Workers Local No. 23 Pension Fund, by and through Robert T. Norcross and
Les J. Zane, as Trustees, Plaintiffs v. United States of America,
Internal Revenue Service and Patrick Kelley, Defendants.
District Court, Mid. Dist. Pa.; Civ. 1:01-CV-2253, January 12, 2004.
Secs. 6321 and 7402]
Tax liens: Pension plan term benefits: Property of the participant.
Guaranteed minimum pension
plan benefits payable to a plan beneficiary following the death of his
taxpayer/father, the plan participant, did not constitute
"property" of the father to which a tax lien could attach. The
father's interest in the payments was limited to the power of
designating a beneficiary; although he could collect lifetime benefits
from the plan, he had no means of obtaining or alienating the funds
during his life. Only the beneficiary had authority to compel payment of
the minimum benefits. The right to designate a beneficiary did not
constitute a beneficial interest sufficient to satisfy the federal
definition of property.
Secs. 6321 and 7402]
District court jurisdiction: Interpleader action: ERISA action. --
Guaranteed minimum pension
plan benefits payable to a plan beneficiary following the death of his
taxpayer/father, the plan participant, did not constitute
"property" of the father to which a tax lien could attach. The
federal district court had jurisdiction over the interpleader action
because it involved claims by the government to enforce the tax code.
Also, pursuant to 28 USC §1331, jurisdiction was also present over
claims by the beneficiary to recover benefits under the Employee
Retirement Income Security Act (ERISA).
CONNER, District Judge: Presently before the court in this interpleader
action are cross-motions for summary judgment by defendants, Patrick
Kelley and the Internal Revenue Service ("IRS"), seeking
disbursement of payments owed under a pension benefit plan administered
by plaintiff, Asbestos Workers Local No. 23 Pension Fund
("Fund"), and governed by the Employee Retirement Income
Security Act ("ERISA"), 29 U.S.C. §§1001-1401. Patrick
Kelley, named as designated beneficiary under the plan, became entitled
to a guaranteed amount of benefits following the death of his father,
Richard Kelley, the participant in the plan. The IRS contends that tax
liens against Richard Kelley's property attached to the term benefits
payable to Patrick Kelley. The Fund filed this interpleader action to
resolve the rights of the IRS and Patrick Kelley to the benefit
The question presented is whether guaranteed minimum benefits payable to
a designated beneficiary under a pension plan constitute
"property" of the participant to which a tax lien may attach. 1
For the reasons that follow, the court finds that such benefits do not
constitute property of the participant and will grant Patrick Kelley's
motion for summary judgment.
I. Statement of Facts 2
For a number of years, plaintiff's father, Richard Kelley, was employed
under a collective bargaining agreement that included a pension benefit
plan. (Doc. 27 ¶6; Doc. 29, Exs. 7-8). The plan offered several payment
options, one of which granted monthly benefits to the participant
throughout the participant's life and, if the participant died before
receiving 120 payments, "the remainder of said  payments"
to a designated beneficiary. (Doc. 29, Ex. 7 at 17a). Under this option,
deemed the "ten-year-guarantee pension," either the
participant or the beneficiary was guaranteed to receive at least 120
monthly benefit payments from the Fund.
On May 20, 1996, Richard Kelley applied for benefits under the plan and
selected the ten-year-guarantee pension option. (Doc. 27 ¶7; Doc. 29,
Ex. 8). He named his son, Patrick Kelley, as his designated beneficiary.
His retirement became effective on June 1, 1996, and on that date he
began receiving pension benefits of approximately $1100 per month. (Doc.
27 ¶ ¶9-10; Doc. 29, Ex. 8).
In 1997, after Richard Kelley failed to satisfy IRS demands for
satisfaction of tax obligations from previous years, a lien in favor of
attached by operation of law to all of his property, including his
interest in pension benefits under the plan. (Doc. 27 ¶12; Doc. 29,
Exs. 1-6). The IRS served notices of levy on the Fund, demanding
disbursement of a portion of the monthly pension benefits as they became
due. Consequently, starting in November 1997 the Fund reduced Richard
Kelley's benefit payments by approximately $500, remitting this sum to
the IRS each month. (Doc. 27 ¶ ¶13-15; Doc. 29, Exs. 9-10).
