Community Property page2
In re William H. Porter, Debtor
District Court, No.
, C-92-4089 FMS, 4/5/93, Reversing and remanding an unreported
Bankruptcy Court decision
Lien for taxes: Community property.--The IRS was allowed to
satisfy a debtor's tax liability that arose upon the sale of the
residence owned by the debtor and his former spouse from the sale
proceeds. Since the sale occurred after the couple's divorce but before
the division of their community property, the debtor had a property
interest in the proceeds at the time of tax assessment pursuant to state
) law. Therefore, the IRS could reach the proceeds to satisfy its lien.
However, the IRS was only allowed to reach one-half of the proceeds of
the sale that were paid into the estate as community property because
the debtor had only a one-half interest in the community property.
Michael Fallon, 100 E. St.,
, for debtor. Bennett G. Young, LeBoeuf, Lamb, Leiby & MacRae, One
Embarcadero Ctr., San Francisco, Calif. 94111, for trustee.
SMITH, District Judge:
This is an appeal from an
order of the U.S. Bankruptcy Court (Jaroslovsky, J.). Appellant is the
; appellee is Gretchen Porter, debtor's former spouse. The IRS sought to
satisfy debtor William H. Porter's tax liability, owing on his share of
the profit from the sale of the Porters' marital residence, from the
proceeds of the sale. The sale occurred after divorce but before
division of the community property. The bankruptcy court ruled that the
IRS could not do so, following the State of
law that community property is not liable for post-dissolution debts of
According to the
government, the question presented is "[w]hether the bankruptcy
court erred in ruling that the debtor's tax liability is not a community
claim which may be satisfied with the proceeds from the sale of the
According to appellee, the
question is whether "the community property of a divorced couple
[is] subject to a post-dissolution claim against one spouse?"
Gretchen Porter and debtor
William H. Porter married in 1969. Their marriage was dissolved by the
California Superior Court for
in November of 1989, but the court reserved jurisdiction to divide their
community property later.
One of the pieces of
community property was the family residence. The residence was sold in
November, 1990. The bulk of the proceeds of sale were placed in a
blocked trust account.
In January of 1991, Debtor
both remarried and filed his 1990 Federal income tax return. The tax was
assessed on January 8, 1991. His return claimed that he owed
$188,000.00, primarily due to the sale of the residence.
On March 8, 1991, the Santa
Barbara Superior Court issued an interim order awarding the custody of
the proceeds from the sale of the marital residence to Gretchen Porter.
This award of the community property to Gretchen Porter occurred after
the tax assessment (as well as after the sale of the residence).
On March 29, 1991, debtor
filed a chapter 7 bankruptcy petition in the Santa Rosa Division of the
On September 26, 1991,
Gretchen Porter objected to the IRS's tax claim to the extent it was a
claim against the community property. She asserted the claim was William
Porter's separate obligation for which the community property was not
The bankruptcy trustee sued
Gretchen Porter for the proceeds of sale, and a compromise was reached
on January 9, 1992 and approved by the bankruptcy court on February 14,
1992. The IRS did not object to the compromise; therefore, all parties
are bound by it. Pursuant to that compromise, the proceeds were divided
equally between Gretchen Porter and the trustee. The trustee's portion
was deemed to be community property. The court assumes that, pursuant to
the settlement, the portion retained by Gretchen Porter was deemed to be
her separate property, free of any lien in favor of the IRS for taxes
owed by debtor. While this is not stated by any party, it is implicit in
the settlement agreement and arguments before this court.
The bankruptcy court held
that the IRS claim is William Porter's separate obligation and cannot be
satisfied out of the community property in the estate. The court stated:
There is no merit to the
assertion of the IRS that it holds a community claim. A debt incurred
after dissolution is not a community debt. In re McCoy, 111 B.R.
276 (9th Cir. BAP 1990). The IRS has advanced no reason why the same
rule should not apply to a tax debt. All of the cases cited by the IRS
concern tax debt incurred before dissolution. The IRS was not entitled
to be paid from the proceeds when the residence was sold; there is no
reason why a subsequent bankruptcy should create such a right.
The Government's Argument
It is agreed that the tax
obligation is not a community debt, 1
because it was not incurred during marriage. The government argues,
however, that debtor's 1990 federal income tax liability is nonetheless
a community claim as defined in the Bankruptcy Code. According to the
government, that claim is provided by 11 U.S.C. §101(7)
, which states:
means claim [sic] that arose before the commencement of the case
concerning the debtor for which property of the kind specified in section 541(a)(2) of this title is liable, whether or not
there is any such property at the time of the commencement of the case.
According to 11 U.S.C. §541(a)(2)
, property of the estate includes:
All interests of the debtor
and the debtor's spouse in community property as of the commencement of
the case that is--
(A) under the sole, equal,
or joint management and control of the debtor; or
(B) liable for an allowable
claim against the debtor, or for both an allowable claim against the
debtor and an allowable claim against the debtor's spouse, to the extent
that such interest is so liable.
The government argues that
these sections clearly show that a debt of the debtor alone can be a
"community claim" if the debtor's community property is liable
for the debt. 2
That is a correct deduction.
The government then notes
that whether a creditor holds a community claim is generally determined
by reference to state law, insofar as state law normally governs which
property can be reached to satisfy certain debts. In re Sweitzer,
111 B.R. 792 (Bankr. W.D. Wis., 1990). The government argues, however,
that where the United States is the creditor with respect to a federal
tax debt, federal law regarding collection rights always takes
precedence over state laws relating to collection rights and remedies
(citing United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 99 L.Ed. 264, 75 S.Ct. 239
(1955) and United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55-57, 2 L.Ed.2d 1135,
1140-41, 78 S.Ct. 1054 (1958) (once it has been determined that under
state law a person holds property or rights to property, "state law
is inoperative to prevent the attachment of liens created by federal
statutes in favor of the United States.")).
The government argues that
William Porter's interest in the proceeds of the sale of the marital
residence is property to which the IRS may look to collect the 1990
federal income tax debt. It contends that upon assessment of the tax on
January 8, 1991 and following demand for payment, a federal lien arose
by operation of federal law to secure the amount of tax, interest, and
additions to tax "upon all property and rights to property, whether
real or personal" belonging to William Porter. 26 U.S.C. §6321
The government further
argues that since William Porter had an equal community property
interest in the residence sale proceeds, the federal tax lien attached
to that interest. Bess [58-2 USTC ¶9595 ], 357
at 57. The state court's subsequent interlocutory order awarding
Gretchen Porter custody of the proceeds did not negate the lien; rather,
the lien merely followed the proceeds into Gretchen Porter's hands.
Restated, the turnover by Gretchen Porter of one-half of the residence
sale proceeds to the estate as community property came with the federal
tax lien still attached; therefore, the community property now held by
the estate is property which may be used to satisfy the debtor's 1990
federal income tax claim. Thus, claims the government, the Bankruptcy
Court erred in holding that the debtor's community property may not be
used to pay claims for which community property is not liable under
state law. 3
Section 541(a)(2) of the Bankruptcy Code provides that certain
community property becomes property of the estate. Bankruptcy Code
section 726(c) states that such property must be segregated from other
property of the estate and may only be used to pay community claims.
According to the government, the IRS's claim for 1990 federal income
taxes is a community claim in that it may be collected from the debtor's
community property, notwithstanding that it is not a "community
State law cannot limit the
property to which a federal tax creditor can reach. United States v.
Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 204-05, 29 L.Ed.2d 406, 91
S.Ct. 1763 (1971) (state law that permitted divorced woman to exonerate
herself from community debts if she renounced community gains could not
result in exemption from the collection of federal income tax on
community earnings where the liability for such tax had attached prior
to such renunciation. Federal income tax liability depends on ownership
and wife had an immediate vested ownership in half of the community
Since William Porter had a
one-half interest in the proceeds from the sale of the marital residence
both on the date the 1990 federal income tax was assessed and on the
date the bankruptcy petition was filed, 4
the government argues that the residence sale proceeds which came into
the estate are liable for that income tax obligation.
Gretchen Porter argues that
the community property is not subject to William Porter's
post-dissolution tax obligation because (under
law) community property is (only) subject to a debt "incurred by
either spouse before or during marriage. . . ."
Civ. Code §5120.110. In re McCoy, 111 B.R. 276 (Bankr. 9th Cir.
1990) noted that community property is not subject to post-dissolution
claims. Accord In re Chenich, 87 B.R. 101 (Bankr. 9th Cir. 1988).
Appellee argues, therefore, that only William Porter's separate property
or his interest in the community property are subject to his post
dissolution debts. In re Marriage of Schenck, 228 Cal.App. 3d
1474, 279 Cal.Rptr. 651 (3rd Dist. 1991). 6
Appellee concludes as
The IRS concedes the tax
obligation is not a community debt. The IRS argues the obligation is a
community claim under the bankruptcy code. While difficult to follow the
* The proceeds from the
sale were community property.
* William Porter had a
one-half interest in the proceeds from the sale.
* His interest is subject
to the IRS tax claim, therefore, the IRS has a community claim.
The flaw in this argument,
according to appellee, is that "there has been no determination or
finding that William Porter had a one-half or any interest in the
proceeds of the sale. In fact, the Santa Barbara Superior Court found he
had no interest in those funds. The bankruptcy court order reserved this
issue for later determination."
This case is controlled by
Ninth Circuit precedent. The key cases are United States v. Overman
[70-1 USTC ¶9342 ], 424 F.2d 1142 (9th Cir. 1970) and In re
USTC ¶9343 ], 424 F.2d 1148 (9th Cir. 1970). Overman
concerned the creation and enforcement of federal tax liens levied on
community property to secure payment of a husband's premarital income
tax liability. In 1954, the IRS levied deficiency assessments against
the taxpayer for his income taxes for the years 1946 and 1947. The
taxpayer married in 1948. The taxpayer failed to meet the deficiency
demand, and a notice of federal tax lien was filed. The government sued
the taxpayer to recover judgment for the tax liabilities and won. The
government then brought the action in question to enforce the liens.
The Ninth Circuit affirmed
the district court's decision that the government had a valid lien on
the taxpayer's undivided one-half interest in the marital community,
that the lien was enforceable against the community assets as to which
foreclosure was sought, and that the government was not precluded from
enforcing its lien by limitations or laches, res judicata, estoppel or
The appellate court
reasoned as follows:
26 U.S.C. §6321
provides that the amount of delinquent tax liability becomes
a lien against "all property and rights to property, whether real
or personal, belonging to" the taxpayer. The Internal Revenue Code
"incorporates state law for the limited purpose of ascertaining
whether or not the taxpayer's interest is 'property' or 'rights to
property.' " Overman [70-1 USTC ¶9342 ], 424 F.2d at 1144 (citing United States
v. Bess [58-2
USTC ¶9595 ], 357 U.S. 51 (1958)). According to Overman:
If state law raises the
taxpayer's interest to the status of property or rights to property,
federal law will cause a lien to attach to that interest. We must thus
law to determine whether the taxpayer's interest in the community
property constitutes "property" or "rights to
property" belonging to him. We believe that it does.
The court noted that in
, the marital community is essentially composed of all property acquired
by spouses after marriage and that the interest of each spouse in the
community is an intangible, equal, present, and vested right. [70-1 USTC ¶9342 ], 424 F.2d at 1144. The court concluded that
the taxpayer's interests in the community property made it
appropriate to characterize
that interest as "rights to property" for purposes of section
6321 . The interest gives the taxpayer present, vested, and
substantial rights to the property of the community, and that interest
has been described by both the Supreme Court of Washington and the
Supreme Court of the
as a "vested property right." No more is needed to identify
the interest as one to which a federal tax lien can attach.
[70-1 USTC ¶9342 ], 424 F.2d at 1145 (citations omitted).
The court continued in a
passage that is most relevant to the case at bar. In the case at bar,
the community property is in
law, community property is not liable for post-dissolution debts. The
IRS debt is a post-dissolution debt. In Overman, the community
property was in
law at the time, community property was not liable for premarital debts
of the husband. The IRS debt in Overman was a premarital debt of
the husband. Overman and the case at bar are analogous. The Overman
court held that the state law did not control:
taxpayer contends, however, that his interest in the community is made
nonattachable by the
rule that the community is generally immune from liability for a
husband's premarital debt. While admitting that a state rule of
exemption is ineffective against a
tax lien, the taxpayer argues that the
rule is more than that. He contends that the rule is one of property
law, and creates a limitation on the extent and quality of his ownership
rights under state law. Even assuming that his characterization of
law is correct, all that section
6321 requires is that the interest be "property" or
"rights to property." It is of no statutory moment how
extensive may be those rights under state law, or what restrictions
exist on the enjoyment of those rights.
attachment of a tax lien under section
6321 and the enforcement of the lien under section
7430 of the Code present different questions. From the
conclusion that a lien attaches, the further conclusion that these
particular liens may be foreclosed or otherwise enforced in a particular
manner does not automatically follow.
with the Government that the right of the
to enforce its liens on
community property does not depend on
law regulating the rights of creditors generally. . . . [S]tate law
regulating creditors' rights does not apply to the United States because
the United States has not looked to state law to decide how to enforce
federal tax liens and nothing in section
7403 , under which this action was brought, suggests that
Congress intended to change that rule.
[70-1 USTC ¶9342 ], 424 F.2d at 1145-46 (citations omitted).
The question then is
whether, at the time the tax was assessed, William Porter retained an
interest in the proceeds that can be characterized as
"property" or "rights to property." In
, as in
, spouses enjoy present, equal, existing, and vested rights in community
property during marriage.
Civil Code §5105
; B.E. Witkin, 11 Summary of
(9th Ed. 1990). At the time of the sale of the residence and
assessment of tax, the Porters were no longer married. This does not
mean, however, that the debtor lost his property rights in the community
property at the moment of dissolution. It is the general rule that
community property is to be divided equally after the marriage. See
Civ. Code §§4800 and 4353.
Appellee argues that there
has been no finding that debtor had a one-half or any interest in the
proceeds of the sale and that, in fact, the Superior Court found that he
had no interest in those funds. 7
The fact that the Superior Court may have decided (or may at some future
date decide) that the interests of justice require that the proceeds be
given to Gretchen Porter as her separate property does not mean that
debtor did not hold a property right in the proceeds of sale at the time
of sale or tax assessment. He did.
It is stipulated that the
proceeds paid into the estate are community property. Overman
teaches that the debtor's interest in community property is
"property and rights to property" within the meaning of 26
and therefore the lien properly attached to those proceeds.
Finally, Overman teaches that
law regarding creditor's rights cannot bar the enforcement of a federal
tax lien "because the
has not looked to state law to decide how to enforce federal tax liens.
. . ." See also United States v. Stonehill [83-1
USTC ¶9285 ], 702 F.2d 1288, 1298 (9th Cir. 1983), cert.
1079 (1984) and Babb v. Schmidt [74-1 USTC ¶9476 ], 496 F.2d 957 (9th Cir. 1974) (discussing Overman
At the time of the tax
assessment, debtor therefore had a property interest in the proceeds and
the IRS could reach the proceeds to satisfy its lien. The settlement
deeming the portion of the proceeds paid into the estate to be community
property confirms that the IRS has a community claim within the meaning
of 11 U.S.C. §§101(7)
that may be satisfied from the portion of the proceeds that
has been paid into the estate.
In re Ackerman was a
companion case to Overman. Ackerman also involved "the
creation and enforcement of federal tax liens upon community property to
pay a husband's antenuptial tax debts." Ackerman [70-1
USTC ¶9343 ], 424 F.2d at 1149. Leopold Ackerman and his
wife Leslie divorced in 1961. Leopold then married Wilma; the IRS
thereafter levied assessments against Leopold and Leslie for taxes owing
for 1959. Leopold and Wilma filed for bankruptcy, and their community
property was transferred to the bankruptcy trustee. The district court
held, inter alia, that the government's tax lien attached to the
whole of the community property. The Ninth Circuit reversed and
As in Overman, the
Government had a lien only on the taxpayer-husband's undivided one-half
interest in the community; it had no lien on the wife's interest. And as
we stated in Overman, the Government may not exceed the
taxpayer's interest in enforcement of its lien. We must therefore delete
the Government as a contestant to Wilma Ackerman's interest in the
community and hold that the Government may not receive from its liens
more than one half of the value of the community estate. There is, as
yet, no final order of distribution of the assets of the bankrupts'
estate, and we cannot therefore pass on the rights of the respective
parties to particular assets in that estate.
the government in this case may not receive Gretchen Porter's one-half
interest in the community property. In this case, however, it is
stipulated that the portion of the proceeds that have been paid into the
estate are community property. We can therefore pass on the rights of
the respective parties to those proceeds. Debtor has an interest in
one-half of those proceeds and the IRS may reach his entire one-half
interest. The IRS may not reach Gretchen Porter's one-half interest.
The IRS may reach one-half
of the proceeds of sale that have been paid into the estate as community
property because the debtor has a one-half interest in community
property. The IRS may not reach Gretchen Porter's one-half interest in
For the foregoing reasons,
the bankruptcy court's order is REVERSED and REMANDED for further
proceedings consistent with this opinion.
IT IS SO ORDERED.
Cal. Civ. Code §5120.030 states: " 'Debt' means an obligation
incurred by a married person before or during marriage, whether based on
contract, tort, or otherwise."
Section 541(a)(2)(A) is inapplicable since at the time of the
commencement of the bankruptcy case the proceeds of sale were under the
sole control of Gretchen Porter. Thus, the government must be relying on
The government implicitly argues that the Bankruptcy Court was wrong
when it stated that the proceeds were not liable for the tax debt prior
to debtor's filing his bankruptcy petition.
It is not clear that debtor did have a one-half interest in the proceeds
of the sale at the time he filed for bankruptcy, because the Superior
Court's interim order giving custody of the proceeds to Gretchen Porter
came before the bankruptcy filing. The court is unaware what the
Superior Court's order stated about the nature of the proceeds, because
the Superior Court's order is not part of the record on appeal. Gretchen
Porter's papers state both that the Superior Court has not yet
determined whether debtor has any rights in the proceeds of the sale and
also that the Superior Court has determined that the proceeds are
Gretchen Porter's separate property. Ultimately, it is not relevant what
the Superior Court order stated because that order was issued after the
sale of the residence and the assessment of debtor's tax liability and
the attachment of federal liens.
Those cases, however, did not pertain to debts owed to the federal
This argument makes it appear as if appellee agrees that debtor's
one-half of the community property is available to the IRS; however,
appellee argues that the Superior Court has not yet determined whether
debtor has any community property interest in the proceeds of the sale
of the residence and therefore the IRS cannot (at least yet) satisfy
debtor's tax liability from the proceeds of the sale.
