by a spouse in a jointly held homestead is a limited interest that can only be alienated with the consent of both spouses or by court action.

Mr. Cooper's interest in the Coopers' spousal homestead is distinguishable from the joint bank account in National Bank, where the delinquent taxpayer had access to the entire amount without prior consent of his codepositors. A homestead held jointly by a husband and wife is of an entirely different nature than a joint tenancy between persons who are not married: no interest of a homestead held jointly by a husband and wife can be conveyed without the consent of both spouses, sec. 706.02(1)(f), Stats.; while joint tenants who are not married have the right to sell their individual interests and thereby sever the joint tenancy. Nelson v. Albrechtson, 93 Wis.2d 552, 563, 287 N.W.2d 811 (1980) (citing Nichols v. Nichols, 43 Wis.2d 346, 349, 168 N.W.2d 876 (1969)).

As Mr. Cooper would not be able to convey any interest of the jointly held spousal homestead without Mrs. Cooper's consent, the IRS, which merely steps into Mr. Cooper's shoes, also cannot convey any interest of the jointly held spousal homestead without either Mrs. Cooper's consent or court action. Due to the nature of Mr. Cooper's property interest under Wisconsin law, any conveyance of that interest by the IRS without Mrs. Cooper's consent and without court action is ineffective. Consequently, the Elfelts did not obtain and do not now own an interest in Mrs. Cooper's homestead.

We recognize that if the IRS had proceeded under I.R.C. §7403 and brought a lien foreclosure action in district court, the IRS might validly have conveyed an interest in the Coopers' jointly held spousal homestead. But even under I.R.C. §7403 the IRS would have to convince the court that such action would be equitable. See Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 709 (courts should exercise limited equitable discretion in I.R.C. §7403 proceedings; I.R.C. §7403 empowers a district court to order the sale of a family house in which a delinquent taxpayer has an interest, even though a nondelinquent spouse also has a homestead interest in the house under state law).

As Mr. Cooper is deceased and because we hold that the IRS did not validly convey any interest in the homestead to the Elfelts, Mrs. Cooper now owns the property in fee simple absolute under her right of survivorship. We therefore remand this matter to the circuit court and direct that the court enter judgment declaring Mrs. Cooper to be the sole owner of the property in fee simple absolute.

By the Court.--The decision of the court of appeals is reversed, and the matter is remanded to the circuit court with directions to enter judgment declaring Mrs. Cooper to be the sole owner of the property in fee simple absolute.

¹ I.R.C. §6331 provides in relevant part:

§6331 . Levy and distraint

(a) Authority of Secretary

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax (and such further sum as shall be sufficient to cover the expenses of the levy) by levy upon all property and rights to property (except such property as is exempt under section 6334 ) belonging to such person or on which there is a lien provided in this chapter for the payment of such tax. . . .

(b) Seizure and sale of property

The term "levy" as used in this title includes the power of distraint and seizure by any means. . . . In any case in which the Secretary may levy upon property or rights to property, he may seize and sell such property or rights to property (whether real or personal, tangible or intangible).

² The property is more particularly described as:

Lot 18 in Dolmar Park, a subdivision of part of the NE 1/4 of the SE 1/4 of Section 17, and the NW 1/4 and the SW 1/4 of the SW 1/4 of Section 16 , in Township number 6 N, Range 17 East, in the town of Ottawa, Waukesha County, Wisconsin.

³ Accordingly, we do not reach Mrs. Cooper's argument under I.R.C. §6335(c) that the property was indivisible and that therefore the IRS should have sold the entire homestead, not just Mr. Cooper's interest. As we find that the IRS did not have the authority to sell Mr. Cooper's interest in the property by administrative sale without Mrs. Cooper's consent, we need not reach the Elfelts' argument that Mrs. Cooper failed to use the remedies provided to her by I.R.C. §§6337 , 6343 , and 7426.

We also do not reach Mrs. Cooper's constitutional arguments. Although the U.S. Supreme Court has stated that "[t]he constitutionality of the levy procedure, of course, 'has long been settled,' " National Bank [85-2 USTC ¶9482 ], 472 U.S. at 721 (citations omitted), we are doubtful of the constitutionality of the actions of the IRS in this case. If we were not to reverse the court of appeals, the IRS's actions would have led to Mrs. Cooper's no longer having a right of survivorship in her spousal homestead, thereby greatly diminishing the value of her property interest. The court of appeals was incorrect when it stated that "[Mrs. Cooper] has the same interest after the sale that she did before the sale." Elfelt, 163 Wis.2d at 496. Before the sale, Mrs. Cooper had an equal undivided jointly held interest in the whole of the homestead with Mr. Cooper, with a right of survivorship. After the sale, she had an interest in one-half of the property as a tenant in common, with no right of survivorship. This diminution in the value of her property interest, without any requirement that she be given adequate notice by the IRS, puts the application of I.R.C. §6331 into serious constitutional doubt. See Mennonite Board of Missions v. Adams, 462 U.S. 791, 795-800 (1983) (Prior to an action that will affect an interest in life, liberty, or property protected by the due process clause, a state must provide notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections. Mere notice by publication is not sufficient when interested parties can be notified by more effective means such as personal service or mailed notice.).

⁴ Sec. 706.02(1)(f), Stats., provides in relevant part:

706.02 Formal requisites. (1) Transactions under s. 706.01(1) shall not be valid unless evidenced by a conveyance which:

. . .

(f) Is signed, or joined in by separate conveyance, by or on behalf of each spouse, if the conveyance alienates any interest of a married person in a homestead under s. 706.01(7) . . . .

 

 

Victoria L. Selbe, Plaintiff v. The United States of America , Defendant v. Frank G. Selbe III, Cross-Defendant

U.S. District Court, West. Dist. Va., Roanoke Div., Civ. 92-0411-R, 92-0433-R, 9/6/95, 912 FSupp 202, 912 FSupp 202

[Code Secs. 6332 and 6335 ]

Wrongful levy: Note: Property of debtor: Valid assessment: Collateral estoppel.--An IRS levy on a note that related to proceeds from the sale of an individual's marital residence was void because, pursuant to a prenuptial agreement, the individual transferred his interest in the note to his ex-wife and thus, did not own the note. After litigating the issue of the note's ownership in a previous case, the IRS was collaterally estopped from relitigating the issue. Further, after the decision in the earlier case, any assessments made against the taxpayer were null, and therefore, no valid assessment currently existed. It was the taxpayer who was the IRS's debtor and the taxpayer whose property must be subject to the Federal Debt Collections Procedures Act. The note was the ex-wife's property, and, therefore, was not subject to the FDCPA.

Daniel L. Hodges, Lily H. Hodges, 200 Kings Rd., Lafayette, La. 70503, pro se. Guy M. Harbert III, Simon Delano Roberts Moore, Gentry, Locke, Rakes & Moore, 10 Franklin Rd., S.E., Roanoke, Va. 24038-0013, for consolidated plaintiff (Selbe, V.L.). Victoria L. Selbe, P.O. Box 8056, Roanoke, Va. 24014, pro se. Guy M. Harbert III, Simon Delano Roberts Moore, H. Michael Deneka, Gentry, Locke, Rakes & Moore, 10 Franklin Rd., S.E., Roanoke, Va. 24038-0013, for defendant (Selbe III, F.G.). Frank G. Selbe III, P.O. Box 8056 , Roanoke , Va. 24014 , pro se. Guy M. Harbert III, Simon Delano Roberts Moore, H. Michael Deneka, Gentry, Locke, Rakes & Moore, 10 Franklin Rd., S.E. , Roanoke , Va. 24038-0013 , for defendant (Selbe, V.L.). Victoria L. Selbe, P.O. Box 8056, Roanoke, Va. 24014, pro se. Earl Montgomery Tucker, P.O. Box 1709, Roanoke, Va. 24008, Richard A. Lloret, P.O. Box 1098, Abingdon, Va. 24212-0398, Margaret M. Earnest, Department of Justice, Washington, D.C. 20530, for defendant (U.S.A.). Julie C. Dudley, Robert P. Crouch, Jr., P.O. Box 1709, Roanoke, Va. 24008-1709, Richard A. Lloret, P.O. Box 1098, Abingdon, Va. 24212-0398, William K. Rounsborg, Margaret M. Earnest, Department of Justice, Washington, D.C. 20530, for consolidated defendant (U.S.A.). Earl Montgomery Tucker, Robert P. Crouch, Jr., P.O. Box 1709, Roanoke, Va. 24008, Richard A. Lloret, P.O. Box 1098, Abingdon, Va. 24212-0398, Margaret M. Earnest, Department of Justice, Washington, D.C. 20530, for cross-claimant (U.S.A.). Guy M. Harbert III, Simon Delano Roberts Moore, H. Michael Deneka, Gentry, Locke, Rakes & Moore, 10 Franklin Rd., S.E. , Roanoke , Va. 24038-0013 , for cross-defendant. Frank G. Selbe, Victoria L. Selbe, P.O. Box 8056 , Roanoke , Va. 24014 , pro se.

MEMORANDUM OPINION

KISER, Chief District Judge:

This case is before me on plaintiff's and cross-defendant's motions for summary judgment. ¹ The parties have briefed the issues contained in these motions and the Court has heard oral argument. The motions are, therefore, ripe for disposition. ² For the reasons stated below, I will grant both motions on the ground that the government may not continue to levy upon a deed of trust note owned by the plaintiff.

FACTUAL BACKGROUND:

On April 2, 1992 cross-defendant Frank G. Selbe III ("Selbe") was arrested for making a false statement on a federal form. The arrest stemmed from a presentencing questionnaire in a 1991 conviction for tax evasion; Selbe did not reveal in the questionnaire a $300,000.00 note connected with the January, 1991 sale of the marital residence to Daniel L. and Lily R. Hodges. The note was issued to Frank and plaintiff Victoria L. Selbe (" Victoria ") jointly; Selbe then indorsed his interest to Victoria . This indorsement was required by the terms of a 1985 prenuptial agreement assigning a portion of the residence sale proceeds to Victoria . I overturned a jury conviction of Selbe, finding that the prenuptial agreement was valid and that Selbe was correct in considering the note to be Victoria 's property. Order & Opinion, United States v. F. Selbe, Criminal Action No. 92-0061-R (September 23, 1992), aff'd No. 92-5717 (4th Cir. June 27, 1994).

Contemporaneously with his arrest Selbe was subjected by the IRS to two jeopardy assessments for unpaid taxes in tax years 1983 and 1984. The IRS levied on the same note that was the basis for Selbe's criminal prosecution. Selbe complained that the assessments were unreasonable, F. Selbe v. United States [95-2 USTC ¶50,400 ], Civil Action No. 92-0638-R.