The payments continued until June 5, 2001, when Richard Kelley died. At
the time of his death, Richard Kelley had received sixty-one payments
under the plan. (Doc. 27 ¶18; Doc. 29, Ex. 11). Soon thereafter, the
IRS advised the Fund that the lien against Richard Kelley remained
attached to the minimum benefits payable to his designated beneficiary
and that the Fund should continue to honor the agency's levy. The Fund
notified Patrick Kelley that he was eligible under the plan to receive
fifty-nine benefit payments as designated beneficiary but that the IRS
had asserted a levy against the benefits. (Doc. 27 ¶ ¶19-21). The Fund
reduced Patrick Kelley's monthly benefits by the amount allegedly
subject to the IRS levy and placed that portion in a separate escrow
account pending resolution of the conflicting claims. (Doc. 29, Ex. 11).
On November 27, 2001, the Fund filed a complaint for interpleader,
naming the IRS and Patrick Kelley as defendants. The complaint sought
resolution of the competing claims of the two parties and a release from
liability in connection with the withheld pension payments. (Doc. 1).
The IRS filed a counterclaim against the Fund for immediate distribution
of the amounts withheld and a cross claim against Patrick Kelley for
foreclosure of the tax liens. (Doc. 8). Patrick Kelley filed a
counterclaim against the Fund for immediate disbursement of the amounts
withheld. (Doc. 10). The court ordered the amount held in escrow by the
Fund and all future payments owed under the plan to be deposited into
the registry of the court pending disposition of the controversy. (Doc.
14). The claimants subsequently filed cross-motions for summary
judgment. (Doc. 68).
II. Subject Matter Jurisdiction
Federal courts have an independent obligation to ensure the existence of
subject matter jurisdiction over claims before them, even when the
parties do not raise the issue. See Nesbit v. Gears Unlimited,
Inc., 347 F.3d 72, 76-77 (3d Cir. 2003); see also FED. R.
CIV. P. 12(h)(3) ("Whenever it appears ... that the court lacks
jurisdiction of the subject matter, the court shall dismiss the
action."). In this case, plaintiff's complaint premises
jurisdiction on 28 U.S.C. §1335, which grants district courts original
jurisdiction over all actions "in the nature of interpleader"
involving "[t]wo or more adverse claimants, of diverse citizenship
as defined in section 1332 of this title." 28 U.S.C. §1335. Under
§1332, however, diversity exists only among citizens of different
states and "foreign state[s]," not between a citizen of a
state and the federal government or an agency thereof. See id.
§1332; Commercial Union Ins. Co. v.
, 999 F.2d 581, 584 (D.C. Cir. 1993). Because the IRS is an agency
of the federal government, no diversity of citizenship exists between
the claimants, and the court cannot exercise jurisdiction over the
action under §1335. See
v. ICC, 258
158, 160 (1922); Commercial Union Ins., 999 F.2d at 584.
This conclusion, however, does not mandate dismissal. In addition to §1335,
interpleader actions may be brought under Federal Rule of Civil
Procedure 22, which, unlike its statutory counterpart, permits actions
to be premised on a jurisdiction basis other than diversity of
citizenship. See FED. R. CIV. P. 22; 7 CHARLES ALAN WRIGHT ET
AL., FEDERAL PRACTICE AND PROCEDURE §1710, at 590 (3d ed. 2001).
Jurisdiction exists over a Rule 22 interpleader action if the claimants'
potential causes of action against the stakeholder would be subject to
the court's jurisdiction under federal law. Bell & Beckwith v.
United States [ 85-2
USTC ¶9813], 766 F.2d 910, 912-13 (6th Cir. 1985) ("In
interpleader actions as in declaratory judgment actions, federal
question jurisdiction exists if such jurisdiction would have existed in
a coercive action by the defendant."); accord Commercial
Nat'l Bank of Chi. v. Demos, 18 F.3d 485, 488-89 (7th Cir. 1994); Commercial
Union, 999 F.2d at 585; Morongo Band of Mission Indians v. Cal.
State Bd., 858 F.2d 1376, 1384 (9th Cir. 1988); Home Corp. v.
deLone, No. Civ. A. 96-7672, 1997 WL 214849, at *4 n.11 (E.D. Pa.
Apr. 23, 1997). In this case, defendants' potential causes of action
against plaintiff --actually asserted as counterclaims --arise under the
Internal Revenue Code and ERISA. See 26 U.S.C. §7403; 29 U.S.C.
