6321 Bank Deposits page1

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In re Arthur J. Cobb, Paula K. Cobb, Debtors. Arthur J. Cobb and Paula K. Cobb, Plaintiffs v. Samera L. Abide, as Chapter 7 Trustee for the bankruptcy estate of Arthur J. Cobb and Paula K. Cobb, Defendant United States of America, Plaintiff v. Arthur J. Cobb, Paula K. Cobb, Samera L. Abide, Citicorp Mortgage, Inc., and Sunburst Bank, Defendants

U.S. Bankruptcy Court, Mid. Dist. La. , 93-11077, 5/1/2002

[Code Secs. 6321 and 6323 ]

Tax liens: Annuities: Property transferred to third parties: Validity and priority against third parties: Super-priority safe harbor: Filing of notice.--

The IRS was entitled to recover funds subject to tax liens that debtors had transferred to third party creditors. The debtors had transferred cash and assigned rights under annuity contracts to their mortgage holder banks after the IRS perfected the tax liens. That the banks had a perfected security interest in real property secured by a mortgage did not give them priority as to the government with respect to the encumbered funds. Moreover, the creditors' were not entitled to the super-priority safe harbor relief under Code Sec. 6323 . The banks were not includible in the classes of interest holders addressed by the statute; moreover, even if they were, the banks took the funds from the annuities after notice had been filed.

[Code Sec. 6332 ]

Surrender of property subject to levy: Post-judgment interest: Pre-judgment interest: Congressional intent.--

The IRS was entitled to post-judgment interest on debtors' funds that were erroneously transferred to other creditors after the imposition of a tax lien. Pre-judgment interest, however, was denied as unsupported by statute or equity. Because pre-judgment interest is intended to encourage payment of taxes, it was inapplicable in the present case where third-party creditors held the funds.

REASONS FOR JUDGMENT

PHILLIPS, Bankruptcy Judge:

BEFORE THE COURT are the motions by the United States of America ("US") to reopen this matter, substitute party, and for the addition of pre and post-judgment interest. For the reasons that follow, the Court will grant the motion to reopen and will render judgment therein; will grant the motion to substitute party to reflect the proper party Defendant as Union Planters Bank, National Association ("Union Planters"); ¹ will deny the US's motion for pre-judgment interest, but grant the US post-judgment interest.

I. BACKGROUND AND PROCEDURAL HISTORY

Prior to filing bankruptcy, Arthur and Paula Cobb were practicing attorneys with a substantial practice. As compensation for attorney's fees in a case in which the Cobbs were counsel for the plaintiff, the Cobbs agreed to accept annuity payments. As part of the structured settlement of that case, the Cobbs became the beneficiaries of four annuity policies issued by Manufacturers Life Insurance Co. The annuity policies entitle the Cobbs to receive (without the right of acceleration) monthly payments, semi-annual payments, and certain lump sum payments over the course of the life of the annuity.

Beside being relatively successful attorneys, the Cobb's were also serially delinquent taxpayers who failed to either file returns and/or pay taxes, both for personal income and for that of Mr. Cobb's business, for an extended period of time beginning in 1978. The Internal Revenue Service ("IRS") finally began assessments against Mr. Cobb, and on November 22, 1991, the IRS filed a notice of federal tax lien for the tax periods, 1987, 1988, 1989, and 1990. On July 15, 1992, the IRS filed an additional notice of federal tax lien for the 1991 tax period. ²

In addition to being abundantly indebted to the IRS for unpaid taxes, Mr. Cobb and his wife were obligors on two different loans secured by two mortgages placed on their personal residence. Citicorp Mortgage, Inc. ("Citicorp") held a first priority mortgage on the residence, while Union Planters occupied a second priority position with respect to its mortgage.

Sometime prior to bankruptcy, the Cobbs began experiencing financial difficulty and defaulted on the mortgage obligations owed to Citicorp and Union Planters. In an attempt to stave off foreclosure, the Cobbs made several lump sum payments to Citicorp and Union Planters to try and bring their loan obligations current. The payments made by the Cobbs totaled $91,578.87 and were made in the following amounts: $55,614.21 to Citicorp on November 25, 1992; $4,638.51 to Citicorp on January 26, 1993; $4,544.52 to Citicorp on March 11, 1993; $19,527.58 to Union Planters in January, 1993; and $7,254.05 to Union Planters in April, 1993.

In addition, the Cobbs assigned their rights as annuitants to the proceeds from the annuity policies to Union Planters. The purported assignment was confected on January 29, 1993. Under the assignment, payments due under the policies were remitted directly to Union Planters by the policy issuer. ³

After the Cobbs filed bankruptcy, the US filed adversary proceeding no. 95-1022. This adversary proceeding was consolidated with another pending adversary proceeding involving claims made by the Cobbs against the trustee, no. 94-1103. The matter was tried on August 29, 1995. Thereafter, a consent judgment was entered in the consolidated adversary proceeding and the consolidated adversary proceeding was closed by order of dismissal. On January 27, 1997, this Court entered an order dismissing the Cobb's bankruptcy case. In its order of dismissal, the Court reserved jurisdiction over Paragraphs 1(B) and 1(C) of the US 's complaint filed in the instant adversary proceeding, no. 95-1022. A similar reservation of jurisdiction was included within the consent judgment entered in the consolidated adversary proceeding. Despite this reservation of jurisdiction, the Court issued an order administratively closing the instant adversary proceeding on September 28, 2001. The Court does not know exactly how, but it seems that this matter has fallen through the proverbial cracks, so to speak, perhaps because of a minute entry that incorrectly referred to this proceeding as being settled and to be made the subject of a dismissal by consent order (the administrative close was done as a ministerial act, upon the Court not having received the consent dismissal erroneously referred to in the minute entry). At any rate, the Court has been made aware of the pending claims and will issue and order reopening the adversary proceeding and will now rule on the merits. Apologies are extended for the delay.

II. ANALYSIS

Paragraphs 1(B) and 1(C), including subparts, essentially allege that the US 's lien claims were properly and validly perfected. More specifically, the paragraphs allege that such liens attached to the annuity payments received by the banks and to the lump sum payments to the banks made by the Cobbs, and therefore such payments must be returned to the US .

The voluminous compendium of laws on the subject of federal taxes, commonly referred to as the Internal Revenue Code, 26 U.S.C., et seq., provides that if any person required to pay taxes:

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. ⁴

The Supreme Court, examining the lien created by 26 U.S.C. §6321, has expounded that the scope, "is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." ⁵ In addition to being extraordinarily broad, the lien imposed by 26 U.S.C. §6321 arises at the time the IRS assessment is made and continues until the liability for the amount of such assessment is made. ⁶

In this case, the IRS made assessments of the Cobbs federal tax liability at various times between 1991 and 1992. The assessments totaled approximately 2.5 million dollars. Pursuant to the statutes cited above, a tax lien arose at that time on all the Cobbs' property (and rights to property), whether immediately in their possession or which was acquired by them after the date of the assessment. According to the statutes, the lien continued in effect until the Cobbs satisfied the debt. ⁷

The next question, is to what did the tax liens attach? The foremost inquiry required under the tax lien statute is whether there is "property" or "right to property" to which the tax lien could encumber. The federal tax lien statutes do not create property rights, but rather attach consequences, federally defined, to rights which are created under state law. ⁸ Resort must first be made to underlying state law to determine the existence and nature of an interest to which the federal tax lien could be asserted. ⁹ If the taxpayers interest under state law is considered "property" or a "right to property," the tax lien attaches to that interest, and "the tax consequences thenceforth are dictated by federal law." ¹⁰

In this instance, the Cobbs' interests at issue are several lump sum payments of cash to the banks to cure a default in the mortgage notes, and the rights to payments due under the various annuity policies. Clearly, without the need for citation, Louisiana state law recognizes that money, i.e., the money used as payments on the mortgage notes, is a form of property, moveable (or personal) property, but property nonetheless. The money was the Cobbs to have, hold, and use, and therefore, was property to which the US 's tax lien attached.

In addition, the rights held by the Cobbs to payments due under the annuity policies was property. Though the Cobbs did not have a present interest in the actual monies due for future payments, what the Cobbs possessed was the right, under the annuity contract, to receive those payments when they became due. ¹¹ Contract rights are a form of property under Louisiana law, and those rights became impressed with the tax lien at the time it arose. ¹² Furthermore, any payments actually made to the Cobbs under the annuity policies would immediately succumb to attachment by the tax lien as well, being both "property" of the Cobbs in the parlance of 26 U.S.C. §6321, and as a consequential transformation of the right to receive that payment, which right was encumbered by the tax lien. ¹³

Once it has been determined that a particular interest a taxpayer holds constitutes "property" or a "right to property," federal law determines the relative priority of competing claims in and to that particular interest. ¹⁴ Priority of competing claimants is generally determined by the "rule of first in time, first in right," meaning that whichever entity perfects a lien on the subject property first is entitled to priority to the property or proceeds of the property. ¹⁵

In this case, the IRS assessed the Cobbs for delinquencies in taxes in November 1991 and July 1992. The liens at issue arose on these dates. The liens covered all property interests presently held by the Cobbs at that time and all property interests thereafter acquired. At the time the liens arose, the Cobbs possessed present interests in the rights to future payments under the annuity contracts. The lien attached to those rights to the extent of the Cobbs' tax liability exigent within the assessments. Additionally, the liens attached to any property interests, including sums of money, to which the Cobbs acquired after the tax lien arose.

At the time the Cobbs transferred lump sums of money to the banks, those sums of money were impressed with the federal tax liens. Moreover, at the time the Cobbs purportedly assigned their rights under the annuities, those rights were encumbered by the tax liens as well. ¹⁶ Both sets of transfers occurred after the IRS had assessed tax deficiencies and the liens arose under 26 U.S.C. §6322.

Furthermore, in no instance did the banks have a prior perfected security interest in the property transferred to them. The banks did have a perfected security interest in the real property secured by a mortgage. However, the "first in time, first in right" rule refers to competing interests on the particular property at issue. The US does not contest that the banks prior perfected mortgages would prime their tax liens regarding the subject matter of the mortgages, i.e., the Cobbs' residence. However, the tax lien is broader than the security interest held by the banks. The tax liens attached to all property to the extent not otherwise validly encumbered. That the Cobbs paid the banks money that the banks used to satisfy an underlying obligation for which they had distinct security for does not mean that the banks had a security interest in those funds used to pay such obligations. The funds themselves (and the rights allegedly transferred by the assignment of the annuity payments) were previously encumbered by the governments tax liens, and passed to the banks subject to that encumbrance. ¹⁷

The "first in time, first in right" general rule is qualified, however, by the "super-priority" provisions of 26 U.S.C. §6323. ¹⁸ According to this statute, a tax lien may be primed by other competing interests under certain limited circumstances, which the banks claim are present in this case.

The provisions of 26 U.S.C. §6323 pertinent to this case provide:

(a) . . .--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

(b) . . .--Even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid--

(1) . . .--With respect to a security (as defined in subsection (h)(4))--

(A) as against a purchaser of such security who at the time of purchase did not have actual notice or knowledge of the existence of such lien; and

(B) as against a holder of a security interest in such security who, at the time such interest came into existence, did not have actual notice or knowledge of the existence of such lien. ¹⁹

Subsection (a) of the statute does not apply in this instance. The provisions of subsection (a) extend priority to certain classes of interest holders if notice has not been properly filed at the time the interest holder accepted or took such interest. In this case, the IRS properly filed its notice as required by 26 U.S.C. §6323(f). ²⁰ Additionally, the transfers from the Cobbs to the banks took place after the IRS had properly filed its notice. Even if the banks fit within the categories described within subsection (a) (which the Court is not convinced they would), the banks took the money and payments from the annuities after notice had been filed. Therefore, the provisions of subsection (a) afford the banks no safe harbor from the government's tax lien.