The Hodges filed an interpleader action, Hodges v. United States et al., Civil Action No. 92-0411-R, and paid the value of the note into court. Victoria, as owner of the note, responded with a civil action against the United States for wrongful levy upon the note, V. Selbe v. United States et al., Civil Action No. 92-0433-R. This court consolidated those actions into the instant case, dismissed the Hodges, and directed the United States to file any cross-claims on or before August 10, 1994 and the Selbes to reply before August 31, 1994. Order, Civil Action No. 92-0411-R (Turk, J., August 5, 1994). ³

The United States filed its cross-claim on August 11. Count I alleged that the U.S. was Selbe's creditor, Selbe its debtor, the residence and its sale proceeds Selbe's assets and the post-sale transfer of the note to Victoria fraudulent as to the debt of the U.S. Count II alleged that Selbe did not receive equivalent value for the residence sale and/or the note transfer and that he was made insolvent, rendering the transfer of the note fraudulent. Count III alleged that the April 2, 1992 ⁴ jeopardy assessments were abated because no statutory notice of deficiency had issued and that they had been resurrected by June 19, 1992 assessments of the same amounts. I did not permit the government to abate the April 2 assessment and reincarnate it in June. Order & Opinion, Civil Action No. 92-0638-R (June 4, 1993). Action proceeds upon the April 2, 1992 assessment alone.

Concurrently, Selbe filed a motion for summary judgment in Civil Action No. 92-0638-R grounded upon the principle of res judicata. Selbe asserted that the determination of a valid prenuptial agreement in his acquittal was dispositive. I agreed, abating the April 2, 1992 assessment and releasing the levy upon the Hodges' note. Order & Opinion, Civil Action No. 92-0638-R, (June 9, 1995).

The note proceeds remain in the possession of this Court. At issue here is Victoria 's motion for summary judgment in consolidated Nos. 92-0411-R & 92-0433-R, asserting wrongful levy upon the note.

DISCUSSION:

Standard of Review

Summary judgment is appropriate if there is no issue of a material fact and the movant is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir. 1994), cert. denied, 115 S.Ct. 67 (1994). The evidence is to be considered in the light most favorable to the nonmovant. Id.

I.

Before addressing the dispositive issue of summary judgment, I must determine the statutory framework upon which my analysis rests. The government filed its cross-claim under the Federal Debt Collections Procedures Act (FDCPA), which provides the procedural and definitional guidelines for the satisfaction of debts owing to the United States . 28 USC §§3001 et seq. Selbe counters that the FDCPA does not apply because there was no action pending against him on May 29, 1991, the effective date of the statute.

The FDCPA arose to provide a single process by which the United States could collect debts owing to it, thereby circumventing the 50 distinct state debt collection procedures under which it had formerly been compelled to proceed. Congress enacted the FDCPA on Nov. 29, 1990 with the proviso that it was to take effect 180 days later, on May 29, 1991. The enactment included a provision retroactively applying the FDCPA to "... actions pending ... on a claim for a debt ..." Pub. L. 101-647, Title XXXVI, Subtitle C, §3631(b)(1)(a). The retroactive application of the FDCPA has been found to be constitutional. Ford v. United States , 25 F.3d 1039, 1994 WL 242156 (4th Cir. N.C. ). Selbe has mistakenly construed this provision to exclude the United States ' action against him, because no action had been initiated at the time the FDCPA became effective. The purpose of the retroactivity provision was merely to enable cases pending under the myriad state procedures to be shifted into the single channel provided by the FDCPA. Claims existing on the FDCPA's effective date, even if not yet brought to action, certainly fall under the FDCPA. My inquiry is, therefore, whether the government had a "claim for a debt" against Selbe on May 29, 1991.

"Claim" is defined in a subchapter of the FDCPA as "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured." 28 USC §3301(3). "Debt" is defined as "an amount that is owing to the United States on account of ... tax ..." Id. §3002(3)(B). The jeopardy assessment issued against Selbe was for tax years 1983 and 1984. Selbe does not dispute his tax liability, nor are the amounts of his liability in dispute here. He does owe a debt to the United States for unpaid taxes. The United States had a right to the payment of those taxes at the close of each tax year. The United States thus had a claim for a debt at the close of both 1983 and 1984, claims which have survived to the present and were certainly pending on May 29, 1991. I conclude that the FDCPA applies to this action. See U.S. v. Dickerson, 790 F.Supp. 1583, 1584-85 (M.D.Ga. 1992); U.S. v. Gelb, 783 F.Supp. 748, 752 (E.D.N.Y. 1991).

II.

Relitigation of an issue or law or fact is precluded by the doctrine of collateral estoppel if the parties had a full and fair opportunity to litigate the issue, the issue was actually litigated, and the issue was essential to prior judgment. Brooks v. Arlington Hospital Ass'n, 850 F.2d 191, 196 (4th Cir. 1988). Issues litigated in a criminal action may have preclusive effect in a subsequent civil suit. United States v. One 1987 Mercedes Benz 330E, 820 F. Supp. 248, 253 (E.D. Va. 1993). Collateral estoppel does not require mutuality of parties through identity or privity, and it may be employed offensively to preempt an opponent's argument. Allen v. McCurry, 449 U.S. 90, 94-95 (1980).

Count I of the Unites States' cross-claim asserts fraudulent transfer of the note to Victoria , under the FDCPA. 28 USC §3304(b) . Count II asserts transfer conducted during the debtor's insolvency, in violation of 28 USC §3304(a) .

The issues of fraudulent transfer and insolvency were raised in the government's unsuccessful opposition to Selbe's motion for summary judgment in Civil Action No. 92-0638-R. I disposed of these issues conclusively by granting Selbe's motion. Opinion, p. 4, full ¶1 (June 9, 1995).

The government further contends that my earlier rulings decided the status of ownership only between Selbe and Victoria , and not the debt owed to the United States . A review of my final opinion in Civil Action No. 92-0638-R reveals that the identical argument was asserted in that case and that I rejected it. Opinion, p. 6, ¶2 (June 9, 1995).

III.

Moreover, this levy became invalid immediately upon that same ruling, and has not been renewed. The government still relies upon its April 2, 1992, assessments, which was abated, and levy upon the note released, by the June 9, 1995 Order in Civil Action No. 92-0638-R. In the instant case I have already ruled, on June 4, 1993, that the second assessment issued on June 19, 1992 is a nullity. ⁵ An invalid assessment cannot provide a foundation for adjudication in favor of the government. Cf. U.S. v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288, 1293-94 (9th Cir. 1983), cert. denied, 465 U.S. 1079 (1984). No valid assessment currently exists. The government asserts that Selbe is estopped from denying his debt because of his plea agreement and plea of guilty in his initial criminal tax evasion case. He may be; I determined only that the jeopardy assessment providing the basis for the cross-claim was unreasonable and therefore invalid. It bears repeating that I have not ruled on the validity of the underlying tax debt. My decision addresses only the ownership of one asset, which cannot be levied upon to satisfy that debt.

IV.

Were I to find a valid assessment currently outstanding, levy upon this note would still be void. The FDCPA directs attachment of and levy against property of the debtor. 28 USC §3102 . "Property" includes "... any present or future interest, whether legal or equitable, in real ... property ... wherever located and however held ... 28 USC §3002(12). Further, the property must be "in the possession, custody or control of the debtor" before it may be attached. 28 USC §3102 .

In Criminal Action No. 92-0061-R I ruled that Victoria had an equitable interest in the residence sale proceeds from 1985 onwards and that Selbe justifiably considered the note to be his wife's property. I specifically held in Civil Action No. 92-0638-R that there is no distinction in the note's ownership status between Selbe and Victoria , or Selbe and the United States , indeed, between Selbe and anyone. I have expressly determined that, as a matter of both law and fact, Selbe does not own the note and that Victoria does own it. That determination was at the heart of my disposition of Civil Action No. 92-0638-R. The United States is now collaterally estopped from relitigating the issue of whose property the note constitutes. It is Selbe who is the government's debtor and Selbe whose property must be subject to the FDCPA. The note is Victoria 's property, and as the property of someone other than the debtor, the note is not subject to the FDCPA.

CONCLUSION:

My decision here answers essentially for the fourth time if the United States may proceed against a note belonging to Victoria Selbe for the legitimate debt of her husband Frank Selbe. As it was in the beginning, is now, and ever shall be, the answer is No.

An appropriate order shall issue.

ORDER

For the reasons stated in the Memorandum Opinion issued contemporaneously with this Order, it is hereby ADJUDGED and ORDERED that the plaintiff's and cross-defendant's motions for summary judgment are GRANTED. Defendant's cross-claim is DISMISSED WITH PREJUDICE.

It is FURTHER ORDERED that the proceeds of a $300,000.00 note issued by Daniel Lee Hodges and Lily Randall Hodges, which are in the possession of this Court, be RELEASED and DISTRIBUTED to plaintiff.

The Clerk is directed to strike both numbers of this consolidated case from the docket of this Court. Any other pending motions are DISMISSED as moot.

The Clerk is further directed to send a certified copy of this Order and the accompanying Memorandum Opinion to all counsel of record.

¹ The consolidation of an interpleader action with Victoria 's action and the presence of the government's cross-claim has apparently created some nominal confusion. Victoria is both plaintiff and cross-claim defendant. Although she is styled defendant in her motion, I will treat her as plaintiff. Selbe filed a motion identical to that of his wife. He is a cross-claim defendant and will be treated as such.

² Both motions are identical in their content and the government responded in kind. Selbe presented argument ore tenus for both himself and his wife. I will address both motions as one, using "Selbe," "Victoria" and "the Selbes" interchangeably.

³ Neither party complied with this Order. I have chosen to ignore these violations and dispose of this case on substantive grounds.

⁴ All parties have at times dated this April 6. Assessment was made on April 2, actual levy on April 6.

⁵ The allegations contained in Count III of the government's cross-claim ignores my Order and Opinion in Civil Action No. 92-0638-R (June 4, 1993), which nullified the later assessment. The government is estopped from asserting Count III; I need not address it further.

 

 

Eunice R. Karp, Plaintiff v. United States of America , Defendant

U.S. District Court, No. Dist. Ill. , East. Div., 93 C 2630, 11/7/94, 868 FSupp 235

[Code Sec. 6321 ]

Lien for taxes: Property not subject to lien.--Liens imposed by the IRS on an individual's property were improper, and the liens were ordered released. Although the individual was jointly liable with her former spouse for a tax liability, the IRS failed to apply overpayments for other tax years to her tax liability, pursuant to its installment payment agreement with the couple, and instead issued refunds for the overpayments to her spouse. Since the overpayments and the payments made under the installment payment agreement extinguished the wife's tax liability, the IRS could not revive her tax liability and impose a lien on her property.