§1132(a)(1)(B). These claims are subject to the district court's
jurisdiction under 26 U.S.C. §7402, which grants jurisdiction over
claims by the
to enforce the Internal Revenue Code, and 28 U.S.C. §1331, which
permits jurisdiction over claims by beneficiaries to recover benefits
under ERISA. See 26 U.S.C. §7402; 28 U.S.C. §1331. Thus, the
court will construe this action as one arising under Federal Rule of
Civil Procedure 22 and exercise jurisdiction over plaintiff's claims. See
St. Louis Union Trust Co. v. Stone [ 78-1
USTC ¶9259], 570 F.2d 833, 835-36 (8th Cir. 1978) (holding
that district court could exercise jurisdiction over Rule 22
interpleader action brought by trust company to resolve claims by
beneficiary of entitlement to benefits on which the IRS asserted a tax
lien); see also 28 U.S.C. §2410 ("[T]he United States may
be named a party in any civil action or suit in any district court ...
of interpleader or in the nature of interpleader with respect to ...
property on which the United States has or claims a ... lien.").
III. Summary Judgment
Standard of Review
Federal Rule of Civil Procedure 56 permits the entry of summary judgment
against a party on an issue or a claim when "the pleadings,
depositions, answers to interrogatories and admissions on file, together
with the affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a judgment as
a matter of law." FED. R. CIV. P. 56(c); see also Saldana
v. Kmart Corp., 260 F.3d 228, 231-32 (3d Cir. 2001). In resolving a
motion for summary judgment, courts should not weigh conflicting
evidence or make factual findings but, rather, should "consider all
evidence in the light most favorable to the non-moving party" to
determine whether "the evidence is such that a reasonable jury
could return a verdict for the nonmoving party." Schnall v.
Amboy Nat'l Bank, 279 F.3d 205, 209 (3d Cir. 2002). Summary judgment
is appropriate when a party "fails to make a showing sufficient to
establish the existence of an element essential to that party's case,
and on which that party will bear the burden of proof at trial." Celotex
Corp. v. Catrett, 477
317, 322-23 (1986).
Validity of the Tax Lien
To ensure the collection of owed taxes, the Internal Revenue Code
creates a lien in favor of the United States on "all property and
rights to property, whether real or personal," belonging to a
person who neglects or refuses to satisfy a tax obligation after demand
from the government. 26 U.S.C. §6321;
see also United States v. Nat'l Bank of Commerce [ 85-2
USTC ¶9482], 472 U.S. 713, 719-20 (1985). Following
attachment of this lien, the Secretary of the Treasury may impose an
administrative levy on the property to the extent necessary to secure
full repayment. 26 U.S.C. §6331.
Such levies may be served not only on the taxpayer but also on third
parties, such as employers and pension fund administrators, to compel
disbursement of compensation or benefits as they become due to the
see also Nat'l Bank of Commerce [ 85-2
USTC ¶9482], 472
at 719-20; In re Connor [ 94-2
USTC ¶50,296], 27 F.3d 365, 366-67 (9th Cir. 1994).
Because the Internal Revenue Code clearly grants to the IRS the power to
attach and levy all "property and rights to property," the
validity of a tax lien often hinges on whether the asset to be attached
qualifies as "property." The Code, however, neither defines
"property" nor provides guidance on whether the existence of
property is a matter of state or federal law. See 26 U.S.C. §6321.
Courts struggled to find the appropriate source for the meaning of the
until Drye v. United States [ 99-2
USTC ¶51,006; 99-2
USTC ¶60,363], 528 U.S. 49 (1999), in which the Supreme
Court held that federal law governs whether an asset constitutes
"property" for purposes of §6321,
but that state law creates the "interests" by which this
standard is judged.
Applying this standard requires distinctions among three related
concepts: "assets," "interests," and
"property." An "asset" is any "item that ...
has value," including cash, chattels, land, rights to contractual
performance, and choses in action. BLACK'S LAW DICTIONARY 112 (7th ed.
1999); see United States v. Craft [ 2002-1
USTC ¶50,361], 535 U.S. 274, 278-79 (2002); United States
v. Bess [ 58-2
USTC ¶9595], 357 U.S. 51, 59-60 (1958); Congress Talcott
Corp. v. Gruber [ 93-1
USTC ¶50,283], 993 F.2d 315, 319-20 (3d Cir. 1993). Assets
may be tangible or intangible, vested or contingent, real or personal. See
Craft [ 2002-1
USTC ¶50,361], 535
at 278-79; Congress Talcott [ 93-1
USTC ¶50,283], 993 F.2d at 319-20; Connor [ 94-2
USTC ¶50,296], 27 F.3d at 366-67. Simply, an asset is
anything that has a legal existence and can be owned.