The provisions of subsection (b) similarly do not apply to provide the banks with "super-priority" above the government's tax liens. The US sets forth a litany of reasons why the banks fail to fall within the purview of the provisions of subsection (b). While the Court believes that the US 's arguments are well founded, it is unnecessary to discuss in detail most of them because the Court finds that the banks had notice of the tax liens at the time the banks accepted the lump sum and annuity payments.

Subsection (b) affords "super-priority" to certain classes of persons involved in specifically listed categories of transactions. For the purposes of the instant case, only the provisions of 26 U.S.C. §6323(b)(1) could conceivably apply. However, both classes of persons for whom "super-priority" could be available requires that the entities take a security, whether by purchase or by taking a security interest therein, without notice of the existence of the tax lien.

In this case, the record and evidence adduced at trial indicate that both banks were aware of the tax liens at the time the lump sum and annuity payments were made. The Court finds that Citicorp was aware of tax liens on October 29, 1992--a month before their acceptance of the first lump sum payment. ²¹ Additionally, the Court finds that Union Planters was aware of tax liens, at the latest, by March 26, 1992--again, prior to acceptance of lump sum and annuity payments. As both banks were aware of the government's tax liens the relevant provisions of 26 U.S.C. §2623(b)(1) do not confer "super-priority" status sufficient to avoid the government's tax lien on the lump sum and annuity payments.

For these reasons, the Court will grant the US a judgment against Citicorp in an amount equal to the total of the lump sum payments received by it from the Cobbs. The Court will also enter a judgment against Union Planters in an amount equal to the amount received by it in lump sum payments from the Cobbs as well as for the total amount of all payments made under the annuity policies until such time as the annuity became the subject of the interpleader action referenced in footnote 2, supra, without prejudice to any right Union Planters has or may have against Citicorp for contribution, etc., due to the payment arrangement made between the two banks regarding the disposition of annuity payments.

III. INTEREST

The US urges this Court to grant pre-and post-judgment interest on the amounts incorporated into this Court's judgment. ²² Regarding post-judgment interest, 28 U.S.C. §1961 provides, "Interest shall be allowed on any money judgment in a civil case recovered in a district court." according to the statute, such interest shall be calculated from the date of the entry of the judgment. Accordingly, the Court will grant the motion of the US to award post-judgment interest to be calculated in accordance with 28 U.S.C. 1961(a). ²³

A right to pre-judgment interest is not specifically conferred by statute. However, the United States Supreme Court has stated that awards of pre-judgment interest be governed by traditional judge-made principles. ²⁴ Among the principles to be considered are: 1) the relative equities between the beneficiaries of the obligation and those on whom it is imposed; 2) fairness; 3) ensuring full compensation; 4) expeditious settlement; 5) the need to conform to historical legislative and judicial precedent. ²⁵ The Fifth Circuit also requires that the Court inquire whether the federal act that creates the cause of action precludes an award of interest, and whether the award furthers the congressional policy behind the act creating the cause of action.

In this case, the Court does not know of any statutory prohibition on recovery of pre-judgment interest in a case such as this. However, the Court does not believe that an award of pre-judgment interest in this specific case and based on the specific facts underlying it would further congressional policy. Congressional policy creates a lien on the taxpayer's property. The policy behind the act is to facilitate payment of tax liability by the taxpayer. In this case, an award of pre-judgment interest would be against a third party not liable for the underlying tax obligation, but rather because the third party possesses former property of the taxpayer (but not as a result of a fraudulent transfer by the taxpayer). The Court sees no reason how congressional policy would be furthered by shouldering a third party should bear an enormous pre-judgment interest award.

The Court does not believe that the traditional principles outlined above help the US either. Those principles form an equitable balancing test. While it may be argued that pre-judgment interest would compensate the US for the time-value of the money, other factors militate against such an award. First, as stated above, the US is requesting interest not from the taxpayer-obligor, but from a third party who accepted property (albeit burdened with the tax lien) from the taxpayer and gave value to the taxpayer in return (in the form of a credit on the balance due under the notes it held).

Secondly, the evidence in the record and introduced throughout the pendency of this proceeding indicates the IRS knew of the annuities well prior to the purported assignment. The IRS also knew that the Cobbs had not paid proper taxes for years. The IRS had ample time to protect its interest in property of the Cobbs to which the lien attached. ²⁶ While the Court finds today that the banks must disgorge the proceeds received from the Cobbs upon which the tax liens were impressed, the banks nonetheless took such proceeds without malice towards the government and with a good faith belief that they had a right to the proceeds. The banks are not the ones who owed the underlying tax debt.

It would be extremely unfair, considering the circumstances surrounding this case, to award pre-judgment interest against the third-party banks in the face of the governments knowledge of the Cobbs property and dilatory actions involving protection of its rights thereto. ²⁷ In sum, the Court finds that an award of pre-judgment interest is not appropriate in this instance and will deny the US 's motion for such.

IV. CONCLUSION

For the foregoing reasons, the Court will issue an order granting the US 's motion to reopen the case, and will allow substitution of Union Planters Bank, National Association as the proper party defendant. Further the Court will enter a judgment against Citicorp equal to the amount it received from the Cobbs in the lump sum payments discussed above. In addition, the Court will enter a judgment against Union Planters equal to the amount it received from the Cobbs in the lump sum payments described above, as well as equal to the amount of all annuity payments dispersed under the annuity that it received pursuant to the purported assignment of the Cobbs rights thereto, without prejudice to Union Planter's right to contribution or other legal and equitable rights against Citicorp for recoupment of sums Union Planters paid to Citicorp under its agreement with Citicorp. The Judgments will include an award of post-petition interest to be calculated in accordance with 28 U.S.C. 1961(a). The Judgments will not include an award of pre-judgment interest.

¹ The original defendant, Sunburst Bank changed its name to Union Planters Bank of Louisiana on June 15, 1995. On August 29, 1995 this Court allowed the substitution of Union Planters Bank of Louisiana . Subsequently, Union Planters Bank of Louisiana merged with Union Planters Bank, National Association. Pursuant to 12 U.S.C. §215(e), the Court will allow the substitution of Union Planters Bank, National Association as proper party defendant.

² In a collateral proceeding entitled, "Manufacturers Life Insurance Co. v. Arthur J. Cobb, et al.," U.S.D.C., E.D.La., No. 93-3325, the district court specifically determined that the November 1991 and July 1992 notice of federal tax liens were properly filed. This Court believes that the District Court's determination on that issue is entitled to issue preclusive effect in this proceeding as it involved the same parties, the issue is identical to one at issue in this proceeding, the issue was litigated and decided by the district court, and the district court's determination was integral to its ultimate conclusion. See, Stripling v. Jordan Production Co., LLC, 234 F.3d 863, 868 (5th Cir. 2000). Therefore, the Court will consider the notices of tax liens filed November 1991 and July 1992 to have been properly filed.

³ Union Planters apparently acted as a receiving agent for Citicorp with regard to the annuity payments, and upon receipt of such would remit a portion of the annuity payment to Citicorp to satisfy a portion of its first priority mortgage.

⁴ 26 U.S.C. §6321 (emphasis added).

⁵ United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-720 (1985).

⁶ 26 U.S.C. §6322.

⁷ See, Texas Commerce Bank-Fort Worth, N. A. v. United States [90-1 USTC ¶50,155], 896 F.2d 152, 161 (5th Cir. 1990).

⁸ See, United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55, 78 S.Ct. 1054, 1057 (1958).

⁹ See, United States v. Craft [2002-1 USTC ¶50,361], 122 S.Ct. 1414, 1420 (2002); Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-514, 80 S.Ct. 1277, 1280-1281 (1960).

¹⁰ See, Medaris v. United States [89-2 USTC ¶9565], 884 F.2d 832, 833 (5th Cir. 1989), quoting National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 722, 105 S.Ct. at 2925.

¹¹ See, In re Wessel [93-2 USTC ¶50,549], 161 B.R. 155, 159 (Bankr. D.S.C. 1993); c.f., United States v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497 (11th Cir. 1989).

¹² Accord, Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770], 542 F.2d 270 (5th Cir. 1976) (contract rights are "right to property").

¹³ See generally, Phelps v. United States [75-1 USTC ¶9467], 421 U.S. 330, 334-335, 95 S.Ct. 1728, 1731 (1975) (the lien attaches to the thing and to whatever is substituted for it).

¹⁴ See, Aquilino [60-2 USTC ¶9538], 363 U.S. at 814, 80 S.Ct. at 1280.

¹⁵ See, Texas Commerce Bank [90-1 USTC ¶50,155], 896 F.2d at 161.

¹⁶ Union Planters has previously argued that it took a security interest in the annuities by virtue of the assignment. While the Court does address the question of whether Union Planters received a security interest by virtue of the assignment, the Court notes that even if it had, the assignment occurred after the tax liens had already attached to the Cobbs' rights under such annuities. Therefore, regardless of whether a security interest was created, the governments' lien would have primed Union Planters' rights to the payments under the assignments.

¹⁷ See, Bess [58-2 USTC ¶9595], 357 U.S. at 57, 78 S.Ct. at 1058 ("The transfer of the property subsequent to the attachment of the lien does not affect the lien, for 'it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere.' ").

¹⁸ See, Western National Bank v. United States [94-1 USTC ¶50,017], 8 F.3d 253, 255 (5th Cir. 1993).

¹⁹ "Security" is defined by 26 U.S.C. §6323(h)(4) as "any bond, debenture, note, or certificate or other evidence of indebtedness, issued by a corporation or a government or political subdivision thereof, with interest coupons or in registered form, share of stock, voting trust certificate, or any certificate of interest or participation in, certificate of deposit or receipt for, temporary or interim certificate for, or warrant or right to subscribe or to purchase any of the foregoing; negotiable instrument; or money.

²⁰ See, n. 2, supra.

²¹ As part of a discovery sanction against Citicorp during the conduct of this proceeding, the Court prevented Citicorp from producing any evidence that it did not have knowledge of the government's tax liens. See, Order dated August 11, 1995, Doc. No. 111.

²² The banks have objected to imposition of interest on the basis that they were never put on notice of the US 's claim for such prior to trial. While the US never explicitly stated in its complaint, "We want interest," the Fifth Circuit has upheld interest awards based on very relaxed pleading standards. In this case, the US prayed for such other relief deemed equitable and just under the circumstances, and the Fifth Circuit has previously upheld an award of interest premised upon similar language. See, Federal Savings and Loan Ins. Corp. v. Texas Real Estate Counselors, Inc., 955 F.2d 261, 270 (5th Cir. 1992).

²³ The US urges the court to award post-judgment interest pursuant to 28 U.S.C. §1961(c)(1). Although this matter originally stems from tax liability, the Court does not believe that this action qualifies as a tax case, but rather is an exercise upon a lien. This interpretation is bolstered by the fact that the US is not proceeding against the taxpayer, but rather against third-parties to enforce its lien. Therefore, interest is appropriate under subsection (a) of the statute, not subsection (c)(1).

²⁴ See, City of Milwaukee v. Cement Div. Nat'l Gypsum Co., 515 U.S. 189, 194, 115 S.Ct. 2091, 2095 (1995); see also, Gore, Inc. v. Glickman, 137 F.3d 863, 868 (5th Cir. 1998).

²⁵ Gore, 137 F.3d at 866.