The government notes that
Gretchen Porter has not challenged the validity of the IRS's claim that
debtor owes taxes on the sale of the residence; rather, she argues only
that the claim should not be satisfied out of community property. If the
property were Gretchen Porter's separate property prior to the sale,
presumably debtor would not owe any tax on the sale. Conversely, if
debtor does owe taxes on the sale, then presumably he had a property
interest in the residence at the time of sale.
Again, there is no evidence before the court of what the Superior Court
did decide. Presumably, since appellee states the Superior Court's order
was an "interim" order, the order did not make any final
decision as to the spouses' respective rights in the proceeds. Whether
it did, however, is irrelevant.
Alexander J. Jansen, Plaintiff v.
United States of America
, CV-S-90-253-RDF(RJJ), 1/28/92
Tax liens: Community property: Antenuptial agreement.--An
antenuptial agreement between a taxpayer and her husband did not prevent
the IRS from levying on the husband's wages. The taxpayer attempted to
protect her husband's property from her premarital tax liability through
the antenuptial agreement. However, under state (
) law, the taxpayer acquired a one-half community property interest in
her husband's wages. Further, the agreement failed to protect the wages
from levy because, even if properly executed, it would have been
ineffective against the
FINDINGS OF FACT AND CONCLUSIONS OF LAW
MILES, Senior Judge:
This is an action filed
under 26 U.S.C. §7426(a)
for the return of property alleged to have been wrongfully
levied by the
for internal revenue taxes. The plaintiff, Alexander J. Jansen, contends
that he is the sole owner of the property levied by the
, although he is not the taxpayer who is liable for the taxes. The
matter was tried before the court sitting without a jury on October 16,
1991. The case is now ready for decision.
Based upon the testimony
and exhibits received at trial, and upon the stipulations of the
parties, the court makes the following findings of fact as required by
Fed.R.Civ. P. 52(a) 1:
1. Plaintiff Alexander J.
Jansen is an individual residing in
. Plaintiff works as a consultant for the McDonnell Douglas Corporation.
2. The defendant is the
United States of America
3. On June 22, 1987,
plaintiff married Sharon K. Byrd, now known as Sharon K. Jansen.
4. Before her marriage to
plaintiff, Sharon Jansen incurred federal income tax liabilities for the
taxable years ended 1981, 1983, and 1984. These tax liabilities are the
personal liabilities of Sharon K. Jansen, and their amount is not in
5. Before her marriage to
plaintiff, Sharon K. Jansen consulted with an accountant, Joseph Smith,
to determine whether plaintiff would be liable for her unpaid tax
liability in the event of her marriage to him. Joseph Smith advised
Sharon Jansen to enter into an antenuptial agreement in order to protect
plaintiff's property from liability for her taxes.
6. Before his marriage to
Sharon Jansen, plaintiff was generally aware that she had some tax
problems, but he was not aware of the full extent of her unpaid tax
liability, which was approximately $23,000 at the time of their
7. Plaintiff and Sharon K.
Jansen did not execute an antenuptial agreement before their marriage.
8. Sharon Jansen was
employed at the time of her marriage to plaintiff. However, shortly
after her marriage she quit her job. She is presently studying to become
9. On or about March 1,
1990, the Internal Revenue Service ("IRS") served the first of
numerous levies upon the McDonnell Douglas Corporation for 50 percent of
the net take home pay of the plaintiff. These levies were intended to
satisfy the personal tax liabilities of Sharon K. Jansen. In all, the
IRS levied a total of $29,294.12 from plaintiff's wages, to be credited
to the tax liabilities of Sharon K. Jansen.
10. The IRS also levied on
a joint bank account owned by plaintiff and Sharon K. Jansen, collecting
a total of $485.30 from the account toward Sharon K. Jansen's tax
liabilities. Plaintiff does not dispute the IRS' levy on this joint
In accordance with
Fed.R.Civ.P. 52(a), the court reaches the following conclusions of law 2:
A. The court has
jurisdiction over this matter pursuant to 26 U.S.C. §7426(a)
B. Venue is proper in this
C. Title 26, Section
6321 provides that if any person liable to pay any tax
neglects or refuses to pay the same after demand, the amount shall be a
lien in favor of the
upon all property and rights to property, whether real or personal,
belonging to such person or thereafter acquired during the life of the
lien. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 268 (1945). The lien imposed
arises at the time the assessment is made and continues until
the liability for the amount is satisfied or becomes unenforceable by
reason of lapse of time. 26 U.S.C. §6322
D. Sharon Jansen incurred
federal income tax liabilities for the taxable years ended 1981, 1983,
and 1984. Thus, on the dates of assessment, federal tax liens arose in
favor of the
against all property and rights to property belonging to Sharon Jansen
or thereafter acquired by her.
E. State law controls in
determining the nature of the legal interest which a taxpayer has in
property sought to be reached by a federal tax lien. Aquilino v.
United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13 (1960); United
States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288, 1298 (9th Cir. 1983). The
question which must be answered in this case is whether the taxpayer,
Sharon Jansen, had "property or rights to property" to which a
federal tax lien could attach, in the form of a one-half interest in
D. Under Nevada law, all
property acquired after marriage by either the husband or wife is
community property, with certain stated exceptions. Nev. Rev. Stat. §123.220.
While generally neither the separate property of a spouse nor his share
of the community property is liable for the debts of the other spouse
contracted before the marriage, Nev. Rev. Stat. §123.050, 3
Nevada law does not exempt a debtor's spouse's own share of the
community property from collection for her liabilities incurred before
E. Plaintiff has argued
that Sharon Jansen did not acquire a community property interest in his
earnings because the couple executed an antenuptial agreement. Nev. Rev.
Stat. Section 123.220 provides as follows:
property, other than that stated in NRS 123.130, acquired after marriage
by either husband or wife, or both, is community property unless
otherwise provided by:
agreement in writing between the spouses, which is effective only as
law recognizes such agreements provided they are executed with the
requisite formalities. 4
However, such an agreement is specifically effective only as between
the spouses, and not against third party creditors, except where the
agreement has been properly recorded. See Nev. Rev. Stat. §§123.280,
The court has heard the
testimony of plaintiff and has also reviewed the deposition testimony of
Sharon Jansen. Both have testified that they executed an antenuptial
agreement shortly before their marriage, on or about June 19, 1987. An
unexecuted copy of the purported original was admitted at trial as
Plaintiff's Exhibit No. 1. The court does not find plaintiff and Sharon
Jansen's testimony that the original agreement was executed to be
F. Even if such an
agreement had been executed, however, it would not be effective against
. Sharon Jansen had a community property interest in one-half of her
husband's earnings, pursuant to Nev. Rev. Stat. §123.220. This interest
was subject to levy by the
in satisfaction of Sharon Jansen's unpaid tax liability.
IT IS THEREFORE ORDERED
that a judgment of no cause of action be entered. Defendant
United States of America
shall be awarded its costs of action.
IT IS SO ORDERED.
Any findings of fact which contain conclusions of law shall be
considered as such.
Any conclusion of law containing findings of fact shall be considered as
But see Greear v. Greear, 303 F.2d 893 (9th Cir. 1962) (husband's
earnings subsequent to his second marriage were subject to his
contractual obligation to pay support to former wife and children).
An antenuptial, or premarital, agreement must be in writing and signed
by both parties. Nev. Rev. Stat. §123A.040.
Karleen B. Medaris, Plaintiff-Appellee v.
United States of America
U.S. Court of Appeals, 5th Circuit, 88-1826, 10/2/89, 884 F2d 832,
Affirming an unreported District Court decision
6303 and 6321
Lien for taxes: Levy and distraint: Community property: Notice.--A
taxpayer was subject to a lien on one-half of her income in a community
property state (Texas) to satisfy her spouse's tax liability, but she
was not entitled to notice of the lien because she was not liable for
the taxes. State law exemptions were not effective against the federal
government and the IRS could attach the wife's income to the extent of
her husband's interest in it. The IRS could also attach all of her
husband's income because he had a property interest in his income under
state law. No notice of the lien and levy was required to be given to
the taxpayer because notice had been sent to her spouse, and she was not
liable for the payment of taxes.
Karleen B. Medaris, 6808
Santiago, Fort Worth, Tex. 76133, pro se. William S. Rose, Jr.,
Assistant Attorney General, Gary R. Allen, Doris D. Coles, William S.
Estabrook III, Department of Justice, Washington, D.C. 20530, for
Before GARZA, REAVLEY and
POLITZ, Circuit Judges.
REAVLEY, Circuit Judge:
The Internal Revenue
Service (IRS) appeals from an order of the district court limiting the
income upon which a tax lien may be levied to one half of that earned by
the delinquent taxpayer as well as one half of that earned by the
delinquent taxpayer's spouse. We agree with the IRS and extend the lien
to all of the taxpayer's income.
Appellee Karleen Medaris is
married to Michael Medaris. Michael has not filed income tax returns
since 1981. The IRS notified Michael, but not Karleen, of its intent to
levy because of unpaid taxes. The IRS then proceeded to levy upon all of
Michael's income and upon one half of Karleen's income. Karleen claims
that the IRS has the authority to levy only upon one half of Michael's
community property law provides that she has a present vested interest
in the other one half. Karleen also contends that the IRS did not
provide her with notice and demand as required by the Internal Revenue
Code. 26 U.S.C. §§6303(a)
. On the government's motion for summary judgment, the
district court determined that one half of the earnings of both Karleen
and Michael could he attached by the government to satisfy Michael's tax
liability. In addition, the district court determined that Karleen was
not entitled to notice under §§6303
and 6331 of the Code because she was not liable for the
The district court
correctly held that one half of Karleen Medaris' earnings may be
attached by the government. However, the district court erred in
allowing the government to levy only upon one half of Michael Medaris'
Property Subject to Tax Lien
A lien for unpaid federal
taxes attaches against "all property and rights to property . . .
belonging to" the person liable for the taxes. 26 U.S.C. §6321
. This provision, which defines broadly the property subject
to attachment by the government for unpaid taxes, indicates "that
Congress meant to reach every interest in property that a taxpayer might
have." United States v National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720, 105 S.Ct. 2919 2924, 86
L.Ed.2d 565 (1985). To determine the extent to which a taxpayer has an
interest in property, state law is consulted.
at 722, 105 S.Ct. at 2925; Broday v. United States [72-1 USTC ¶9269 ], 455 F.2d 1097, 1099 (5th Cir.1972). Once
the extent of a taxpayer's legal interest in property is determined by
state law, "the tax consequences thenceforth are dictated by
federal law." National Bank of Commerce, 472
at 722, 105 S.Ct. at 2925.
The district court
correctly allowed the IRS to levy upon one half of Karleen's income to
satisfy Michael's tax liability.
law provides that property acquired during marriage, other than by gift,
devise, descent or personal injury recovery, is community property.
Tex.Fam.Code Ann. §5.01 (
1975). Each spouse has a one half interest in all community property. Broday,
455 F.2d at 1100-01. Michael, therefore, has a one half interest in
There are limits to this
interest however, which have been imposed by statute. Specifically, a
spouse's earnings, which are characterized as "sole management
community property," see Tex.Fam.Code Ann. §5.22(a)(1) (
1975), are exempt from the other spouse's creditors.
Supp.1989). This provision appears to remove Karleen's income from the
reach of Michael's creditors. The Supreme Court, however, in
of the Internal Revenue Code 1
has held that state law exemptions are not effective against the United
States. United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 205, 91 S.Ct. 1763, 1771, 29
L.Ed.2d 406 (1971). Similarly, this court has held that where a married
woman "has a vested interest in, and is the owner of, a half share
of the community income" over which her husband has sole management
and control, that one half interest may be seized to satisfy her tax
liability despite state law to the contrary. Broday, 455 F.2d at
1100-01. Accordingly, because Michael has a one half interest in
Karleen's income and because the exemption found in §5.61(b)(2) of the
Texas Family Code is ineffective against the federal government, the IRS
is able to attach Karleen's income to the extent of Michael's interest
We modify the order of the
district court because it allows the IRS to attach only one half of
Michael's earnings. In limiting the reach of the IRS, the district court
relied heavily on two decisions of the Ninth Circuit, United States
v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142 (9th Cir.1970), and In re
USTC ¶9343 ], 424 F.2d 1148 (9th Cir.1970). These cases,
construing Washington and
community property law, are distinguishable from the present controversy
law. In Overman and Ackerman, state law prevented
premarital creditors of a husband from reaching any community property.
at 1150. Notwithstanding these state law provisions, the court concluded
that the husbands had an undivided one half interest in the community
property against which the government could assert its liens. The
interest which the wives had in the community property, however, was not
subject to the government's liens.
Two subsequent Ninth
Circuit decisions, United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288 (9th Cir.1983), cert.
1079, 104 S.Ct. 1440, 79 L.Ed.2d 761 (1984), and Babb v. Schmidt
[74-1 USTC ¶9476 ], 496 F.2d 957 (9th Cir. 1974), explain the
limitations of Overman and Ackerman. In Stonehill,
the court, construing Philippine law, allowed the government to attach all
of the community property of married couples, including the wives' 2
vested one half interest, to satisfy tax liabilities incurred by the
husbands. The court distinguished Overman and Ackerman
from the controversy before it.
and Ackerman extended the reach of premarital tax liens to half
of the community property even when state law insulated the community
property from premarital creditors generally. In the present case, in
contrast, Philippine law (article 161) permits the liens to reach all
of the conjugal property. Nothing in Overman or Ackerman
reduces the reach of the tax liens below what local law permits.
702 F.2d at 1298. Overman and Ackerman, therefore, may not
be viewed as reducing the reach of the government below what state law
allows to creditors generally.
In Babb, the court,
construing California community property law, allowed the government to
levy upon the wife's "vested interest in her share of the
community" to satisfy her husband's premarital tax liabilities.
at 958. The court rejected the wife's argument that Overman and Ackerman
prevented the government from reaching her one half of the community
at 958-59. The court indicated that state law "provides the basis
at 958. While Washington and
law immunize the wife's share of the community from the husband's
law subjects the wife's share of the community to such claims.
Much like Philippine law in
law provides that certain community property is subject to liabilities
incurred by a spouse. See Tex.Fam.Code Ann. §5.61 (Vernon 1975
& Supp.1989). Specifically, under
law Michael's income is classified as community property; his interest
in it is such that he has "sole management, control, and
disposition" over it, id. §§5.22(a)(1), 5.01(b) (
1975), and this sole management community property is "subject to
the liabilities incurred by him . . . before or during marriage," id.
§5.61(c). These sections of the Texas Family Code clearly establish
that Michael has a property interest in his income and that this
property is subject to all liabilities incurred by Michael.
The district court also
concluded that the "state law identification of property that is
subject to liabilities is irrelevant to a determination of property
which is subject to a federal tax lien because federal law controls that
determination." While we agree with this statement of the law, we
fail to see how that statement prevents the government from attaching
all of Michael's personal earnings. The Internal Revenue Code identifies
that property upon which a lien may be imposed as "all property and
rights to property . . . belonging to" any person who has failed to
pay taxes that are due. 26 U.S.C. §6321
. Property that is exempt from levy by the government is
identified in §6334
of the Code. No special exemption is provided for the
earnings of a spouse in community property jurisdictions. Therefore,
because Michael has a property interest in his income as determined by
law, the government may impose a lien on all of it pursuant to
federal law. See Broday, 455 F.2d at 1101.
The IRS urges that the
ability to enforce a federal tax lien should not be less than the
ability of private creditors to collect on their debts. We agree.
Placing the IRS in a position at least equal to that of private
creditors is supported by Stonehill and Babb. Those cases
hold that where state law (or foreign law, in the case of Stonehill
) makes all of the community property available to satisfy the private
debts of either spouse, the federal government, too, is able to look to
the delinquent taxpayer's entire property to satisfy his tax
obligations. See Stonehill, 702 F.2d at 1298-99; Babb, 496
F.2d at 960.
We agree with the district
court's decision that the IRS was not required to give Karleen Medaris
notice under §§6303(a)
and 6331(d) of the Internal Revenue Code. As the district
court stated, "[t]hese provisions only require the Government to
provide notice to the person 'liable' for the payment of taxes."
Because Karleen Medaris is not liable for the taxes, notice to her was
not necessary under §§6303(a)
of the Internal Revenue Code.
The judgment is modified to
extend the IRS lien to all of Michael Medaris' earnings.
AFFIRMED AS MODIFIED.
26 U.S.C. §6334(c)
Notwithstanding any other
law of the
. . . no property or rights to property shall be exempt from levy other
than the property specifically made exempt by subsection (a).
The wives were not subject to
income tax because they were neither citizens nor residents of the
United States of America, Plaintiff v. Lucienne
D'Hotelle de Benitez Rexach, et al., Defendants
S. District Court, Dist. P. R., Civil Number 531-64, 9/23/75
[Code Secs. 1, 6406 and 7422]
Liability for tax: Citizen v. non-citizen: Administrative review:
Laches: Res adjudicata: Collateral estoppel:--The Supreme Court
decision in Schneider v. Rusk, in which it was held that it was
unconstitutional to void the U. S. citizenship of a naturalized citizen
after three years' residence in the country of his birth, was not
applied retroactively to the taxpayer for purposes of determining her
income tax liability. As to other years, the doctrines of laches, res
adjudicata and collateral estoppel did not apply to bar tax assessments
where the government had made no false representations or inducements to
the taxpayer and the merits of the case had never previously been
adjudicated with respect to the particular taxpayer.
[Code Sec. 6321]
Lien for taxes: Community property: Liability of husband: Property
claimed by husband.--The taxpayer's husband was liable for taxes on
his wife's share of income he earned during the years at issue, but
which he failed to distribute to his wife during her lifetime. The Court
also held that the taxpayer's husband was liable for the value of a tax
lien on property previously owned by the taxpayer, but which the husband
was now claiming as his own.
United States Attorney,
, P. R., for plaintiff. Brown, Newsom & Cordova, GPO
, P. R., for defendants.
TORRUELLA, District Judge:
This case is one more
chapter in a series of prior actions before this Court involving
attempts to recover income taxes allegedly due to the Government of the
This Court has jurisdiction
over the subject matter of this controversy by virtue of Sections 7401,
7402 and 7403 of the Internal Revenue Code of 1954 and Section 1340 and
1345 of Title 28 of the United States Code.