"Interests" in an asset are those legally cognizable means by
which an individual may exert control over the asset. See Craft
USTC ¶50,361], 535
at 278-79. Such interests may include the power to profit from or use
the asset, to exclude others or inhibit its sale, or to devise or
designate beneficiaries of the asset. See id.; Bess
USTC ¶9595], 357
at 59-60. Because an individual's interests depend on the extent to
which they may be enforced in courts in that person's jurisdiction,
state law generally controls this issue. Drye [ 99-2
USTC ¶51,006; 99-2
USTC ¶60,363], 528
"Property," for purposes of the Internal Revenue Code, is a
label applied under federal law to an asset when a person has a
sufficiently "beneficial interest" in it. See id.
at 58. When an individual may gain personally from the exercise of his
or her interest, federal law will recognize the asset as property of the
individual. See Craft [ 2002-1
USTC ¶50,361], 535
at 278-79. To use a familiar metaphor, a person's interests in an asset
under state law are sticks in the person's bundle, and federal law
decides whether the bundle is heavy enough to be called
Thus, the validity of a lien against a delinquent taxpayer under the
Internal Revenue Code requires resolution of three related issues: (1)
what "asset" the government seeks to attach, (2) what
"interests" the taxpayer has in the asset under state law, and
(3) whether the taxpayer derives sufficient benefits from the interests
for the asset to constitute "property" of the taxpayer under
Nature of the Asset To Be Attached
A prerequisite to determining an individual's "interests" in
an asset, or deciding whether the asset qualifies as
"property," is identifying the precise nature of the asset
that the government seeks to attach. See id. at 278-81.
Whether the asset arises from a contract, statute, or common law heavily
influences the analysis of rights available under state law, and initial
classification demands close attention. See id.; Bess
USTC ¶9595], 357
In this case, the asset claimed by the IRS is Richard Kelley's
contractual right to the minimum benefit payments under the pension
plan. According to the agency, the lien that arose during Richard
Kelley's life attached to those benefits and remained effective
following his death, when the right to the payments was transferred to
Patrick Kelley. See id. at 57 ("The transfer of
property subsequent to the attachment of the lien does not affect the
lien, for `it is of the very nature and essence of a lien, that no
matter into whose hands the property goes, it passes cum onere 4
...."'). Having identified the asset as a contractual right, the
court must consult state contract law to determine Richard Kelley's
"interests" in the benefit at the time of attachment.
Interests in the Asset
When the asset at issue is a right to contractual performance, the plain
language of the contract forms the centerpiece of the discussion of the
individual's interests. See, e.g., id. at 55; see Willison
v. Consolidation Coal Co., 637 A.2d 979, 982 (
1994). Both federal and state law dictate strict fidelity to the
unambiguous meaning of the terms of an agreement, and a party's
interests must be measured by those provisions. 5
See Int'l Union, United Auto. Workers of Am., Local No. 1697, 188 F.3d
130, 138 (3d Cir. 1999); Willison, 637 A.2d at 982.
The contract in this case, the pension plan, entitled Richard Kelley to
collect lifetime benefits from the Fund, but offered no method by which
he could obtain or alienate the funds during his life. The plan did not
permit participants to redeem benefits early or to surrender the value
of the annuity for an immediate lump-sum payment. Essentially, Richard
Kelley's rights under the plan were limited to suing for monthly
payments as they became due, if not made promptly by the Fund. Indeed,
the only individual with authority to compel payment of the minimum
benefits is the designated beneficiary. The plan accords the
beneficiary, not the participant, a right to receive these payments and
grants him or her the option, with Fund approval, to obtain them as a
lump sum. 6
The power to enforce payment of the minimum benefits lies exclusively
with Patrick Kelley.