²⁶ In fact, the Court finds that the annuities could have been seized even before this adversary proceeding, and even before the bankruptcy case, was filed. Why the government failed to act has never been explained. While such failure on the part of the government does not offer help to the defendants regarding the main demand, if provides the Court guidance to refuse to issue post-judgment interest.

²⁷ The Court finds that factors 4) and 5) above are neutral and do not sway the Court either way.

 

 

 

The Prudential Insurance Company of America, Plaintiff/Stakeholder v. Stephen Allen, Vicki S. Allen and the United States Department of the Treasury-Internal Revenue Service, Defendant/Claimants

U.S. District Court, So. Dist. Ind., New Albany Div., NA 96-118 C B/G, 3/31/98

[Code Sec. 6321 ]

Lien for taxes: Attachment: Annuities: Ownership: Ineffective transfers: Incarcerated taxpayer.--A tax lien attached to a taxpayer's insurance annuities because he failed to transfer them to his wife before his deficiencies were assessed. Under state ( Indiana ) law, his wife's payment of the premiums while he was incarcerated did not make her the owner of the annuities. Instead, the taxpayer had to substantially comply with the annuity's contract terms regarding a change in ownership, or show that he was unable to do so despite all reasonable efforts. However, the taxpayer failed to inform the issuing insurance company of the purported change in ownership, and failed to show that he attempted but was unable to inform them. Thus, he remained the owner of the annuities at the time his delinquencies were assessed, and the tax lien attached to the annuities prior to any equitable interest of his wife.

John W. Woodward, Jr., Wyatt, Tarrant & Combs, 117 E. Spring St., New Albany, Ind. 47151-0649, R. Thomas Blackburn, Jr., P.O. Box 3844, Louisville, Ky. 40201, for plaintiff/stakeholder. Jeffrey L. Hunter, Assistant United States Attorney, Indianapolis, Ind. 46204, S. Robert Lyons, Department of Justice, Washington, D.C. 20530, for defendant/claimants.

ORDER GRANTING SUMMARY JUDGMENT

BARKER, Chief Judge:

This matter is before the Court on the Motion for Summary Judgment filed by Defendant United States on November 3, 1997. Plaintiff brought this litigation as a stakeholder of insurance proceeds and asserts no substantive position with regard to the issues raised in the Summary Judgment Motion. Defendants Stephen H. Allen and Vicki S. Allen have opposed the Motion for Summary Judgment through their brief filed on January 16, 1998, to which the United States replied on February 12, 1998. The Court, being duly advised, finds that the Summary Judgment in favor of the United States is required, based on the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. The Prudential Insurance Company of America ("Prudential") issued three annuity contracts (contract numbers 36-991-887, 76-990-247, R4-127-584) that are the subject of this interpleader case on or about April 16, 1984, May 26, 1986, and October 2, 1987, respectively.

2. Each of the three annuity contacts provided that Stephen Allen was both the owner and the insured, and that Vicki Allen, his wife, was the designated beneficiary of the contract.

3. Each contract further provided the following with respect to the ownership of the contract:

GENERAL PROVISIONS

Definitions.--We define here some of the words and phrases used all through this contract.

We, Our and Us.--Prudential.

You and Your.--The owner of the contract.

Contract Modifications.--Only a Prudential officer may agree to modify this contract, and then only in writing.

Ownership and Control.--Unless we endorse this contract to say otherwise: (1) the owner of the contract is the Insured; and (2) while the Insured is living the owner alone is entitled to (a) any contract benefit and value, and (b) the exercise of any right and privilege granted by the contract or by us.

4. On or about March 27, 1991, Mr. Allen pled guilty to a violation of federal law.

5. After being sentenced to a term of imprisonment of five years, Stephen Allen wrote a letter to his wife expressing regret for his actions and telling her that everything he owned was hers, including the annuities. No physical copy of this letter is in existence, or at least none has yet been produced.

6. No copy of this letter was ever sent to Prudential.

7. Prudential has never endorsed the three annuities to make Mrs. Allen the owner.

8. Mr. Allen has produced no evidence to establish that he did all within his power or all that was reasonable to comply with the policy provisions respecting a change of ownership, or that through no fault of his own he was unable to achieve his goal.

9. During the five years Mr. Allen was incarcerated, Mrs. Allen paid the premiums on the annuities.

10. The Internal Revenue Service, on June 1, 1992, assessed $26,222.49 and $113,425.87 in tax for 1989 and 1990, plus penalties, against Mr. Allen, and filed a notice of federal tax lien with respect to that liability on August 8, 1992.

CONCLUSIONS OF LAW

1. A showing by the United States that federal taxes have been assessed and that such assessment has not been paid is presumptively correct and establishes a prima facie case that taxes are due. United States , et. al. v. Janis [76-2 USTC ¶16,229], 428 U.S. 433 (1976).

2. A taxpayer's failure to pay a federal tax assessment after notice and demand results in a federal tax lien upon all of the taxpayer's property and rights to property, including property subsequently acquired by the taxpayer. 26 U.S.C. §6321.

3. The Certificates of Assessments and Payments submitted by the United States are presumptive proof in this case and otherwise that taxes are owing and that notice and demand was sent. Pursifull v. United States [93-2 USTC ¶50,584], 849 F.Supp. 597 (USDC SD OH 1993), aff'd by unpublished opinion, 19 F.3d 19 (6th Cir. 1994).

4. A federal tax lien arises on the date of assessment, and continues until the taxpayer's liability "is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322.

5. The United States ' lien attached to all property and rights to property of Stephen Allen on June 1, 1992, the date the taxes were assessed.

6. While federal law governs the right of the United States to enforce a tax lien, the determination of rights as to property claimed by a taxpayer is a question of state law. United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 722-23 (1985).

7. The annuities at issue are "property" or "rights to property" to which a federal tax lien attaches. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51 (1958).

8. There is no authority under Indiana law that establishes that the mere payment of the premiums due on an annuity makes the payor the owner of the annuity. Cf. United States v. Fried [63-1 USTC ¶9106], 309 F.2d 851, 852 (2nd Cir. 1962).

9. Under Indiana law, substantial compliance with the requirements of policy must occur to effect a change in ownership of the policy. Cf. Borgman v. Borgman, 420 N.E. 1261, 1263 (Ind. Ct. Appeals 1981).

10. The requirement that the terms of the policy be substantially complied with is not exclusively for the protection of the insurance company. Cook v. The Equitable Life Assurance Society of the United States , 428 N.E.2d 110, 115 (Ind. Ct. Appeals 1981).

11. The letter Mr. Allen sent to Mrs. Allen did not substantially with the terms of the annuities in terms of effecting a change in ownership.

12. The letter Mr. Allen sent to Mrs. Allen therefore did not effect a legal transfer of ownership of the annuities.

13. In the absence of substantial compliance with the terms of the annuities respecting a change in ownership, Mr. Allen was required to show that he did all within his power or all that reasonably could have been expected of him to comply with the policy provisions respecting a change of ownership, and despite that, through no fault of his own, he was unable to achieve his goal. Cf. Cook v. The Equitable Life Assurance Society of the United States , 428 N.E.2d 110, 115 (Ind. Ct. Appeals 1981). Mr. Allen failed to satisfy these requirements.

14. The United States ' tax lien attached to the annuities.

15. An equitable lien does not defeat the United States ' federal tax lien. 26 U.S.C. §6323.

16. The United States ' tax lien is prior to any equitable interest Mrs. Allen may have in the annuities.

17. The United States is entitled to the interpled property.

IT IS SO ORDERED.

 

 

 

In re John Tillery, Debtor. John Tillery, Plaintiff v. United States of America , Defendant

U.S. Bankruptcy Court, East. Dist. Okla. , 95-70899, 12/31/96, 204 BR 575.

[Code Sec. 6321 ]

Bankruptcy: Tax liabilities: IRS tax lien: Notice of filing: Attachment: Disability payments: Debtor's right to receive: Property interest.--

An IRS tax lien arising with respect to a debtor's unpaid taxes attached to his civil service disability retirement annuity payments. The debtor had a right to receive the payments at the time he filed for bankruptcy, and that right constituted a property interest. Since the debtor's tax liability was assessed and notice of the lien was filed prepetition, the lien attached to the debtor's prepetition and postpetition disability payments.

Jimmy L. Veith, P.O. Box 607 , Ardmore , Okla. 73402 , for plaintiff. Laurence K. Williams, Department of Justice, Washington , D.C. 20530 , for defendant.

ORDER

CORNISH, Bankruptcy Judge:

On this 30th day of December, 1996, the Motions for Summary Judgment filed by both the Plaintiff and Defendant came on for consideration.

After a review of the above-referenced pleadings, this Court does hereby enter the following findings and conclusions in conformity with Rule 7052, Fed. R. Bankr. P., in this core proceeding:

FINDINGS OF FACT

1. The Plaintiff filed Chapter 7 bankruptcy on July 10, 1995 and received an Order of Discharge on October 30, 1995. The Order of Discharge extinguished the Plaintiff's personal liability for his 1981, 1984, 1986 and 1989 federal income taxes, interest and penalties.

2. The Plaintiff did not list his property interest in the Civil Service Retirement and Disability Fund on Schedule B as personal property. He listed in Schedule I that he received $1,768.00 per month in "retirement."

3. On the date of filing the petition, the Plaintiff was receiving disability retirement annuity payments drawn from the Civil Service Retirement and Disability Fund. The Plaintiff first started receiving his disability payments on August 22, 1976, after serving the United States Government for 21 years and 11 months. During his 21 years with the government, the Plaintiff made contributions to the Civil Service Retirement and Disability Fund.

4. The Internal Revenue Service levied upon the Plaintiff's disability retirement and annuity payments on May 30, 1996. The IRS has collected $1,266.58. The Office of Personnel Management has sent to the IRS $2,533.16 pursuant to the levy; however, the IRS has refunded $1,266.58 to the Plaintiff. The IRS has released its levy pursuant to the Court's granting of the Temporary Restraining Order on October 24, 1996.

5. The enforcement of the IRS levy was made pursuant to a federal tax lien arising from the Plaintiff's income tax liabilities. The federal tax lien arose from the Plaintiff's 1989 tax liability, notice of which was filed May 21, 1991. This was the only properly filed Notice of Federal Tax Lien for the Plaintiff's personal property. The 1989 federal tax liability, plus statutory additions, equals $1,599.29.

6. The Plaintiff is seeking to enjoin continuation of the levy because it is violative of the Order of Discharge. The Plaintiff seeks an Order releasing his civil service disability retirement annuity payments from the Federal Tax Lien and the return of $1,266.58. The United States seeks an Order of this Court finding that the federal tax lien for Plaintiff's 1989 federal income tax attaches to the civil service disability retirement annuity payments and awarding it $332.71.

CONCLUSIONS OF LAW

The issue before this Court is whether the tax lien arising from the Plaintiff's 1989 tax liability attaches to the Plaintiff's disability retirement annuity payments. Title 26, §6321 of the Internal Revenue Code creates a federal tax lien, in the amount of the unpaid tax, on all property or rights to property, whether real or personal, belonging to the taxpayer. This broad language "reveals on its face that Congress meant to reach every interest in property a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985). The lien imposed by §6321 arises when an assessment is made and continues until either the taxpayer's liability is satisfied or the statute of limitations on collection expires. 26 U.S.C. §6322. The lien attaches to the taxpayer's property and rights to property as of the moment of assessment and once filed, attaches to any after-acquired property. In re Lyons , 148 B.R. 88 (Bankr. D. D.C. 1992). The Court in In re Wesche [96-1 USTC ¶50,265], 193 B.R. 76 (Bankr. M.D. Fla. 1996), was faced with the issue of whether IRS tax liens attach to the debtor's post-petition civil service retirement payments totaling $2,156.00 per month. The Court noted that it is "firmly established in case law that a 'federal tax lien attaches to a then existing right to receive property in the future.' " Wessell v. United States of America (In re Wessell) [93-2 USTC ¶50,549], 161 B.R. 155 (Bankr. D.S.C. 1993)). The Court in Wesche found that the federal tax liens attached to the debtor's right to receive his pension payments prior to the filing of his bankruptcy petition and therefore, the liens continued to attach to his right to receive the pension payments. Id. at 78. The cases cited by the Debtor are not applicable since they deal with the issue of whether tax liens attach to property acquired after bankruptcy.