Michael von Mandel, Mary von Mandel, von Mandel & von Mandel, 135 S. LaSalle St. , Chicago , Ill. 60603 , for plaintiff. Stacey S. Hallett, Department of Justice, Washington , D.C. 20530 , for defendant.

MEMORANDUM AND ORDER

MORAN, Chief Judge:

Plaintiff has moved for partial summary judgment and the government has filed a cross motion for summary judgment. The parties do not dispute the basic facts and each has presented everything that party deems relevant to a resolution of the dispute. The dispute relates to the legal implications of those facts. Because we agree with plaintiff's view of those legal implications we grant plaintiff's motion and deny defendant's.

For most of the relevant period the parties agree not only about what happened but also what it all meant. Plaintiff Eunice R. Karp was married to Jerome Karp in 1976, when he was involved in a tax shelter which gave rise to a significant tax liability. Although Eunice and Jerome were in the process of getting a divorce it had not yet gone through and Eunice signed a 1976 joint return with Jerome, at least in part as an accommodation to him, that did not reflect that tax liability. In 1986 the Internal Revenue Service (IRS) issued a statutory notice of deficiency for 1976 and sent it to Eunice. She sent it on to Jerome, presumably because he had agreed in 1977 to indemnify her for any tax liability arising from the 1976 joint return. Jerome filed a Tax Court petition, but in his name alone. On September 24, 1986, Eunice was assessed a deficiency in the amount of $137,991.88, resulting from a tax deficiency of $55,837 and interest of $82,154.88. Liens were filed against her property in 1987, 1988 and early 1989.

There is no dispute that Eunice, although not involved in the tax shelter that led to the 1976 tax liability, was jointly liable with Jerome for whatever liability there might be. The problem was how to get it paid.

In early 1989 three documents were executed. One related to tax overpayments in 1975, 1977 and 1978. Jerome signed an IRS form on January 18, 1989, accepting the IRS calculation of the amount of the overpayments as correct. That led subsequently to abatement of certain income tax assessments for those years. With a credit being given for a prior payment, the amount of those overpayments, including interest, if applied to the 1976 tax liability, left $53,348 due for 1976. On January 17, 1989, Eunice and Jerome entered into an indemnity agreement, as the involved IRS agents were well aware, in which he agreed to pay the 1976 deficiency and she agreed to enter into an installment payment plan with the IRS, although Jerome would actually make those payments, and she gave up any rights to the overpayments. Finally, on January 18, 1989, Eunice entered into an Installment Agreement with the IRS in which she agreed to pay $9,178.77 a month to pay a tax liability stated to be $53,348 plus interest. All this was pursuant to calculations furnished to the IRS on January 6, 1989, that the previous overpayments plus $53,348, plus $1,724.59 interest arising during the six-month installment payment period equalled the total amount due. In other words, Eunice and the IRS agreed to an installment plan for payment of the net amount due after application of the 1975, 1977 and 1978 overpayments to the 1976 liability.

The stage was set for liquidation of the 1976 liability and, indeed, Jerome did make, in a timely fashion, the payments Eunice was obligated to the IRS to have made pursuant to the Installment Agreement. However, instead of applying the overpayments to the 1976 liability the IRS issued three checks to Jerome and Eunice and mailed them to Jerome. The dates of the checks were July 7, 1989, July 21, 1989, and August 31, 1990. Jerome negotiated all three checks (we are not advised how he could have done so without Eunice's endorsement). The parties agree that Eunice was unaware of the refunds until much later and obtained nothing from them. Eventually the IRS, in July 1993, released the liens on Eunice's property. Then, apparently because it finally realized that the 1976 liability had not been fully liquidated because the overpayments had been refunded to Jerome rather than applied to the 1976 liability, the IRS on August 31, 1993, revoked the release and filed a new lien as well.

Plaintiff insists that the present liens are improper and that she is entitled to damages, not yet established, arising from the IRS failure to release those liens, pursuant to §7432 of the Internal Revenue Code. The IRS agreed to payment of the 1976 liability, she argues, by application of the overpayments and the installment payments to that liability, and it cannot later revive that liability because of its subsequent erroneous refunds. The IRS contends that it could have applied the overpayments to the 1976 liability but it had no statutory obligation to do so, that the only agreement to so apply them is in the Indemnity Agreement between Eunice and Jerome, to which the IRS was not a party, that the installment agreement required Eunice to pay until the liability was paid in full, and that the refunds were not erroneous because there were in fact overpayments for 1975, 1977 and 1978. It also argues, in its reply memorandum, that plaintiff is in reality seeking to estop the government, a concept of very narrow reach and not applicable here.

Turning to the last point first, plaintiff is not contending that she should be the beneficiary of some governmental error that reduces her tax obligation below that which lawfully should be imposed. She is asking only that full satisfaction of all tax obligations be recognized in the manner she, Jerome and the IRS contemplated. She is right for two reasons. One is that the IRS agreed to that arrangement. The calculation of the amount of the overpayments, the indemnity agreement and the Installment Agreement were all entered into on January 17 or 18, 1989, pursuant to correspondence with the IRS setting forth the arrangement for full satisfaction of the 1976 obligation by application of the overpayments and the periodic payments. The indemnity agreement, of which the IRS was fully aware, permitted the IRS and Jerome to so apply the overpayments without further action by Eunice. The Installment Agreement specifically recited that any refunds otherwise due would be applied to the tax liability, and the installment payments were to be for the amount necessary to make up the difference. The IRS cannot ignore interlocking agreements, by which it would be fully paid, just because it forgot about them when it sent out the refunds. Further, the IRS had in its hands all the funds necessary to extinguish the liability. While the factual circumstances of United States v. Wilkes [91-2 USTC ¶50,565 ], 946 F.2d 1143 (5th Cir. 1991) and Rodriguez v. United States [86-1 USTC ¶9289 ], 629 F.Supp. 333 (N.D. Ill. 1986) are somewhat different, we think the same principle is applicable: the parent of the entire amount (here by retention of the overpayments and the installment payments) extinguished the obligation, and it could not be revived by subsequent erroneous and unsolicited refunds.

And the refunds were erroneous, not because there were no prior overpayments but because they were not supposed to be refunded. The IRS has statutory discretion to apply or refund, but it cannot exercise that discretion so as to violate the arrangements it had properly and voluntarily accepted. Perhaps the IRS cannot now proceed against Jerome, and, if so, he has had an unwarranted windfall. That is not true of Eunice. She has done all that was expected of her, and the IRS cannot transfer to her the burden of a loss occasioned by its own mistakes. Plaintiff's motion for partial summary judgment is granted, with the IRS directed to release its liens, and the government's motion is denied.

 

 

In re Birl C. Street , Jr., Catherine M. Street , Debtors

U.S. Bankruptcy Court, Dist. Md. , at Rockville , 92-1-5502-PM, 3/11/94, 165 BR 408, 165 BR 408

[Code Secs. 6321 and 6323 ]

Tax liens: Tenants by the entirety: Bankruptcy.--

A tax lien on the survivorship interest of one of two tenants by the entireties could not be enforced against the couple's residence. The IRS was not a secured creditor because under state ( Maryland ) law, property owned by tenants by the entirety could be sold without regard to a lien against either tenant.

Ronald Schwartz, 2446 Reedie Dr. , Silver Spring , Md. 30902 , for debtors. Richard L. Gilman, Department of Justice, Washington , D.C. 20530 , for I.R.S.

MEMORANDUM OF DECISION

MANNES, Chief Judge:

Before the court is the debtors' objection to the claim filed by the United States of America for the Internal Revenue Service ("IRS"). The court adopts the parties' Proposed Stipulation of Facts (D.E. 40) (see Appendix attached). It is agreed that the IRS claims for the years 1986, 1987, and 1991 represent joint claims against both debtors. The parties further agree that the IRS also has a secured claim against Catherlene Street to the extent that the IRS liens attach to her interest in property in which the estate has an interest. There are two items for the IRS lien to adhere. The first is her interest as a tenant by the entirety of the parties' residence located at 3603 Daffney Court , Upper Marlboro, Maryland , and the second is her interest in two 401(k) plans claimed by her as exempt.

The court is unsure that the parties agree what issue is joined. This contested matter was started by the debtors' objection to the proof of claim of the Internal Revenue Service (D.E. 11) with six prayers for relief. Prayer 6 causes confusion--"that the debtors be granted such other relief as the Court deems appropriate and necessary." This is the traditional prayer for general relief filed in equity cases. It has no relevance to this contested matter. Perhaps this led the IRS to conclude in its reply to debtors' memorandum:

"Based on the foregoing, debtors' objection to the IRS' proof of claim insofar as it seeks a determination that the IRS' liens do not attach to Catherlene Street 's ERISA plan ought to be disallowed."

The parties are reminded that the bankruptcy discharge does not operate by itself to avoid the IRS liens. Such liens survive the closing of this case and retain whatever vitality they may have had going into the bankruptcy case. "[V]alid liens that have not been disallowed or avoided survive the bankruptcy discharge of the underlying debt." Estate of Lellock v. Prudential Ins. Co. of Am., 811 F.2d 186, 189 (CA3 1989) (footnote omitted), See also, In re Walls, 125 B.R. 908 (BC Del. 1991); Matter of Pierce, 29 B.R. 612, 614 (BC E.D.N.C. 1983); In re Nason, 22 B.R. 690 (BC Me. 1982). As to the lien creditor, the bankruptcy discharge extinguishes only one mode of enforcing a claim, proceeding against the debtor in personam. The in rem component of the claim remains. Johnson v. Home State Bank, 501 U.S. 78, 111 S.Ct. 2150, 2154-55 (1991). Debtors do not suggest that any grounds exist under 11 U.S.C. §545 for the avoidance of any statutory lien. Such an action requires the filing of an adversary proceeding.

Some historical recollection is useful. In a short per curiam opinion filed in the seminal case of Greenblatt v. Ford, 638 F.2d 14 (CA4 1981), affirming In re Ford, 3 B.R. 559 (BC Md. 1980), the Court of Appeals confronted the Maryland tenancy by the entireties. The court pointed out that if one of two tenants by the entirety filed a bankruptcy case, whatever interest that tenant had became a part of the bankruptcy estate. Id. That interest passes out of the estate by virtue of a claimed exemption. In Chippenham Hospital, Inc. v. Bondurant, 716 F.2d 1057, 1058 (CA4 1983), a case under the Bankruptcy Code, the Fourth Circuit adhered to its precedent under the Bankruptcy Act of 1898, Phillips v. Krakower, 46 F.2d 764, 765-66 (CA4 1931), and upheld the right of a creditor of a debtor and nonfiling spouse to get relief from the automatic stay of 11 U.S.C. §362(a) to reach property held by the entireties. Later, in Sumy v. Schlossberg, 777 F.2d 921 (CA4 1985), the Fourth Circuit pointed out that under 11 U.S.C. §363(h) the trustee may sell property held by a debtor as a tenant by the entirety with a non-debtor spouse for the benefit of creditors of both the filing tenant and the non-filing tenant, subject however to the protections of that subsection. No one argues that this case is an appropriate one for such sale. Again, such action would have to be commenced by way of an adversary proceeding. In the absence of Sumy facts, the trustee cannot reach entireties property without the joinder of both tenants.