The only power Richard Kelley had over the minimum payments during his
life was the ability to designate a beneficiary of those funds after his
death. The plan clearly provided him with discretionary authority to
choose a beneficiary and change that designation at any time. (Doc. 29,
Ex. 7 at 37a). Because this authority offered Richard Kelley limited
control over the minimum payments, it constitutes a cognizable interest
in those payments. See Drye [ 99-2
USTC ¶51,006; 99-2
USTC ¶60,363], 528
at 58; Bess [ 58-2
USTC ¶9595], 357
at 59-60. Whether this interest is sufficiently beneficial to qualify
the asset as "property" is a matter of federal law. Drye
USTC ¶51,006; 99-2
USTC ¶60,363], 528
Qualification of the Asset as "Property"
Satisfaction of the federal standard for "property" requires
only that the interests give the taxpayer, at the time of attachment, a
minimal level of control of the disposition of the asset for his or her
personal benefit. 7
See id. Subsequent changes in the taxpayer's legal status or adverse
consequences of the exercise of the interest "are of no concern to
the operation of the federal tax law." Nat'l Bank of Commerce [ 85-2
USTC ¶9482], 472
at 723; see Drye [ 99-2
USTC ¶51,006; 99-2
USTC ¶60,363], 528
at 52, 58-59. Thus, even if the individual loses or renounces his or her
interest in the asset, federal law will still recognize the asset as
"property" of the individual so long as exercise of the
interest offered the taxpayer a potential benefit at the time of
attachment. See, e.g., Bess [ 58-2
USTC ¶9595], 357 U.S. at 56; cf. Lane v. UNUM Life Ins. Co.
of Am., No. 1:02-CV-1573, 2003 WL 22838754, at *3 (M.D. Pa. Nov. 25,
2003) ("The law recognizes many situations in which a person may
irrevocably renounce the right to receive a benefit but still be
considered `eligible' for it.").
The mere right to designate a beneficiary, however, is not a
sufficiently "beneficial interest" to satisfy the federal
definition of property. Bess [ 58-2
USTC ¶9595], 357
at 59-60; see Drye [ 99-2
USTC ¶51,006; 99-2
USTC ¶60,363], 528
at 52, 59 n.6. As the Supreme Court stated nearly fifty years ago in the
context of life insurance policies, the power of designation offers the
owner no ability to use the funds for his or her personal benefit. Bess
USTC ¶9595], 357
at 59-60. Because disposition of the funds occurs after the death of the
owner, that party cannot enjoy the asset or otherwise use it to his or
Only the beneficiary stands to gain. Whatever incidental benefits the
owner may obtain from the authority to designate is simply insufficient
to meet the federal definition of "property."
Because Richard Kelley's interest in the minimum payments was limited to
the power of designation, those benefits did not constitute his
"property" under the Internal Revenue Code. See id.
No lien attached to those funds and the IRS lacked authority to issue a
levy against them. See 26 U.S.C. §§6321,
Patrick Kelley is entitled to receive the pension benefit payments free
of any lien or levy asserted by the IRS.
For the foregoing reasons, the court finds that the guaranteed minimum
benefits payable to Patrick Kelley as designated beneficiary under the
pension benefit plan did not constitute "property" of Richard
Kelley to which the tax lien attached. Therefore, the court will grant
Patrick Kelley's motion for summary judgment and deny the motion of the
IRS. However, because plaintiff's complaint includes claims for
injunctive relief and costs that have not yet been addressed by the
parties, entry of judgment will be deferred pending submission of briefs
in support of and in opposition to these claims. See WRIGHT ET
AL., supra, §§1717, 1719 (discussing claims for injunctive
relief and costs in interpleader cases pursuant to Federal Rule of Civil
An appropriate order will issue.
AND NOW, this 12th day of January, 2004, upon consideration of the
cross-motions for summary judgment (Docs. 26, 30), and for the reasons
set forth in the accompanying memorandum, it is hereby ORDERED that:
United States of America
's motion for summary judgment (Doc. 26) is DENIED.
2. Defendant Patrick Kelley's motion for summary judgment (Doc. 30) is
3. The order of court (Doc. 14) dated February 20, 2002, shall remain in
full force and effect pending resolution of plaintiff's remaining
4. Plaintiff shall file a brief in support of its remaining claims
within fifteen (15) days of the date of this order. Defendants shall
file a response to plaintiff's brief within fifteen (15) days of the
filing of plaintiff's brief.
5. The Clerk of Court is directed to defer the entry of judgment until
the conclusion of this case.