D'Hotelle de Benitez Rexach, hereinafter referred to as Lucienne, was
on January 15, 1909. She married Defendant Félix Benítez Rexach,
hereinafter referred to as Benitez Rexach, in 1928. Thereafter Lucienne
lived in Puerto Rico commencing in 1938 and became a naturalized citizen
on December 7, 1942. As it appears from the finding of facts in the case
of U. S. v. Benítez Rexach [60-2 USTC ¶9607], 185 F. Supp. 465,
in 1944 Lucienne left for the
with her husband. From the facts in the above case we can infer that she
resided in the
from 1944 to November 9, 1946 and then she travelled to
where she resided until May 20, 1952.
passport was issued to Lucienne on November 10, 1947 by the American
On February 11, 1952
Lucienne filed an application for another passport renewal at the United
States Consulate in
. This request was denied and a Certificate of Loss of Nationality was
issued and signed by the American Vice Consul in Nice on May 21, 1952.
The Vice Consul determined that Lucienne being a naturalized citizen,
she had violated Section 404, Chapter IV, of the Nationality Act of 1940
by living and residing in her domicile of origin for more than three
years, and thus effectively loosing her citizenship as of November 9,
1949. This Certificate was approved by the Department of State on
December 23, 1952. A notification of the loss of nationality was filed
at the United States District Court for
on March 5, 1953. Lucienne's passport was taken at Nice, cancelled, and
never returned to her.
Meanwhile, on January 2,
1952 a decree of privileged naturalization was issued in her favor by
the Dominican Government, under the provisions of Dominican Republic Law
Number 1633. 3
Thereafter on September 4, 1956 a Dominican diplomatic passport was
issued in her name and Lucienne travelled extensively with this
passport. On January 20, 1962 the Dominican Government cancelled her
citizenship and on June 5, 1962 a French passport was issued to her.
On May 18, 1964 the case of
Scheider v. Rusk 4
was decided by the Supreme Court of the United States. Therein, the
Court held that Sec. 352(a)(1) 5
of the Immigration and Nationality Act of 1952 was unconstitutional
since "living abroad, whether the citizen be naturalized or native
born, is no badge of lack of allegiance and in no way evidences a
voluntary renunciation of nationality and allegiance." It was
stipulated by the parties in this case that from December 23, 1952 up to
1964 no steps were taken by Lucienne to contest her nationality or to
affirm her renunciation thereof.
On August 13, 1964 a
delegate of the Commissioner of Internal Revenue pursuant to Sec. 6861
of the Internal Revenue Code of 1954, appearing at 26 USC Sec. 6861(a),
made a jeopardy assessment for the sum of $9,065,036.93 against Lucienne
for calendar years 1944 through 1950, based on assessed tax deficiencies
and interests to the date of assessment. 6
Notice and demand for payment was sent to Lucienne on August 13, 1964.
On June 29, 1964 a similar assessment was made for the amount of
$12,515,151.89 for fiscal year 1951 through 1958 and a delinquency
penalty for 1951 and 1952. Notice and demand for payment were made to
Lucienne on June 29, 1964. However, the parties stipulated that all
delinquencies or other penalties referred to on the deficiencies were
It should be noted that the
above tax assessment periods were based upon one half of the income that
Defendant Benítez Rexach earned in the Dominican Republic during said
periods and upon the contention that Lucienne had a vested interest over
said one half of Defendant Benítez Rexach's income in the Dominican
Republic under the community property law of the Dominican Republic. See
v. Benítez Rexach, 185 F. Supp. 465, D. C. P. R., 1960. Said
taxable income was derived from the employment of capital and services
by Benítez Rexach in the
On January 12, 1965 the
United States Department of State sent a letter to an attorney
representing Lucienne in the matter of citizenship, informing her that
her expatriation from November 9, 1949 was automatically voided due to Schneider
v. Rusk, supra. Lucienne answered on January 29, 1965 stating that
after her citizenship was revoked she had accepted the decision without
protest and that thereafter she had never considered herself a citizen
. She cited in said letter the case of U. S. v. Benitez Rexach
[60-2 USTC ¶9607], 185 F. Supp. 465 D. C. P. R., 1960, as being
dispositive of the question.
The complaint in this case
was filed on November 12, 1964. Lucienne died on January 18, 1968.
The tax regulations of the
United States generally provide that citizens of the United States 7
are liable to pay income tax even if they are not residents of the
United States and own no assets or receive no income within the United
See 26 CFR 1.1-1(a)(b), P-H 1975 Fed. Taxes Sec. 3423; Cook v. Tait,
47 (1924); U. S. v. Benítez Rexach [60-2 USTC ¶9607], 185 F.
Supp. 465 (D. C. P. R. 1960). A citizen is defined by the regulations as
a person born or naturalized in the
and who is subject to its jurisdiction. Such a definition must be made
under the Immigration and Naturalization Act of 1954. See P-H 1975 Fed.
Taxes Sec. 3424.
Thus we must first look at
the effect, if any, of Schneider v. Rusk, supra, upon Lucienne's
citizenship. In this respect we must determine whether for the purpose
of this case, Schneider should be applied retroactively in such
manner as to result in the voiding of Lucienne's loss of citizenship and
to make her responsible for the payment of the assessed taxes from
November 9, 1949 onwards.
In the landmark decision of
Linkletter v. Walker, 381
618 (1965), the Supreme Court established the criteria for determining
whether new constitutional rulings in both criminal and civil litigation
should be applied prospectively or retrospectively. While deciding that
the Constitution neither prohibits nor requires retroactive effect to
its decisions, and that no distinction exists between civil and criminal
cases, the Court set forth on Page 629 that:
"Once the premise is
accepted that we are neither required to apply, nor prohibited from
applying, a decision retrospectively, we must weigh the merits and
demerits in each case by looking to the prior history of the rule in
question, its purpose and effect, and whether retrospective operation
will further or retard its operation." (Emphasis added).
subsequent analysis of the Linkletter decision, the Circuit Court
for the 9th Circuit in the case of Simpson v. United Oil Company of
California, 411 F. 2d 897 (CA 9, 1969) expounded the principle that
has since been followed in determining the retrospective effect of
rulings in civil litigation. The Court states at Page 903, that:
consideration [in civil cases] is--did a party to the present litigation
rely on a rule of law which has now been changed so that it would be
inequitable to apply the new rule to such party." 9
In other decisions the
Supreme Court has indicated that a balancing of the equities must be
conducted before a civil case may be applied retroactively. In the case
of Chicot County Dist. v. Bank, 308 U. S. 371 (1940), the Court
was confronted with determining whether having found that an Act if
unconstitutional is by itself an automatic conclusion that said act was
not a law, and that it was inoperative and conferred no rights or
imposed no duties. The Court states in page 374 that:
"The actual existence
of a statute prior to such a determination [of unconstitutionality] is
an operative fact and may have consequences which cannot be justly
ignored. The past cannot always be erased by a new judicial
These questions are among
the most difficult of those which have engaged the attention of courts,
state and federal, and it is manifest from numerous decisions that an
all-inclusive statement of a principle of absolute retroactive
invalidity cannot be justified." 10
In another decision, Cipriano
v. City of
, et al., 395
701 (1969), the Court set forth in page 706 that:
"Where a decision
of this Court could produce substantial inequitable results if applied
retroactively, there is ample basis in our cases for avoiding the
'injustice or hardship' by a holding of non retroactivity."
(Emphasis added). (Citations omitted).
In the recent decision of Chevron
Oil Co. v. Huson, 404 U. S. 97 (1971), the Supreme Court set forth
in page 106 the standards to be taken into consideration when
determining the issue of nonretroactivity by expressing that:
"In our cases dealing
with the nonretroactivity question, we have generally considered three
separate factors. First, the decision to be applied nonretroactively
must establish a new principle of law, either by overruling clear past
precedent on which litigants may have relied, 11
or by deciding an issue of first impression whose resolution was not
clearly foreshadowed. 12
Second, it has been stressed that 'we must . . . weigh the merits and
demerits in each case by looking to the prior history of the rule in
question, its purpose and effect, and whether retrospective operation
will further or retard its operation. 13
Finally, we have weighed the inequity imposed by retroactive
application, for '[w]here a decision of this Court could produce
substantial inequitable results if applied retroactively, there is ample
basis in our cases for avoiding the 'injustice or hardship' by a holding
of nonretroactivity." 14
The Court further
emphasizes at page 108 that: "Yet, retroactive application of the
Louisiana statute of limitations 15
to this case would deprive the respondent of any remedy whatsoever on
the basis of a superseding legal doctrine that was quite
Finally, in Lemon v.
192 (1973), the Supreme Court again balanced the equities in deciding
not to apply a decision retroactively in a civil case. The Court set
forth in page 201 that:
"In equity, as nowhere
else, courts eschew rigid absolutes and look to the practical realities
and necessities inescapably involved in reconciling competing interests,
notwithstanding that those interests have constitutional roots."
In resuming the above we
can say, that the general principles that govern retroactivity should be
applied on a case by case basis taking into consideration such factors
as the reliance placed by the parties on the legislation in question,
the balancing of the equities of the particular situation, and the
foreseeability or lack thereof, that the legal doctrine or statute in
question would be declared unconstitutional.
Measured against these
standards we are of the opinion that the present circumstances do not
merit the consequences that would follow from retroactive application of
Schneider v. Rusk, supra, to Lucienne for purposes of determining
her income tax liability. Most assuredly not only did she rely on the
revocation of her citizenship as expressed to her by the United States
Consul in Nice, as is demonstrated by her obtaining the passport of
France thereafter, but in fact this very Court also relied on said
action in making related findings in other Benitez Rexach cases
previously cited herein. This reliance speaks for itself as regard any
possible contention that Lucienne could have foreseen that the relevant
section of the Nationality Act would be declared unconstitutional.
Considering that it was, first of all, a presumably valid statute of
Congress which placed Lucienne outside of the protection of the
citizenship of the United States, and that secondly, it was the
Executive Branch that proceeded to strip her of these important
benefits, it would be tantamount to compounding these legal absurdities
to have the Judiciary carry the fiction that the Constitution is always
as interpreted by the Supreme Court to the logical but insensible
conclusion propounded by the Government in this action. The equities
against retroactive application of Schneider v. Rusk, supra, lay
with Lucienne, and we so hold. 17
We thus conclude that for
purposes of this case, Lucienne was not a citizen of
after November 9, 1949, and thus not subject to taxation on her half of
the income of Benitez Rexach earned outside of the jurisdiction of the
We are not required to
focus on the period encompassing 1944 through November 9, 1949, and in
this respect, we must first deal with the applicability of the doctrines
of laches, res judicata or collateral estoppel and the contention of
Defendants that the prior suits involving various of the present
Defendants bring these doctrines into play herein.
To begin with it is clear
that in a non-equity case, 18
the United States is not subject to the defense of laches when it is
suing to enforce public rights and while acting in its governmental
v. Sumnerlin, 310
v. Samson Management Corp., 64 F. R. D. 83 (ND, GA, 1974). In
the present case the Government is enforcing such a public claim.
The doctrines of res
judicata and collateral estoppel are related but different precepts.
Under the doctrine of res
judicata a judgment on the merits in a prior suit involving the same
parties or their privies bars a subsequent suit based upon the same
cause of action. See Lawlor v. National Screen Service, 349
In the recent case of Sea
Land Service, Inc. v. Gaudet, 414
573 (1974), the Supreme Court defined the doctrine of res judicata as
operating to bar:
. . . "repetitious
suits involving the same cause of action. [The bar] rests upon
considerations of economy of judicial time and public policy favoring
the establishment of certainty in legal relations. The rule provides
that when a court of competent jurisdiction has entered a final judgment
on the merits of a cause of action, the parties to the suit and their
privies are thereafter bound 'not only as to every matter which was
offered and received to sustain or defeat the claim or demand, but as to
any other admissible matter which might have been offered for that
purpose.' The judgment puts an end to the cause of action, which cannot
again be brought into litigation between the parties upon any ground
whatever, absent fraud, or some other factor invalidating the
judgment." (Citations omitted).
The doctrine of collateral
estoppel is applied in the following situation:
"[W]here the second
action between the same parties is upon a different claim or demand, the
judgment in the prior action operates as an estoppel only as to those
matters in issue or points controverted, upon the determination of which
the finding or verdict was rendered. In all cases, therefore, where it
is sought to apply the estoppel of a judgment rendered upon one cause of
action to matters arising in a suit upon a different cause of action,
the inquiry must always be as to the point or question actually
litigated and determined in the original action, not what might have
been thus litigated and determined. Only upon such matters is the
judgment conclusive in another action." See Cream Top Creamery
v. Dean Milk Co., 383 F. 2d 358 (CA 6, 1967).
The difference between the
two doctrines was stated by the Supreme Court as follows:
"The basic distinction
between the doctrines of res judicata and collateral estoppel, as those
terms are used in this case, has frequently been emphasized. Thus, under
the doctrine of res judicata, a judgment 'on the merits' in a prior suit
involving the same parties or their privies bars a second suit based on
the same cause of action. Under the doctrine of collateral estoppel, on
the other hand, such a judgment precludes relitigation of issues
actually litigated and determined in the prior suit regardless of
whether it was based on the same cause of action as the second
suit." See, Lawlor v. National Screen Service, 349
An analysis of the prior Benítez
Rexach cases leads us to conclude that neither of these doctrines
are applicable to the Government's cause of action for the collection of
taxes during the period of 1944 through November, 1949.
In the case of United
States v. Benitez Rexach [60-2 USTC ¶9607], 185 F. Supp. 465 (D. C.
P. R. 1960) Lucienne was not included as a party. Benítez Rexach raised
the question of her citizenship as a defense. The rights of Benítez
Rexach were adjudicated and no cause of action was brought or litigated
against Lucienne for the collection of taxes during the 1944 through
1949 period. In United States v. Benitez Rexach [62-1 USTC ¶9199],
200 F. Supp. 494 (D. C. P. R., 1961); United States v. Benitex
Rexach, 41 F. R. D. 180 (D. C. P. R., 1966), and United States v.
Benitez Rexach, Civil Number 67-64, Lucienne is included as a party
with interest on the properties of Benítez Rexach. But again, no
adjudication was made by the Court as to her tax responsibility for the
above mentioned period.
There is thus no identity
between the cause of action in this case and that of the other Benítez
Rexach cases, nor has there been any adjudication on the merits, or
otherwise, of Lucienne's tax responsibility for fiscal years 1944
through 1949. Therefore, neither res judicata nor collateral estoppel
bar recovery for said period.
Defendants next allege that
the Government is estopped from collecting from Lucienne during the
fiscal years 1944-1949.
The doctrine of estoppel
has been defined by the courts as ". . . where one party makes by
its words or actions a false representation of fact and the other party
reasonably relies on the misrepresentation and is prejudiced
thereby." See Allied Steel Construction Co. v. Employers
Casualty Co., 422 F. 2d 1369 (CA-10, 1970); Aetna Insurance Co.
v. Glens Falls Insurance Co., 453 F. 2d 687 (CA-5, 1972).
The Courts have considered
the following elements as necessary, for the doctrine of estoppel to be
False representation or concealment of material facts.
False representation made with knowledge of the facts.
party to whom it was made must have been ignorant of the truth of the
False representation made with interest or intention that the other
party acts upon it.
See American Security
and Trust Company v. Fletcher, 490 F. 2d 481 (CA-4, 1974) Cert.
900 (1975); California State Board of Equalization v. Coast Radio
Products, 228 F. 2d 520 (CA-9, 1955).
The doctrine of estoppel
must be applied with great caution to the Government, although it is
recognized that under the proper circumstances the Government may be
v. Gross, 451 F. 2d 1355 (CA-7, 1971); 2
, Administrative Law Treatise, Secs. 1703 and 1704 (1958 and 1970
Supp.). The Court in the Gross case, states at page 1358 that:
"In most of those
cases holding the government to be estopped the facts upon which the
private party relied, to his detriment, were addressed or communicated
directly to him by government officials."
the language in several other cases seems to restrict generally the
application of estoppel to the Government. For example, in the case of Udall
v. Oelschlaeger, 389 F. 2d 974 (C. A. D. C., 1968), the Court
expressed at page 977 that the:
. . .
"Government is never disabled from protecting the public interest
by reason of the past mistakes of its agents."
case which follows this latter pattern is that of United States v. E.
W. Savage & Son, Inc., 343 F. Supp. 123 (D. C. S. D. 1972)
affirmed 475 F. 2d 305; wherein the Court states at page 126 that:
cannot be stopped by the acts of its agents even if grounds normally
sufficient for estoppel in a suit between private parties are
The First Circuit Court
seems to follow this restrictive pattern in the case of Peignand v.
Immigration and Naturalization Service, 440 F. 2d 757 (CA-1, 1971),
where the Court states at page 761:
doctrine of estoppel, assuming it can operate at all against the
Government, is not applicable here. The respondent did not lead
petitioner to any course of action which he would not otherwise have
taken, or [lead] him to change his situation in any way, whether to his
detriment or otherwise." (Emphasis added).
Defendants heavily rely on
the following allegations to support their contention that estoppel
applies to the Government in the present case.
Commissioner is attempting to correct the mistake of interpretation
under the law of the
or foreign law. 19
Commissioner arbitrarily abused his powers.
Twenty years have passed from the time the alleged taxes were due and it
would be unreasonable to collect them now.
Although Defendants cite
the case of Schuster v. C. I. R. [62-2 USTC ¶12,121] 312 F. 2d
311 (CA-9, 1962), this case mainly supports a contrary conclusion to
that favoring their position. We find that the Court states, at page
recognize the force of the proposition that estoppel should be applied
against the Government with utmost caution and restraint, for it is not
a happy occasion when the Government's hands, performing duties on
behalf of the public, are tied by the acts and conduct of particular
individuals. Estoppel has been applied against the Commissioner in
limited situations, but they have usually arisen where the
Commissioner's act involved matters of a purely administrative mature.
Indeed the tendency against Government estoppel is particularly strong
where the official's conduct involves questions of essentially
legislative significance, as where he conveys a false impression of the
laws of the country. Obviously, Congress's legislative authority should
not be readily subordinated to the action of a wayward or
unknowledgeable administrative official. Accordingly, the general
proposition has been that the estoppel doctrine is inapplicable to
prevent the Commissioner from correcting a mistake of law."
we regard this proposition as one of general application, not as
embracing the concept that the Commissioner might always correct a legal
mistake regardless of the injustice which will result. It is conceivable
that a person might sustain such a profound and unconscionable injury in
reliance on the Commissioner's action as to require, in accordance with
any sense of justice and fair play, that the Commissioner not be allowed
to inflict the injury. It is to be emphasized that such situations must
necessarily be rare, for the policy in favor of an efficient collection
of the public revenue outweights the policy of the estoppel doctrine in
its usual and customary context." (Citations omitted).