For a thorough analysis of the relationship of bankruptcy and entireties law in Maryland and elsewhere, one may look to Arnold, Tenancy by the Entirety and Creditors Rights in Maryland, IX Md.L.Rev. 291 (1948), and Craig, An Analysis of Estates by the Entirety in Bankruptcy, 48 Am.Bankr.L.J. 255 (1974), and the numerous cases analyzed by Professor Arnold, including: Jordan v. Reynolds, 105 Md. 288, 66 A. 37 (1907); Frey v. McGaw, 127 Md. 23, 95 A. 960 (1915); and Annapolis Banking & Trust Co. v. Smith, 164 Md. 8, 164 A. 157 (1933), among others.

What the IRS has is a lien on the survivorship interest of one tenant, Catherlene Street . That lien cannot he enforced against property held by the entireties. Cf. Phillips v. Krakower, 46 F.2d 764, 765 (CA4 1931). In Maryland , this concept operates to protect the entireties property from judgments against one of the two entireties tenants as well to strike down leases or mortgages placed by one of two such tenants. State v. Friedman, 283 Md. 701, 393 A.2d 1356, 1358-59 (1978); Fox v. Fraebel, 140 Md. 54, 116 A. 876, 877 (1922); Arbesman v. Winer, 298 Md. 282, 468 A.2d 633, 637-39 (1983). Under existing Maryland law, the Streets may dispose of the property without regard to a lien against one. Watterson v. Edgerly, 40 Md. App. 230, 388 A.2d 934, 939 (1978); Hertz v. Mills 166 Md. 492, 171 A. 709, 711 (1934). Logic dictates the same result as to statutory liens.

Therefore, the IRS has no interest as a secured creditor in 3603 Daffney Court , Upper Marlboro, Maryland . Pursuant to the parties' Stipulation the court will not consider whether the IRS has a claim secured by the debtor Catherlene Street 's retirement plans. In any event, any interest in these plans are not includable as property of debtors' bankruptcy estate. Patterson v. Shumate, -- U.S. --, 112 S.Ct. 2242, 2247 (1992); In re Moore , 907 F.2d 1476 (CA4 1990); In re Rueter, 11 F.3d 850 (CA9 1993). Therefore, the allowed claim of IRS is not secured by a lien on property in which the estate has an interest. 11 U.S.C. §506. Its lien against the interest of Catherlene Street remains.

An order will be entered in accordance with the foregoing.

APPENDIX

STIPULATION OF FACTS

(1) The Internal Revenue Service has a secured claim only as to Catherlene Street ;

(2) The Internal Revenue Service's claim for tax years 1980 through 1984 are [sic] solely against Catherlene Street . The Internal Revenue Service's claim for tax years 1986, 1987, and 1991 are [sic] joint claims against both debtors;

(3) The Internal Revenue Service has a secured claim against Catherlene Street for tax years 1980 through 1984, 1986, and 1987, only to the extent that the Internal Revenue Service's liens attach to her interest in property, if any, in which the estate has an interest, including her undivided interest in property which debtors hold as tenants by the entirety. To the extent that Catherlene Street 's interest in the property in which the estate has an interest is less than the IRS' claim for tax years 1980 through 1984, 1986 and 1987, the IRS' claim is unsecured (general). In this regard, the liens filed against Catherlene Street are void as to the property in which the estate has an interest.

(4) The debtor's [sic] own tenancy by the entireties property in Prince George 's County consisting of a residence, with equity in the amount of $17,066.69, and household goods and furnishings valued at $4,668.00.

 

 

Walton G. Ezell and Tresa H. Ezell, Plaintiffs v. United States of America, et al., Defendants Norma Ford Younger, Fordland Farms, Inc., Plaintiffs v. United States of America, et al. Defendants

U.S. District Court, West. Dist. Ky., Paducah Div., Civ. 84-0318-P(J), Civ. 85-0081-P(J), 8/16/89

[Code Sec. 6321 ]

Lien for taxes: Property rights of nondelinquent spouse and unrelated parties.--An individual had no property interest in several farms at the time the IRS assessed tax deficiencies against him and recorded notices of liens on the property. A prior court judgment that awarded the farms to the individual's former wife pursuant to the couple's divorce settlement divested the husband of his ownership interest, and the wife's filing of a lis pendens gave the IRS notice of the award. Therefore, the tax lien was subordinated to the interests of third parties who purchased the farms from the wife.

MEMORANDUM OPINION AND ORDER

JOHNSTONE, Chief Judge:

This matter is before the court on cross motions for summary judgment filed by defendant Internal Revenue Service and defendant Federal Land Bank of Louisville (Land Bank). Plaintiffs Walton G. Ezell, Tresa H. Ezell, Norma Ford Younger and Fordland Farms, Inc. have joined in Federal Land Bank's motion.

On May 20, 1977, Loyd and Norma Ford obtained a divorce in the Christian County Circuit Court. Prior to the divorce, they had owned several farms as tenants by the entirety. The court awarded the farms to Mrs. Ford. She filed a lis pendens notice three days later. Mr. Ford appealed the property award to the Kentucky Court of Appeals. That court affirmed in part and reversed in part. On remand, the circuit court again awarded the farms to Mrs. Ford. The court of appeals affirmed. Discretionary review was denied.

On June 4, October 29 and December 3, 1979, while the second appeal was pending, the IRS assessed tax liabilities against Loyd. It recorded notices of federal tax liens on January 16, 1980 and April 4, 1980. On November 4, 1980, the Master Commissioner recorded a deed, confirming Mrs. Ford's title to the farms.

Mrs. Ford conveyed one of the farms to plaintiff Fordland and one to the Ezells. The Ezells mortgaged their farm to Federal Land Bank. On or about June 18, 1984, the IRS levied on the farms of Ezell and Fordland to collect the taxes assessed against Mr. Ford.

The federal tax lien arose pursuant to 26 U.S.C. §6321 , which provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

State law dictates what property belongs to taxpayers when taxes are assessed. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 80 S.Ct. 1277 (1960). The court's judgment of January 3, 1979, awarding the farms to Mrs. Ford was final and conclusive. See Brown v. Commonwealth, 243 S.W.2d 885, 886 ( Ky. 1951); McCormack v. Moore , 117 S.W.2d 952, 957 ( Ky. 1938). The judgment divested Loyd of his ownership interest in the farms. See Faris v. Goins, 13 S.W. 2 ( Ky. 1890). Thus, he had no interest, save the bare legal title, when the IRS subsequently assessed tax deficiencies against him and recorded the tax liens. The filing of the lis pendens by Mrs. Ford gave the IRS notice that the farms had been awarded to her. Ky. Rev. Stat. 382.440(1) provides:

No action, cross-action, counterclaim, or any other proceeding . . . filed in any court of this state, in which the title to, or the possession or use of, or any lien, tax assessment or charge on real property, or any interest therein, is in any manner affected or involved, nor any order of judgment therein, . . . shall in any manner affect the right, title or interest of any subsequent purchaser, lessee or encumbrancer of such real property, or interest for value and without notice thereof, except from the time there is filed, in the office of the County Clerk of the county in which such real property or the greater part thereof lies . . .

Thus, the lien asserted by the IRS is subordinated to the interest of Fordland and the Ezells who purchased the property from Mrs. Ford.

Furthermore, under Kentucky law equity requires that the judgment of January 3, 1979, be honored. Equity regards as done that which ought to have been done. Munday v. Munday, 687 S.W.2d 143, 144 ( Ky. 1985); Johnson v. Potter, 433 S.W.2d 358, 362 ( Ky. 1968).

This case screams for the application of equity. At a pretrial conference, it was undenied that Mr. Ford's tax liability would be paid upon the conclusion of the bankruptcy proceedings. It would simply be unjust for Mrs. Ford to bear the burden of her former husband's tax liabilities under these facts.

The motion of Federal Land Bank, Fordland, Mrs. Ford and the Ezells for summary judgment is GRANTED.

IT IS SO ORDERED.

 

 

Dorothy Saligoe Schmit, Plaintiff-Appellee v. United States of America , Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 88-15555, 2/16/90, Affirming a District Court decision, 89-1 USTC ¶9303 , 688 F.Supp. 1466

[Code Sec. 6321 ]

Lien for taxes: Property rights of nondelinquent spouse.--A lien against the property of a delinquent taxpayer was not valid or enforceable against a single-family residence that was and always had been the sole and separate property of the taxpayer's former wife. Although Nevada law presumed a gift of one-half of such property's value when the property was put in the names of both husband and wife, the presumption was overcome by undisputed evidence that the wife had acquired the property with separate funds and had scrupulously used separate funds to make all payments on the property.

Edward J. Hanigan, Edwards, Kolesar, Toigo & Sewell, Chartered, 3320 W. Sahara Ave. , Las Vegas , Nev. 89102 , for plaintiff-appellee. James I.K. Knapp, Acting Assistant Attorney General, Department of Justice, Washington , D.C. 20530 , for defendant-appellant.

Before HALL, BRUNETTI and NOONAN, JR., Circuit Judges.

ORDER

Appellant's request for publication pursuant to Circuit Rule 36-4 is granted. The memorandum disposition filed December 15, 1989 is redesignated as an opinion by Judge Brunetti.

OPINION

BRUNETTI, Circuit Judge:

Plaintiff-Appellee Dorothy Schmit ("Schmit") brought an action in the federal district court pursuant to I.R.C. §7426 to enjoin Defendant-Appellant United States from levying against her home for unpaid taxes and to adjudge the tax lien wrongful and order it released. The taxes are owed by Schmit's now deceased former husband, Joseph Saligoe ("Saligoe").

Schmit's home was purchased entirely with Schmit's separate property, but title was recorded in the name of Schmit and her husband as joint tenants. In 1980, Schmit and her husband were divorced, and the state divorce court ruled that the home was primarily Schmit's separate property and awarded the home to her. On January 24, 1986, the Nevada court entered Amended Findings of Fact, Conclusions of Law, and Decree of Divorce Nunc Pro Tunc and held that the property "was and is the sole and separate property" of Schmit.