Although several courts have grappled with the issue of whether a tax
lien against the participant attaches to future pension benefits owed to
the participant, see Shanbaum v. United States [ 94-2
USTC ¶50,512], 32 F.3d 180 (5th Cir. 1994); In re Connor
USTC ¶50,296], 27 F.3d 365 (9th Cir. 1994); Travelers
Ins. Co. v. Ratterman [ 96-1
USTC ¶50,143], No. C-1-94-466, 1996 WL 149332 (S.D. Ohio
Jan. 12, 1996); Toledo Plumbers & Pipefitters Ret. Plan &
Trust v. United States [ 91-2
USTC ¶50,343], No. 3:80-CV-7513, 1991 WL 172932 (N.D. Ohio
June 21, 1991); In re Fuller, 204 B.R. 894 (Bankr. W.D. Pa.
1997); In re Jacobs [ 93-1
USTC ¶50,118], 147 B.R. 106 (Bankr. W.D. Pa. 1992), the
parties have not cited and the court has been unable to find any case
addressing whether a tax lien against the participant attaches to
benefits payable to the beneficiary.
Because Patrick Kelley failed to file a responsive statement of material
facts, as required by Local Rule 56.1, all facts set forth in the
statement of material facts of the IRS "will be deemed to be
admitted." L.R. 56.1.
Compare Leggett v. United States [ 97-2
USTC ¶50,635; 97-2
USTC ¶60,286], 120 F.3d 592, 564-96 (5th Cir. 1997) (holding
that state law defines whether individual has "property" for
purposes of §6321);
Mapes v. United States, 15 F.3d 138, 140 (9th Cir. 1994) (same), with
Drye Family 1995 Trust v. United States [ 98-2
USTC ¶50,651], 152 F.3d 892, 898-99 (8th Cir. 1998) (holding
that federal law defines whether individual has "property" for
purposes of §6321),
aff'd [ 99-2
USTC ¶51,006; 99-2
USTC ¶60,363], 528 U.S. 49 (1999); United States v.
Comparato [ 94-2
USTC ¶50,354], 22 F.3d 455, 457-58 (2d Cir. 1994) (same).
"With the burden." BLACK'S LAW DICTIONARY 386 (7th ed. 1999).
In cases premised on employee benefit plans governed by ERISA, state law
contract actions are generally preempted, see Egelhoff v.
Egelhoff ex rel. Breiner, 532 U.S. 141, 146-47 (2001), suggesting
that federal common law should be applied to determine what interests
the contract vests in the taxpayer for purposes of this analysis.
However, because this case may be resolved on the basis of traditional
contract principles common to both state and federal common law, compare
Epright v. Envtl. Res. Mgmt., Inc., 81 F.3d 335, 339-41 (3d Cir.
1996) (stating that plain meaning of ERISA plan controls
interpretation), with Willison, 637 A.2d at 982 (stating
that plain meaning of contract controls interpretation), it is
unnecessary to decide which should be applied in this case. See United
Auto. Workers of Am., Local No. 1697, 188 F.3d 130, 138 (3d Cir.
1999) ( "[T]raditional rules of contract construction apply [to
ERISA claims] when not inconsistent with federal ... law.").
Viewed another way, the plan embodies two distinct contracts. One
provided a life annuity to Richard Kelley, and his rights were limited
to enforcing that contract during his life. Upon his death, that
contract ended, and a new contract, with Patrick Kelley as the intended
beneficiary, arose. Thereafter, Patrick Kelley had an independent right
to compel payment of the remaining guaranteed amount.
Perhaps the greatest testament to the low threshold of this standard is
the willingness of courts to recognize the existence of
"property" in circumstances in which the taxpayer has only
limited or contingent control over the asset. Liens have been permitted
against real estate that cannot be sold or otherwise alienated, see
Craft [ 2002-1
USTC ¶50,361], 535 U.S. at 284, 288, contract revenues that
are unearned and contingent upon future performance, see Congress
Talcott [ 93-1
USTC ¶50,283], 993 F.2d at 319-20, inheritances that the
taxpayer has irrevocably disclaimed, see Drye [ 99-2
USTC ¶51,006; 99-2
USTC ¶60,363], 528 U.S. at 52, and the surrender value of
life insurance policies that can no longer be surrendered, see Bess
USTC ¶9595], 357 U.S. at 59-60.
States of America, Plaintiff v. Timothy J. McCarville, Evelyn W.
McCarville, Bank One, and Administrative Committee of the Money Purchase
Plan of Local 400 and Mechanical Contractors Association of North
Central Wisconsin, Defendants.