The application of the
estoppel doctrine to tax cases has been analyzed in the case of In Re
Petition of La Voie, 349 F. Supp. 68, at page 74, (D. C. St. Thom.,
1972), wherein the Court states that:
"Estoppel is invoked
frequently and with little success in tax cases, where the taxpayer
seeks to hold the Internal Revenue Service to an early ruling. However,
in most cases a reversal of opinion does not seem unjust; the taxpayer
is simply called upon for sums which should have been paid all along.
And where the taxpayer has changed his location or procedures in
reliance on the earlier ruling, it may still be argued that the public
interest in maintenance of the fisc overbears the individual interests
A similar interpretation on
the applicability of estoppel is found in the case of Simmons v.
United States [71-2 USTC ¶9583], 334 F. Supp. 853 (DC WD Ten.
1971), wherein the Court set forth at page 853 that:
"It is generally held
United States of America
is not estopped except by authority of statute. At best, it may be said
for Plaintiff that equitable estoppel against the sovereign will be
invoked only under very exceptional circumstances." (Citations
Based on the foregoing it
is our opinion that estoppel is not applicable to the present situation.
From the record it appears that no false representation or inducement
were made to the Defendants. In fact any interpretation as to the
Dominican Law was introduced initially by Rexach Benítez as a defense
in the case of U. S. v. Benítez Rexach [60-2 USTC ¶9607], 185
F. Supp. 465. Thus, Defendants were not led into error by any of
Plaintiffs' actions as regard the 1944-1949 period.
The computation of
Lucienne's tax liability for the fiscal years 1944-1949 is to be
effectuated pursuant to the formula stipulated by the parties and which
is on file.
We must now discuss other
consequences of this tax liability.
Not only did the income
earned by the Defendant Benítez Rexach in the
give rise to his business properties in that country, but the income
which he earned in the
was reinvested, among other things, in the Escambron Development Company
which holds title to the Normandie Hotel which is situated in
. Said property is subject to Lucienne's property rights. Defendant Benítez
Rexach has admitted that he did not turn over to Lucienne the one half
vested community property interest in the income he earned in the
, but rather he only furnished her adequate support and retained her
vested one-half community property interest. Since the tax liabilities
alleged herein are computed as a percentage of Lucienne's vested one
half community property interest in her husband's income, her said one
half vested interest as retained by Benitez Rexach is necessarily
greater than the tax liabilities computed on said one half vested
When Lucienne died on
January 18, 1968, Defendant María Benítez Rexach de Andreu as the
executrix of her estate, was named as a Defendant in this suit. By terms
of the will left by Lucienne all her estate was left to the Defendant
Lucienne D'Hotelle de Benítez
Rexach died holding legal title to a certain tract of real property
situated in Bayamón,
in which Benítez Rexach also claims a one-half interest.
As the administrator of the
conjugal community Benítez Rexach was authorized to retain and
administer all the property of the said conjugal community, including
the vested one-half community property interest of Lucienne in the
income Benítez Rexach earned in the
during the years 1944 through 1949, inclusive. 31 LPRA Sec. 3671; Pérez
v. Hawayeck, 69 P. R. R. 46 (1948). This is particularly so since as
previously stated Benítez Rexach has admitted that he retained
possession of the vested one-half community property interest of
Lucienne in the income he earned in the
during the years 1944 through 1958, providing her only with support.
The federal income tax
assessments which were made against Lucienne on August 13, 1964, for the
years 1944 through 1949, inclusive, are secured by tax liens which arose
on the dates of the assessments, and which tax liens encumber all
property and rights to property of Lucienne, including her rights to the
vested one-half community property interests in the said income of her
husband, which community property interests have at all times relevant
hereto been held by Benítez Rexach. See Section 6321 of the Internal
Revenue Code of 1954, appearing at 26 USCA 6321. Accordingly, the
Defendant Benítez Rexach, as the holder of property on which the
claims tax liens, is liable to the
for the amount due on said tax liens or for the amount or value of the
property so held by him and encumbered by the said tax liens, whichever
amount is the lesser.
Upon the death of Lucienne,
Benítez Rexach as the administrator of the said conjugal community, was
accountable for her vested one-half community property interest to the
estate of Lucienne, which estate is being administered here in
. See 31 LPRA Secs. 3621, 3681, 3692, 3694 and 3697. However, the said
vested one-half community property interest in Benítez Rexach's income
earned in the
during the years 1944 through 1949 has not been turned over to the
estate of Lucienne, but rather has been retained by him under claims of
her last will and testament being probated in
, which leaves all her estate to him. Such a retention by Defendant Benítez
Rexach renders him liable to the United States as a transferee at law,
31 LPRA Sec. 3498; United States v. Bess [58-2 USTC ¶9595], 357
U. S. 51 (1958); Commissioner v. Stearn [58-2 USTC ¶9594], 357
U. S. 39 (1958); and further he is liable to the United States for a
tortious conversion of its tax liens in that he is holding property as
his own which is subject to the federal tax liens securing the tax
liabilities assessed against Lucienne. United States v. Allen
[62-2 USTC ¶9704], 207 F. Supp. 545 (D. C. E. D. Wash., 1962); Nomellini
Construction Co. v. United States [71-2 USTC ¶9510], 328 F. Supp.
1281 (DC ED Cal. 1971); United States v. Matthews, 244 F. 2d 626
(CA 9, 1957); George Adams & Frederick Co. v. South Omaha
National Bank, 123 Fed. 641 (CA 8, 1903);
v. Pete Brown Enterprises, Inc., 328 F. Supp. 600 (DC ND Miss.,
1971); Exeter Company v. Holland Corp., 23 P. 2d 864 (1933); American
State Bank v. Sullivan, 134
300, 235 P. 2d 815. The Defendant Benítez Rexach's said liability as a
transferee and for tortious conversion of lien is for the amount of said
liabilities of Lucienne or the amount of the transferred and converted
property, whichever amount is the lesser.
is entitled to a judgment against María Benítez Rexach de Andreu as
executrix of the estate of Lucienne for the amount of income taxes due
from Lucienne for the years 1944 through 1949, computed according to the
formula agreed upon by the parties in the stipulation previously
referred to herein. Furthermore, the United States is entitled to a
judgment against the Defendant Benítez Rexach both in his individual
capacity because of his liability as a transferee of property subject to
federal tax liens and on account of his tortious conversion of federal
tax liens, and in his capacity as the administrator of the aforesaid
conjugal community it that he failed to pay the aforesaid federal tax
liabilities which were a debt of the aforesaid conjugal community. Since
the aforesaid tax liabilities were computed as a percentage of
Lucienne's vested one-half community property interest in the income
earned by her husband in the Dominican Republic during the years 1944
through 1949, the aforesaid tax liabilities are necessarily less than
the amount of her community property interest which are subject to the
federal tax liens and which have been improperly retained by the
Defendant Benítez Rexach. Therefore, the judgment to be entered against
Defendant Benítez Rexach both in his individual capacity for tortious
conversion and as a transferee, and in his capacity as administrator of
the said conjugal community is to be in the lesser amount of the tax
liabilities due from Lucienne computed according to the formula agreed
upon by the parties. The United States is also entitled to a judgment
against the Defendant Benítez Rexach as he is holding property which
belongs to the estate of Lucienne, to wit, Lucienne's vested one-half
community property interest in the income earned by her husband, Benítez
Rexach, in the Dominican Republic during the years 1944 through 1949,
and which community property interest is subject to the tax liens
outstanding against the decedent, Lucienne. Since, as aforesaid, the
said tax liens secure liabilities which are lesser in amount than the
value of said one-half community property interests, the United States
is entitled to a judgment against Benítez Rexach in the amount of the
tax liabilities due from Lucienne computed according to the formula
agreed upon by the parties in the stipulation.
The United States may
foreclose its tax liens which secure the tax liabilities due from
Lucienne for the years 1944 through 1949, against the real property
described in the complaint herein titled in the name of Lucienne and
situated in Bayamón, Puerto Rico, and also its liens against the stock
of the Escambrón Development Company which owns the Normandie Hotel.
Judgment shall be entered
in accordance with this Opinion.
It is so Ordered.
See United States v. Benitez Rexach, et al. [60-2 USTC ¶9607],
185 F. Supp. 465 (D. C. P. R. 1960); United States v. Benitez Rexach,
et al. [62-1 USTC ¶9199], 200 F. Supp. 494 (D. C. P. R. 1961); United
States v. Benitez Rexach, 41 F. R. D. 180 (D. C. P. R. 1966); United
States v. Benitez Rexach, Civil Number 67-64.
Sec. 404 of the Nationality Act of 1940, 8 USC 8101 et seq. provided in
substance that a naturalized citizen would forfeit his citizenship if he
resided in his domicile of origin for 3 years. See
v. Karahalias, 205 F. 2d 331 (CA 2, 1953). Sec. 404 was repealed
and this area was covered similarly by Sec. 1484(a) of the Immigration
and Nationality Act of 1952. See 8 USCA Sec. 804, Historical Note, Page
Lucienne became a Dominican citizen under the provisions of Chapter IV
of the above mentioned law, which allowed the President of the Republic
to invest or confer by decree Dominican citizenship upon those aliens
who deserved such an investiture without the usual requirements of
See footnote 2, this section is similar to Section 404 of the
Nationality Act of 1940 under which Lucienne lost her citizenship. Thus,
it follows that the constitutional rule expressed in Schneider is
also applicable to any loss of nationality under Section 352.
Under 26 USC Sec. 6861 such an assessment may be made if the collection
of taxes would be jeopardized by delay. We are not here concerned with a
statute of limitations situation by reason of the fact that Lucienne
never filed tax returns. See 26 USC 6501(c)(3).
In case of non-resident aliens or corporations the tax is essentially in
rem or in other words against the income earned in or received from
sources within the
. Resident aliens are taxed the same as citizens of the
. See 26 CFR 1.1-1(a); 26 USCA 871(b) and 877(B); Mertens, Law of
Federal Income Taxation, Volume 1, Chapter 1, Sec. 1.06, Page 12
(1974). However, we do not have these factual situations in this case.
Except for the exclusion found in 26 USCA Sec. 933, which is not at
issue according to the stipulation signed by the parties in this case.
It should be noted that the above decision was reversed as to the
application of the "equity rule" to the petitioner in that
case. See Simpson v. Union Oil Co., 396
13 (1969). However, no alteration was made by the Supreme Court with
respect to the interpretation of the Court of Appeals as to the
application of the Linkletter case to civil litigation. To the
contrary, the Supreme Court seems to adopt said interpretation by
reserving ". . . the question whether, when all the facts are
known, there may be any equities that would warrant only prospective
application . . ."
In the case of Hanover Shoe Inc. v. United Shoe Mach., 392 U. S.
481 (1968), in page 496 the Court confronts the same issue before us
without making an adjudication of it, to wit: "The theory of the
Court of Appeals seems to have been that when a party has significantly
relied upon a clear and established doctrine, and the retrospective
application of a newly declared doctrine would upset that justifiable
reliance to his substantial injury, consideration of justice and
fairness require that the new rule apply prospectively only."
Shoe Inc. v. United Shoe Machinery Corp., 392
481, 496 (1968).
Allen v. State Board of Election, 393
544, 572 (1969).
Cipriano v. City of
701, 706 (1968).
Although this case deals with the retroactivity of a statute, not of a
court decision, the rule set forth seems to apply to both situations.
See also, Jordan v. Weaver, 472 F. 2d 985 (CA 7, 1973), reversed
on other grounds; Nelson v. Schmidt, 373 F. Supp. 705 (W. D.
We might add that even were Schneider to apply, the facts of this case
strongly indicate a voluntary renunciation by Lucienne to her American
citizenship after being notified of her loss of nationality in 1952.
When her Dominican citizenship was revoked in 1962, she was issued a
French passport, her citizenship of birth, and used the said citizenship
until her death 12 years later.
In equitable cases the doctrine of laches may apply as against the
. Holmberg v. Armbrecht, 327
As we understand this allegation, Defendants are raising the fact that
in the initial Benitez Rexach case, 185 F. Supp. 465, the
Government argued against the theory that Lucienne under the Dominican
Republic Law had a one half vested interest on Benitez Rexach's earnings
in the Dominican Republic and thus Benitez Rexach could only be taxed on
his half of the earnings. In this case the government is resting its
case on the conclusion reached by the Court in 185 F. Supp. 465 as to
the fact that Lucienne had such a vested interest and since the theory
of the Government is that she never lost her citizenship, she must be
taxed for such vested interest. It is Defendants' allegation that
Plaintiff is estopped from taking such a position since they initially
United States of America, Plaintiff-Appellee v.
Harry S. Stonehill, Individually and as Trustee of the Lourdes Blanco
Stonehill Children's Trust, The Elizabeth Anne Stonehill Trust, and The
Susan J. Stonehill Trust, et al., Defendants-Appellants, Trammell, Rand,
Nathan & Lincoln, a Partnership; and Pacita Carrion Brooks,
Court of Appeals, 9th Circuit, Nos. Ca 80-4590, 80-4598, 80-4599,
80-6062, 702 F2d 1288, 4/8/83. Affirming and reversing District Court,
76-2 USTC ¶9647 and 81-1 USTC ¶9370
[Code Secs. 6321 and 7403]
Lien for taxes: Foreclosure: Nonresident alien spouses: Community
property: Philippine law.--Conjugal (community) property, including
that held in the names of the taxpayers' nonresident alien wives, was
subject to tax liens arising from deficiencies assessed on the husbands'
half of the community income; the liens could be foreclosed against all
of the conjugal property. Under Philippine law the conjugal property,
including the wives' share, was liable for debts of the husbands,
including the taxes, that were incurred to benefit the community
[Code Sec. 6323]
Lien for taxes: Priority of: Lien for attorney's fees.--Federal
tax liens had priority over any interest the taxpayers' attorneys had in
the property subject to the tax liens. Deeds of trust executed by the
taxpayers to satisfy legal fees conveyed no interest and were not
superior to the government's liens because they violated a court order
that prohibited the taxpayers from encumbering the property. Also no
equitable lien for attorney's fees arose under operation of
law. The judgment as to other third parties' claims was reversed and
remanded for determination of their respective rights in the taxpayers'
property since the trial court's decision did not expressly consider
[Code Secs. 61 and 446]
Gross income: IRS's determination: Presumption of correctness:
Reconstruction of income: Net worth method: Opening net worth.--The
IRS's assessments were entitled to the presumption of correctness
because evidence was introduced that the taxpayers received unreported
income from foreign businesses. The assessments were not arbitrary or
erroneous even though they were adjusted as the result of two errors.
The fact that a bribe paid on behalf of their company to obtain a
license should have been treated as a business investment in determining
their opening net worth did not demonstrate a pattern of pervasive
arbitrariness that would destroy the presumption for the entire
assessment. Likewise the assessments were not tainted by the fact that
the IRS initially failed to reduce the taxpayers' income by applying the
Philippine community property law. The use of the net worth method to
reconstruct the taxpayers' income was proper since the taxpayers'
records were incomplete and did not reflect millions of dollars
deposited in Swiss bank accounts. No substantial unfairness resulted
from the failure of the government to introduce the net worth
computations into evidence because the computations were set forth in
the deficiency notices received by the taxpayers.
Michael L. Paup, Kristina
E. Harrigan, Carleton D. Powell, Department of Justice, Washington, D.
C. 20530, for plaintiff-appellee. James A. Moore, Schware, Williamson,
Wyatt, Moore & Roberts, 1100 S. W. Sixth Ave., Portland, Ore. 97204,
Trammell, Rand, Nathan & Lincoln, Washington, D. C., William W.
Saunders, 2299 Kuhio Ave., Honolulu, HI. 96815, for
Before CANBY, NORRIS and
REINHARDT, Circuit Judges.
CANBY, Circuit Judge:
The government initiated
this action to foreclose income tax liens. After trial to the court, the
district judge granted judgment in favor of the government. United
States v. Stonehill [76-2 USTC ¶9647], 420 F. Supp. 46 (C. D. Cal.
1976). The taxpayers, their wives, their lawyers and certain other
Affirming, and reversing
and remanding in part, the District Court, 76-2 USTC ¶9647 and 81-1
Appellants Harry S.
Stonehill and Robert P. Brooks (the taxpayers) are
citizens who entered business in the
after World War II. They settled in the
and both married Filipino women. They prospered, eventually controlling
many successful corporations and wielding great influence in Philippine
In 1950, the taxpayers
branched out into the cigarette manufacturing business by establishing
the United States Tobacco Company (USTC). Their fortunes brightened
considerably after 1958 when one of their companies obtained the first
and only exclusive license (barter permit) to import American tobacco
. For the license, the taxpayers made payments totalling ten million
pesos (three million dollars at the black market exchange rate) to the
ultimately victorious Philippine presidential candidate. The license
gave the taxpayers a monopoly on Philippine sales of American tobacco,
which consumers greatly preferred. USTC, controlled and largely owned by
the taxpayers, was the principal beneficiary of the license. USTC bought
the American tobacco and manufactured cigarettes for sale in the
In the first fourteen months after the acquisition of the licence,
USTC's share in the Philippine cigarette market increased by some 1500%
(from a 3.7% share to 58%).
The district court found
that, between 1958 and 1961, millions of dollars from various Philippine
business dealings passed through the taxpayers' hands. Much of this
money came from illegal and unrecorded sources. 2
The taxpayers extracted commissions and rebates from exporters and
shippers of the American tobacco. They received kickbacks from
Philippine manufacturers who were permitted to buy imported tobacco, and
they siphoned off large sums from USTC and other controlled
corporations. Neither the corporate books nor the taxpayers' individual
records reflected these transactions. Over nine million dollars flowed
through black market channels to secret Swiss bank accounts and
"shell" companies. Some of this money paid expenses of USTC in
About four million of these dollars were invested in American real
estate and securities. During these years the taxpayers reported
combined incomes of less than $200,000.
In about 1960, both
American and Philippine officials became interested in the taxpayers'
activities. The United States State Department believed that Stonehill
was a corrupt influence on the Philippine government and wanted to get
him out of that country. 4
Consequently, the United States Internal Revenue Service began to
investigate the taxpayers' affairs.
On March 3, 1962, some 200
agents of the Philippine National Bureau of Investigation raided the
offices of the taxpayers and seventeen of their corporations. The agents
illegally seized thirty-five truckloads of documents. Representatives of
the United States Internal Revenue Service were permitted to examine
these documents, and over 35,000 were eventually copied by the Internal
Revenue Service. 5
A three year, worldwide audit ensued. More than fifty revenue agents
audited some twentyf-five business entities in the
. Because the taxpayers' records did not accurately reflect income, the
Commissioner used the audit information to estimate unreported income by
calculating the increase in the taxpayers' net worth. The Commissioner
computed tax deficiencies (including interest and penalties) of
$13,613,721.51 against Stonehill and $11,182,966.73 against Brooks.
