Bank Deposits page1
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
Mid. Dist. La.
, 93-11077, 5/1/2002
Secs. 6321 and 6323
Tax liens: Annuities: Property transferred to third parties: Validity
and priority against third parties: Super-priority safe harbor: Filing
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.
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
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,
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
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
'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.
Paragraphs 1(B) and 1(C),
including subparts, essentially allege that the
'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
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
upon all property and rights to property, whether real or
personal, belonging to such person. 4
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
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.
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
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,
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
'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
Contract rights are a form of property under
law, and those rights became impressed with the tax lien at the time it
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
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
(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
The provisions of
subsection (b) similarly do not apply to provide the banks with
"super-priority" above the government's tax liens. The
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
'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
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
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.
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
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
The Court does not believe
that the traditional principles outlined above help the
either. Those principles form an equitable balancing test. While it may
be argued that pre-judgment interest would compensate the
for the time-value of the money, other factors militate against such an
award. First, as stated above, the
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
's motion for such.
For the foregoing reasons,
the Court will issue an order granting the
'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
The original defendant, Sunburst Bank changed its name to Union Planters
on June 15, 1995. On August 29, 1995 this Court allowed the substitution
of Union Planters Bank of
. Subsequently, Union Planters Bank of
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.
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
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.
26 U.S.C. §6321 (emphasis added).
United States v. National Bank of Commerce [85-2 USTC ¶9482],
472 U.S. 713, 719-720 (1985).
26 U.S.C. §6322.
See, Texas Commerce Bank-Fort Worth, N. A. v. United States [90-1
USTC ¶50,155], 896 F.2d 152, 161 (5th Cir. 1990).
See, United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55,
78 S.Ct. 1054, 1057 (1958).
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).
See, Medaris v.
[89-2 USTC ¶9565], 884 F.2d 832, 833 (5th Cir. 1989), quoting National
Bank of Commerce [85-2 USTC ¶9482], 472
at 722, 105 S.Ct. at 2925.
See, In re Wessel [93-2 USTC ¶50,549], 161 B.R. 155, 159 (Bankr.
D.S.C. 1993); c.f.,
v. Metropolitan Life Ins. [89-1 USTC ¶9362], 874 F.2d 1497 (11th
Accord, Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770],
542 F.2d 270 (5th Cir. 1976) (contract rights are "right to
See generally, Phelps v.
[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
See, Aquilino [60-2 USTC ¶9538], 363
at 814, 80 S.Ct. at 1280.
See, Texas Commerce Bank [90-1 USTC ¶50,155], 896 F.2d at 161.
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.
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
See, Western National Bank v. United States [94-1 USTC ¶50,017],
8 F.3d 253, 255 (5th Cir. 1993).
"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.
See, n. 2, supra.
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.
The banks have objected to imposition of interest on the basis that they
were never put on notice of the
's claim for such prior to trial. While the
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
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).
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
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).
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).
Gore, 137 F.3d at 866.
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.
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,
District Court, So.
Dist. Ind., New Albany Div., NA 96-118 C B/G, 3/31/98
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 (
) 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.
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
replied on February 12, 1998. The Court, being duly advised, finds that
the Summary Judgment in favor of the
is required, based on the following Findings of Fact and Conclusions of
1. The Prudential Insurance
("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:
here some of the words and phrases used all through this contract.
We, Our and
You and Your.--The owner of
Modifications.--Only a Prudential officer may agree to modify this
contract, and then only in writing.
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
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.
1. A showing by the
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.
, 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
3. The Certificates of
Assessments and Payments submitted by the
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.
' 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
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
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
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).
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
, 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
, 428 N.E.2d 110, 115 (Ind. Ct. Appeals 1981). Mr. Allen failed to
satisfy these requirements.
' tax lien attached to the annuities.
15. An equitable lien does
not defeat the
' federal tax lien. 26 U.S.C. §6323.
' tax lien is prior to any equitable interest Mrs. Allen may have in the
is entitled to the interpled property.
IT IS SO ORDERED.
In re John Tillery, Debtor. John Tillery, Plaintiff
United States of America
Bankruptcy Court, East.
, 95-70899, 12/31/96, 204 BR 575.
Sec. 6321 ]
Bankruptcy: Tax liabilities: IRS tax lien: Notice of filing:
Attachment: Disability payments: Debtor's right to receive: Property
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
Jimmy L. Veith,
P.O. Box 607
, for plaintiff. Laurence K. Williams, Department of Justice,
, for defendant.
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:
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
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
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.
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
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
, 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.
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
Eugene P. Tinari, et al., Plaintiffs v.
United States of America
District Court, East.
, CIV. 95-4807, 8/15/96
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 (
) 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
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
The parties have stipulated
that the following facts are true and that no further evidence will be
1. Plaintiff, Eugene
Tinari, is an adult individual who resides at
1502 Grovnor Court
2. Plaintiff, Sharon
Tinari, is an adult individual who resides at
43 Cherokee Road
3. Plaintiff, Kathleen
Tinari, is an adult individual who resides at
136 Michigan Avenue
4. Plaintiff, Christopher
Tinari, is a minor individual who resides at
813 Galer Drive,
5. Plaintiffs are
Katherine's children. Katherine was a resident of
, who died on January 11, 1995, in a tragic automobile accident in
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
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
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
16. The annuity policies
designated Nino as primary beneficiary and designated Katherine's
children--Eugene, Sharon, Kathleen and Christopher--as contingent
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
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.
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."
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.
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
'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
USTC ¶9595 ], 357
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.
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
at 204. Section
6334(c) of the Internal Revenue Code provides that no
property is exempt from levy other than property specifically exempted
. 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.
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
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
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,
United States of America
, Internal Revenue Service, Defendant and George W. Stevenson, Chapter 7
Trustee, Intervening Defendant
Bankruptcy Court, West.
, West. Div., 92-33141-B, 12/17/93
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 (
) 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.
P.O. Box 1468
, for plaintiff. George W. Stevenson,
200 Jefferson Ave.
, 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.
Trustee. James Morris, 4141 Mimosa Hill,
, for debtor.
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.
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
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.
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
. 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
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)
, this is the county register's office located in the taxpayer's county
Code Ann. §66
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)
. As such, even the status of a bankruptcy trustee, which
encompasses such capacities pursuant to the strong arm powers of 11
, 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.
, 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
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.
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.
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.
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
Bankruptcy Court, Dist.
S.C., 92-73283, 9/17/93
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
' 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.
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.
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.
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
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.
The issues before this
Court as agreed upon by the parties in the joint pre-trial order are as
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.
Plaintiff claims that he is
entitled to prevail in this action on the grounds the
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
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.
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.
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
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.
the Internal Revenue Code.
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
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
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
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.
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
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.
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
S. District Court, Middle Dist. Pa., No. 9778 Civil, 313 FSupp 1399,
[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.
SHERIDAN, District Judge:
This action was tried to
the court without a jury.
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
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.
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.
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
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
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,
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."
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.
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.
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
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:
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
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.
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
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.
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
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.
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
Notice was given even to those against whom judgment by default had been
Some of which would qualify as summaries of business records.
See note 2, supra.
See 12 P. S. §§ 878-880.
United States of America v. Archie Bellin, Goldy
Bellin and Connecticut General Life Insurance Company
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
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.
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
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
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.
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.