On the basis of stipulated facts contained in the proposed joint pretrial order, the federal district court agreed with the state court that the home was always Schmit's separate property and granted Schmit's motion for summary judgment. The United States appeals, arguing that under 28 U.S.C. §1738 the district court improperly gave issue preclusive effect to the state court judgment.

Appellee's motion to supplement the record with the proposed joint pretrial order is granted because the district court relied on the order in making its decision.

We review the district court's grant of summary judgment de novo. Kruso v. International Telephone & Telegraph Corp., 872 F.2d 1416, 1421 (9th Cir. 1989). This court may affirm on any ground that appears from the record before the district court, whether or not the district court relied on it. Soranno's Gasco, Inc. v. Morgan, 874 F.2d 1310, 1313 (9th Cir. 1989). Thus, we need not decide whether under 28 U.S.C. §1738 the district court properly gave issue preclusive effect to the state court judgment, since we can affirm on other grounds.

Although the government can levy upon jointly owned property to collect taxes, the government's lien under I.R.C. §6321 attaches only to the interest owned by the delinquent taxpayer. United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 691 (1983). Whether the delinquent taxpayer has an interest in the property, and the extent of that taxpayer's interest, is governed by state law. Id. at 683; Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13 (1960).

Under Nevada law, a presumption of gift of one-half of the property's value arises where a spouse uses separate funds to acquire property in the names of the husband and wife as joint tenants. Campbell v. Campbell, 101 Nev. 380, 705 P.2d 154, 155 (1985); Gorden v. Gorden, 93 Nev. 494, 569 P.2d 397, 398 (1977). However, this presumption can be overcome by clear and convincing evidence that no gift was intended. Id.

In the instant case, the parties stipulated that Schmit initially acquired the property using only separate funds. Additionally, the undisputed evidence shows that Schmit was very careful during the marriage to maintain a separate property bank account, and to make all monthly payments on the property from this account. The United States has offered no evidence supporting its position that the property was partially owned by Saligoe. These undisputed facts rebut the presumption of gift by clear and convincing evidence.

Like the Nevada state court, we hold that Schmit's home was always entirely her separate property under Nevada law. Regardless of the form of record title, Saligoe never had any actual interest in Schmit's home. Thus, the government's lien never attached to the property, and the government cannot levy upon the property.

AFFIRMED.

 

 

Internal Revenue Service, Plaintiff v. Donald Gaster and Mary Ann Gaster, Defendants v. Ninth Ward Savings Bank, FSB, Third-Party Defendant

(CA-3), U.S. Court of Appeals, 3rd Circuit, 94-7195, 94-7196, 12/5/94, Affirming, reversing and vacating an Unreported District Court decision

[Code Sec. 6321 ]

Lien for taxes: Property not subject to lien: Nondelinquent spouse, property rights of.--The IRS was not entitled to levy against a bank account to enforce a judgment for tax deficiency where the taxpayer against whom the deficiency was determined could not unilaterally withdraw funds from the account under state (Delaware) law. The taxpayer, his wife and their son owned the bank account jointly and each owner had been allowed to make unilateral withdrawals under the original titling of the signature card. However, the taxpayer changed the signature card before the levy was issued to require both his signature and that of his wife or the single signature of his son.

Gregory M. Sleet, United States Attorney, Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, William S. Estabrook III, Alice L. Ronk, Department of Justice, Washington, D.C. 20530, for plaintiff. Peter A. Mardinly, Paul, Mardinly, Durham , James, Flandreau & Rodger, 320 W. Front St. , Media , Pa. 19063 , for defendants. William J. Marsden, Potter, Anderson & Corroon, 350 Delaware Tr. Bldg., Wilmington, Del. 19899-0951, for third-party defendant.

Before: BECKER and COWEN, Circuit Judges and POLLAK, District Judge. ^***

OPINION OF THE COURT

BECKER, Circuit Judge:

This appeal from a judgment of the District Court for the District of Delaware primarily presents the question whether the Internal Revenue Service ("IRS") had the right to levy pursuant to 26 U.S.C. §6321 on a bank account at the Ninth Ward Savings Bank ("the Bank") in Wilmington, Delaware, owned jointly by appellants Donald Gaster and his wife Mary Ann Gaster, along with their son Bryan Gaster. The IRS levied against the account in order to enforce a judgment for a tax deficiency obtained against Donald Gaster in his individual capacity. Donald Gaster died during the pendency of this appeal, and his estate has challenged the propriety of the IRS levy. Alleging that the property which was levied upon was held by her and Donald Gaster (the "Gasters") as tenants by the entireties, Mary Ann Gaster claimed an interest in property seized for another's taxes under 26 U.S.C. §7426 . (Bryan Gaster has waived all interest in the bank account and is not a party.)

It is unquestioned that the IRS can properly levy on the account if Donald Gaster, the delinquent taxpayer, had the unilateral right to withdraw money from the joint bank account under Delaware law. The district court determined, following a bench trial, that Donald Gaster had a unilateral right to withdraw funds from the account and hence the IRS could properly levy on the account. We conclude, however, that the district court erred and that pursuant to the Gasters' contract with the Bank and applicable Delaware law, both the signature of Donald and Mary Ann Gaster were required in order to withdraw funds from the account. We therefore hold the IRS levy to be improper and reverse the judgment of the district court with the direction to dissolve the levy.

I.

On June 25, 1985, the Gasters opened an account at the Bank to deposit the proceeds from the sale of an apartment building in Secane , Pennsylvania , which they had held as tenants by the entireties. When they opened the account, the Gasters transferred a portion of it to their son, titling in the alternative the account's original signature card and six-month certificate of deposit ("CD")--"Donald Gaster or Mary Ann Gaster or Bryan Gaster." It is undisputed that the titling of a signature card in the alternative allows for unilateral withdrawal from the account by each owner. The district court found that the Gasters titled the signature card in the alternative--which permitted access to the account with one signature--because Donald Gaster would be unavailable due to the pendency of serious surgery.

On the following day, June 26, 1985, the Supreme Court decided United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 105 S. Ct. 2919 (1985), holding that the determination whether a delinquent taxpayer has an interest in a joint bank account subject to a federal tax lien turns on whether the delinquent has a unilateral right under the applicable state law to withdraw funds from the account. Shortly after the publication of the National Bank of Commerce opinion, the Gasters became aware of its holding and resolved to protect their jointly-held property from an IRS levy that could arise from an IRS judgment obtained against Donald Gaster on May 12, 1977. To effectuate this intent, Donald Gaster went to the Bank in December 1985, and retitled the signature card to read "Donald Gaster and Mary Ann Gaster or Bryan Gaster," so that more than one signature would be required in order for Donald Gaster to withdraw funds from the jointly owned account. Over the next five years (until and including the time of the IRS levy on August 24, 1990) all correspondence from the Bank with regard to the account referred to the account in this conjunctive form.

From the time the account had been established, the Bank sent a savings transfer form to the Gasters every six-months to authorize the roll-over of the proceeds from an expiring CD for the purchase of a new CD. Even after the change in the signature card, Mary Gaster would return the form, with her signature alone, on behalf of both herself and her husband. With the return of each transfer form, the account's title remained conjunctive. No withdrawals of any kind have ever been made from the account.

On August 24, 1990, the IRS levied on the account pursuant to 26 U.S.C. §6321 to enforce the 1977 tax deficiency judgment against Donald Gaster. In response to this levy, the Bank filed a complaint in interpleader against the Gasters and the IRS in the Delaware Superior Court. The IRS removed the interpleader action to the District Court for the District of Delaware, 28 U.S.C. §1444 , invoking jurisdiction pursuant to 28 U.S.C. §§1340 and 1345 and also 26 U.S.C. §§7402 and 7403 . As we have noted, the district court held that the IRS could levy on the account, deciding that Donald Gaster had a unilateral right to withdraw the funds. The court concluded in a memorandum opinion that Donald Gaster's subsequent modification of the account signature card was ineffective, given that Donald Gaster alone formally executed the change. This appeal followed.

While we review the district court's findings of fact under a clearly erroneous standard, Sheet Metal Workers Int'l Ass'n Local 19 v. 2300 Group, Inc., 949 F.2d 1274, 1278 (3d Cir. 1991), the court's conclusion that Donald Gaster had an unrestricted unilateral right to withdraw the funds under Delaware law is a legal question over which we exercise plenary review. Borse v. Piece Goods Shop, Inc., 963 F.2d 611, 613 (3d Cir. 1992); High v. Balun, 943 F.2d 323, 325 (3d Cir. 1991).

II.

A.

Section 6321 of the Code, 26 U.S.C. §6321 , provides: "[i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

In National Bank of Commerce, the Supreme Court addressed the question of when a delinquent taxpayer's interest in a joint bank account constitutes "property" or "rights to property" pursuant to §6321 . The Court concluded that a delinquent taxpayer has such an interest in property on which the IRS may levy when "under state law, a taxpayer has the unrestricted right to withdraw funds from the account." National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 725-726, 105 S.Ct. at 2927. Whether the delinquent has such a right to the funds is governed by state law, since "state law controls in determining the nature of the legal interest which the taxpayer had in the property." Id. at 722, 105 S.Ct. at 2925 (internal quotation omitted) ("This follows from the fact that the federal statute creates no property rights but merely attaches consequences, federally defined, to rights created under state law." (internal quotation omitted)). Thus, in deciding whether the IRS may properly levy on the jointly-owned account at the Bank, we must determine whether the tax delinquent, Donald Gaster, had an unrestricted right to the funds in the account under Delaware law. Pursuant to National Bank of Commerce, before considering Mary Ann Gaster's cross-claim for the return of her ownership interest in the proceeds of the bank account under 26 U.S.C. §7426 , we are required to determine the propriety of the IRS levy. ¹ National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 728, 105 S.Ct. at 2928 ("[A] levy action settles no rights in the property subject to seizure." (internal quotation omitted)). If the IRS levy is determined to be proper, "one claiming an interest in property seized for another's taxes may bring a civil action [under §7426 ] against the United States to have the property or the proceeds of its sale returned." Id. Alternatively, §6343(b) provides an administrative proceeding to allow a claimant a remedy for the return of seized property. Treas. Reg. §301.6343-1(b)(2) , 26 C.F.R. §301.6343-1(b)(2) (1984). It is only under these post-seizure proceedings that the ownership form of the property becomes relevant.

In sum, as the Court made clear in National Bank of Commerce, the propriety of the IRS levy turns only on right to withdraw, not the ownership form of the bank account. The ownership form determines only the claimant's share of the seized property under her post-seizure claim. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 728 n.11, 105 S.Ct. at 2928 n.11. Thus, whether or not Donald and Mary Ann Gaster owned their share of the account as tenants by the entireties is relevant only if we first determine that the IRS levy was proper.