In the instant case, the Debtor is receiving civil service annuity payments. He was receiving the payments at the time he filed bankruptcy. At the time of filing of the petition, he had a right to receive the pension payments and this right to receive payment is a property right. As a result, the tax lien attached to the Debtor's pension payments prior to filing bankruptcy and thus, continues to attach to his post-petition payments.

IT IS THEREFORE ORDERED that the Motion for Summary Judgment filed by the Defendant is granted. The IRS is entitled to retain the $1,266.58 and is entitled to an additional $332.71.

 

 

 

Eugene P. Tinari, et al., Plaintiffs v. United States of America , Defendant

U.S. District Court, East. Dist. Pa. , CIV. 95-4807, 8/15/96

[Code Secs. 6321 and 6334 ]

Liens and levies: Annuity contracts: Death benefits: State law: Renunciation of right to benefits.--A widower's property interests in death benefits that were payable to him as the primary beneficiary under his deceased wife's annuity policies were not exempt from levy by the IRS in satisfaction of his tax liabilities. His right to the funds vested at the moment of his wife's death, and the continuing tax lien against his property interests immediately attached to his interest in the death benefits. The fact that the taxpayer renounced his right to benefits under the annuity policies after his wife's death did not preclude the tax lien from attaching to his interests. Although state ( Pennsylvania ) law permits the disclaimer of property interests and provides that such a disclaimer relates back to the date of the decedent's death, federal law was controlling, and the taxpayer's renunciation did not displace the tax lien.

MEMORANDUM AND ORDER

YOHN, JR., District Judge:

This action arises in the aftermath of the untimely demise of Katherine Tinari ("Katherine"). At the time of her death, Katherine owned two annuity policies, worth approximately $400,000, that named her husband, Nino V. Tinari ("Nino"), as the primary beneficiary and her children, the plaintiffs in this action, as the contingent beneficiaries. The defendant United States of America , through its agent the Internal Revenue Service ("IRS"), had a continuing tax lien against Nino's property. Once Katherine died, Nino's interest in death benefits under the annuity policies (the "benefits") vested and the IRS immediately levied on the benefits pursuant to its lien.

Plaintiffs responded by bringing this action to recover the $400,000 in benefits collected by the IRS. Specifically, plaintiffs claim that the federal tax lien against Nino's property could not have reached the benefits because Nino renounced his right to them pursuant to Pennsylvania statute. Accordingly, plaintiffs argue, the benefits should have passed to them as the contingent beneficiaries. For the reasons outlined below, the court will enter judgment in favor of defendant and against plaintiffs.

STIPULATED FACTS:

The parties have stipulated that the following facts are true and that no further evidence will be submitted.

1. Plaintiff, Eugene Tinari, is an adult individual who resides at 1502 Grovnor Court , West Chester , Pennsylvania .

2. Plaintiff, Sharon Tinari, is an adult individual who resides at 43 Cherokee Road , Yonkers , New York .

3. Plaintiff, Kathleen Tinari, is an adult individual who resides at 136 Michigan Avenue , Washington , D.C. .

4. Plaintiff, Christopher Tinari, is a minor individual who resides at 813 Galer Drive, Newtown Square , Pennsylvania .

5. Plaintiffs are Katherine's children. Katherine was a resident of Delaware County , Pennsylvania , who died on January 11, 1995, in a tragic automobile accident in Bucks County , Pennsylvania .

6. In April of 1993, the IRS issued proposed income tax changes for Katherine jointly with her husband, Nino, for the tax years 1985 to 1989. These proposed changes, including taxes, penalties and interest, exceeded the sum of $1.2 million.

7. On May 12, 1993, Katherine filed a petition with the United States Tax Court ("Tax Court") objecting to the proposed changes against her, arguing that she should receive innocent spouse treatment pursuant to 26 U.S.C. §6013 .

8. Nino filed a separate Tax Court petition objecting to the changes against him.

9. On June 9, 1993, while the Tax Court cases were pending, the IRS issued a Notice of Jeopardy and Right of Appeal ("Jeopardy Assessment") against Katherine and Nino.

10. The Jeopardy Assessment stated that Katherine and Nino had been assessed jointly for unpaid income taxes for the years 1985 through 1989 in an amount exceeding $1.2 million including taxes, interest and penalties.

11. On June 15, 1993, Katherine filed an administrative appeal with the IRS objecting to the Jeopardy Assessment. The IRS denied her appeal.

12. On June 29, 1993, Katherine filed a complaint in the United States District Court for the Eastern District of Pennsylvania appealing the propriety of the Jeopardy Assessment as it pertained to her.

13. Katherine, through her counsel, and counsel for the United States Department of Justice Tax Division negotiated an agreement to stay the appeal of the Jeopardy Assessment until the Tax Court resolved Katherine's claims.

14. On November 15, 1994, Katherine settled her Tax Court case and the Honorable Edna G. Parker, United States Tax Court, issued an order of settlement. In general, the settlement of Katherine's Tax Court case amounted to a finding of joint liability with her husband, Nino, for taxes and interest totalling $200,000. As to all other taxes, interest and penalties, she received innocent spouse treatment pursuant to 26 U.S.C. §6013 .

15. At all times relevant, Katherine owned two annuity policies with Kemper Life Insurance Company ("Kemper") and Lincoln National Life Insurance Company ("Lincoln") worth about $400,000 (the "annuity policies").

16. The annuity policies designated Nino as primary beneficiary and designated Katherine's children--Eugene, Sharon, Kathleen and Christopher--as contingent beneficiaries.

17. Pursuant to the annuity policies, the primary beneficiary was to be paid the death benefits if the annuitant died.

18. On December 12, 1994, Revenue Officer Thaddeus Madden returned the annuity policies along with other documents to Katherine.

19. Katherine did not change the primary beneficiary of the annuity policies before her death on January 11, 1995.

20. The IRS had not abated the Jeopardy Assessment against Katherine by the time of her death.

21. At the time of her death, the IRS had liens on all of Katherine's property including the annuity policies.

22. At the time of Katherine's death, Nino had an outstanding tax liability in excess of the value of the annuity policies' death benefits.

23. On January 25, 1995, the IRS served levies on Kemper and Lincoln in connection with Nino's unpaid tax liabilities.

24. Nino, through his attorney, notified Kemper and Lincoln, that he was renouncing and forfeiting his rights as beneficiary under the policies.

25. Kemper and Lincoln honored the levies and paid the death benefits of the annuity policies to the IRS.

DISCUSSION:

The federal tax lien statute, 26 U.S.C. §6321 , creates a lien on "all property and rights to property" belonging to any person who, being liable to pay any tax, neglects or refuses to pay the tax after demand. 26 U.S.C.A. §6321 (West 1989). The United States Supreme Court has described the statutory language as "broad" and reflective of a congressional intent "to reach every interest in property that a taxpayer may have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1985). "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Id. at 720 (quoting Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267 (1945)).

Of course, §6321 does not create any property rights, it "merely attaches consequences, federally defined, to rights created under state law. ..." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958). "[S]tate law controls in determining the nature of the legal interest which the taxpayer had in the property . . .sought to be reached by the statute." Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960) (quoting Morgan v. Commissioner [40-1 USTC ¶9210 ], 309 U.S. 78, 82 (1940)).

The sole question before the court is whether Nino's renunciation of his right to benefits under the annuity policies removed the benefits from the grasp of the federal tax lien against his property interests. Plaintiffs implore the court to answer this question in the affirmative, relying on a Pennsylvania statute that permits "[a] person to whom an interest in property would have devolved by whatever means, including ... beneficiaries of life insurance and annuity policies ... [to] disclaim it in whole or in part by a written disclaimer[.]" 20 PA. CONS. STAT. ANN. §6201 (Supp. 1996). Such a disclaimer has the following effect:

(a) In general.--A disclaimer relates back for all purposes to the date of the death of the decedent. ... The disclaimer shall be binding upon the disclaimant and all persons claiming through or under him.

(b) Rights of other parties.--Unless a testator or donor has provided for another disposition, the disclaimer shall, for purposes of determining the rights of other parties, be equivalent to the disclaimant's having died before the decedent in the case of a devolution by will or intestacy. ...

20 PA. CONS. STAT. ANN. §6205 (Supp. 1996). Accordingly, plaintiffs contend that because Nino's disclaimer relates back to the date of Katherine's death, Nino's property interest in the benefits never vested and, therefore, the federal tax lien never attached to the benefits and the IRS's levy upon them was improper.

Despite the appealing logic of plaintiffs' argument, the court is constrained to reject it; legal fictions such as the relation back component of Pennsylvania 's disclaimer law cannot preclude a federal tax lien. Plaintiffs do not, and cannot, deny the timeline of events: (1) Katherine died; (2) Nino's property interest in the benefits vested; (3) the continuing federal tax lien instantly attached to that property interest; and (4) Nino subsequently renounced his right to the benefits. The United States Supreme Court has declared that "once it has been determined that state law has created property interests sufficient for [a] federal tax lien to attach, state law is inoperative to prevent the attachment of such liens." United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 683 (1983) (quoting Bess [58-2 USTC ¶9595 ], 357 U.S. at 56-57.) Accordingly, Nino's renunciation, which occurred after his property interest in the benefits vested, did not displace the federal tax lien. See United States v. Irvine [94-1 USTC ¶60,163 ], 114 S. Ct. 1473, 1482 (1994) (legal fiction of state law disclaimer cannot circumvent federal gift tax); United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 203-04 (1971) (state law renunciation could not defeat federal tax lien that attached to property rights that vested prior to the renunciation); United States v. Comparato [94-2 USTC ¶50,354 ], 22 F.3d 455, 457-58 (2d Cir.) (following Mitchell), cert. denied, 115 S. Ct. 481 (1994).

Once the federal tax lien attached to Nino's interest in the benefits, federal law controlled whether that interest was exempt from levy by the IRS. As the United States Supreme Court has noted "an exempt status under state law does not bind the federal collector. Federal law governs what is exempt from federal levy." Mitchell [71-1 USTC ¶9451 ], 403 U.S. at 204. Section 6334(c) of the Internal Revenue Code provides that no property is exempt from levy other than property specifically exempted by §6334(a) . 26 U.S.C.A. §6334 (Supp. 1996). Since §6334(a) does not provide a general exemption for either property interests in the benefits of annuity policies or subsequently renounced property interests, the federal tax lien was effective against Nino's interest in the benefits despite his subsequent renunciation pursuant to Pennsylvania statute. For these reasons, the court will enter judgment in favor of defendant.

This is, as this court knows, an exceedingly unfortunate result for the plaintiffs. However, it is a result required by current law and the remedy is a change in federal law or a change in beneficiaries prior to death.

CONCLUSIONS OF LAW:

1. The court has jurisdiction over this case pursuant to 28 U.S.C. §1346.

2. At the moment of Katherine's death, Nino possessed a vested property interest in the benefits.

3. The continuing federal tax lien against Nino's property interests immediately attached to his interest in the benefits.