Fearing that the taxpayers,
if given time, would try to remove their assets from this country, the
Commissioner issued "jeopardy" assessments pursuant to 26 U.
S. C. §6861 against the taxpayers on January 18, 1965. 6
Section 6861 permits the Commissioner to issue an assessment without
first sending the usual notice of deficiency (90 day letter) when
collection would be "jeopardized by delay." The filing of the
jeopardy assessments created tax liens on the property of the taxpayers.
26 U. S. C. §6321. 7
One week later, the United States Commenced week later, the
commenced of the taxpayers' properties in the
Years of litigation ensued,
involving hundreds of depositions all over the world, dozens of
hearings, and three successive judges. Resolution was complicated by the
absence of crucial documents and witnesses (including the taxpayers
themselves), by sensitive diplomatic and political considerations, and
by many charges of misconduct made by both sides. In 1967, the taxpayers
made a motion to suppress the evidence illegally seized in the
Philippine raids. The district court concluded that the
had not instigated or particiated in the illegal searches and denied the
motion. [68-1 USTC ¶9167] 274 F. Supp. 420 (S. D. Cal. 1967). We
affirmed. [69-1 USTC ¶9117] 405 F. 2d 738 (1968), cert. denied,
After pre-trial hearings in
1974, the government conceded that half of the taxpayers' income
constituted income to their wives under Philippine community property
laws. The wives are not subject to
income taxation. Therefore, the amount of tax assessed against the
taxpayers was halved.
Ten years after the action
commenced, on May 27-30, 1975, it was tried before Judge Solomon. The
government introduced many documents and depositions to prove fraud. To
support the asserted tax deficiencies, however, the government
introduced only the jeopardy assessments. The government thus chose to
rely on the presumption that the assessments are correct, rather than
proving each item of the underlying net worth computations. The jeopardy
assessments themselves contained only bare assertions of tax due plus
interest and penalties in each of the four years. Apparently by
oversight, the net worth computations were never put into evidence at
The district court upheld
the validity of the tax liens. The court adjusted the assessments to
correct the treatment of the ten million peso bribe, and to reflect the
conceded community property split. Although these adjustments greatly
reduced the assessments, the district court held that the taxpayers had
not rebutted the presumption of correctness. The district judge also
rejected the wives' claim that the tax liens did not encumber their
community half interest in the properties. United States v. Stonehill
[76-2 USTC ¶9647], 420 F. Supp. 46 (C. D. Cal. 1976).
After the main trial,
Trammell, Rand, Nathan and Lincoln (TRNL), the lawyers representing the
taxpayers, intervened to foreclose liens securing legal fees against
some of the properties subject to litigation. The district judge
rejected their claim, ruling that the TRNL's rights were ineffective
against or inferior to the government's tax liens.
Four groups of defendants
(1) The taxpayers, Harry S.
Stonehill and Robert P. Brooks, appeal the finding of tax liability.
(2) Their wives, Lourdes
Blanco Stonehill and Pacita C. Brooks, appeal the decision that the
liens encumber their community property interest in the properties.
(3) Trammel, Rand, Nathan
and Lincoln, the law firm that defended the taxpayers, appeals the
district court's ruling that any liens for attorneys' fees that they
have upon these properties are invalid against the government.
(4) Finally, certain third
parties appeal the judgment on the ground that it extinguished their
interests in the property without their having an opportunity to
litigate the issue.
In the trial to foreclose
tax liens, the government produced no evidence on the amount of tax
liability, but chose instead to rely upon the presumption of correctness
which applied to the assessments of tax. The taxpayers contend that the
district court erred in awarding judgment on the basis of the
presumption. They argue that the presumption never arose, or was
destroyed by the substantial errors in the original assessments.
A. Factual Foundation
for the Assessments. In an action to collect tax, the government
bears the burden of proof. The government can usually carry its initial
burden, however, merely by introducing its assessment of tax due.
Normally, a presumption of correctness attaches to the assessment, and
its introduction establishes a prima facie case. Welch v. Helvering
[3 USTC ¶1164], 290
111, 115 (1933); United States v. Moltor [64-2 USTC ¶9820], 337
F. 2d 917, 922 (9th Cir. 1964). The presumption does not arise unless it
is supported by a minimal evidentiary foundation. Weimerskirch v.
Commissioner [79-1 USTC ¶9359], 596 F. 2d 358, 360 (9th Cir. 1979).
The taxpayers contend that the assessments have were not entitled to the
presumption of correctness because they lacked any factual foundation.
The factual foundation for
the assessment is laid "once some substantive evidence is
introduced demonstrating that the taxpayer received unreported
income." Edwards v. Commissioner [82-2 USTC ¶9472], 680 F.
2d 1268, 1270 (9th Cir. 1982) (per curiam). Accord Weimerskirch v.
Commissioner [79-1 USTC ¶9359], 596 F. 2d 358, 360 (9th Cir. 1979);
United States v. Janis, [76-2 USTC ¶16,229], 428 U. S. 433,
441-42 (1976); Suarez v. United States [78-2 USTC ¶16,304], 582
F. 2d 1007, 1010 n. 3 (5th Cir. 1978); Carson v. United States
[78-1 USTC ¶16,280], 560 F. 2d 693, 696-98 (5th Cir. 1977); Gerardo
v. Commissioner [77-1 USTC ¶9322], 552 F. 2d 549, 552 (3d Cir.
1977). In Weimerskirch, the government assessed deficiencies
based on allegedly unreported income from the sale of heroin. The
government offered no evidence, however, showing that Weimerskirch had
even sold any heroin, or that he had received any unreported income. 596
F. 2d at 361-62. This court held that the Commissioner was not entitled
to rely solely on the presumption of correctness. Here, in contrast,
overwhelming evidence demonstrated that the taxpayers had received
millions of dollars of unreported income from their Philippine and
American businesses. Between 1959 and 1962, more than nine million
dollars flowed into secret Swiss bank accounts belonging to the
taxpayers. The taxpayers acquired over four million dollars worth of
property and securities in the
with money from these Swiss accounts. During these years, the taxpayers
reported income totalling only $200,000. The assessments thus stood
securely upon a foundation of concrete evidence; the presumption of
correctness was applicable.
The taxpayers next argue
that this foundation evidence was admitted solely on the issue of fraud
and cannot be used to support the presumption. This argument too
narrowly restricts the ruling of the trial judge. He explained the
permissible use of the evidence: "The Government may rely on any
evidence to defend the integrity of the Commissioner's determination
against the taxpayers' attacks. The Government may not, however, rely on
evidence admitted on the issue of fraud to prove specific items of tax
liability." 420 F. Supp. at 57 n. 10. The district judge was
concerned that the government might abandon its reliance upon the
presumption of correctness by trying to prove and total up many
individual items of tax liability. The government is not doing that
here. To "defend the integrity" of the assessments comprehends
supplying the necessary factual basis to show that they are not utterly
without foundation. The use of the fraud evidence by the district judge
himself reinforces this interpretation. The district judge used the
fraud evidence in deciding that the taxpayers' records were inadequate, id.
at 55 n. 9, and in showing a likely source of income to justify the use
of the net worth method, id. We are satisfied that the district
court's admission of the fraud evidence was not so restricted as
appellants contend, and that it is available to supply the Weimerskirch
We conclude the district
court properly held that the presumption of correctness applied to the
B. Taxpayer's Rebuttal
of the Presumption. The taxpayers contend that they successfully
rebutted the presumption of correctness by demonstrating substantial
errors in the assessments.
Introduction of the
presumptively correct assessment shifts the burden of proof to the
taxpayer. United States v. Molitor [64-2 USTC ¶9820], 337 F. 2d
917, 922 (9th Cir. 1964). If the taxpayer rebuts the presumption, it
disappears. In a suit to collect tax on unreported income, the burden of
proving the deficiency then reverts to the government. Herbert v.
Commissioner [67-1 USTC ¶9421], 377 F. 2d 65, 69 (9th Cir. 1967); 9
Mertens, Law of Federal Income Taxation §49.218 (1976).
To rebut the presumption of
correctness, the taxpayer has the burden of proving that the assessment
is "arbitrary or erroneous." Helvering v. Taylor [35-1
USTC ¶9044], 293
507, 515 (1935); Cohen v. Commissioner [59-1 USTC ¶9388], 266 F.
2d 5, 11 (9th Cir. 1959). Where an assessment is based on more than one
item, the presumption of correctness attaches to each item. Proof that
an item is in error destroys the presumption for that single item; the
remaining items retain their presumption of correctness. Clark v.
Commissioner [59-1 USTC ¶9430], 266 F.2d 698, 707 (9th Cir. 1959); Hoffman
v. Commissioner [62-1 USTC ¶9218], 298 F. 2d 784, 788 (3d Cir.
1962); Foster v. Commissioner [68-1 USTC ¶9256], 391 F. 2d 727,
735 (4th Cir. 1968); Anderson v. Commissioner [58-1 USTC ¶9117],
250 F. 2d 242, 246 (5th Cir. 1957); Banks v. Commissioner [63-2
USTC ¶9698], 322 F. 2d 530, 538 (8th Cir. 1968). Even where the
assessment has separable items, however, error which demonstrates a
pattern of arbitrariness or carelessness will destroy the presumption
for the entire assessment. Hoffman v. Commissioner [62-1 USTC ¶9218],
298 F. 2d 784, 788 (3d Cir. 1962). See Gasper v. Commissioner
[55-2 USTC ¶9541], 225 F. 2d 284, (9th Cir. 1955); Cohen v.
Commissioner [59-1 USTC ¶9388], 266 F. 2d 5 (9th Cir. 1959); Thomas
v. Commissioner [55-1 USTC ¶9509], 223 F. 2d 83 (9th Cir. 1955).
"errors" reduced the assessments by about sixty percent: the
pretrial concession that half of the conjugal income was not taxable ot
the taxpayers, and the trial court's decision that the ten million peso
bribe should be treated as a business expenditure. 9
The district court held that the presumption of correctness applied to
the remaining parts of the assessment, and that the errors did not show
arbitrariness. These factual determinations of the district court will
not be overturned unless they are "clearly erroneous." Weimerskirch
v. Commissioner [79-1 USTC ¶9359], 596 F. 2d 358, 359-60 (9th Cir.
The taxpayers contend that
the "multiple items" doctrine could not apply here, for these
assessments contained no separable items but only solitary assertions of
tax due in each year. Thus, they say, the errors left no
"unaffected parts" to which the presumption could adhere. The
argument fails, however, for the parts need not be delineated in the
assessment itself. In Clark v. Commissioner [59-1 USTC ¶9430],
266 F. 2d 698 (9th Cir. 1959), we held that error in one separable item
did not infect the entire assessment. The parts in that case were not
separately set forth in the assessment itself, but in a report prepared
by a government agent.
at 705 & 707. Accord, Banks v. Commissioner [63-2 USTC ¶9698],
322 F. 2d 530, 538 (8th Cir. 1968). Thus, in the present case, the
multiple items could be supplied by the net worth calculations
underlying the assessments. Reliance upon the net worth computations is
complicated by the government's failure to put them into evidence. In
this case, however, the taxpyers admit that they received the net worth
calculations in their notices of deficiency. They actually attacked
several individual items of the calculations, and showed that the
Commissioner had erroneously excluded the ten million peso bribe from
their opening net worth. Attorneys for both sides, on the record, made
repeated references to the net worth calculations and the numerous items
of which they were comprised. 10
In these circumstances, the district judge correctly ruled that the
assessments were based upon multiple items, and that the presumption
continued to apply after the adjustments.
The taxpayers have also
failed to prove that the errors demonstrate a pattern of arbitrariness. Gasper
v. Commissioner [55-2 USTC ¶9541], 225 F. 2d 284 (9th Cir. 1955),
presents the kind of pervasive arbitrariness that can taint the entire
assessment. There, the Commissioner used the "mark-up" method
to determine income for a small pub. The Tax Court found, however, that
the number of bottles consumed during the year was known, as were the
various prices per drink and number of drinks per bottle. A simple
calculation could accurately determine income, yet the Commissioner
adopted a method which appeared to bear only a slight relationship to
actual income. For one class of liquor the markup method overstated
income by more than fifty percent.
at 285. Thus, the method chosen was unnecessarily crude. All of the
resulting assessments were infected by this fundamental error; no
presumption could survive.
Neither of the errors here
show the arbitrariness displayed in Gasper. Whether the taxpayers
were taxable on all of their business income or (as ultimately proved to
be the case) on only half presented a difficult question of Philippine
law. Experts differed. The taxpayers themselves failed to make community
property claims on their returns. In these circumstances, the
government's pre-trial concession of this unclear legal point does not
cast doubt upon the other items underlying the assessment, nor show
carelessness. See Gobins v. Commissioner [CCH Dec. 19,218], 18 T.
C. 1159, 1169 (1952), aff'd per curiam, [55-1 USTC ¶9160], 217
F. 2d 952 (9th Cir. 1954); Silverman v. Commissioner [76-2 USTC
¶13,148], 538 F. 2d 927, 930-31 (2d Cir. 1976). The district judge was
correct in finding that this error did not destroy the presumption.
Commissioner's classification of the ten million peso bribe as a
personal expenditure, although error, was reasonable. The payment was
illegal and was not reflected in the records of any of the taxpayers'
corporations. The money apparently came from the taxpayers' personal
funds. The mistaken treatment of this payment did not demonstrate a
pattern of pervasive arbitrariness that could infect the entire
These conclusions are
buttressed by the nature of this case. The Commissioner was forced to
use the imprecise net worth method of estimating income because the
taxpayers' records were unreliable and did not accurately reflect
income. 420 F. Supp. at 55. Some error is unavoidable in such a
reconstruction. Banks v. Commissioner [63-2 USTC ¶9698], 322 F.
2d 530, 548 (8th Cir. 1963). Errors arising from the taxpayers' attempts
to conceal their income will rarely rebut the overall presumption of
correctness. Skillful concealment must not raise an insurmountable
barrier to proof. United States v. Johnson [43-1 USTC ¶9470],
503, 518 (1943).
The district judge was
correct in holding that the assessments, after adjustment to reflect
necessary changes, continued to carry the presumption of correctness.
Because the taxpayers failed to discharge their burden of rebutting the
presumption, the tax liability was established.
C. Other Contentions.
The taxpayers contend that the use of the net worth method was improper.
The net worth method is acceptable only if the taxpayers' records do not
accurately reflect income. Holland v. United States [54-2 USTC ¶9714],
121, 125 (1954). Here, taxpayers caused millions of unrecorded dollars
to be deposited in Swiss bank accounts. Any contention that the
taxpayer's records accurately reflected income is frivolous. Use of the
net worth method here was proper.
The taxpayers next argue
that the government may have abandoned the presumption of correctness by
switching to a theory of constructive dividends. Such a change of legal
theory may destroy the presumption that the assessments were correct. Helvering
v. Tex-Penn Oil Co. [37-1 USTC ¶9194], 300
481 (1937). The government's constructive dividend theory, however, was
not a change from the net worth method, but an integral part of it. Some
of the money from the Swiss accounts was used to pay expenses of USTC in
. In calculating the taxpayers' closing net worth, the government
treated these payments as capital contributions to USTC, and therefore
as evidence of taxable income. The taxpayers attacked this allocation,
arguing that the money represented USTC earnings in the
used to pay USTC expenses in the
. Thus, the taxpayers argued that these increases in net worth were not
yet taxable to them. See United States v. Smith [69-2 USTC ¶9726],
418 F. 2d 589, 593 (5th Cir. 1969); Ireland v. United States
[80-2 USTC ¶9556], 621 F. 2d 731, (5th Cir. 1980) (a constructive
dividend must advance the shareholder's personal, not business
interest). The government replied that while in the Swiss accounts, the
money was under the sole control of the taxpayers. The money thus
amounted to constructive dividends to them from their corporations, and
was income. Corlis v. Bowers [2 USTC ¶525], 281
376, 378 (1930); Hartman v. United States [57-2 USTC ¶9726], 245
F. 2d 349, 352-53 (8th Cir. 1957). So employed, the constructive
dividend theory was merely an underlying part of the government's net
worth case. Reliance on this sub-theory does not defeat the presumption.
The taxpayers also complain
that, although they were ready to attack specific items of the net worth
computations, they were unable to do so because the figures were never
put into evidence. The absence of these calculations, they contend, made
it unfairly difficult for them to carry their burden of proving the
assessment arbitrary or erroneous.
protestations of unfairness, however, fly in the face of the record. The
taxpayers admit that they received notices of deficiency which set forth
the net worth calculations. The taxpayers deposed a government agent
regarding the net worth statements and in 1972 received detailed
requests for admissions concerning the net worth computations. Their own
counsel repeatedly referred to the large number of items comprised in
the calculations. Finally, the taxpayers actually attacked several
individual elements of the net worth calculations: the cash on hand in
the opening net worth, the government's failure to include the ten
million peso payment as an asset in their opening net worth, the
original value of stock in USTC, and the inclusion in the closing net
worth of payments from the Swiss accounts for the benefit of USTC in the
United States. The district court agreed with their argument concerning
the ten million peso payment. 420 F. Supp. at 59.
Fairness may indeed require
that the taxpayer know the basis for an assessment. We certainly do not
recommend that the government refrain from putting its net worth
computations into evidence. Nevertheless, the taxpayers here knew each
detail of the calculations. Under these circumstances, no substantial
unfairness resulted from the failure to introduce the computations into
Finally, the taxpayers
argue that the judgment assumes certain matters that are not supported
by the record: for example, the amount of long-term capital gain, the
amount of dividends received credit, and whether the ten million peso
bribe was made with separate or community property funds. This argument
is not well-founded. The assumptions of capital gains and dividends
credit were used in making the assessment and so are presumptively
correct. The taxpayers have not carried the burden of proving them
wrong. The fifty-fifty split made by the district court in allocating
the community property interest was reasonable in the absence of other
indications; the taxpayers have not shown it to be incorrect. The
judgment thus rests securely on the prima facie case created by the
We therefore hold that the
presumption of correctness applied to those assessments and was not
rebutted. The judgment of tax liability is accordingly affirmed.
Community Property Interests
The realty covered by the
government's tax liens is community property. The parties agree that the
nature and extent of the husband's interests in the properties is,
governed by Philippine law. Taxpayers' wives contend that under
Philippine law and the Internal Revenue Code the tax liens cannot apply
to more than their husbands' half interests in the property. The
district court rejected this argument and the wives appeal.