District Court, East.
; 01-C-787, August 21, 2003.
Related DC Wis. decision at 2003-1
Assessment of tax: Certificates of Assessments and Payments: Prima
facie case: Evidence: Frivolous arguments: Jurisdiction. --
Certificates of Assessments
and Payments reflecting adjusted outstanding assessments against a
retired steamfitter for seven tax years established a prima facie
case of tax liability absent a showing of error. Because the taxpayer
merely denied liability and filed nothing that drew the evidence into
dispute, the government was entitled to have the assessments reduced to
judgment. His contention that he could not be considered a
"taxpayer" because he simply exercised his inalienable right
to work as a steamfitter was rejected as meritless. The individual could
not declare himself to be outside the scope of the federal tax laws.
Further, the court had jurisdiction over the case, which involved
federal law and federal taxation.
Secs. 6203, 6321
Tax liens: Date assessment created: Property subject to tax liens:
Employee pension plans: Evidence. --
Federal tax liens against a
delinquent taxpayer arose on the same dates as the unpaid taxes were
assessed by the IRS, and the individual introduced no evidence to
dispute that the government provided him with proper notice and demand
for payment. Thus, the liens, which attached to "all property and
rights to property," reached all of his rights and property
interests in an employee benefit plan. His contention that the liens
were not valid under state (
) law were rejected because tax liens are subject to federal law.
Secs. 6323 and 6501]
Statute of limitations: Three-year period: Tax returns: Forms W-2:
Substitute returns: Tolling of limitations period: Offers in compromise.
The IRS's tax assessments
against an individual who failed to timely file returns and who
contended that he was not subject to federal income tax were not barred
by the statute of limitations. The IRS assessed the taxes within the
permitted three-year period, and the government had 10 years in which to
collect the amounts owing. Neither the Forms W-2 filed by the taxpayer's
employer nor the substitute returns filed by the IRS qualified as
"returns" for purposes of starting the limitations period.
Instead, the untimely returns filed by the taxpayer triggered the
running of the statute of limitations, which was further tolled by his
two offers in compromise (OICs). He provided no evidence contradicting
the government's declaration regarding the periods during which the OICs
were pending and their effect on the limitations dates.
Secs. 6663 and 7402]
Penalties, civil: Fraud: Evidence: Summary judgment. --
The government was not
entitled to summary judgment on the issue of an individual's liability
for fraud penalties absent a showing that no rational jury could find
his claims regarding a lack of fraudulent intent to be sincere. The
taxpayer contended that he believed he did not owe the assessed amounts
and asserted that any false statements in his tax withholding statements
were inadvertent and constituted mistakes. Although his self-serving
allegations might seem incredible in the face of the government's
evidence of fraud, the record did not disclose the taxpayer's education
or level of sophistication.
GRIESBACH, District Judge: The United States filed this case on August
3, 2001, seeking to reduce federal tax assessments to judgment and
foreclose federal tax liens against personal property. The
also seeks to assess a penalty equal to 50% of his underpayment of taxes
against McCarville for civil fraud. The case is presently before me on
' motion for summary judgment against the main defendant, Timothy
I conclude that there is no dispute as to material fact regarding the
assessment of taxes owed by McCarville and the tax liens against his
personal property and therefore grant the government's motion as to
those issues. As to the civil fraud penalty, however, I conclude that a
factual dispute does exist and therefore deny summary judgment as to
Summary judgment is proper if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with any affidavits,
show that there is no genuine issue of material fact and the moving
party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c);
Celotex Corp. v. Catrett, 477
317, 322 (1986).
The moving party has the initial burden of demonstrating that it is
entitled to summary judgment.
at 323. As a plaintiff moving for summary judgment, the
must show that the evidence supporting its claims is so compelling that
no reasonable jury could return a verdict for the defendant. See
Select Creations, Inc. v. Paliafito Am., Inc., 911 F.Supp. 1130,
1149 (E.D. Wis. 1995); Anderson v. Liberty Lobby, Inc., 477
242, 248-50 (1986). Once this burden is met, McCarville must designate
specific facts to defend the cause of action, showing that there is a
genuine issue of material fact for trial. Celotex, 477
at 322-24. There must be a genuine issue of material fact
for the case to go to trial. Anderson, 477
at 247-48. "Material" means that the factual dispute must be
outcome-determinative under governing law. Contreras v. City of
, 119 F.3d 1286, 1291 (7th Cir. 1997). A "genuine" issue
of material fact requires specific and sufficient evidence that, if
believed by a jury, would actually support a verdict in a party's favor.