4. Nino's subsequent renunciation of that property interest pursuant to Pennsylvania statute did not displace the federal tax lien.

5. Nino's property interest in the benefits was not exempt from levy by the IRS.

 

 

 

In re James R. Morris, Debtor. James R. Morris, Plaintiff v. United States of America , Internal Revenue Service, Defendant and George W. Stevenson, Chapter 7 Trustee, Intervening Defendant

U.S. Bankruptcy Court, West. Dist. Tenn. , West. Div., 92-33141-B, 12/17/93

[Code Secs. 6321 and 6334 ]

Tax liens: Property exempt from levy: Disability benefits.--

Social security disability payments received by a debtor in bankruptcy proceedings on behalf of his deceased spouse were subject to a prior recorded tax lien. Although the money was exempt from claims of other creditors under state ( Tennessee ) exemption laws and his tax liabilities for the tax years were dischargeable as personal obligations, this had no effect on the applicability of the federal tax lien. Further, the fact that the disability payments may have been considered part of his deceased spouse's probate estate was without consequence because the lien attached to any property actually owned by the taxpayer and to any property to which he had an ownership right.

Christian Goeldner, P.O. Box 1468 , Southaven , Miss. 38671-1468 , for plaintiff. George W. Stevenson, 200 Jefferson Ave. , Memphis , Tenn. 38103 , for trustee. William W. Siler, Assistant United States Attorney, 200 Jefferson Ave., Memphis, Tenn. 38103, Carol C. Priest, Department of Justice, Washington, D.C. 20530, for defendant. Madalyn C. Scott, 200 Jefferson Ave. , Memphis , Tenn. 38103 , for U.S. Trustee. James Morris, 4141 Mimosa Hill, Bartlett , Tenn. 38135 , for debtor.

MEMORANDUM OPINION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT ON COMPLAINT TO DETERMINE DISCHARGEABILITY OF DEBT AND FOR DECLARATORY JUDGMENT

BROWN, Bankruptcy Judge:

This cause is before the Court on cross motions for summary judgment filed by the debtor and the Internal Revenue Service ("IRS"). At issue is whether the debtor may exempt Social Security disability benefits due his wife but not paid until after her death from the federal tax lien asserted by the defendant. The following constitutes findings of fact and conclusions of law pursuant to F.R.B.P. 7052 and 7056.

FACTUAL SUMMARY

The parties are in agreement that no genuine issues of material fact exist in this proceeding. The following is a brief summary of these undisputed facts.

The debtor filed his voluntary Chapter 7 petition for relief on December 19, 1992. Prior to that time he and his wife jointly owed federal income tax, interest and penalties in the cumulative amount of $26,146.36 for the tax years 1987, 1988 and 1989. Assessment of the 1987 tax in the amount of $12,500.00 was made against the debtor and his wife on May 28, 1990. Notice of the federal tax lien for this liability was filed in Shelby County, Tennessee on December 17, 1990. The debtor filed joint tax returns for 1988 and 1989 in November, 1990. These returns established tax liabilities of $2,507.00 and $7,327.00 respectively. Assessments of these amounts were made on November 26, 1990, and notice of a tax lien was filed on August 20, 1992.

The debtor's wife died in August, 1990. Before her death, she had filed a claim for disability compensation with the Social Security Administration ("SSA"). The SSA originally denied her claim and she appealed that decision. After her death, the denial was reversed and five days after the debtor's Chapter 7 petition was filed, on December 24, 1992, the SSA issued a check for accrued disability benefits in the amount of $27,741.00. The check was made payable to "James R. Morris on behalf of Katherine Morris, deceased." Response of the [U.S.A.] . . . On January 14, 1993, the IRS served a levy upon the debtor for the collection of funds belonging to Mrs. Morris or her estate that were subject to the federal tax liens. On January 24, 1993, the debtor delivered the SSA check to the Chapter 7 Trustee, Mr. Stevenson ("Trustee") who deposited it in the debtor's bankruptcy estate account.

The IRS subsequently filed a motion to require the Trustee to abandon any asserted interest in the funds. The motion was later withdrawn and this adversary proceeding filed. The Chapter 7 Trustee subsequently intervened in order to protect any interest that the bankruptcy estate might have in the funds.

The government acknowledges that the debtor's 1987 and 1988 tax liabilities are dischargeable pursuant to §§727 and 523(a)(1) of the Bankruptcy Code. However, the effect that this discharge might have on the asserted IRS lien is contested by the parties.

DISCUSSION

Examination of the Internal Revenue Code, 26 U.S.C. §101 , et. seq., reveals that a federal tax lien is triggered when "any person liable to pay any tax neglects or refuses to pay the same after demand." 26 U.S.C.§6321. Demand may be satisfied by mailing notice of the liability to the taxpayer. 26 U.S.C. §6303(a) . Such a lien is in the amount of the unpaid tax, penalty and interest, if any, and is "upon all property and rights to property, whether real or personal, belonging to [the taxpayer]." 26 U.S.C. §6321 . (Emphasis added). See also U.S. v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 105 S.Ct. 2919, 86 L.Ed.2d 565 (1985). State law defines the extent of the taxpayer's interest in property but the tax lien arises under federal law and will, to the extent of its value, attach to the debtor's property interest. Id., U.S. v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 80 S.Ct. 1008, 4 L.Ed.2d 1192 (1960).

The lien commences "at the time the assessment [of tax liability] is made" and continues until it is satisfied or "becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322 . Such a lien becomes effective against subsequent third party creditors upon registration of the notice of lien by the IRS in the appropriate governmental office located in the taxpayer's resident state. 26 U.S.C. §6323(f) . In Tennessee , this is the county register's office located in the taxpayer's county of residence. Tenn. Code Ann. §66 -21-201.

Once registered, the lien is effective against and, with limited exceptions not applicable here, has priority over subsequent judgment lien creditors, purchasers, and security interest holders. 26 U.S.C. §6323(a) and (b) . As such, even the status of a bankruptcy trustee, which encompasses such capacities pursuant to the strong arm powers of 11 U.S.C. §544 , is subject to the priority of a recorded tax lien.

Furthermore, as a creature of federal law, the federal tax lien is not affected by state law exemptions. 26 U.S.C. §6334(c) ; U.S. v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 91 S.Ct. 1763, 29 L.Ed.2d 406 (1971); Knox v. Great West Life Assur. Co. , 212 F.2d 789 (6th Cir. 1954). Only those property interests or rights thereto enumerated by 26 U.S.C. §6334(a) are exempt from the operation of a federal tax lien. This is significant for purposes of this proceeding because at least in the bankruptcy context, Tennessee has opted out of the federal exemption scheme of 11 U.S.C. §522 and provides its own list of property interests that are exempt from the claims of creditors, which list includes disability benefits. Tenn. Code Ann. §26 -2-112 ("opt out" provision) and §26 -2-111(C). Neither disability benefits nor the right to receive them are counted among the property interests that are exempt from the operation of a federal tax lien. 26 U.S.C. §6334(a) ; Kane v. Burlington Savings Bank [63-2 USTC ¶9596 ], 320 F.2d 545 (2d Cir. 1963).

Satisfaction of a federal tax lien may be accomplished by payment of the amount due, by the surrender of property with a value equal to the amount of the lien, or by levy, which may include seizure and distraint, upon property subject to the lien. 26 U.S.C. §6331 and §6332 .

CONCLUSION

In the instant proceeding, the debtor argues that the IRS is not entitled to the Social Security disability funds at issue because they are exempt from the claims of creditors under state law made applicable by 11 U.S.C. §522(b). Were this a creditor other than the federal government, the debtor would be correct. However, as discussed above and unfortunately for the debtor, the power to tax granted to Congress by the United States Constitution and implemented through the above named statutes, preempts these otherwise applicable state ex- emption laws and renders these funds subject to the tax lien and levy. U.S. Const. art. I, §8 ; U.S. Const. amend. XVI; 26 U.S.C. §6334(c) .

This is true even though the 1987 and 1988 tax liabilities are unquestionably dischargeable as a personal obligation of the debtor. It is well settled that the discharge of personal liability has no effect on a lien against the debtor's property. See, In re Isom [90-1 USTC ¶50,216 ], 901 F.2d 744 (9th Cir. 1990); In re Victor, 1991 WL 268038 (Bankr. W.D. Tenn. 1991).

As further discussed above, the effectiveness of such a lien against a taxpayer's "right to property" operates to render these funds subject to the lien prior to issuance of the SSA check. 26 U.S.C. §6321 ; U.S. v. National Bank of Commerce, supra. Thus, whether the funds were to be property of the debtor or of Mrs. Morris' probate estate is of no importance because, at least to the extent of the amount of the federal tax lien, the funds are subject thereto and were so subject upon commencement of this bankruptcy case.

From the above findings and conclusions, the Court concludes that as a matter of law, the plaintiff is entitled to a discharge of his personal liability for 1987 and 1988 taxes and the defendant is entitled to receipt of the funds at issue to the extent necessary to satisfy its lien.

IT IS THEREFORE ORDERED THAT:

1. The debtor is granted a discharge of his personal tax liabilities for 1987 and 1988; and

2. The Internal Revenue Service is entitled to payment in an amount necessary to satisfy its federal tax lien from the social security disability funds presently held by the Chapter 7 Trustee.

SO ORDERED.

 

 

 

In re George E. Wessel, Jr., aka George E. Wessel, Debtor. George E. Wessel, Plaintiff v. United States of America , L. Winston Lee, Trustee, Defendant

U.S. Bankruptcy Court, Dist. S.C., 92-73283, 9/17/93

[Code Sec. 6321 ]

Federal tax lien: Bankruptcy discharge.--

The IRS held a properly perfected security interest in a doctor's group annuity contract that survived the doctor's bankruptcy discharge and the release of an IRS levy. The United States ' proof of claim was prima facie evidence that the debtor's unpaid federal income tax liabilities were secured by valid federal liens and no evidence had been presented to show that the liens were invalid. Although the liens could not attach to property acquired after the bankruptcy petition was filed, they did attach to all of the doctor's rights to property when the liens arose, before the bankruptcy petition was filed, including his contractual right to receive annuity payments in the future.

[Code Sec. 6343 ]

Federal tax lien: Release of levy.--

The IRS's release of the levy on the payor of a doctor's annuity did not prevent a subsequent levy on the same property. A levy is simply the administrative means of collecting property encumbered by a federal tax lien. So long as the lien remained on the property, it could be seized, even if a previous levy was released.

ORDER

BISHOP, Judge:

This matter came before the Court on stipulated facts and exhibits as set forth in the pretrial order. The parties further agreed to present their legal arguments by briefs. Prior to the submission of the briefs, the parties entered into a consent order which found that the debtor's federal income tax liabilities for 1973, 1976, 1977, 1978, 1979, 1980, 1981, 1982 and 1983 are dischargeable pursuant to 11 U.S.C. §727 and are not excepted from discharge pursuant to 11 U.S.C. §523. The consent order further deferred judgment on any issues not resolved therein to the time of trial. L. Winston Lee, the Chapter 7 trustee, chose not to participate in this adversary proceeding and a judgment by default on all issues presented by the adversary proceeding has been entered against him.

FINDINGS OF FACT

1. The debtor is indebted to the Internal Revenue Service ("IRS") in the amount of approximately $26,388,000.00 for taxes. By Consent Order the parties agree that this is a dischargeable debt pursuant to 11 U.S.C. §727 and is not excepted from discharge pursuant to 11 U.S.C. §523. This consent order disposes of the debtor's first cause of action.