Under Philippine law,
income from the husbands' businesses was conjugal property 11
in which the wife had an immediate vested half interest. Philippine
Civil Code Ann. Art. 153 (1971). The taxpayers are taxable only on their
half of the community income. Rev. Rul. 269, 1956-1 C. B. 318; United
States v. Mitchell [71-1 USTC ¶9451], 403
190, 197 (1971). The wives are neither citizens nor residents of the
and so are not subject to
The government concedes
that it cannot tax the wives on their half of the conjugal income. The
issue here is whether tax liens arising from properly assessed
deficiencies on the husbands' half of the income can be foreclosed
against all of the conjugal property.
Philippine law provides
that the conjugal property is liable for certain debts of the husband.
Article 161 of the Philippine Code provides: "The conjugal
partnership shall be liable for (1) all debts and obligations contracted
by the husband for the benefit of the conjugal partnership . . .."
Generally, obligations incurred in the course of a trade or business are
for the benefit of the community. Luzon Surety Co. v. DeGarcia,
30 S. C. R. A. 111, 115 (Phil. 1969). In certain unusual circumstances,
where the community received no actual benefit, business obligations
have been held to fall beyond the scope of article 161.
(husband received no consideration for standing as surety on a debt); Laperal
v. Katigbak, 104 Phil. 999, 1004-05 (1958) (spouses separated and
wife no longer received any of the business income). Here, the wives
undeniably received the benefits of their husbands' business income; the
tax obligations were incurred to benefit the community.
The wives argue that,
although they received income from their husband's businesses, they
received no benefit from the attachment of the tax liens. This argument
ignores the reality of this transaction. The income and tax were not two
unrelated transactions; rather they are aspects of a single transaction.
The wives can no more retain the benefit of earnings while avoiding the
non-beneficial taxes than they could retain a loan while avoiding the
non-beneficial obligation of a promissory note. See Laperal v.
Katigbak, 104 Phil. at 1004; Javier v. Osmena, 34 Phil. 336
Second, the wives contend
that their husbands lack any property interest in the wives' half of the
property to which the tax liens can attach.
Pursuant to 26 U. S. C. §6321
(1967), a lien for unpaid taxes arises upon "all property and
rights to property, whether real or personal, belonging to such
Local law, here Philippine, determines whether the taxpayer has
"rights to property" to which the tax lien may attach. See Morgan
v. Commissioner [40-1 USTC ¶9210], 309
78, 80 (1940); Runkel v. United States [76-1 USTC ¶9152], 527 F.
2d 914 (9th Cir. 1975). Because the tax deficiencies were assessed only
against the husbands, the tax liens under Section 6321 can encumber only
property in which the husbands have some right. The wives contend that
their husbands have no property rights in the wives' half of the
conjugal property, and that the tax liens therefore cannot extend to
more than the husbands' half of the conjugal properties.
For support, the wives cite
United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142 (9th
Cir. 1970); Ackerman v. United States [70-1 USTC ¶9343], 424 F.
2d 1148 (9th Cir. 1970), and Commissioner v. Cadwallader [42-1
USTC ¶10,173], 127 F. 2d 547 (9th Cir. 1942). None of these cases,
however, is controlling.
In both Overman and Ackerman,
state law prevented a husband's premarital creditors from reaching any
of the community property. The government nevertheless attempted to
foreclose premarital tax liens against the community property. The wives
argued that the husband lacked a separate property interest in any of
the community property to which a premarital tax lien could attach. Overman,
427 F. 2d at 1145; Ackerman, 424 F. 2d at 1149. We held that §6321
overrode the state creditor exclusion and that the husband had a
sufficient property right in his undivided one half interest in the
community property for the assertion of tax liens. Overman, 424
F. 2d at 1146; Ackerman, 424 F. 2d at 1150.
Thus, Overman and Ackerman
extended the reach of premarital tax liens to half of the community
property even when state law insulated the community property from
premarital creditors generally. In the present case, in contrast,
Philippine law (article 161) permits the liens to reach all of
the conjugal property. Nothing in Overman or Ackerman
reduces the reach of the tax liens below what local law permits.
In Commissioner v.
Cadwallader [42-1 USTC ¶10,173], 127 F. 2d 547 (9th Cir. 1942), we
considered the application of federal estate taxes to an American couple
living in the
. When the husband died, we held that "for the purpose of the
federal estate tax the husband must be held to have no interest in the
wife's share of the conjugal estate."
at 549-50. Thus, the assessment of estate tax wasl limited to his
half of the community property. Similarly, here, income tax was assessed
on only half of the community income. Cadwallader does not
control on the issue of whether the husband has a property interest in
the conjugal property for purposes of section 6321.
We faced this issue
squarely in Babb v. Schmidt [74-1 USTC ¶9476], 496 F. 2d 957
(9th Cir. 1974). There,
law made the community property liable for the husband's separate debts.
The government tried to foreclose pre-marital incom tax liens against
all of the community property. Relying upon Overman and Ackerman,
the wife argued that her husband had no property right in her half of
the community property to which a tax lien could attach. We rejected her
contention: "If California law makes the wife's share of the
community property available to creditors of the husband, California law
has by the same rule implicitly given the husband rights in that
property sufficient to meet the requirements of 26 U. S. C. §6321."
The present situation is
indistinguishable. Article 161 gives certain of the husband's creditors
rights against the conjugal property. Under the holding of Babb v.
Schmidt, this is a sufficient property interest to support the tax
liens. Accord United States v. Rexach, F. V., 77-1 USTC ¶9105
(D. P. R. 1977); United States v. Benitez Rexach [76-1 USTC ¶9135],
411 F. Supp. 1288 (D. P. R. 1976) rev'd on other grounds, United
States v. Lucienne D'Hotelle [77-2 USTC ¶9486], 558 F. 2d 37 (1st
Cir. 1976) (the tax liens imposed on the community property, but tax
liability so secured did not exceed half of community assets).
The district court was
therefore correct in deciding that the tax liens encumbered all of the
Liens for Attorney's Fees
TRNL appeals the district
court's ruling that any rights TRNL has in these properties are
subordinate to the government's tax liens.
On January 25, 1965, the
filed notices of tax liens and notices of pendency of action covering
all of the property subject to this suit. Shortly thereafter, the
taxpayers employed TRNL to defend them in the ensuing litigation.
On April 8, 1965, the
taxpayers and the
executed a stipulation regarding the property subject to the tax liens.
Paragraph four of the stipulation provides:
the approval hereof by the Court this stipulation shall constitute an
order of the Court effective forth with and restraining defendant Harry
S. Stonehill, his agents, employees and attorneys, from in any manner,
either directly or indirectly, selling, mortgaging, pledging,
encumbering, assigning, or otherwise disposing of, or withdrawing or
removing all or part of the properties or assets which he owns in the
United States, including, but not limited to those listed in the
attached Schedule A, from the jurisdiction of this Court or from the
jurisdiction of the United States District Court for the Northern
District of California or from the jurisdiction of the United States
District Court for the District of Hawaii (as the case may be) or from
the territorial confines of the United States.
from TRNL signed the stipulation on behalf of the taxpayers. 13
By 1977, the taxpayers owed
TRNL some $800,000 in legal fees. To satisfy this obligation, the
taxpayers executed trust deeds conveying security interests in certain
properties to TRNL. The law firm filed the deeds in the records of
. The properties were already the subject of this litigation.
TRNL asserts that it has
liens on these properties, either because of the trust deeds or because
of equitable liens for attorney's fees arising under
law. TRNL also argues that its rights have priority over the
government's tax liens.
The government's properly
filed tax liens normally would take priority over the subsequent rights
of TRNL. 26 U. S. C. §6321. To retain the original priority longer than
six years, however, 26
C. §6323(g) requires the government to refile its notice of tax lien.
Here the government failed to refile within the statutory period.
Although the failure to refile does not affect the validity of the
liens, it may reduce their priority. S. Rep. No. 1708, 89th Cong., 2d
Sess. (Sen. Fin. Comm.) reprinted in 1966 U. S. Code Cong. & Admin.
News 3733. Treasury Regulation 26 C. F. R. 301.6323(g)-1, however,
creates an exception to the refiling requirement for property
"which is the subject matter of a suit to which the United States
is a party, commenced prior to the expiration of the required refiling
period." TRNL contends that the regulation is invalid because it is
contrary to the legislative intent of the statute it purports to
interpret. Because of our resolution of TRNL's claims, we need not reach
this issue. 14
A. The Deeds of Trust.
Generally, a client may by agreement grant his attorney a lien to secure
legal fees. Isrin v.
2d 153, 403 P. 2d 728, 45
Rptr. 320 (1965);
v. Berney, 235
App. 2d 424, 45
Rptr. 467 (1965); Wagner v. Sariotti, 56
App. 2d 693, 133 P. 2d 430 (1943). Here, however, the district judge
ruled that the deeds of trust conveyed no valid security interest
because they violated the court order. TRNL argues that this ruling was
error. By affidavit, TRNL states that the stipulation was not intended
to apply to attorney's fees, but was only to prohibit assignment to
ignores the plain wording of the order. The order prohibits "in any
manner, either directly or indirectly, selling, mortgaging, pledging,
encumbering" the property subject to tax liens. This language is
unambiguous. TRNL's own 1969 explication of the meaning of the order is
in accord. See note 13 supra. The district court did not err in
finding that the attempted conveyance violated the order.
Nor did the district judge
err in holding that the deeds of trust could convey to TRNL no interest
superior to the tax liens. TRNL was present at the negotiation and
signing of the stipulation. The attempted conveyance treads dangerously
close to wilful violation of a court order. A federal court's general
equitable and disciplinary powers suffice to invalidate the deeds of
trust under these circumstances. See Lamb v. Cramer, 285
217 (1932). Any rights of TRNL arising by agreement with the taxpayers
are junior to the government's tax liens.
TRNL also asserts equitable
liens for attorney's fees arising by operation of
law provides an equitable lien for attorneys in only two situations: the
creation of a "common fund" or the maintenance of litigation
which produces "substantial benefits" for a class. Mandel
v. Hodges, 54
App. 3d 596, 620, 127
Rptr. 244, 260 (1976); Fletcher v. A. J. Industries, Inc., 266
App. 2d 313, 320, 72
Rptr. 146 (1968). TRNL contends that by substantially reducing the
assessment it "protected and preserved" a fund, and thus falls
within the "common fund" doctrine under the holding of Winslow
v. Harold G. Ferguson Corp., 25
2d 274, 153 P. 2d 714 (1944).
In Winslow, a lawyer
represented some beneficiaries of a trust. The trust purpose had become
impossible to achieve and all the beneficiaries were in danger of losing
the value of their interests. The lawyer succeeded in terminating the
trust and securing the appointment of a receiver to liquidate the trust
assets and distribute them to the beneficiaries and creditors. 153 P. 2d
at 716. The California Supreme Court stated:
It is a
well-established doctrine of equity jurisprudence that where a common
fund exists to which a number of persons are entitled and in their
interest successful litigation is maintained for its preservation and
protection, an allowance of counsel fees may properly be made from such
fund. By this means all of the beneficiaries of the fund pay their share
of the expense necessary to make it available to them.
at 715. In Winslow,
was one of the creditors. The court held that an equitable lien arose
upon the trust assets for the attorney's fees and took precedence even
over pre-existing tax liens. The court commented: "Counsel's right
to compensation under such circumstances arises from the benefit
conferred upon those who would have suffered loss but for his timely
intervention, and not by reason of an agreement to pay his fees."
The situation at hand is
very different from Winslow. In Winslow, the
was one of a class of creditors who benefited from the lawyer's efforts
in protecting the common fund from dissipation. Here, in contrast, no
"common fund" existed. TRNL did not "preserve" a
fund for the benefit of the
. Its efforts, in fact, were directed toward defeating the government's
claims. TRNL's reliance upon Winslow thus is misplaced. No lien
arises in these circumstances. For the same reason the following cases
cited by TRNL are inapposite: Kennebec Box v. O. S. Richards Corp.,
5 F. 2d 951 (2d Cir. 1925); In re Holmes Manufacturing Co., 19 F.
2d 239 (2d Cir. 1927); In re Columbia Ribbon Co., 117 F. 2d 999
(3d Cir. 1941); Bauer & Son v. Wilkes-Barre Light Co., 274
Pa. 165, 117 A. 920 (1922), and Malm v. Home Riverside Coal Mines
Co., 152 Kan. 489, 103 P. 2d 798 (1940).
Finally, TRNL argues that Mackall
v. Willoughby, 167
681 (1897), supports its claim to an equitable lien. Mackall,
however, is not on point. In Mackall, the attorney and client had
a written fee agreement. The dispute involved the proper
construction of the word "recovered" as used in the contract. Mackall
provides no benefit for a party asserting non-contractual liens.
law provides no equitable lien in favor of TRNL. Because the trust deeds
conveyed no interest, the district court correctly ruled that TRNL has
no interest in any of the properties subject to the government's tax
Appellants Ben Gromet,
William W. Saunders, Tower Development Corporation, and Meriwether
Development Corporation claim interests in certain properties involved
in this suit. These appellants stipulated that the validity of the tax
liens should be tried before determination of their respective rights in
the property. The district court's order purported to dispose of the
interests of all parties, although it did not expressly consider the
claims of these appellants.
These appellants have not
yet had their day in court. The judgment, insofar as it pertains to
them, is reversed and remanded to the district court for determination
of their claims.
The judgment insofar as it
relates to Ben Gromet, William W. Saunders, Tower Development
Corporation, and Meriwether Development Corporation is reversed and
remanded for resolution of their claims. The judgment as it relates to
all other appellants is affirmed.
AFFIRMED in part; REVERSED
in part and REMANDED.
The imported tobacco was used in cigarettes sold under the brand names
and Old Gold.
These illegal dealings were documented by evidence introduced on the
issue of fraud. The district court held that the government had proved
fraud by clear and convincing evidence. The taxpayers do not contest
this portion of the decision.
The tobacco barter permit allowed the taxpayers to import ten million
pounds of American tobacco on condition that they export fourteen
million pounds of Philippine tobacco. Supposedly, the value of the
exported tobacco would equal the value imported, and thus prevent any
flow of currency out of the
. In fact, American tobacco cost about four times as much as Philippine.
The taxpayers therefore needed large sums of money in the
to purchase the American tobacco. Philippine law, however, severely
restricted the outflow of currency from the country. Part of the
diversion of funds to
was to evade these Philippine currency restrictions.
A State Department interoffice memorandum dated January 10, 1962 stated:
"Parsons stated in the
opinion of the Embassy it is imperative for American interests in the
Philippines that some way be found to get Stonehill out of the
Philippines and break his stranglehold here. The reasons for their
concern were known to me, although I did not concern my December
memorandum with details on the areas not of direct interest to Internal
Revenue; nor will I burden the memo with these details. In general,
however, Stonehill has had an evil and corrupt influence on the
Philippine government in the past and has now indicated that he will
manipulate the new administration in the
even more visciously (sic). Whereas the American government is vitally
interested in developing and improving the democracy and economy of the
Philippines, it appears that Stonehill's individual influence may be
sufficient to undermine the entire American effort and perhaps destroy
democracy here and the cost to the United States will be immeasurable
and much beyond the hundreds of millions involved in the aid programs
memorandum concluded that the "only attack that can be made on
Stonehill is through IRS."
The taxpayers' records were never returned to them by the Philippine
government. Many of the records were apparently destroyed by a typhoon
C. §6861(a) provides:
"(a) Authority for
making.--If the Secretary or his delegate believes that the assessment
or collection of a deficiency, as defined in section 6211, will be
jeopardized by delay, he shall, notwithstanding the provisions of
section 6213(a), immediately assess such deficiency (together with all
interest, additional amounts, and additions to the tax provided for by
law), and notice and demand shall be made by the Secretary or his
delegate for the payment thereof."
C. §6321 is quoted at note 12, infra.
The government filed suits to foreclose tax liens in the district courts
for the Northern District of California, the Contral District of
California, and the District of Hawaii. The parties have agreed that the
judgment of the District Court for the Central District of California
shall be entered as the judgments in the other actions.
One other adjustment was made to the assessments. About $700,000 in
bribes to various officials were documented in a secret "Blue
Book." The State Department feared that publication of the Blue
Book would damage
foreign policy interests. The government therefore agreed to treat the
$700,000 as deductible business expenses and the taxpayers agreed not to
claim that this change in the assessments made them arbitrary. The
district court then sealed the book.
The status of the net worth calculations was somewhat unclear. The
district judge based portions of his opinion upon them. 420 F. Supp. at
Philippine law uses the term "conjugal property" instead of
community property. For our purposes, they have the same meaning.
C. §6321 provides:
If any person liable to pay
any tax neglects or refuses to pay the same after demand, the amount
(including any interest, additional amount, addition to tax, or
assessable penalty, together with any costs that may accrue in addition
thereto) shall be a lien in favor of the United States upon all property
and rights to property, whether real or personal, belonging to such
Hans Nathan, a partner in TRNL, later explained the stipulation:
negotiated and reached an understanding with opposing counsel to the
effect that, to effect an orderly disposition of this case without
causing any prejudice to the United States, the Defendant would be
permitted to obtain funds from sources abroad; to expend these funds
freely to defray his living expenses and for the expenses of this suit
during the pendency thereof. Defendant in turn would not attempt to
dispose of any assets located in the
at the time of the entering into of said agreement. The agreement was
implemented by a stipulation and order dated April 9, 1965 and filed
The government argues that regardless of the validity of the treasury
regulation the tax liens take priority under the
law of lis pendens. We note that the special filing procedures
for tax liens may preclude reliance upon state lis pendens rules
to protect tax liens. Again, however, in view of our disposition of
TRNL's claims, we need not decide this issue.
Barbara Hollingshead v. the
United States of America
S. District Court, No.
Div., No. CA1-85-54-K, 7/1/85
[Code Secs. 7421 and 7426]
Jurisdiction: Suit by nontaxpayer: Spouse of taxpayer: Assessment of
Tax: Restraint: Community property subject to lien.--A district
court had jurisdiction to hear a request made by the wife of a
delinquent taxpayer for injunctive relief from a wrongful levy. Although
IRS had not taken action against the wife, a levy was placed on her
husband's one half interest of her real estate commissions. The
Anti-Injunction provision did not apply against her, whether or not her
husband had a vested interest in her earnings which were sold management
community property under
[Code Sec. 6321]
Lien for taxes: Community property subject to lien.--The wife of
a delinquent taxpayer was denied injunctive relief from a levy on a one
half interest of her real estate commissions because her commissions
were subject to her husband's tax debts under
community property law. Even though the wife's commissions were under
her sole management and control, her interest was equal, not superior,
to her husband's. Although sole management community property would not
have to be divided equally in a divorce case, the distinction was
unimportant for tax purposes.
state law did not exempt a nondelinquent spouse's sole management
community property from the other spouse's federal tax liability.