Before proceeding to that determination, it is important to note that in National Bank of Commerce the Supreme Court acknowledged that if money is held by a husband and wife in a joint bank account as tenants by the entireties ² under applicable state law "the Government could not use the money in the account to satisfy the tax obligations of one spouse," notwithstanding the propriety of the levy. National Bank of Commerce [85-2 ustc ¶9482 ], 472 U.S. at 729 n.11, 105 S.Ct. at 2928 n.11 (citing Raffaele v. Granger [52-1 ustc ¶9321 ], 196 F.2d 620, 622 (1952), which recognizes that if an account is held as tenants by the entireties under Pennsylvania law the IRS's "attempt to deal separately with or dispose of the interest of one is in derogation of the other spouse's ownership of the entire property and, therefore, legally ineffective"). Similarly under Delaware law, the IRS would not be entitled to the money in the account if the Gasters owned the account as tenants by the entireties since both Donald and Mary Ann Gaster would be "seized, not merely of equal interests, but of the whole estate during their lives and the interest of neither of them can be sold, attached or liened except by the joint act of both husband and wife." Steigler v. Insurance Co. of North America, 384 A.2d 398, 400 (Del. 1978) (citation omitted).

Consequently, if a tenancy by the entireties existed, Mary Ann Gaster could successfully recover the entire amount in the account pursuant to her §7426 (property claim) action. However, while it appears that the Gasters owned their share of the account ³ from its establishment in June of 1985 as tenants by the entireties under Delaware law, ⁴ as we have stated, we need not address this issue if we first determine that the IRS levy was improper.

B.

The propriety of the IRS levy depends on whether Donald Gaster possessed a unilateral right of withdrawal as determined "by his contract with the bank, as well as by the relevant [ Delaware ] statutory provisions." National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 723, 105 S.Ct. at 2926. If Donald Gaster had a unilateral right to withdraw funds from the account, the IRS levy was proper; if he did not have such a right, the IRS levy was improper. It is not disputed that when the joint account at the Bank was initially established, Donald Gaster had a unilateral right to withdraw funds from the account, given the original alternative form of the account signature card. The issue, however, is the ability of Donald Gaster to unilaterally withdraw funds at the time of the IRS levy, after his change in the signature card, the efficacy of which, as we explain infra, is clear. ⁵

The record provides uncontested testimony that Bank policy would have required the signature of both Donald and Mary Ann Gaster (or, alternatively, the single signature of Bryan Gaster) in order to make a withdrawal from the account, given the conjunctive signature card. The fact that Bryan Gaster could have unilaterally withdrawn the funds is not relevant to our analysis since under National Bank of Commerce, we must determine whether the delinquent taxpayer had a right, acting alone, to withdraw funds from the account. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 728, 105 S.Ct. at 2928.

The Bank has stated that it would have honored a withdrawal from this particular savings account by issuing a check payable as the account was titled--"Donald Gaster and Mary Ann Gaster or Bryan Gaster." If such a check were issued, Delaware law would require the signature of both Donald and Mary Ann Gaster (or the sole signature of Bryan Gaster) in order to negotiate the check. Delaware has enacted the relevant portion of Article 3 of the Uniform Commercial Code which requires the signature of each payee when a check is issued in the conjunctive form.

An instrument payable to the order of two or more persons: . . . (b) if not in the alternative is payable to all of them and may be negotiated, discharged or enforced only by all of them.

6 Del. C. §3 -116(b) (emphasis added). Therefore, as a matter of Delaware law, both the signatures of Donald and Mary Ann Gaster were required to withdraw funds from the savings account. Given that his wife's signature was also required, the delinquent taxpayer, Donald Gaster, did not have the ability to withdraw funds unilaterally from the account; correspondingly, the IRS levy was improper.

C.

Notwithstanding the fact that representatives of the Bank testified that they would require the signatures of both Donald and Mary Ann Gaster to actually make a withdrawal from the account, the district court refused to recognize the legal effect of the change in the signature card since Mary Ann Gaster never executed a document evidencing her assent to the change. We disagree with the significance the district court placed on the failure of Mary Ann Gaster to formally demonstrate her consent.

We may conclude that Donald Gaster had the actual authority to act as an agent of his wife in this particular instance if he was acting consistent with a manifestation of consent by Mary Ann Gaster. An agency relationship " 'results from the manifestation of consent by one person to another that the other shall act on his behalf . . . .' " Cox v. Deon, 1994 Del. Super. LEXIS 357, at *9 (July 29, 1994) (adopting the definition of Restatement (Second) of Agency §1 ); see also Concors Supply Co. v. Giesecke, Int'l, Ltd., 1990 Del. Super. LEXIS 87, at *5 (March 5, 1990). Consent sufficient to establish an agency relationship exists not only where there is prior authorization, but also where a principal ratifies acts done on her behalf after the fact. McCabe v. Williams, 45 A.2d 503, 505 (Del. 1944); Hirzel Funeral Homes, Inc. v. Equitable Trust Co., 83 A.2d 700, 701 (Del. Super. Ct. 1951); Restatement (Second) of Agency §100 & cmt. a ("The affirmance of the act of an unauthorized person by the purported principal, all conditions for ratification being fulfilled, normally has the same effect as if such person had been originally authorized."). Thus, the change in the signature card is legally binding if Mary Ann Gaster was aware of, and ratified, the change done, in part, on her behalf.

At trial, Mary Ann Gaster testified that even though she failed to explicitly authorize Donald Gaster's actions before the fact, she manifested a general consent to his acting on her behalf.

Q: Mrs. Gaster, when did you become aware that the accounts at Ninth Ward Savings Bank and Loan had been changed from Donald or Mary Ann Gaster to Donald and Mary Ann Gaster?

A: I guess after Donald did it. Being married to a man for 40 years, I trust anything he does, I agree with.

Q: He did not consult you before he did this?

A: I don't feel he would have to--I mean, what's his is mine, and what's mine is his.

In addition to her acknowledging her ratification of his actions at trial Mary Ann Gaster was aware of and failed to object to the change that her husband made in the signature card for a period of more than five years after the change in the card and before the time of the levy. She signed on multiple occasions the saving transfer forms which reinvested the funds in an account where title was consistent with the change in the signature card--"Donald and Mary Ann Gaster or Bryan Gaster." Given these uncontested facts, including those that demonstrate Mary Ann Gaster's retroactive consent to the change in the signature card, we conclude that as a matter of Delaware law Mary Ann Gaster ratified the change. See Restatement (Second) of Agency §83 (1958) (allowing a principal to ratify an agent's unauthorized prior act if he knows about it and fails to take affirmative steps to disavow the act).

In sum, we conclude that the change in the card was legally effective, since when Donald Gaster executed the change in the signature card he was acting as the agent of his wife under Delaware law as to her share of the account. Buttressing this conclusion is the fact that Delaware law, in general, considers a husband and wife as agents of the other when dealing with a joint account. See Hoyle v. Hoyle, 66 A.2d 130, 132 (Del. Ch. 1949). ⁶

D.

In addition to concluding that the change in the signature card was ineffective, the district court also appeared to rely for its determination that Donald Gaster had unilateral access to the account on the fact that Mary Ann Gaster at times unilaterally executed saving transfers on the account. Because only Mary Ann Gaster signed the saving transfer forms, the government contends that Donald Gaster really had a unilateral right to withdraw funds from the account, the Gasters' interests in the account being identical. We disagree. A savings transfer is not a withdrawal, since no money leaves the bank. See Black's Law Dictionary 1104 (6th ed. 1990) (defining withdrawal as the "removal of money or securities from a bank or other place of deposit" (emphasis added)). The ability to remove funds from the bank is clearly the touchstone under National Bank of Commerce. See National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 723, 105 S. Ct. at 2926 (focusing on whether the delinquent "had the unqualified right to withdraw the full amounts on deposit in the joint accounts without notice to his co-depositors" (emphasis added)). At trial, Bank officials clarified this distinction, stating that while the conjunctive signature card required the signature of both Donald and Mary Ann Gaster in order for either to have made a withdrawal, two signatures were not required to make a savings transfer, since the signature card only governed withdrawals. ⁷

III.

In sum, we conclude that pursuant to the Gasters' contract with the Bank and applicable Delaware law, both the signature of Donald and Mary Ann Gaster were required in order to withdraw funds from the account. Accordingly, we hold the IRS levy to be improper and will therefore reverse the judgment of the district court with the direction to dissolve the levy. In addition, we will vacate as moot the judgment in favor of the IRS as to Mary Ann Gaster's §7426 cross-claim, and will affirm the district court's judgment as to the Gasters' claim against Ninth Ward Savings Bank. ⁸

^*** Honorable Louis H. Pollak, United States District Judge for the Eastern District of Pennsylvania, sitting by designation.

¹ The district court found that Mary Ann Gaster's §7426 claim to one-half of the funds, in the alternative, as a tenant in common (as opposed to as a tenant by the entireties) was time barred in that the claim was not made within nine months of the date of the levy as required by 26 U.S.C. §6532(c) . On appeal, looking to the pre-trial conduct and communication, the IRS has conceded that Mary Ann Gaster did in fact assert her §7426 claim within nine months of the levy. Given that we find the IRS levy was improper, we never reach the validity of Mary Ann Gaster's §7426 claim to one-half of the account as a tenant in common.

² A tenancy by the entireties "is created between a husband and wife and by which together they hold title to the whole with right of survivorship so that, upon death of either, [the] other takes [the] whole. . . . Neither party can alienate or encumber the property without the consent of the other." Black's Law Dictionary 1022 (6th ed. 1990).

³ The question of the ownership form of Donald and Mary Ann Gaster's share of the account is not affected by the fact that the account was owned along with their son Bryan. "In jurisdictions where tenancies by the entirety have not been abolished, a tenancy by the entirety may be created [between] three or more persons, two of whom are husband and wife--e.g., by a transfer to H (husband) and W (wife), and X, in which case H and W take an undivided one-half interest as tenants by the entirety, and X takes a one-half undivided interest as tenant in common vis-a-vis H and W." Robert A. Cunningham et al., The Law of Property 204 (2d ed. 1993).