2. This is a core proceeding and this Court has jurisdiction and venue.

3. The debtor filed a Chapter 7 proceeding in this Court on June 3, 1992.

4. The debtor's discharge was entered by the Court on December 30, 1992.

5. The debt to the IRS was duly scheduled on the debtor's bankruptcy schedules, and the IRS received timely notice of this proceeding.

6. The debtor's schedules list a Group Annuity Contract, GA-4278, Certificate #301-14-1017, Tem-Cole, Inc., existing pursuant to a plan managed by Prudential Asset Management Co., Inc.

7. Under this plan the debtor is entitled to receive monthly annuity payments in the amount of approximately $7,200.00. Pursuant to the terms of that contract, the debtor was to receive monthly guaranteed annuity payments beginning on December 1, 1984, and continuing for ninety-seven (97) months thereafter, with the remainder of the 97 payments being made to his beneficiary in the event that he died before the expiration of that time. The 97 monthly period expired in January of 1993, and the debtor is now only entitled to receive a monthly payment for so long as he lives. The right to payment terminates within the month that he dies. Prudential has the right to demand proof that the debtor is living before it is required to make a monthly distribution. The debtor's right to continue to receive the monthly annuity payment is contingent each month upon the debtor being alive within that month. As of the expiration of the 97 month period, the plan does not provide for any lump sum distribution to the debtor and the account has no balance.

8. Of the $7,200.00 annuity payment, the IRS was, prior to the debtor filing his petition in bankruptcy, levying from these payments the sum of approximately $4,447.00 per month pursuant to section 6331 of the Internal Revenue Code.

9. Throughout 1990, the debtor resided at 1813 Roosevelt Boulevard , Ypsilanti , Washtenaw County , Michigan .

10. A Notice of Federal Tax Lien with respect to the debtor's federal income tax liabilities for 1977, 1978, 1981, 1982 and 1983 was filed with the Register of Deeds of Washtenaw County of June 28, 1990.

11. A Notice of Federal Tax Lien with respect to the debtor's federal income tax liabilities for 1979 and 1980 was filed with the Register of Deed of Washtenaw County of November 5, 1990.

12. A Notice of Federal Tax Lien with respect to the debtor's federal income tax liability for 1983 was filed with the Clerk of Court of Palm Beach County on March 7, 1985.

ISSUES

The issues before this Court as agreed upon by the parties in the joint pre-trial order are as follows:

1. Whether the IRS holds a properly perfected security interest in the Group Annuity Contract that survives the debtor's bankruptcy discharge and the Release of Levy and, if so, how much of the debt owed to the IRS is secured by that lien.

2. Whether the Group Annuity Contract is property of the estate.

3. If the Group Annuity Contract is property of the estate, whether it is exemptible and beyond the reach of creditors.

As noted earlier, the Court has already found that the Group Annuity Contract is not property of the estate. Since the formulation of these issues for the Joint Pre-Trial Order, the Parties to this proceeding have concurred on this issue as is indicated by the briefs submitted to the Court. The parties also now agree, as indicated by the briefs, that the issue of whether the Group Annuity Contract is exemptible and beyond the reach of creditors would not be relevant in this case given the finding that the Contract is not property of the estate. The only issue which remains is whether the IRS holds a properly perfected security interest that survives the debtor's bankruptcy discharge and the Release of Levy and, if so, how much of the debt owed to the IRS is secured by that lien.

DISCUSSION

I.

Plaintiff claims that he is entitled to prevail in this action on the grounds the United States has failed to prove that its federal tax liens are valid. Plaintiff bases this assertion on the contention that the record is silent as to whether notice and demand for payment were ever issued to plaintiff. Plaintiff ignores Rule 3001(f) of the Rules of Bankruptcy Practice and Procedure ("Rules"), which states that "a proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." In In re South Atlantic Packers Association, Inc., 30 B.R. 836 (Bankr. D.S.C. 1983), the Court held that a proof of claim is prima facie evidence of the secured status of a claim and that the objecting party had the burden of going forward and producing sufficient evidence to rebut the secured party's claim. See 30 B.R. at 839. See also In re Stallings [89-2 USTC ¶9496 ], 118 B.R. 387, 390 (Bankr. D.S.C. 1989) aff'd without opinion 914 F.2d 249 (4th Cir. 1990). (Proof of claim prima facie evidence of federal tax liability.)

The proof of claim reflects that notices of federal tax liens were filed and also contains copies of the notices of the liens. In accordance with clearly established law, the proof of claim is prima facie evidence that the debtor's unpaid federal income tax liabilities for 1979-1993 are secured by valid federal liens. Plaintiff contends that the federal tax liens are not valid but has failed to establish by competent evidence and appropriate legal authority that the federal tax liens involved here are invalid.

Plaintiff further claims that the record contains no evidence that the IRS mailed notice and demand for payment of the federal tax liabilities to plaintiff. This, however, is incorrect as the record contains two copies of the Notices of Tax Liens filed with the Register of Deeds of Washtenaw County, Michigan. Each notice contains the following statement:

as provided by sections 6321 , 6322 , and 6323 of the Internal Revenue Code, notice is given that taxes (including interest and penalties) have been assessed against the following tax payer. Demand for payment of this liability has been made, but it remains unpaid. Therefore, there is a lien in favor of the United States on all property and rights to property belonging to this taxpayer for the amount of these taxes, and additional penalties, interest, and costs that may accrue.

The notices of federal tax liens were received into evidence by stipulation and the plaintiff offered no evidence to rebut the statement on the notice of federal tax lien that notice and demand for payment was made.

The plaintiff further argues that the statute of limitations for collection of the tax liabilities has expired. Section 6502(a) (1) of the Internal Revenue Code provides that a tax may be collected by levy or by a proceeding in court within ten years of the dates of assessment. The record shows that assessments of the plaintiff's federal income tax liabilities for 1977, 1978, 1981, 1982, and 1983, apparently based upon the liability reflected upon each such income tax return, were made in the next succeeding calendar year. In addition, subsequent assessments of audit deficiencies were made for 1977 and 1978 on October 25, 1989; for 1981 and 1982 on March 14, 1990; and for 1979 and 1980 on March 19, 1990. The ten-year collection period has not expired for any of the audit assessments or for the assessment of the plaintiff's federal income tax liability for 1983. ¹ Plaintiff asserts that the tax liability must be assessed within three years after a return is filed. See Section 6501(a) of the Internal Revenue Code. However, numerous exceptions exist to that rule. See Sections 6503(c) and 6502(e) of the Internal Revenue Code. Section 6503(a) provides that, inter alia, the running of the period for assessing a tax liability shall be suspended during the time that a notice of deficiency has been issued pursuant to Section 6212 of the Internal Revenue Code and during the period that a Tax Court proceeding is ongoing. Section 6503 of the Internal Revenue Code sets forth other grounds for suspending the period for assessing the tax. Accordingly, the fact that the assessment was made more than three years after a return is filed does not necessarily mean that the tax was assessed untimely. As discussed above, the proof of claim is prima facie evidence of its validity and amount. No evidence exists to show that any tax liability was untimely assessed.

In short, plaintiff has offered nothing to show that the federal tax liens are invalid.

II.

Plaintiff seeks to convince the Court that the federal tax liens do not attach to post-petition annuity payments. As the taxes were discharged in this action, it is true that these liens will not attach to property, or rights to property, that plaintiff acquires post-petition. However, plaintiff ignores caselaw which establishes that a federal tax lien attaches to a then existing right to receive property in the future. Here, there is no question that prior to the petition in bankruptcy, plaintiff had a fixed right to receive the annuity payments. In fact, there was nothing more that he had to do in order to receive them. He did not have to perform services or do anything else. Plaintiff disputes this by asserting that staying alive was a condition precedent to receiving the payments. While the debtor may be correct that staying alive is a condition precedent to receiving payment, staying alive is not a condition precedent in acquiring a property right in the annuity. The debtor acquired this prepetition, in fact years before filing, and continues to keep this right and interest as long as he is living. Being alive does not create the property right; rather, death terminates this previously created property right in the annuity. Death is not a condition precedent to acquisition but a condition subsequent. Despite the fact that the annuity payments could not be assigned or bequeathed, this does not change the fact that plaintiff had a completely fixed right in the annuity payments as of the time that the tax liens arose.

Plaintiff's reliance on Rev. Rul. 55-210 and United States v. Long Island Drug Co. [41-1 USTC ¶9140 ], 115 F.2d 983 (2d Cir. 1940) is misplaced. Long Island Drug Co. involved a levy on wages. The Court of Appeals held that the levy did not attach to subsequent wages for services not yet rendered. The Court of Appeals specifically distinguished Long Island Drug Co from the situation where no future performance was required from the taxpayer. 115 F.2d at 986. Plaintiff here has to do nothing else to receive the annuity payments.

As for Rev. Rul 55-210 , that revenue ruling runs counter to plaintiff's arguments. The ruling states as follows:

Where a taxpayer has an unqualified or fixed right, under a trust or contract, or through a chose in action, to receive periodic payments or distributions of property, a Federal Lien attaches to the taxpayer's entire right, and a notice of levy based upon such lien is effective to reach, in addition to payments or distributions then due, any subsequent payments or distributions that will become due thereafter, at the time such payments or distributions become due.

As of the time that the federal tax liens arose, they attached to all plaintiff's rights to property, including his contractual right to receive the annuity payments that are the subject of this case. Even if the payments under a contract are contingent or due to be received in the future, the federal tax lien still attaches to the contractual right to receive those payments. Randall v. H. Nakashima & Co. [76-2 USTC ¶9770 ], 542 F.2d 270 (5th Cir. 1976) (federal tax lien attached to contractual right to receive telephone equipment system). Randall noted that "it would therefore frustrate the attempt to make the tax lien provisions consistent with modern commercial concepts as codified in the Uniform Commercial Code to deny that the taxpayer's contract rights were property rights to which the federal tax lien may attach." [76-2 USTC ¶9770 ], 542 F.2d at 274. Seaboard Surity Co. v. United States [62-2 USTC ¶9653 ], 306 F.2d 855 (9th Cir. 1962) (federal tax lien attached to right to receive proceeds under government contract). Seaboard held that "these tax liens attached immediately to all rights of taxpayers under the government contract awarded December 31, 1956, including payments whenever earned . . . The fact that taxpayer's rights under the contract were dependent on its performance did not affect the tax liens as far as the defendant creditors are concerned." [62-2 USTC ¶9653 ], 306 F.2d at 859. Bigheart Pipeline Corporation v. United States [84-2 USTC ¶9961 ], 600 F. Supp. 50 (N.D. Okl. 1984) (federal tax lien attaches to right to receive proceeds from oil and gas lease). Bigheart held that "under §6321 and applicable case law, a federal tax lien may attach to a contingent interest."

As the federal tax liens attached to the plaintiff's right to receive the annuity payments prior to his filing his petition in bankruptcy, the federal tax liens continue to attach to his contractual right to receive annuity payments. Dewsnup v. Timm, 112 S.Ct. 773 (1992), involving a mortgage on real property. The Supreme Court held that the creditor's lien passed through the bankruptcy proceedings unaffected. In its opinion, the Supreme Court specifically quoted the statement in Ferry v. Sanderfoot, 111 S. Ct. 1825, 1829 (1991), that "ordinarily, liens and other secured interests survive bankruptcy." It is of no consequence that the underlying federal income tax liabilities are discharged in this action. As Dewsnup noted, the discharge only relieves the plaintiff of personal liability for the debt. It does not affect in rem actions against property. 112 S.Ct.at 778, quoting Johnson v. Home State Bank, 111 S.Ct. 2150, 2154 (1991). Similarly, it does not matter that the property involved here is personalty. Matter of Windham, 136 B.R. 878, 882-883 (Bankr. M.D. Fla. 1992) specifically held that a lien on personalty may not be "stripped down" in a Chapter 7 bankruptcy case.