Lastly, the IRS was allowed to levy any property interest the husband
possessed, regardless of how "meaningful" his ownership was. C.
J. Wyly Est. (CA-5 80-1 USTC ¶13,332) distinguished
[Code Sec. 6331]
Levy and Distraint: Sufficiency of Notice.--A levy on the real
estate commissions of the wife of a delinquent taxpayer was properly
imposed even though the wife was not given the required ten day notice.
The levy was valid because the ten day notice and demand had been given
to the husband, who held a one half interest in his wife's commissions
community property law. The notice given to the wife four days prior to
the levy was irrelevant because she was not the delinquent taxpayer and
because she had no interest in her husband's portion of her wages.
Charles L. Black,
, Black, Tarpley & Scarborough,
104 Pine St.
, for plaintiff. Mrs. Cynthia E. Robokos, Department of Justice,
, for defendant.
BELEW, Jr., District Judge:
Plaintiff has filed this
lawsuit to enjoin the Internal Revenue Service ("IRS") from
placing a levy on her earnings in order to satisfy the tax deficiencies
of her husband, Thomas N. Hollingshead. For the reasons hereinafter
stated, we deny Plaintiff's Motion for Preliminary and Permanent
On January 17, 1985, the
IRS opened an investigation regarding the possible nonfiling of federal
income tax returns by Thomas N. Hollingshead and his wife, Barbara,
Plaintiff herein, for the years 1982 and 1983. On January 22, 1985, a
summons was served on Thomas N. Hollingshead requiring him to produce
income tax returns for both Mr. and Mrs. Hollingshead, among others, for
the years 1982 and 1983.
On February 8, 1985, the
Hollingsheads filed separate returns for the years 1982 and 1983 for the
first time; however, Mr. Hollingshead did not pay his tax liability for
those years and was subsequently found to owe the government $94,560.29
in unpaid taxes, plus additional interest and statutory additions as
provided by law. 1
On February 11, 1985, a
1058 form called "Final Notice" was sent to Mr. Hollingshead
at 73 Fairway Oaks,
, by certified mail. The IRS still received no payment. Finally, on May
16, 1985, the IRS sent to Neal and Barbara Hollingshead,
P. O. Box 3055
, a Final Notice of Intention to Levy Wages or Salary. The Notice made
clear that the levy was an attempt to satisfy the tax debt of Mr.
Hollingshead, although it did not state what property was to be levied.
On May 21, 1985, Ronald W.
Matthews, Revenue Officer, served a Notice of Levy upon Coldwell Banker
Metro Realtors, Plaintiff's employer. The Notice stated:
virtue of the taxes assessed and owing against Thomas N. Hollingshead,
this levy will cover and attach to the interest of Thomas N.
Hollingshead in one-half of any funds due and owing to Barbara
Hollingshead. Such funds being the community property of Mr. and Mrs.
Thomas N. Hollingshead.
On May 24, 1985, Plaintiff
filed this lawsuit as well as her various motions for injunctive relief
claiming first, that pursuant to Section 5.22 of the Texas Family Code,
Plaintiff's earnings are sole management community property in
which Mr. Hollingshead has no vested interest, and second, that pursuant
to 26 U. S. C. §6331, she did not receive the statutory ten day notice
prior to the levy. For these two reasons, Plaintiff claims that the IRS
is not entitled to any portion of her wages in satisfaction of Mr.
Hollingshead's tax deficiencies. 2
The Court entered a temporary restraining order on the ex parte motion
of Plaintiff on May 24, 1985, which order was to continue in full force
and effect until the Court's hearing in this matter conducted on June
17, 1985. At the hearing, the Court extended the order to remain in full
force and effect until July 1, 1985.
jurisdiction upon 26 U. S. C. §7426, 3
but the government argues that this Court lacks jurisdiction of this
matter pursuant to 26 U. S. C. §7421(a), the Anti-Injunction provision
of the Internal Revenue Code. We disagree with the government's
Section 7421(a) of the
Internal Revenue Code of 1954 ("I. R. C.") states: "No
suit for the purpose of restraining the assessment or collection of any
tax shall be maintained in any court by any person, whether or not such
person is the person against whom such tax was assessed", with
certain exceptions, one of which is a civil action by a nontaxpayer who
claims that his or her property has been the subject of a wrongful levy.
See 26 U. S. C. §7426(a).
Plaintiff herein is a
nontaxpayer who claims that half of her earned real estate commissions
has been wrongfully levied to pay the tax debt of her husband. Hence,
her situation is expressly within the ambit of the above-referenced
exception to the Anti- Injunction provision. See Bob Jones University
v. Simon [74-1 USTC ¶9438], 416
725 (1974); Belton v. Comm'r, 82-2 USTC ¶9455 (D. Col. 1982).
government argues that Plaintiff's claim of wrongful levy is not valid.
Since the community property law of Texas gives her no interest
in the half portion of her earnings levied by the government, the
argument goes, she is not a person "who claims an interest in"
that half portion. 4
By this argument, the government attempts to lift itself by its
bootstraps. The very issue before the court today is whether community
property law in
vests in the husband a property interest in the wife's personal eanings.
The fact that we will ultimately decide this issue in the government's
does not affect our power to hear the lawsuit under the Section 7426(a)
exception to the Anti-Injunction provision. See J. A. Wynne C., Inc.
v. R. D. Phillips Construction Co. [81-1 USTC ¶9305], 641 F. 2d 205
(5th Cir. 1981).
To determine whether
Plaintiff's husband does have property rights 6
in Plaintiff's earnings, we must look to the definition of underlying
property interests under state law, although the consequences that
attach to those interests are determined by federal law. United
States v. Rodgers [83-1 USTC ¶9874], 461
677 (1983); Lange v. Phinney [75-1 USTC ¶9230], 507 F. 2d 1000
(5th Cir. 1975).
Pursuant to Section 5.22 of
the Texas Family Code, Plaintiff's real estate commissions are community
property under her sole management and control. 7
While Section 5.22 does unequivocally refer to a spouse's personal
earnings as community property, it is silent on the nature of each
spouse's ownership interest in the earnings. The government suggests
that in Texas, "community property" means equal ownership
regardless of control, 8
and our review of the pertinent case law reveals that the government's
position is the correct one.
In 1930, the Supreme Court
had occasion to rule upon the nature of the property interest given by
the predecessor of Section 5.22 to the non-managing spouse. In Hopkins
v. Bacon [2 USTC ¶613], 282 U. S. 122 (1930), it found that under
Texas law, the wife had a "present vested property interest, equal
and equivalent to that of her husband" in the sole management
community property of the husband. 282
at 126-27. This ownership interest gave the wife the right to file a
separate income tax return declaring one-half of this income.
In determining the
law on this issue, the Supreme Court relied on Arnold v. Leonard,
273 S. W. 799 (1925). The
case involved a then newly enacted
statute which purported to give a wife a separate property interest in
the rents and revenues from her separate realty interest. On the basis
of that statute, Mrs. Arnold sought to enjoin the administrator of her
husband's estate from seizing such revenues to satisfy a judgment
creditor of the decedent-husband. The Texas Supreme Court found that
according to the Texas Constitution, the revenues from Mrs. Arnold's
separate property were necessarily community property and since the
decedent-husband "had an interest in and to property which, under
the Constitution, was guaranteed . . . to the community", the
administrator would not be enjoined from seizing the revenues. 273 S. W.
at 805. We find nothing in subsequent statutes or cases 9
to indicate a change in this basic principle that a spouse has a vested
property interest in the other spouse's sole management community
maintains that any ownership interest that the husband has is all but
illusory, and she advances several arguments in support of this theory.
First, she cites the fact that in
, upon a divorce, a spouse does not automatically receive half of the
sole management community property. While the presiding judge can in his
or her discretion divide this property between the spouses, he need not.
Fam. Code §3.63 (
1975). Furthermore, Plaintiff argues the marital liabilities provisions
of the Texas Family Code demonstrate the legislative intent that a
spouse be treated as the sole owner of his or her personal earnings. 11
For example, Section 5.61 of that Code specifically protects one
spouse's property from the liabilities of the other spouse incurred
before marriage or nontortiously during the marriage.
Finally, the Plaintiff
cites the recent Fifth Circuit case of Estate of Wyly v. Comm'r of
Internal Revenue [80-1 USTC ¶13,332], 610 F. 2d 1282 (5th Cir.
1980) for the proposition that the ownership right of a spouse in Mr.
Hollingshead's situation gives a spouse so little influence over the
sole management community property that it is really no interest at all.
We are not persuaded by any of these arguments.
The fact that a judge had
discretion to divide sole management property does not demonstrate that
Plaintiff has an ownership interest in her sole management property
superior to that of her husband. Under
law, a judge has discretion to divide all community property upon a
divorce of the parties. See Cameron v. Cameron, 641 S. W. 2d 210
1982). Only a spouse's separate property cannot be so divided. See Eggemeyer
v. Eggemeyer, 554 S. W. 2d 137 (
1977). In this respect, the sole management property is treated no
differently than jointly owned community property to which both parties
have an equal right.
As to Plaintiff's argument
regarding Section 5.61 of the Code, that section defines the liability
that follows from different types of marital property. Plaintiff is
correct that subdivision (b) of that section exempts on spouse's sole
management community property from liability in certain instances. But
under subdivision (c), all community property, jointly or solely managed
by a spouse, "is subject to the liability incurred by him or her
before or during the marriage." Pursuant to these provisions,
law have found the sole management community property interest of
nondelinquent taxpayers to be subject to the tax debts of their spouses.
See Short v. United States [75-1 USTC ¶9232], 395 F. Supp. (E.
D. Tex. 1975). 13
The Court cannot ignore the obligations of Section 5.61(c) in favor of
the portion of §5.61(b) that Plaintiff deems more favorable to her
cause of action.
As to Plaintiff's final
argument concerning the Wyly case, we find the Wyly case
inapposite because it deals solely with federal estate and not
federal income tax law. In Wyly, the Fifth Circuit Court of
Appeals was faced with the question of what a decedent was required to
include in his gross estate. The decedents in the three companion cases
had made gifts to spouses prior to their death which gifts had earned
income. Under Texas community property law, the earned income was sole
management community property, so the IRS took the position that the
donors had all arguably retained a "right to income", pursuant
to 26 U. S. C. §2036(a)(1), which had to be declared as part of the
decedents' gross estates.
While finding that the
decedent-donors had an ownership right to the income, 14
that court found that it was ownership "in an almost abstract
sense" and by no means enough to constitute a meaningful
"right to income" such that would have to be declared in their
gross estates. 610 F. 2d at 1289, 1291-92.
The Fifth Circuit's
conclusion in Wyly is logical in light of the purpose of 26 U. S.
C. §2036(a)(1) which is "to prevent circumvention of federal
estate law by use of inter vivos schemes which do not
significantly alter lifetime beneficial enjoyment of property supposedly
transferred by a decedent." 610 F. 2d at 1290. The Wyly
donors clearly had no access to their "retained" interests
such that they were underestimating the value of their gross estates.
By contrast, the inquiry in
a federal income tax lien situation such as the one at bar should not be
whether the ownership right that admittedly exists is a meaningful one,
but whether it exists at all. See Broday v. United States [72-1
USTC ¶9269], 455 F. 2d 1097 (5th Cir. 1972). Raising revenue is a
crucial function which cannot be performed efficiently if those who own
property are permitted to keep that property out of the government's
reach by a claim that the ownership right is not meaningful. Section
6321 of the I. R. C. entitles the government to enter a lien on all
property or rights to property, not just "significant" rights
in property. 15
Since Plaintiff has not
been able to convince us that the rule of Hopkins and Arnold
regarding equal ownership of property regardless of control has changed,
we find that rule governs this case. Mr. Hollingshead is, therefore, the
owner of one-half of Plaintiff's real estate commissions and therefore,
the government is entitled to pursue the course of action it has taken
to levy that property. Furthermore, in light of the aforementioned
findings of fact and conclusions of law, it is our view that we have,
for all practical purposes, decided this case on its merits. Therefore,
we need not discuss the four factors which a movant seeking preliminary
injunctive relief generally must establish. 16
Plaintiff's final argument
is that she did not receive the requisite ten (10) day notice prior to
the government's service of the notice of levy on her employer. Because
the law only requires that notice be given to the delinquent taxpayer,
we find Plaintiff's argument to be without merit.
Section 6331(d) of the I.
R. C. provides: "If any person liable to pay any tax neglects or
refuses to pay the same within 10 days after notice and demand, it shall
be lawful for the Secretary . . . to collect such tax . . . by levy upon
all property and rights to property . . . belonging to such
As the legislative history
to this provision reflects, the notice and demand need only be given to
the taxpayer. In the General Explanation of the Tax Equity and Fiscal
Responsibility Act of 1982, prepared by the staff of the Joint Committee
on Taxation for H. R. 4961, P. L. 97-248 (Dec. 31, 1982), the
explanation of Section 6331(d) is contained under a Section entitled
"Taxpayer Safeguard Provisions." One portion of this report
"Levy may be made upon
the salary or wages of a taxpayer only after the Secretary has notified
the taxpayer in writing of his intention to make such levy,
unless there has been a finding that the collection of tax is in
, at 260. (Emphasis added).
in the report, the explanations states:
"The Act provides that
levy may be made upon the salary, wages, or other property of any person
with respect to any unpaid tax only after the Secretary has notified the
person in writing of his intention to make such levy. . . . As under
prior law, a single notice will be sufficient to cover all property of
the taxpayer subject to levy,"
In the instant case,
Plaintiff claims that her property cannot be the subject of a levy since
the only notice and demand that she received came a mere four days
before the notice of levy was served on her employer. First of all, as
we make clear today, her property has not been levied. Only her
husband's share of her sole management community property has been
levied; the government has made no attempt to levy her half of that
property. Secondly, her receipt of the notice and demand is not
relevant to the ten day period since she is not the delinquent taxpayer.
The Final Notice sent to Mr. Hollingshead, who is the delinquent
taxpayer, on February 11, 1985 fulfills the ten day notice requirement
Plaintiff's Motion for
Preliminary and Permanent Injunction is denied and the Complaint is
dismissed with prejudice in its entirety. An order will be entered in
accordance with this opinion.
Came on to be heard
Plaintiff's Motion for Preliminary Injunction and Complaint for
Permanent Injunctive Relief. Having considered the Motion, Complaint,
Briefs and responses thereto, as well as testimony adduced at a hearing
held before this Court on June 17, 1985, the Court is of the opinion
that said Motion be and is, therefore DENIED. It is further ordered that
the Complaint be dismissed in its entirety.
IT IS ORDERED.
It is possible that Mrs. Hollingshead also owes taxes for those same tax
years; however, the IRS has, as yet, taken no action against her.
On June 17, 1985, the Plaintiff filed a supplement to her Complaint,
seeking to enjoin the IRS from levying funds in a checking account of
one Verna Mae Ramsey. The IRS has agreed to remove the levy on these
funds upon a showing by Plaintiff that none of her own monies is in the
account. Plaintiff also, in this Supplemental Complaint, brings to the
Court's attention a post-nuptial agreement regarding the tax treatment
of future earnings of the Plaintiff and her husband. Because this
agreement was entered into on June 11, 1985, almost two weeks after the
filing of this lawsuit, it has no bearing on the already earned
commissions that are the subject of this lawsuit.
26 U. S. C. §7426 provides: "If a levy has been made on property .
. ., any person (other than the person against whom is assessed the tax
out of which such levy arose) who claims an interest in . . . such
property and that such property was wrongfully levied upon may bring a
civil action against the United States in a district court of the United
States . . ."
See Brief in Support of Removal of Temporary Restraining Order, pp. 4-5.
See discussion, infra.
26 U. S. C. §6321 provides: "If any person liable to pay any tax
neglects or refuses to pay the same after demand, the amount . . . shall
be a lien in favor of the United States upon all property and rights to
property, whether real or personal, belonging to such person."
Section 5.22 of the Texas Family Code provides: "During marriage,
each spouse has the sole management, control and disposition of community
property that he or she would have earned if single, including but
not limited to (1) personal earnings . . ." (emphasis added).
See Supplemental Brief to Show Cause Why Preliminary Injunction Should
Not Issue, pp. 2-3.
Plaintiff argues that changes in
community property law since Hopkins and Arnold were
decided have made the holdings in those cases obsolete. See Brief in
Support of Issuance of Preliminary Injunction, pp. 2-7. While community
property law in
has admittedly liberalized a wife's rights in many ways since the
decisions, the notion that the nonmanaging spouse has an ownership
interest in property equivalent to that of the managing spouse has not
changed. Hopkins and Arnold are still cited as good law
for this proposition. United States v. Mitchell [71-1 USTC ¶9451],
190 (1971); Lange v. Phinney [75-1 USTC ¶9230], 507 F. 2d 1000
Brief in Support of Issuance of Temporary Restraining Order, p. 4.
Brief in Support of Issuance of Temporary Restraining Order, pp. 4-5.
Brief in Support of Issuance of Preliminary Injunction, pp. 2-5.
Recently, the Supreme Court held that under
law, a wife's homestead interest, "a separate and undivided
possessory interest" could be sold to satisfy her husband's tax
debts. The wife was, however, entitled to compensation. United States
v. Rodgers [83-1 USTC ¶9374]. 461
The court identified two interests that a nonmanaging spouse has in sole
management community property: "(1) a spouse's ability to complain
of fraud on his or her account, and (2) his or her ability to complain
that the other spouse used such income to improve a separate
estate." 610 F. 2d at 1289. For estate tax purposes, the court
found these two interests to be worth very little.
The importance of enabling the government to collect the taxes which are
its due is reflected by the broad scheme of lien provisions available to
it. See United States v. Rodgers [83-1 USTC ¶9374], 461
The movant must show: (1) a substantial likelihood that he will prevail
on the merits; (2) a substantial threat of irreparable injury which (3)
outweighs the harm an injunction might inflict upon the nonmovant; and
(4) no disservice to the public interest. See Productos Carnic, S. A.
v. Central American Beef and Seafood Treading
, 621 F. 2d 683 (5th Cir. 1980); 11 Wright and Miller §2948.
Samuel C. Short, III v. United States of America et
S. District Court, East.
Div., No. P-73-CA-14, 395 FSupp 1151, 1/15/75
[Code Sec. 6321]
Tax liens: Property subject to: Community property: Voidable
transfer: Interpleader: Attorney's fees.--Proceeds from a sale of
restaurant equipment were property to which a tax lien against the
seller's husband could attach. The proceeds were community
property--they were not separate property of the wife. A transfer to
their son of the payments due was void under state law. The buyer, who
brought this interpleader action, was not entitled to attorney's fees,
since the lien covered the entire amount in controversy.
