Property rights of a nondeclared spouse
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
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.
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
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.
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
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.
; 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
to themselves as joint tenants. Under
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).
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
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
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.
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.
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
at 6. The court, as directed by the Eighth Circuit, considers four
factors in determining whether to grant the plaintiff's motion for a
1. Is there a substantial
threat that the plaintiff will suffer irreparable harm if the relief is
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.
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.
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
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.
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.
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
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.
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.
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
3. The court denies the
government's request that Mrs. O'Hagan post a bond.
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
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
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,
Supreme Court, 90-1326, 6/17/92, 485 NW2d 56
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 (
) 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
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
The facts are as follows.
In 1963, the Coopers purchased the property at
38050 Dolmar Park Road
, 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
. 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
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'
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
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,
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
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
, it was improper to sell Mr. Cooper's interest without
selling the property in its entirety. Finally, Mrs. Cooper argues that
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
, 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
, 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
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.
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)
, 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
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
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."
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
at 728-29. Parties proceeding under I.R.C. §§6343
have nine months from the time of the levy to assert their
property rights in the levied property.
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)
, 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
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.
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.
(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."
at 725 (citations omitted).
In National Bank,
the delinquent taxpayer was a codepositor in two jointly held bank
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.
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.
at 726 (citations and
footnote omitted). In a footnote to the above quote, the Court stated:
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
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.
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:
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.
v. Kiyo, 104
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
: it is absolutely inalienable without the consent of both spouses and
is therefore worthless to one spouse acting alone without the consent of
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
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
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
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.
provides in relevant part:
. 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
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).
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.
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
, 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
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.).
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
District Court, West.
Dist. Va., Roanoke Div., Civ. 92-0411-R, 92-0433-R, 9/6/95, 912 FSupp
202, 912 FSupp 202
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
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
P.O. Box 8056
, pro se. Guy M. Harbert III, Simon Delano Roberts Moore, H.
Michael Deneka, Gentry, Locke, Rakes & Moore,
10 Franklin Rd., S.E.
, 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
10 Franklin Rd., S.E.
, for cross-defendant. Frank G. Selbe, Victoria L. Selbe,
P.O. Box 8056
, pro se.
KISER, Chief District
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
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.
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
") jointly; Selbe then indorsed his interest to
. This indorsement was required by the terms of a 1985 prenuptial
agreement assigning a portion of the residence sale proceeds to
. I overturned a jury conviction of Selbe, finding that the prenuptial
agreement was valid and that Selbe was correct in considering the note
'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.
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
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
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
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,
The note proceeds remain in
the possession of this Court. At issue here is
's motion for summary judgment in consolidated Nos. 92-0411-R &
92-0433-R, asserting wrongful levy upon the note.
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.
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
. 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
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.
, 25 F.3d 1039, 1994 WL 242156 (4th
). Selbe has mistakenly construed this provision to exclude the
' 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.
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
for unpaid taxes. The
had a right to the payment of those taxes at the close of each tax year.
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
v. Dickerson, 790 F.Supp. 1583, 1584-85 (M.D.Ga. 1992);
v. Gelb, 783 F.Supp. 748, 752 (E.D.N.Y. 1991).
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
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.
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
90, 94-95 (1980).
Count I of the Unites
States' cross-claim asserts fraudulent transfer of the note to
, 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
, and not the debt owed to the
. 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).
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
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.
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.
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
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
, or Selbe and the
, 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
does own it. That determination was at the heart of my disposition of
Civil Action No. 92-0638-R. The
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
's property, and as the property of someone other than the debtor, the
note is not subject to the FDCPA.
My decision here answers
essentially for the fourth time if the
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
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.
The consolidation of an interpleader action with
's action and the presence of the government's cross-claim has
apparently created some nominal confusion.
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.
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.
Neither party complied with this Order. I have chosen to ignore these
violations and dispose of this case on substantive grounds.
All parties have at times dated this April 6. Assessment was made on
April 2, actual levy on April 6.
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
District Court, No.
, East. Div., 93 C 2630, 11/7/94, 868 FSupp 235
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.
, for plaintiff. Stacey S. Hallett, Department of Justice,
, for defendant.
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
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
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.
Birl C. Street
Catherine M. Street
, 92-1-5502-PM, 3/11/94, 165 BR 408, 165 BR 408
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 (
) law, property owned by tenants by the entirety could be sold without
regard to a lien against either tenant.
2446 Reedie Dr.
, for debtors. Richard L. Gilman, Department of Justice,
, for I.R.S.
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
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,
, and the second is her interest in two 401(k) plans claimed by her as
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
'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
1991); Matter of Pierce, 29 B.R. 612, 614 (BC E.D.N.C. 1983); In
re Nason, 22 B.R. 690 (BC
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
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.
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
1980), the Court of Appeals confronted the
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.
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
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
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
288, 66 A. 37 (1907); Frey v. McGaw, 127
23, 95 A. 960 (1915); and Annapolis Banking & Trust Co. v. Smith,
8, 164 A. 157 (1933), among others.
What the IRS has is a lien
on the survivorship interest of one tenant,
. That lien cannot he enforced against property held by the entireties. Cf.
Phillips v. Krakower, 46 F.2d 764, 765 (CA4 1931). In
, 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.