As it is clear that the federal tax lien remains attached to the plaintiff's contractual right to the annuity payments, the IRS may administratively seize the annuity payments even though the plaintiff has received his discharge. So long as it is encumbered by a federal tax lien, property may be administratively seized, even if it is not in the hands of the taxpayer or even if it does not even belong to the taxpayer. Section 6331(a) of the Internal Revenue Code; United States v. Donahue Industries, Inc. [90-2 USTC ¶50,343 ], 905 F. 2d 1325, 1331 (9th Cir. 1990). To the extent that the plaintiff seeks a declaratory judgment holding that payments under the annuity contract may not be seized to satisfy the tax liens in question, there are no grounds to provide such relief. ² In this respect, it is immaterial that plaintiff may not assign his benefits under the plan. Section 6334(a) lists types of property exempt from levy. The only type of pension payments exempt from a levy is

annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force and Coast Guard Metal of Honor roll (38 U.S.C. Section 562 ), and annuities based on retired or retainer pay under Chapter 73 of Title 10 of the United States Code.

Section 6334(a)(6) of the Internal Revenue Code.

Section 6334(c) of the Internal Revenue Code states that no property other than what is set forth at Section 6334(a) of the Internal Revenue Code is exempt from levy. See also 26 C.F.R. Section 1.401(a)-13(b). (Anti-assignment provisions of Section 401(a)(13) do not preclude administrative levy pursuant to Section 6331 of the Internal Revenue Code).

It is also of no consequence that on June 19, 1992, the Internal Revenue Service released the levy on the payor of the annuity, Prudential Insurance Company. As can be seen by the copy of the release of the levy attached to the pretrial order, the release was made pursuant to Section 6343 of the Internal Revenue Code. Section 6343(a)(3) of the Internal Revenue Code states that a release of a levy shall not prevent a subsequent levy on the same property. A levy is simply the administrative means of collecting property encumbered by a federal tax lien. See National Bank of Commerce, supra, 472 U.S. at 720. As long as the federal tax lien remains on the property, it may be seized even if a previous levy was released.

It therefore appears that there is nothing to prevent the IRS from collecting, post-petition, the annuity payments in question. It is therefore

ORDERED that notwithstanding any order of discharge entered in this case, the federal tax liens securing plaintiff's federal income tax liabilities for 1977-1983 continue to attach to all property and rights to property owned by plaintiff as of the date of the filing of the petition in bankruptcy in this case; it is further

ORDERED that notwithstanding any order of discharge entered in this case, the federal tax liens securing plaintiff's federal income tax liabilities for 1977-1983 continue to attach to plaintiff's right to receive annuity payments which Prudential Insurance Company of America is obligated to pay to plaintiff pursuant to Group Annuity Contract No. GA-4872, Certificate No. 301-14-1017; it is further

ORDERED that notwithstanding any order of discharge entered in this case, the United States of America may, by all lawful means, collect payments due plaintiff pursuant to Group Annuity Contract No. GA-4872, Certificate No. 301-14-1017 as long as the aforementioned federal tax lien remains in effect, unless the debtor dies prior thereto.

AND IT IS SO ORDERED.

¹ Prior to November 5, 1990, Section 6502 of the Internal Revenue Code provided six years after assessment to collect unpaid federal income tax liabilities either administratively or through commencing a proceeding in court. On November 5, 1990, Section 6502 was amended to provide a ten-year collection period. The amendment applied to all subsequent assessments and to all assessments for which the statute of limitations had not yet expired as of November 5, 1990. As the plaintiff's federal income tax liability for 1983 was assessed on December 7, 1984, its collection period had not expired as of November 5, 1990. Certainly, the time for collecting the assessments based upon the audit deficiencies had not expired as of the amendment of Section 6502 of the Internal Revenue Code. See OBRA, 1990, P.L. 101-508, Section 11317(c) (November 5, 1990). Also, it should be noted that the collection period is suspended for the time that the automatic stay imposed by 11 U.S.C. §362 was in effect, plus six months thereafter.

² Plaintiff's federal income tax liabilities for 1973 and 1976 were not assessed and are discharged in this case. As these liabilities were never secured by federal tax liens, they may not be collected through seizure of the annuity payments or otherwise. Likewise property in which the plaintiff acquired no interest until after he filed his bankruptcy petition will not be encumbered by the federal tax liens securing plaintiff's federal income tax liabilities for 1977-1981. However, that does not change the fact that the federal tax liens in place at the time that the plaintiff filed his petition in bankruptcy continue to attach to plaintiff's right to receive the annuity payments.

 

 

 

United States of America, Plaintiff v. Admistrator of the Estate of Helen C. McCall; Executor of the Estate of Patrick J. McCall, a/k/a Patrick M. McCall; Citizens Savings Bank; Paul F. Harron; Mauch Chunk Trust Company; and The Equitable Life Assurance Society of the United States, Defendants

U. S. District Court, Middle Dist. Pa., No. 9778 Civil, 313 FSupp 1399, 12/18/69

[Code Sec. 6323(f)]

Lien for taxes: Priority: Filing.--The Government's tax lien was superior to a bank's claim that it held a security interest in annuity contracts assigned to it in 1953 by the delinquent taxpayers. The Government's lien was perfected in 1951 by filing notice of the lien in the county where the taxpayers lived.

[Code Sec. 6323]

Lien for taxes: Interpleader: Recovery of interpleader costs.--An insurance company was denied recovery of costs of interpleading where the allowance of such costs would have impaired the value of the Government's lien attaching to annuity contracts of the delinquent taxpayers. BACK REFERENCES: 70FED ¶5362.62.

[Code Sec. 6323(a)]

Lien for taxes: Priority: Judgment creditor: Revival of judgment.--A trust company lost its priority over the Government's tax lien by failing to revive its judgment under state law. The IRS did not make any representations which could have persuaded the trust company into not reviving its lien in a timely manner. BACK REFERENCES: 70FED ¶5362.78.

Bernard J. Brown, United States Attorney, Post Office Bldg., Scranton, Pa., for plaintiff. John Dobash, 171 W. Ridge St., Lansford, Pa., for H. G. McCall Est.; John P. McCall, 14 Acorn Lane, Ludlow, Mass., for P. J. McCall Est.; Alan S. Flink, 830 Hospital Trust Bldg., Providence, R. I., for Citizens Savings Bank; Lawrence Biele, 1489 Suburban Station Bldg., Philadelphia, Pa., for P. F. Harron; Roger N. Nanovic, 57 Broadway, Jim Thorpe, Pa., for Mauch Chunk Tr. Co.; Warren, Hill, Henkelman & McMenamin, Scranton Electric Bldg., Scranton, Pa., for the Equitable Life Assurance Society of the U. S., defendants.

Memorandum

SHERIDAN, District Judge:

This action was tried to the court without a jury.

[Facts]

The complaint seeks to establish the priority of a lien of the United States on the settlement value of certain annuity contracts issued by Equitable to decedents, Patrick J. McCall and Helen McCall, and on real estate owned by Patrick J. McCall, by reason of decedents' non-payment of income taxes. It is alleged in Count 1, which relates to the annuity contracts that the United States has valid liens against decedents' estates for unpaid income taxes for which the decedents were either jointly and severally liable or severally liable; ¹ that the settlement values ² of the annuity contracts are payable to decedents' estates, subject to the claims or interest, by way of assignment, of defendants, the Citizens Savings Bank (Citizens) and Paul F. Harron; that no part of the alleged balance due on the assessments has been paid; and that the assets of the estates are insufficient to satisfy outstanding debts of the estates.

Count 2 incorporates the allegations of Count 1 with respect to unpaid taxes, liens, liability of decedents and insufficiency of decedents' assets to satisfy all outstanding debts. It is alleged in Count 2 that Patrick J. McCall was the owner of two parcels of land in Lehighton and one parcel in Lansford, Carbon County, Pennsylvania, and that this land forms a part of the estate of Patrick J. McCall subject to the claims or interest of defendant, the Mauch Chunk Trust Company (Mauch Chunk).

Each count requests the court to require defendants to show the nature of their claims on these assets; that the court adjudicate the tax liability to be as set forth in the complaint; that the United States be declared the holder of valid and subsisting liens on the assets described in the complaint; and that the court determine the rights and priorities of the liens and claims of the parties to this action.

[Claimant's Contentions]

Citizens filed an answer in which it claims an interest in the settlement value of the annuity contracts by reason of certain assignments from decedents to secure a loan on which a balance of $19,157.10 is due. It admitted the allegations with respect to assessment, non-payment, and the like. It averred, however, that its rights are superior to those of the United States and prayed for judgment to the extent of the balance due on the loan plus interest and costs. The Equitable Life Assurance Society (Equitable) filed an answer in which it admitted the allegations with respect to issuance of the annuity contracts, the settlement values, and the assignments thereof as set forth in Count 1. Equitable indicated, however, that it is a mere stakeholder, requested the court to determine the rights of the other parties in the settlement values and to allow it costs and attorney's fees.

Mauch Chunk filed an answer to Count 2 in which it stated that a judgment for $30,000 in its favor against Patrick J. McCall is a lien on his real estate, and is superior to all other liens thereon.

The defendants, the Executor of the estate of Patrick J. McCall, the Administrator of the estate of Helen G. McCall, and Paul F. Harron, failed to appear, plead or otherwise defend, within the required time and judgment by default was entered against them.

[Debtor's Residence]

Previously, plaintiff moved for summary judgment. Only Citizens opposed judgment in favor of plaintiff on Count 1. Citizens' interest in the settlement values of the annuity contracts arose because of the McCalls' December 3, 1953, assignment of the contracts to Citizens as collateral for a loan. The Government contended that assuming the assignments qualify Citizens as a holder of a security interest, as defined in 26 U. S. C. A. §6323, nevertheless, on November 27 and 28, 1951, the United States filed lien notices in Schuylkill and Carbon Counties for assessments for the taxable years 1943-1945. The Government argued that since the total amount of the assessments ($356,589.64) far exceeded the settlement values of the contracts, the United States, having perfected its lien prior to the assignments to Citizens, was entitled to priority over Citizens. The motion for summary judgment was denied because the pleadings, and supporting affidavits submitted by the plaintiff, did not establish that the residence of the McCalls at the time of filing of the liens was in either one of the counties, Carbon or Schuylkill, and the filing of the lien in the county of residence was necessary to perfect the liens under Section 6323. The pleadings and affidavits, however, established the other facts which would warrant the relief asked for by the plaintiff.

When this action was called for trial, all defendants were given notice of the time and place. ³ None appeared but Equitable, whose interest in the priority fight between plaintiff and Citizens is that of a mere stakeholder. The Government introduced into evidence, without objection, the pleadings, the affidavits previously submitted in connection with its motion for summary judgment, ⁴ and called Emmet T. McCall, son of Helen G. and Patrick J. McCall, to testify. This evidence clearly established that in 1951, the plaintiff filed notices of lien in Carbon and Schuylkill Counties covering assessments, totalling $356,589.64 for the years 1943-1945; that these liens related to the joint and several liability of Patrick J. and Helen G. McCall in the amount of $206,299.21 and liability of Patrick J. McCall in the amount of $150,290.43; that Patrick J. McCall and Helen G. McCall were residents of Carbon County during the entire year of 1951; that the notices perfected the lien of the plaintiff, as of 1951, under the provisions of Section 6323; that the assignment of the annuity contracts to Citizens did not take place until 1953; that the assessments which were the subject of the liens far exceeded the settlement value of $46,079.78 of the annuity contracts; ⁵ and that assuming that the assignments of the annuity contracts to Citizents qualified it as a holder of a security interest, the prior perfection of the plaintiff's lien entitled plaintiff to priority over Citizens.