T. D. Wells, Jr., 41 First
N. W. St.,
, for plaintiff. Roby Hadden, United States Attorney, Houston Abel,
Assistant United States Attorney, Tyler, Tex., W. M. Holman, San Angelo,
Tex., pro se, for defendants.
Opinion and Order
JUSTICE, District Judge:
This civil action,
involving federal tax liens, 1
is in the nature of an interpleader. Plaintiff, Short, complains that
the controversy between the
and William M. and Alma Jean Holman leaves him in the position of
stakeholder, threatened with law suits by both defendants.
Plaintiff entered into a
contract with the Holmans on or about June 1, 1973, for the purchase of
equipment for use in an Ozark Fried Chicken outlet. Alma Jean Holman was
the major shareholder in Ozark Fried Chicken, Inc., at the time in
question. Negotiating with W. M. Holman (the husband of Alma Jean),
Short made a $4,000.00 down payment in the form of a check, dated June
6, 1973, payable to Alma Jean Holman. This check was endorsed by Mrs.
Holman and cashed by her. The full purchase price negotiated with the
Holmans was $10,000. Short executed a note for the $6,000.00 balance,
payable in twelve monthly payments of $500.00 each to W. R. Holman, son
of W. M. and Alma Jean Holman. Short testified that W. M. Holman
directed that the note be made payable to W. R. Holman, in order to help
finance W. R. Holman's college expenses. Although Alma Jean Holman
testified that the note was partly in consideration for the work done by
W. R. Holman in the family stores while he was growing up, she admitted
that the money came as a surprise to him and that it was, in effect, a
By August 23, 1973, the
Secretary of the Treasury had made assessments, in the form of 100%
penalties, against W. M. Holman, because of the failure of corporations
in which he was a responsible officer to pay taxes. (Apparently there
were insufficient corporate assets to pay for withholding taxes, which
had not been withheld.) On that date, a delegate of the Secretary of the
Treasury served a copy of a notice of levy upon plaintiff. 2
This notice informed Short that W. M. Holman owed the United States the
sum of $57,290.12, that demand had been made for such amount, and that
all property and rights to property belonging to W. M. Holman in Short's
possession were thereby levied upon and seized. By this time, Short had
made two of the $500.00 payments, and therefore still owed $5,000.00 on
It is the contention of
defendants W. M. Holman and Alma Jean Holman that the restaurant
equipment sold to Short was Alma Jean Holman's separate property, and
that the proceeds therefrom cannot be reached to satisfy tax liens of
The question of whether and
to what extent each spouse has property is determined under the
applicable state law. Aquilino v. United States [60-2 USTC ¶9538],
509 (1960); Morgan v. Commissioner of Internal Revenue [40-1 USTC
78 (1940). Once it is determined under state law that the taxpayer owns
property or rights to property, federal law is controlling to determine
whether a tax lien will attach to such property. United States v.
Bess [58-2 USTC ¶9595], 357
51 (1958); United States v. Hubbell [63-2 USTC ¶9724], 323 F. 2d
197, 200 (5th Cir. 1963).
The evidence discloses that
Alma Jean Holman went into the fried chicken business in 1963,
developing a special recipe for cooking fried chicken which she
registered under the trade name "Miss Alma's Recipe". Desiring
to open franchises under the name "Ozark Fried Chicken", she
early in 1965. There, she incorporated her business as Ozark Fried
Chicken, Inc., the only corporate asset being $1,000.00 in a bank
In December of 1965, the
Holmans moved to
, and changed the name of Ozark Fried Chicken, Inc., to O. F. C.
Operating Co., Inc., doing business in
"Ozark Fried Chicken" outlet was opened in 1965, and was
managed by Mrs. Holman. At some time after moving to
, Alma Jean formed a corporation in
, for the corporate purpose of selling franchises using the name Ozark
Fried Chicken, Inc. She then sold several franchises in
, employing the names Ozark Fried Chicken and Miss Alma's Recipe. W. M.
Holman was designated as president and chief executive officer of Ozark
Fried Chicken, Inc.
The restaurant equipment
which Short bought had been acquired by Alma Jean Holman from two
sources. Part of the equipment was transferred from the
franchise and the rest was purchased from a franchise in
in 1970. Mrs. Holman testified that she bought this property in her
individual capacity; she does not contend that this was a corporate
transaction. There was no evidence introduced by either defendant as to
the source of the funds which were used by Mrs. Holman to acquire the
equipment that was sold to plaintiff Short. It is against this
background that the Holmans make their claim that the equipment was Mrs.
Holman's separate property.
law, property acquired during marriage, other than that acquired by
gift, devise, descent, or personal injury recovery, is community
Family Code §5.01. A spouse's separate property consists of that
acquired by the above-mentioned means and any property owned by the
spouse before marriage.
All property possessed during marriage is presumed to be community
property, until the contrary is satisfactorily proved.
Family Code. §5.02. See also
, 374 S. W. 2d 800 (Tex. Civ. App.--Eastland 1964); Kitchens v.
Kitchens, 407 S. W. 2d 300 (Tex. Civ. App.--El Paso 1966). Since the
restaurant equipment was acquired during the Holman's marriage and no
evidence sufficient to overcome the presumption has been produced, it
must be deemed to be community property.
This court need not
consider whether the equipment or proceeds were Mrs. Holman's special
community property. This portion of a community estate is generally
exempt from the spouse's creditors under the Texas Family Code §5.61(a)(2).
The right of the
to enforce its liens does not depend, however, upon state laws which
regulate the rights of creditors. United States v. Mitchell [71-1
USTC ¶9451], 403
190 (1971). The
statute is subject to Mitchell even if it "defines property
rights" rather than being a "mere exemption statute." Broday
v. United States [72-1 USTC ¶9269], 455 F. 2d 1097, 1101 (5th Cir.
1972). Thus, even if the equipment and proceeds from its sale were Mrs.
Holman's special community property, they are reachable by a federal tax
The controlling issue,
then, is whether the transfer of the monthly payments due under the
contract with Short from the Holmans to their son removes these funds
from the reach of the federal lien. The court finds that the payments
are subject to the lien, since the transfer may be set aside under
law as void. (See United States v. St. Mary [72-1 USTC ¶9319],
334 F. Supp. 799, 802 (E. D. Pa. 1971), wherein that court examined
Pennsylvania law to draw the same conclusion.)
Under V. T. C. A. §24.03
Business and Commerce Code,
transfer by a debtor is void with respect to an existing creditor of the
debtor if the transfer is not made for fair consideration, unless, in
addition to the property transferred, the debtor has at the time of
transfer enough property in this state subject to execution to pay all
of his existing debts.
Subsection (b) of §24.03
states that "Subsection (a) of this section does not void a
transfer with respect to a subsequent creditor of or purchaser from the
debtor". But subsection (b) does not apply to the present
situation, even though the transfer took place before the notice of levy
on August 23, 1973. The obligation to pay the tax penalties arose before
the transfer, as evidenced by the dates of assessment. The
is deemed a creditor of the taxpayer from the date when the obligation
to pay taxes accrues. Coca-Cola Co. of Tuscon v. C. I. R. [CCH
Dec. 25,380], 37 T. C. 1006 (1962), aff'd [64-2 USTC ¶9643] 334 F. 2d
875 (9th Cir. 1964); United States v. Kaplan, 267 F. 2d 114 (2d
Cir. 1959); United States v. 58th St. Plaza Theatre, Inc. [68-1
USTC ¶9407], 287 F. Supp. 475 (S. D. N. Y. 1968). The fact that the
notice of levy was issued after the transfer does not materially affect
the question of whether the transferred property is subject to the
federal lien. In
Plaza, supra, the Government's lien arose from delinquent
corporate income taxes. The court there commented:
[t]o permit taxpayers to
manipulate assets during the pendency of Tax Court or IRS proceedings
and still shield themselves from transferee liability merely because
such transfers were made prior to final decisions, would be manifestly
unjust. The better result places the government in essentially the same
position as that of a private creditor. Successful creditors . . . are
not limited to reaching only those assets transferred . . . after their
claims have been reduced to a judgment. 287 F. Supp. at 501.
It was virtually conceded
by Alma Jean Holman, and the court finds, that the transfer was not
"for fair consideration" within the meaning of §24.03. Se,
e.g., Fitzgerald v. Brown, Smith and Marsh Bros., 283 S. W. 576
(Tex. Civ. App.--Texarkana 1926). Actual intent to defraud creditors is
not necessary to render a voluntary conveyance void as to the creditors.
First State Bank of Mobetti v. Goodner, 168 S. W. 2d 941 (Tex.
Civ. App.--Amarillo 1943). The burden is on the party seeking to uphold
the transfer to show valid consideration or the capacity of the debtor
to pay his debts. Cf. Alamo Lumber Co. v. Guajardo, 315 S. W. 2d
672 (Tex. Civ. App.--Eastland 1958), vacated on other grounds, 317 S. W.
2d 725 (
1958). Here, the Holmans did not meet either burden; hence, as against
the tax liens of the
, the transfer of the right to payments to W. R. Holman is void. The
, then, is entitled to receive the remaining $5,000.00 due on the
$6,000.00 promissory note.
The sole remaining issue is
that of attorney's fees. However disposed this court may be to award
such fees to an innocent stakeholder forced into litigation to prevent
double vexation, the rule seems well settled that "in United States
tax cases, at least, the attorneys' fees and costs are tied to the fund.
If the Government gets the whole fund, the fundholder takes nothing from
it for attorneys' fees and costs." Bank of American National
Trust and Sav. Ass'n v. Mamakos [73-1 USTC ¶9290], 57 F. R. D. 198,
202 (N. D. Cal. 1972). See also United States v. Liverpool &
London Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United
States v. R. F. Ball Const. Co. [58-1 USTC ¶9327], 355 U. S. 587
(1958); United States v. Gurley [69-2 USTC ¶9562], 415 F. 2d 144
(5th Cir. 1969); United States v. Hubbell [63-2 USTC ¶9724], 323
F. 2d 197 (5th Cir. 1963). Plaintiff's reliance on United States v.
State National Bank of Connecticut [70-1 USTC ¶9209], 421 F. 2d 519
(2d Cir. 1970) does not sufficiently distinguish this civil action from
the above-cited authorities. Since the Government's lien here more than
covers the amount in controversy, attorney's fees can not be deducted
from the judgment and must be denied.
C. §2410, wherein the
waives its sovereign immunity in such claims.
C. §6321, pursuant to which liens in favor of the Government are
created from non-payment of taxes. See also 26
C. §6671 which provides that penalties are to be treated in the same
manner as taxes under this title.
United States of America
, Plaintiff v. John R. Mayfield, et al., Defendants
S. District Court, So. Dist. Tex., Hoston Div., Civil Action No.
[1954 Code Sec. 6321]
Lien for taxes: Seized cash: Community property.--Cash seized
from a safety deposit box rented in the name of the taxpayer and his
wife community property in the absence of proof that it was the separate
property of the wife. The cash was subject to the Government's tax lien
for delinquent wagering taxes owed by a partnership of which the
taxpayer-husband was a member.
John H. Baumgarten,
Assistant United States Attorney, Houston, Tex., Joel P. Kay, Department
of Justice, Washington, D. C. 20530, for plaintiff. Newton Schwartz,
, for defendants.
NOEL, District Judge:
This is an action in which
seeks to obtain a judgment for unpaid federal gambling excise taxes
assessed against John R. Mayfield, Robert J. Butler, and John R.
Mayfield and Robert J. Butler, a partnership, in the amount of
$16,342.50, plus interest, for the year 1963. Internal Revenue Code of
1954, §4401. The assessment was made December 20, 1963, and notice of
the assessment was given and demand for payment made March 25, 1964. The
taxpayers have refused to pay the amounts alleged to be due.
The government seeks to
foreclose a tax lien against a certain sum of money, $13,017.00, which
was seized from a safe deposit box at the Sharpstown State Bank December
of 1963. The safe deposit box was rented in the names of Mr. and Mrs.
John R. Mayfield. The money is now in the registry of the Court.
Plaintiff asserts that the
$13,017 is the property of the defendants, or the community property of
Mr. and Mrs. Mayfield, and that it is subject to the payment of Mr.
Mayfield's tax debts. In their answer, defendants deny that the
government has a valid tax lien against them, in part because plaintiff
failed to give immediate notice following the making of the assessment
and demand, as required by Internal Revenue Code of 1954, §6862, and
because no facts were alleged to support the imposition of a jeopardy
assessment. Furthermore, Mrs. Mayfield, an intervenor, contends that the
$13,017 was a gift from her husband, John R. Mayfield, and that it is,
therefore, her separate property and not subject to the debts or
liabilities of Mr. Mayfield.
The government served
notice to take oral depositions of both John R. Mayfield and Mrs.
Mayfield, intervenor, under Fed. R. Civ. P. 30, but neither parties
appeared before the officer who was to take their depositions.
Defendants Mayfield and
failed to respond to the written interrogatories properly served upon
them pursuant to Fed. R. Civ. Proc. 33. Plaintiff has filed a Motion to
Strike Defendants' Original Answer and Intervenor's Claim and
Intervention, and asks that the Court enter default judgment against the
parties under the provision of Fed. R. Civ. P. 37(d), which reads:
"if a party . . . wilfully fails to appear before the officer who
is to take his deposition, after being served with proper notice, the
court on motion and notice may strike out all or any part of any
pleading of that party . . . or enter a judgment by default against that
The case was tried to the
Court on December 5, 1966. Defendants' counsel was present at the trial,
but neither Mr. Mayfield, Mrs. Mayfield, nor Mr. Butler appeared.
Defendants have been accorded ample opportunity to prepare and present
their case and to allege facts at the trial or in response to
plaintiff's discovery or by use of their own discovery procedure which
might raise or support a defense to the complaint. Not only have they
failed to avail themselves of this opportunity, but they have
intentionally eluded discovery efforts of the plaintiff and the
proceedings of this Court. Defendant's counsel offered no reasonable
excuse for the inadvertance of his clients and, indeed, it appears that
there is none.
with Federal Rules 30 and 33 is solely due to the fault of the
defendants and is the result of their willful failure and refusal to
comply with the rules, as is evidenced by their failure to appear for
the taking of oral depositions, their failure to answer written
interrogatories, and their absence at the trial of the case.
Accordingly, plaintiff is entitled to the remedies available under Rule
37(d), and its motion to strike will be granted and default judgment
entered in favor of the government. See Societe Internationale v.
197 (1958); West & Brooker Co. v. Continental Casualty Co.,
303 F. 2d 91, 92-93 (4th Cir. 1962).
The defendants have the
burden of proving that they do not owe the taxes which have been
assessed against them. See Eagle v. Commissioner [57-1 USTC ¶9543],
242 F. 2d 635 (5th Cir. 1957); Kjar v. United States [47-1 USTC
¶9150], 69 F. Supp. 406 (Ct. Cl.), cert. denied, 332
768 (1947). The amount of the assessment, absent refutation, is presumed
correct, and if the taxpayers desire to challenge the assessment, they
have the burden of proof. Pepsi-Cola Bottling Co. of Washington, D.
District of Columbia
, 337 F. 2d 109, 112 (D. C. Cir. 1964). The decision to make a
jeopardy assessment is within the sound legal discretion and judgment of
the Commissioner, and is not subject to judicial review. Lloyd v.
Patterson [57-1 USTC ¶9549], 242 F. 2d 742, 743-44 (5th Cir. 1957).
And finally, money earned during marriage and held in the names of both
spouses is presumed to be community property, and subject to the
husband's debts; this presumption will be overcome only by clear and
convincing proof that the money is the separate property of one spouse.
See Duncan v. Duncan, 374 S. W. 2d 800, 802 (Tex. Civ. App.
1964); Commissioner v. Fleming [46-1 USTC ¶10,271], 155 F. 2d
204, 206 (5th Cir. 1946). Defendants have failed to offer any proof to
rebut the preceding presumptions. In striking defendants' answer and
intervenor's claim, plaintiff's allegations become uncontroverted and
permit entry of default judgment. Counsel for plaintiff shall prepare an
appropriate final judgment.
The Clerk shall record this
Memorandum and Order and furnish copies to counsel of record.
Came on to be heard the
above-entitled and numbered cause, whereupon appeared the plaintiff,
United States of America, by the United States Attorney For the Southern
District of Texas, and the defendants, John R. Mayfield, Robert J.
Butler and John R. Mayfield and Robert J. Butler as a partnership, and
the intervenor, Mrs. John R. Mayfield, appeared by their counsel of
record, Newton B. Schwartz;
And the Court having
considered the evidence introduced by plaintiff at the trial herein, the
failure of defendants and the intervenor to personally appear and
introduce evidence at said trial, the memorandums of law filed by the
parties hereto and all other pleadings heretofore filed in this
proceeding by all parties;
It is therefore ORDERED,
ADJUDGED and DECREED that the claim of the intervenor, Mrs. John R.
Mayfield, is stricken and defaulted and that she take nothing by her
It is further ORDERED,
ADJUDGED AND DECREED that John R. Mayfield is indebted to the United
States of America in the amount of $19,391.67, together with costs of
court in the amount $44; that Robert J. Butler is indebted to the United
States of America in the amount of $19,391.67; and that John R. Mayfield
and Robert J. Butler, a partnership, are indebted to the United States
of America in the amount of $19,391.67;
It is further ORDERED,
ADJUDGED AND DECREED that the United States of America by virtue of the
foregoing liabilities has valid and subsisting tax liens, each in the
amount of $19,391.67 which encumber the fund of money in the Registry of
the Court in the above-numbered and titled proceeding in the amount of
$13,017; and that said tax liens be foreclosed against said fund of
money and that said fund, after the deduction of court costs in the
amount of $44, be delivered to the United States of America for
application to each of the three liabilities heretofore stated;
It is further ORDERED,
ADJUDGED AND DECREED that the United States of America do have and
recover a deficiency judgment against John R. Mayfield in the amount of
$6,378.70, together with interest at the rate of 6 percent per annum
until the foregoing amounts are paid, for all of which the plaintiff may
have its execution; that the United States of America do have and
recover a deficiency judgment against Robert J. Butler in the amount of
$6,378.70, together with interest at the rate of 6 percent per annum
until the foregoing amounts are paid, for all of which the plaintiff may
have its execution; and that the United States of America do have and
recover a deficiency judgment against John R. Mayfield and Robert J.
Butler, a partnership, in the amount of $6,378.70, together with
interest at the rate of 6 percent per annum until the foregoing amounts
are paid, for all of which the plaintiff may have its execution.