701, 393 A.2d 1356, 1358-59 (1978); Fox v. Fraebel, 140
54, 116 A. 876, 877 (1922); Arbesman v. Winer, 298
282, 468 A.2d 633, 637-39 (1983). Under existing
law, the Streets may dispose of the property without regard to a lien
against one. Watterson v. Edgerly, 40
App. 230, 388 A.2d 934, 939 (1978); Hertz v. Mills 166
492, 171 A. 709, 711 (1934). Logic dictates the same result as to
Therefore, the IRS has no
interest as a secured creditor in
3603 Daffney Court
, Upper Marlboro,
. Pursuant to the parties' Stipulation the court will not consider
whether the IRS has a claim secured by the debtor
's retirement plans. In any event, any interest in these plans are not
includable as property of debtors' bankruptcy estate. Patterson v.
--, 112 S.Ct. 2242, 2247 (1992); In re
, 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
An order will be entered in
accordance with the foregoing.
STIPULATION OF FACTS
(1) The Internal Revenue
Service has a secured claim only as to
(2) The Internal Revenue
Service's claim for tax years 1980 through 1984 are [sic] solely against
. 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
'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
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
'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.
District Court, West.
Dist. Ky., Paducah Div., Civ. 84-0318-P(J), Civ. 85-0081-P(J), 8/16/89
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
(Land Bank). Plaintiffs Walton G. Ezell, Tresa H. Ezell, Norma Ford
Younger and Fordland Farms, Inc. have joined in Federal Land Bank's
On May 20, 1977, Loyd and
Norma Ford obtained a divorce in the
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,
1951); McCormack v.
, 117 S.W.2d 952, 957 (
1938). The judgment divested Loyd of his ownership interest in the
farms. See Faris v. Goins, 13 S.W. 2 (
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)
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 . . .
the lien asserted by the IRS is subordinated to the interest of Fordland
and the Ezells who purchased the property from Mrs. Ford.
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 (
1985); Johnson v. Potter, 433 S.W.2d 358, 362 (
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
IT IS SO ORDERED.
Dorothy Saligoe Schmit, Plaintiff-Appellee v.
United States of America
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
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.
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.
, for plaintiff-appellee. James I.K. Knapp, Acting Assistant Attorney
General, Department of Justice,
, for defendant-appellant.
Before HALL, BRUNETTI and
NOONAN, JR., Circuit Judges.
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
BRUNETTI, Circuit Judge:
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
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
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.
at 683; Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-13 (1960).
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.
v. Campbell, 101
380, 705 P.2d 154, 155 (1985); Gorden v. Gorden, 93
494, 569 P.2d 397, 398 (1977). However, this presumption can be overcome
by clear and convincing evidence that no gift was intended.
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
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.
state court, we hold that Schmit's home was always entirely her separate
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
Internal Revenue Service, Plaintiff v. Donald
Gaster and Mary Ann Gaster, Defendants v. Ninth Ward Savings Bank, FSB,
U.S. Court of Appeals, 3rd Circuit, 94-7195, 94-7196, 12/5/94,
Affirming, reversing and vacating an Unreported District Court decision
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,
, James, Flandreau & Rodger,
320 W. Front St.
, for defendants. William J. Marsden, Potter, Anderson & Corroon,
350 Delaware Tr. Bldg., Wilmington, Del. 19899-0951, for third-party
Before: BECKER and COWEN,
Circuit Judges and POLLAK, District Judge. ***
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
. (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
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
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.
On June 25, 1985, the
Gasters opened an account at the Bank to deposit the proceeds from the
sale of an apartment building in
, 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
. 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).
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
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
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.
National Bank of Commerce [85-2 USTC ¶9482 ], 472
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
to have the property or the proceeds of its sale returned."
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
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
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
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.
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 [
] statutory provisions." National Bank of Commerce [85-2
USTC ¶9482 ], 472
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
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,
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.
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.
-116(b) (emphasis added). Therefore, as a matter of
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.
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
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.
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
A: I guess after Donald did
it. Being married to a man for 40 years, I trust anything he does, I
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.
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
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
law as to her share of the account. Buttressing this conclusion is the
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
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
at 723, 105
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
In sum, we conclude that
pursuant to the Gasters' contract with the Bank and applicable
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
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.
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.
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
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).
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
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 "
and the majority of other jurisdictions as well" is
"presumptively held by the entireties." See William M.
Young v. Tri-Mar Asso.
, 362 A.2d 214, 215 (Del. Super.
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
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
, 93 A.2d 920, 922 (Del. Ch. 1953). In addition,
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
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 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
law. Arguably, such action could be viewed as a fraudulent conveyance
, 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,
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
Ch. LEXIS 101 (July 6, 1994); Givens v. Givens, 1986 WL 2270 (
We cannot decide whether
Donald Gaster's conduct establishes a fraudulent conveyance under
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
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
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
476, 200 A. 624, 117 A.L.R. 904 [(1938)]; Berhalter v. Berhalter,
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.
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.
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
District Court, Mid.
Div., 93-1380-CIV-T-25B. Affirming and remanding a Bankruptcy Court
USTC ¶50,476 , 156 BR 323, 4/7/95, 189 BR 214
6321 , 6871
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.
, for appellee.
METZNER, Senior District
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
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
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
USTC ¶50,364 ], 155 B.R. 818 (N.D. N.Y. 1993); In re
USTC ¶50,095 ], 152 B.R. 329 (D. Wyo. 1993); In re Berzon,
145 B.R. 247 (Bankr. N.D.
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
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 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
United States of America
Bankruptcy Court, Mid.
Div., 91-5808-8P7, 6/17/93, 156 BR 323.
6321 and 6871
Bankruptcy: Discharge of tax deficiency: Tax lien: Nondelinquent
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.
, 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,
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
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
property. It is without dispute that the Debtor owed no taxes for the
tax year 1978 when the
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
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
. 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
(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
(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.
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
provides that a tax assessment shall create a lien in favor
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
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
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
separate final judgment shall be entered in accordance with the