⁴ The district court made a factual finding that, when the account was initially established, the Gasters desired that only one signature be required to access the account because of Donald Gaster's poor health. From that fact, the court concluded that the account was established as a tenancy in common. In light of its finding that the change in signature card was legally ineffective, see discussion infra, the court also held that the account remained a tenancy in common even after Donald Gaster changed the signature card to the conjunctive. While we need not, given our holding, address the question of the ownership form of the account, it does appear that under Delaware law Donald and Mary Ann Gaster's share of the account was initially established as a tenancy by the entireties. That is because in addition to the presumption, recognized by the district court, in favor of a tenancy by the entireties when a joint bank account is opened by a husband and wife in the conjunctive form, Widder v. Leeds, 317 A.2d 32, 34 (Del. Ch. 1974), a more general presumption exists in favor of a tenancy by the entireties under Delaware law. Property held by husband and wife in " Delaware and the majority of other jurisdictions as well" is "presumptively held by the entireties." See William M. Young v. Tri-Mar Asso. Co. , 362 A.2d 214, 215 (Del. Super. Ct. 1976). The fact that the Gasters originally established the account in the alternative to allow for unilateral withdrawal would not negate a finding that the account was held as tenants by the entireties. Under Delaware law a joint bank account, though in such form as to permit either husband or wife to draw, is a tenancy by the entireties, in the absence of evidence to the contrary. Hoyle v. Hoyle, 66 A.2d 130, 132 (Del Ch. 1949); see also In re Griffith , 93 A.2d 920, 922 (Del. Ch. 1953). In addition, Delaware courts have discounted the significance of bank signature cards in determining the presence of a tenancy by the entireties. See In re McCall, 398 A.2d 1210, 1215 (Del Ch. 1978) ("The purpose of such a card being not for the purpose of establishing ownership but only to guard against a payment to an unauthorized person.").

Moreover, the district court acknowledged that the funds in the account at Ninth Ward Bank originated from the sale of the Secane apartment building, owned by the Gasters as tenants by the entireties. In Delaware proceeds of property held by a husband and wife as tenants by the entireties will continue to be held as tenants by the entireties absent clear evidence of a contrary intent. Moser v. Moser, 287 A.2d 398, 399 (Del. 1972); Widder, 317 A.2d at 35 ("[D]irect derivatives of entireties property prima facie remain entireties property, even if taken in the name of one spouse alone."); Tri-Mar, 362 A.2d at 216. Given this strong presumption, it appears Mr. and Mrs. Gaster would continue to hold their share of the account as tenants by the entireties.

⁵ The district court concluded that Donald Gaster changed the signature card at the bank in light of the Court's opinion in National Bank of Commerce in order to avoid a possible IRS levy to collect an existing deficiency judgment. Notwithstanding this factual finding, the district court did not consider and the IRS has not argued that Donald Gaster's change in the signature card, in order to deny the IRS the ability to levy on the account, constituted a fraudulent conveyance under Delaware law. Arguably, such action could be viewed as a fraudulent conveyance under 6 Del. C. §§1304 , 1307, in that Mr. Gaster altered the signature card in order to avoid collection on an existing IRS judgment. While the case at bar presents a slightly different question, Delaware case law has found a fraudulent conveyance when a spouse alters the ownership form of property to a tenancy by the entireties in order to avoid a judgment creditor. Harrington v. Hollingsworth, 1994 Del. Ch. LEXIS 101 (July 6, 1994); Givens v. Givens, 1986 WL 2270 ( Del. Super. 1986).

We cannot decide whether Donald Gaster's conduct establishes a fraudulent conveyance under Delaware law, however, since the IRS's failure to raise the issue either in the district court or on appeal constitutes a waiver. See Brenner v. Local 514, United Brotherhood of Carpenters, 927 F.2d 1283, 1298 (3d Cir. 1991) ("It is well established that failure to raise an issue in the district court constitutes a waiver of the argument."); International Raw Materials v. Stauffer Chem. Co., 978 F.2d 1318, 1327 n.11 (3d Cir. 1992) ("We have repeatedly emphasized that failure to raise a theory as an issue on appeal constitutes a waiver because consideration of that theory would vitiate the requirement of the Federal Rules of Appellate Procedure and our own local rules that, absent extraordinary circumstances, briefs must contain statements of all issues presented for appeal, together with supporting arguments and citations." (internal quotation omitted)), cert. denied, 113 S.Ct. 1588 (1993).

⁶ In Hoyle, the Delaware Chancery Court was presented with the question whether a husband and wife could own a joint bank account as tenants by the entireties notwithstanding the fact that both spouses had the unilateral right to withdraw funds from the account. The court determined that a tenancy by the entirety could exist even with the unilateral right of withdrawal, since each spouse can be viewed as acting as the agent of the other with regard to a joint account.

It should be noted that while the bank accounts here were in the names of the husband and wife, the money could be withdrawn by either the husband or the wife. The fact that the money could be withdrawn by either spouse has been held in Pennsylvania not to defeat a finding of an estate by the entirety in such money because in such a situation each spouse is considered to be the agent of the other. This is deemed to satisfy the so-called "control" unity requirement of such an estate. See Madden v. Gosztonyi Savings & Trust Co., 331 Pa. 476, 200 A. 624, 117 A.L.R. 904 [(1938)]; Berhalter v. Berhalter, 315 Pa. 225, 173 A. 172, 173 [(1934)]. I accept and adopt the reasoning and conclusion of the Pennsylvania Supreme Court in this respect.

Hoyle, 66 A.2d at 132 (emphasis added). Subsequent Delaware cases have limited the finding of an agency relationship in the event that one spouse becomes incapacitated, In re Griffith, 93 A.2d at 922-23 ("The present case is distinguished from the Hoyle case in that . . . the other tenant by the entireties, had been adjudicated an insane person . . . . The fact that the husband's mental or physical condition was such that he was incapable of transacting business would not constitute the wife as general agent or vest her with a general or unlimited authority as to all his affairs."); Barrows v. Bowen, 1994 Del. Ch. LEXIS 63, at *7 ("This disinclination to assume agency or natural guardianship is designed to encourage formal judicial guardianship adjudications which protect the interests of possibly impaired person."). However, the Hoyle court's finding of an agency relationship, as between competent spouses in dealing with a joint bank account, has gone uncontested.

⁷ As the Restatement (Second) of Contracts §223 makes clear, course of dealing plays a role in contract interpretation. Correspondingly, a different case might be presented if, notwithstanding the conjunctive signature card and stated bank policy, the Gasters had a practice of making unilateral withdrawals which were honored by the Bank. If such a scenario were presented, we would need to examine whether the parties' course of dealing overrode the apparent requirement, as embodied in the conjunctive signature card, for the signature of both Donald and Mary Ann Gaster in order for either to make a withdrawal. On the present record, however, no such analysis is required since unilateral savings transfers do not constitute a course of dealing inconsistent with the requirement that both Donald and Mary Ann Gaster authorize a withdrawal from the account.

⁸ The Gasters filed a counterclaim against the Bank alleging that if Donald Gaster had unilateral access to the account, the Bank was negligent and/or in breach of contract in complying with the Gasters' instructions in retitling the signature card. The Gasters reason that, if the district court correctly concluded that the unilateral change in the signature card was ineffective, then the Bank neglected a duty to inform them of the appropriate manner in which to properly alter the card. The district court summarily rejected this claim. The Gasters have appealed the district court's judgment in favor of the Bank. Given our determination that Donald Gaster effectively changed the signature card so as to avoid the proper imposition of an IRS levy--hence we need not address the Gasters' claim against the Bank, and we will affirm the district court's judgment in favor of the Bank.

 

 

United States of America , Appellant v. Jimmy Lee Cox, Appellee

U.S. District Court, Mid. Dist. Fla., Tampa Div., 93-1380-CIV-T-25B. Affirming and remanding a Bankruptcy Court decision, 93-2 USTC ¶50,476 , 156 BR 323, 4/7/95, 189 BR 214

[Code Secs. 6321 , 6871 and 7203 ]

Bankruptcy: Discharge of tax liability: Willful attempt to evade taxes: Tax liens: Validity.--In determining that an individual's tax liability was dischargeable where the IRS did not prove that the taxpayer acted fraudulently, the Bankruptcy Court was required to apply the civil tax fraud standard, which referred to a voluntary, conscious, or intentional attempt to evade taxes. Further, tax liens against property that did not belong to the individual were invalid.

Douglas Frazier, 500 Zack St., Tampa, Fla. 33602-7256, Bruce T. Russell, Department of Justice, Washington, D.C. 20530, for appellant. Ronald Russell Bidwell, 4919 Memorial Hwy. , Tampa , Fla. 33634 , for appellee.

Order

 

METZNER, Senior District Judge:

The United States appeals from an order of the bankruptcy court holding that the debtor's federal income tax liabilities were dischargeable and that any liens based on the liabilities were void.

11 U.S.C. 523(a)(1)(C) provides that a discharge does not discharge an individual debtor from any tax debt with respect to which the debtor "willfully attempted in any manner to evade or defeat such tax."

The finding of facts made by the court below showed that the debtor did not file income tax returns for the years 1982 through 1987. The revenue officer assigned to investigate these delinquencies concluded that there was no evidence of fraudulent intent to evade taxes for the years in question. The Bankruptcy Court found no evidence of such intent.

The court below proceeded on the basis that the government had the burden of proving that the taxpayer acted with specific intent to evade a tax which is the criminal standard for fraud, I.R.C. §7201 .

The government contends however that Section 523(a)(1)(C) does not limit non-dischargeability of the tax liabilities to a showing of fraud. It argues that the court below erred when it equated "willful attempt to evade or defeat" with criminal fraud. It argues that the civil tax fraud standard should be applied and not the criminal tax fraud standard.

The criminal tax fraud standard requires (1) willfulness, (2) failure to pay the tax when due and (3) an affirmative act constituting an evasion or attempted evasion of the tax. Sansone v. United States [65-1 USTC ¶9307 ], 380 U.S. 343, 351, 85 S.Ct. 1004, 13 L.Ed.2d (1965).

The civil tax fraud standard requires only that the taxpayer voluntarily, consciously, or intentionally attempted to evade the tax. There is no requirement of an affirmative act.

I agree with the government's contention that the civil tax fraud standard should be applied. In re Toti [94-1 USTC ¶50,231 ], 24 F.3rd 806 (6th Cir. 1994); In re Langlois [93-2 USTC ¶50,364 ], 155 B.R. 818 (N.D. N.Y. 1993); In re Peterson [93-1 USTC ¶50,095 ], 152 B.R. 329 (D. Wyo. 1993); In re Berzon, 145 B.R. 247 (Bankr. N.D. Ill. 1992).

The recent case of Haas v. I.R.S. [95-1 USTC ¶50,200 ], 11th Cir. March 30, 1995, has been called to my attention. As I read that case it holds that mere failure to pay taxes does not violate the wording of the statute. It does not dispute the standard of the statute which is the only determination made by this Court.

The determination of whether the tax liabilities of the debtor should be exempt from discharge raises a question of fact to be decided using the civil standard of fraud. This can best be achieved by the court which heard the testimony.