[Interpleader Costs]

Equitable claims that it is entitled to counsel fees and costs out of the proceeds of the annuity contracts. While it did not file a formal counterclaim in interpleader, in its prayer for relief in its answer to plaintiff's complaint, Equitable requested:

"1. That the plaintiff and the defendants, Administrator of the Estate of Helen G. McCall, Executor of the Estate of Patrick J. McCall, a/k/a Patrick M. McCall; Citizens Savings Bank, Paul F. Harron and Mauch Chunk Trust Company, be required to litigate and settle among themselves their rights and claims in this action, without involving this defendant, and that the Court discharge this defendant from all liability in the premises except to the party, if any, it shall adjudge entitled to the proceeds of the policies involved herein."

In effect, therefore, it has interpleaded and disclaimed any right to the funds. Equitable relies on United States v. Ullman, E. D. Pa. 1953, [53-2 USTC ¶9648] 115 F. Supp. 211, in support of its claim to counsel fees and expenses. That case, while lending support to Equitable's argument, was apparently the first decision in connection with a claim for counsel fees and costs where the lien exceeded the fund. The court stated (p. 214), "The United States Attorney frankly concedes that insofar as his research and the Department of Justice indicates that this is a matter of first impression." Later cases clearly hold that counsel fees and costs cannot be awarded when the lien exceeds the amount of the fund, for to permit this would be to diminish the Government's prior lien. United States v. Wilson, 3 Cir. 1964, [64-1 USTC ¶9396] 333 F. 2d 147; Youngstown Sheet & Tube Co. v. Patterson-Emerson-Comstock of Indiana, N. D. Ind. 1963, [64-1 USTC ¶9128] 227 F. Supp. 208; Narragansett Bay Gardens, Inc. v. Grant Construction Co., D. R. I., 1959, [59-2 USTC ¶9557] 176 F. Supp. 451; Ford Motor Co. v. Hackart Constr. Co., D. N. J., 1956, [56-2 USTC ¶9831] 143 F. Supp. 216. The Narragansett case, supra, cited by the Third Circuit in Wilson, supra, specifically considered the holding in Ullman, supra, and rejected it as against the weight of authority. Equitable's application for counsel fees and costs will be denied.

[Revival of Judgment]

The remaining question relates to the priority of lien to the real estate described in Count II. On the motion for summary judgment, only Mauch Chunk opposed the plaintiff's right to priority of the lien on the real estate. The pleadings and affidavits submitted in connection with the motion showed that the notices of lien in connection with the assessments were properly recorded in Carbon County. The United States admitted that Mauch Chunk's judgment lien, docketed to No. 106 January Term 1951 in the Court of Common Pleas of Carbon County, had priority over the lien of the United States. The Government argued, however, that Mauch Chunk lost its priority by failing to revive the judgment within five years of the last revival on January 19, 1961. ⁶ Mauch Chunk filed a counter-affidavit in which it admitted it had not revived its lien, but asserted this was because of an offer by the Internal Revenue Service, accepted in writing, to settle Mauch Chunk's claim for $10,000, which would have permitted the United States to obtain a first lien. Mauch Chunk stated that on February 8, 1967, as soon as it learned that the United States did not intend to fulfill the arrangements made by the Internal Revenue Service, it revived its lien. Mauch Chunk argued that under these facts it was lulled by the Government into permitting its priority to lapse, and the United States was thereby equitably estopped from asserting any priority. The motion was denied primarily because the plaintiff failed to address itself either by way of legal argument or counter-affidavit to the matters set forth in the affidavit of Mauch Chunk, and further, the Mauch Chunk affidavit did not establish, and at most permitted only an inference, that Mauch Chunk was lulled into permitting its priority to lapse.

[Equitable Estoppel Not Present]

At the trial, Mauch Chunk, although given notice, did not appear. The plaintiff introduced into evidence the pleadings and affidavits submitted in connection with its motion for summary judgment, together with supplemental affidavits of the Internal Revenue Service representatives who dealt with Mauch Chunk. This evidence clearly demonstrates that the Internal Revenue Service did not make any representations which could have lulled Mauch Chunk into not reviving its lien in a timely manner. Therefore, the Government is not equitably estopped from asserting its acquired priority of lien to the real estate.

In view of the foregoing, it is unnecessary to consider the plaintiff's legal argument that the Government is not estopped by the acts of its agents who purport to enter into an arrangement to do what the law does not permit.

An appropriate judgment will be entered.

Judgment

In accordance with memorandum this day filed, it is ORDERED, ADJUDGED and DECREED that:

1. The United States recover of defendant, John Dobash solely in his capacity as Administrator D. B. N. of the Estate of Helen G. McCall, the sum of $234,746.77 for unpaid federal income taxes assessed against her for the taxable years 1944, 1946, 1948, 1949 and 1950, and for penalties and interest to December 28, 1966, plus interest thereafter as provided by law.

2. The United States recover of defendant, John P. McCall solely in his capacity as Executor of the Estate of Patrick J. McCall, the sum of $460,973.57 for unpaid federal income taxes for the years 1943 through 1950, inclusive, and for penalties and interest to December 28, 1966, plus interest thereafter as provided by law.

3. As a result of the filing of a notice of lien on November 28, 1951, in Carbon County, Pennsylvania, the county of residence of Patrick J. McCall and Helen G. McCall at that time, the United States acquired valid and subsisting liens against Patrick J. McCall and Helen G. McCall to the extent of unpaid income taxes, penalties and interest assessed against them and due and owing as of December 28, 1966, as follows:

Taxable                                                 Amount

Year                        Persons Liable                 Due

                Patrick J. McCall and

1944            Helen G. McCall ..........         $206,299.21

1943            Patrick J. McCall ........         $ 39,149.58

1945            Patrick J. McCall ........         $111,140.85

                                                   $356,589.64

 

4. That to the extent of the amount of the valid and subsisting liens described in paragraph 3 above, the plaintiff's liens are first in priority to the liens and claims of defendants, Citizens Savings Bank, Paul F. Harron and Mauch Chunk Trust Company, as regards the following real and personal property constituting a part of the Estate of Patrick J. McCall and Helen G. McCall:

A. Annuity contracts issued by The Equitable Life Assurance Society of the United States:

Contract No.           Date of Issue                          Beneficiary             Amount

11,884,534              12/24/44           Est. of Patrick J. McCall ....         $17,987.41

11,884,999              12/22/44           Est. of Helen G. McCall ......         $18,317.72

12,055,305               12/5/45           Est. of Patrick J. McCall ....         $ 9,744.65

                                                                                  $46,079.78

 

B. Two parcels of real property located in Lehighton, Mahoning Township, Carbon County, Pennsylvania, as more particularly described in Exhibits A and B of the complaint, and one parcel of real property located at West Abbott Street, Lansford, Pennsylvania, as more particularly described in Exhibit C of the complaint, all owned by Patrick J. McCall.

4. Defendant, The Equitable Life Assurance Society of the United States, is not entitled to an award for costs and attorney's fees.

¹

                                      Balance of Assessment Due

Taxable Period                     Including Penalty and Interest

                         Joint & Several           Estate of         Estate of

                               Liability          Patrick J.          Helen G.

                          (Both Estates)              McCall            McCall

1944, 48, 49, 50             $231,991.70

1946 ...........                                                     $2,755.07

1943, 45, 46, 47                                 $228,981.87

                             $231,991.70         $228,981.87         $2,755.07

 

Assessments for the above were made in 1951 and 1952 with the exception of about $6,200, charged against both estates, which was assessed in 1955.

² The settlement value are alleged to be as follows:

Contract No.           Date of Issue                          Beneficiary             Amount

11,884,534              12/24/44           Est. of Patrick J. McCall ....         $17,987.41

11,884,999              12/22/44           Est. of Helen G. McCall ......         $18,317.72

12,055,305               12/5/45           Est. of Patrick J. McCall ....         $ 9,774.65

                                                                                  $46,079.78

 

³ Notice was given even to those against whom judgment by default had been entered.

⁴ Some of which would qualify as summaries of business records.

⁵ See note 2, supra.

⁶ See 12 P. S. §§ 878-880.

 

 

 

United States of America v. Archie Bellin, Goldy Bellin and Connecticut General Life Insurance Company

U. S. District Court, Dist. R. I., C. A. No. 1891, 11/9/56

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien for taxes: Cash surrender value of annuity policy.--The lien for unpaid income taxes was adjudged a prior lien against all property of the taxpayers, including an annuity policy. They were ordered to apply to the insurance company for the cash surrender value of the policy, payable in a check made out to the annuitant-taxpayer and the United States.

Joseph Mainelli, United States Attorney, Samuel S. Tanzi, Assistant United States Attorney, for plaintiff. Thomas H. Quinn, Matthew W. Goring, Stephen B. Ives, Jr., Providence, R. I., of counsel, for defendants.

Judgment

DAY, District Judge:

This matter came on for hearing on the plaintiff's motion for judgment on the pleadings, which was considered by the Court as a motion for summary judgment under the provisions of Rule 12(c) of the Federal Rules of Civil Procedure, and after argument and consideration thereof, it is hereby

Ordered

1. That judgment be entered for the plaintiff, United States of America against the defendant, Archie Bellin in the sum of $95,538.22 Dollars and against the defendants, Archie Bellin and Goldy Bellin jointly in the sum of $121,425.16 Dollars.

2. That the liens of the United States of America, arising out of the assessment of federal income taxes against the defendant, Archie Bellin for the years 1942 and 1944 in the sum of $68,683.80 Dollars, and against the defendants, Archie Bellin and Goldy Bellin for the year 1943 in the sum of $82,483.56 Dollars be and are decreed to be prior, valid and subsisting liens upon all property and rights to property of the defendant, Archie Bellin and the defendants, Archie and Goldy Bellin, and in which the defendant, Archie Bellin, and the defendants, Archie and Goldy Bellin have a right or interest as property or rights to property which the defendants have acquired since May 1, 1950, including Annuity Policy No. 67764 issued on the life of Archie Bellin by the defendant, Connecticut General Life Insurance Company; that the plaintiff's liens against all property and rights to property of the defendants, Archie Bellin and Goldy Bellin, be, and hereby are foreclosed, such foreclosure including foreclosure against the interest of the said Archie Bellin in said annuity policy issued by the defendant, Connecticut General Life Insurance Company, in accordance with the provisions of paragraphs 3 through 5 of this judgment.

3. That the defendants, Archie and Goldy Bellin are hereby directed to make application to the defendant, Connecticut General Life Insurance Company to accept the cash surrender option contained in annuity policy No. 67764 issued by the defendant, Connecticut General Life Insurance Company upon the appropriate form, to be supplied by the defendant, Connecticut General Life Insurance Company.

4. That the defendant, Connecticut General Life Insurance Company, upon the receipt of said application and upon surrender of said policy, pay the cash surrender value of said annuity in a check payable to the defendant, Archie Bellin and to the plaintiff, United States of America , said cash surrender value being the sum of $10,939.21 Dollars.

5. That on receipt of said check from the defendant, Connecticut General Life Insurance Company, Archie Bellin endorse the same in blank, and deliver same to the plaintiff, United States of America, in partial satisfaction of the judgment against Archie Bellin, set forth in pragraph 1, hereof.