The tax liens were levied on the basis that the government believed that the debtor had an interest in the properties. The court below held that such was not the case. This finding is AFFIRMED.

The case is REMANDED to the court below for a determination of non-dischargeability and its judgment is AFFIRMED voiding the tax liens is AFFIRMED.

DONE AND ORDERED.

 

 

In re Jimmy Lee Cox, Debtor. Jimmy Lee Cox, Debtor v. United States of America , Defendant

U.S. Bankruptcy Court, Mid. Dist. Fla., Tampa Div., 91-5808-8P7, 6/17/93, 156 BR 323.

[Code Secs. 6321 and 6871 ]

Bankruptcy: Discharge of tax deficiency: Tax lien: Nondelinquent spouse.--

An individual's tax deficiency was discharged in a Chapter 7 liquidation where the IRS could not prove that the taxpayer acted fraudulently. While he did not pay all of the taxes due, the taxpayer did cooperate with the IRS in filing returns which were accepted as accurate by IRS agents. There was no evidence that he hid assets or shielded income. In addition, the IRS did not have valid tax liens against properties of the taxpayer's wife. The wife purchased the properties in her own name in tax years for which the taxpayer did not owe any deficiency. The wife did not owe any deficiency, the taxpayer had no interest in the properties, and there was no evidence of an intent to evade tax. As a result, there were no valid tax liens on the properties.

Ronald R. Bidwell, 4919 Memorial Hwy. , Tampa , Fla. 33634 , for debtor. Robert W. Genzman, United States Attorney, Tampa, Fla. 33602, Benjamin A. DeLuna, Internal Revenue Service, Jacksonville, Fla. 32202, Bruce T. Russell, Department of Justice, Washington, D.C. 20530, for defendant.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION

PASKAY, Bankruptcy Judge:

THIS IS a Chapter 7 liquidation case and the matter under consideration is the dischargeability of a debt admittedly owed by Jimmy Lee Cox (Debtor) to the United States of America , Internal Revenue Service (Government). The adversary proceeding was commenced by the Debtor who in Count I is seeking a determination that the income taxes owed to the Government for the tax years 1982 through 1987 representing a total debt of $142,948.83, together with accrued penalties and interest to the date of Debtor's petition, are not subject to the exception to the discharge set forth in §523(a)(1) of the Bankruptcy Code. In Count II of the Complaint, the Debtor seeks a determination of the nature, extent and validity of the IRS pre-petition liens asserted for the Debtor's liabilities for income taxes for years 1982 through 1987. The facts as established at the final evidentiary hearing are as follows:

At the time relevant, the Debtor was a self-employed agricultural broker. At the time of the filing of his voluntary Petition for Relief under Chapter 7 of the Bankruptcy Code the Debtor was married to Shirley Cox (Mrs. Cox). This was the second time the Debtor married Mrs. Cox. Their first marriage ended in divorce in July, 1972. The couple remarried on November 22, 1975. Mrs. Cox's willingness to remarry the Debtor was based on the condition that she would no longer have any financial involvement with the Debtor or his business. She insisted on this condition because his disastrous financial transactions during their first marriage. Based on this, the couple no longer filed joint tax returns and she no longer had any business involvement with the Debtor. Subsequently, on November 27, 1978, Mrs. Cox acquired real property known as the Beau Lane property. It is without dispute that the Debtor owed no taxes for the tax year 1978 when the Beau Lane property was purchased.

In August, 1988, the Debtor's sons Warren Cox and Mark Cox formed M&W Agriculture, Inc., a Florida Corporation which was an agricultural brokerage business. The sons were the sole officers, directors, and shareholders of the corporation. Shortly after the corporation was formed, the Debtor was employed by the corporation because of extensive business contacts in the agricultural brokerage market. As an employee, the Debtor earned $5,200.00 in 1988, $15,175.00 in 1989 and $30,400.00 in 1990. The Debtor never had and still does not have any financial interest in the corporation. The corporation is organized as a "sub-chapter S corporation," and all undistributed income of the corporation was reported on the individual income tax returns of Warren Cox and Mark Cox, the sons of the Debtor, and they paid their respective income taxes.

In the summer of 1988 Della Wallace (Ms. Wallace), a Revenue Officer employed by the Internal Revenue Service, was assigned the delinquent tax accounts of the Debtor for the years 1982, 1983 and 1984. Ms. Wallace's responsibility was to collect the unpaid balance owed by the Debtor for these years and to assure that the Debtor complies with his obligation to file the appropriate tax returns for the other years which were still open. In compliance with Ms. Wallace's request, the Debtor filed his federal income tax returns for the years of 1982, 1983 and 1984 and submitted Form 433-A Collection Information Statement for Individuals on which he furnished all of the financial information requested. Ms. Wallace reviewed the information and after due diligence determined that the information was true and correct and that there was no evidence of fraudulent intent to evade payment of taxes. Ms. Wallace also requested that the Debtor prepare and file the 1985, 1986 and 1987 federal tax returns. The Debtor complied and on August 31, 1988 filed tax returns for these years. Ms. Wallace also reviewed these returns and found no evidence of fraud relating to the years of 1985, 1986 and 1987.

The following year the Debtor, in full satisfaction of taxes due for the year 1988, timely filed his 1988 tax return and paid $28,000 with funds obtained from Mrs. Cox. The Debtor also timely filed and paid his income tax liabilities for 1989, 1990 and 1991. In April 1990, Mrs. Cox purchased a home titled solely in her name in Oakland , Florida . She again borrowed $62,113.33 from M&W Agriculture, Inc. to finance the purchase of this residence and was granted a second mortgage which was properly recorded in due course against the property. None of the Debtor's funds were used to pay anything in connection with this purchase. The Debtor paid no consideration for the home and did not furnish any funds towards the acquisition of the property.

Based on the foregoing, it is the Debtor's contention that the tax liabilities for the tax years 1982 through 1987 are not excepted from discharge under §523(a)(1) and are dischargeable under §727. The Internal Revenue Service asserts in its Amended Answer that the debt was nondischargeable pursuant to §523(a)(1)(C) in that the Debtor made a fraudulent return or wilfully attempted in any manner to evade or defeat taxes in question by shielding his assets and income by virtue of a secret or hidden interest in M&W Agriculture, Inc. or by receiving a direct benefit from the two loans from Mrs. Cox or from the corporation. There is no evidence in this record that any funds of the Debtor were used to acquire either of the properties.

In determining whether the tax obligations in question are dischargeable, this court must initially focus its analysis on section 523(a)(1) of the Bankruptcy Code which provides as follows:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt--

(1) for a tax or a customs duty--

(A) of the kind and for the periods specified in section 507(a)(2) or 507(a)(7) of this title, whether or not a claim for such tax was filed or allowed;

(B) with respect to which a return, if required--

(i) was not filed; or

(ii) was filed after the date on which such return was last due, under applicable law or under any extension, and after two years before the date of the filing of the petition; or

(C) with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.

To accomplish the purpose behind the Bankruptcy Code, which is to provide the Debtor with a fresh start, it is assumed that a debt is dischargeable unless the party complaining that the debt is nondischargeable meets the burden of proving nondischargeability. Tilley v. Jessee, 789 F.2d 1074 (4th Cir. 1986). The standard of proof required in adversary proceedings brought under 11 U.S.C. §523(a)(1)(C) is a preponderance of the evidence. Grogan v. Garner, 11 S.Ct. 654, 112 L.Ed.2d 755 (1991). The general rule is that the burden of proof is on the Debtor. However, on the issue of fraud, the burden of proof shifts to the Government. Stoltzfus v. U.S. [68-2 USTC ¶9499 ], 398 F.2d 1002, (3rd Cir. 1968), cert. denied, 393 U.S. 1020, 89 S.Ct. 627, 21 L.Ed.2d 565 (1969); In re Kirk, 98 B.R. 51 (Bankr. M.D. Fla. 1989).

To prove fraud the Defendant must show that the taxpayer acted with specific intent to evade a tax believed to be owing. Korecky v. Commissioner [86-1 USTC ¶9232 ], 781 F.2d 1566, 1568 (11th Cir. 1986). The Government must establish (1) knowledge of the falsehood of the return; (2) an intent to evade the taxes; and (3) an underpayment of the tax. Considine v. U.S. [81-1 USTC ¶9280 ], 645 F.2d 925, 929 (1981), cert. denied 459 U.S. 835, 103 S.Ct. 1979, 74 L.Ed.2d 76 (1982). The Government has not met that burden. This record is devoid of any evidence of fraud on the part of the Debtor. On the contrary, the Debtor filed the tax returns for the years in question and fully cooperated with Ms. Wallace, the Internal Revenue Service agent who was satisfied that the Debtor's tax returns were not fraudulent. A further investigation by the Internal Revenue Service conducted by Janice Waitman after the Debtor filed his Petition for Relief failed to uncover any evidence that the Debtor is hiding assets or that he is shielding his assets and income by virtue of some secret or hidden interest in M&W Agriculture, Inc. or by receiving a direct benefit from the two loans from the corporation as the Defendant claims. The Debtor never had any financial interest in the corporation, and the loans were made to Mrs. Cox alone and even if Mrs. Cox has no obligation to repay the loans, these were clearly nothing more than a gift to her from her sons or from the corporation and certainly would not be taxable income to the Debtor.

Count II of Debtor's Complaint sought a determination of whether Defendant's pre-petition liens are determined to be enforceable and, if so, to what extent. 26 U.S.C. §6321 provides that a tax assessment shall create a lien in favor of the United States upon all property and rights to property, whether real or personal belonging to the Debtor. 26 U.S.C. §6322 provides that the lien shall continue until the tax liability for the amount so assessed is satisfied or becomes unenforceable. In the instant case, the tax liabilities are solely the liability of the Debtor. However, any real property upon which the Defendant contends these liens are attached are owned in the sole name of Mrs. Cox. The first of said properties, the Beau Lane property was acquired November 27, 1978. Therefore, it is clear that this property was not titled solely to Mrs. Cox in an attempt to evade payment of her husband's tax liabilities for the years 1982 through 1987 because the property was acquired before there were any known tax liabilities. Obviously, there cannot be a tax lien if there is no valid underlying obligation to pay taxes. Moreover, the Oakland property was acquired in 1990 and it is clean that the Debtor did not owe any taxes for that tax year. Having concluded the Debtor did not evade any of the taxes for the years in question, obviously there cannot be a valid enforceable tax lien against any of the properties particularly since this record reveals no doubt that the properties were acquired by Mrs. Cox and the Debtor never had any ownership interest in these properties.

A separate final judgment shall be entered in accordance with the foregoing.