Fed. R. Civ. P. 56(e); Anderson, 477
at 249. Where the record taken as a whole could not lead a rational
trier of fact to find for the nonmoving party, there is no genuine issue
for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
574, 587 (1986).
In analyzing whether a question of fact exists, the court construes the
evidence in the light most favorable to the party opposing the motion. Anderson,
filed its motion for summary judgment on April 2, 2003, together with
several affidavits. Six days later McCarville, who represents himself,
filed an "objection" to the motion for summary judgment; no
evidence was presented by McCarville. Thinking perhaps that this was
McCarville's brief in response to the motion, the
filed a reply brief. Notwithstanding the local rules, which provide for
only one response brief. Civil L.R. 7.1(c), McCarville also filed an
"opposition" to the motion for summary judgment on May 1,
again failing to submit any evidence. The
filed a reply to McCarville's second brief as well. 1
Then, because McCarville (as a pro se litigant) had not been
properly warned about summary judgment procedures and the need for
evidence, I gave McCarville those warnings and allowed him to file
evidentiary materials if he desired. On July 7, he filed a
"response" to the summary judgment motion. The first two pages
are attested to under penalty of perjury. In other words, the first two
pages of the response are verified, constituting some evidence. Almost
everything McCarville says in those two pages, though, cannot be taken
as facts in his favor. Other than his statement that for the years at
issue he worked as a steamfitter, he merely sets forth his legal
argument and legal conclusions. ( See, e.g., Pl.'s Resp. to Gov't
Motion for Summ. J. at 2 ("The law is a witness to the fact that I
am not liable for a federal income tax.").) "Self-serving
assertions without factual support in the record will not defeat a
motion for summary judgment." Jones v. Merchants Nat'l Bank
& Trust Co., 42 F.3d 1054, 1058 (7th Cir. 1994).
McCarville and his wife Evelyn reside in Iola,
. During the years for which the
seeks recovery for unpaid taxes, McCarville worked as a steamfitter.
In February 1982, McCarville signed and filed a 1981 federal income tax
return, jointly with his wife Evelyn. Federal income tax of about $2500
was withheld from his wages in 1981. In 1982, 1983, and 1984, however,
McCarville filed form W-4 with his employers, claiming that he did not
owe any federal income tax for the prior year and that he did not expect
to owe any federal income tax in each then-present year. In 1982, 1983,
and 1984, McCarville claimed he was exempt from the federal income tax
withholding requirements. In 1984, no federal income tax was withheld
form McCarville's wages.
McCarville did not file timely form 1040 income tax returns for 1982
through 1987. As a result, the Internal Revenue Service prepared
substitutes for income tax returns for those years. The IRS determined
that McCarville had federal income tax liability for 1982 through 1987
based on third-party information reported to the IRS (for example,
employer W-2 reports of wages paid). A civil income tax audit for 1982
to 1984 began in September 1985, but it was suspended in June 1986 due
to a criminal investigation. In October 1988, McCarville was convicted
of failing to file federal income tax returns for 1984 and 1985 and
sentenced to a term of imprisonment. In 1989, the civil income tax audit
resumed for years 1982 to 1984, and another began for 1985 to 1987.
On February 27, 1990, McCarville filed late income tax returns for 1983
through 1988. 2
Thereafter, a delegate of the Secretary of the Treasury assessed
McCarville for unpaid federal income taxes and related interest and
other additions, based on the substitute returns. The assessments were
made on May 30, 1990, for tax years 1986 and 1987, for unpaid taxes of
about $18,000 and $15,000 respectively (exclusive of interest);
September 10, 1990, for tax year 1985, for unpaid taxes of about $18,000
(exclusive of interest); and March 15, 1991, for tax years 1982, 1983,
and 1984, for unpaid taxes of about $13,000, $8,000, and $76,000
respectively (exclusive of interest and additions).
The 1988 return was filed late an February 13, 1990. On April 23, 1990,
a delegate of the Secretary of the Treasury assessed McCarville for
unpaid federal income taxes and additions for 1988, in the amount of
about $3,000 (exclusive of interest).
A delegate of the Secretary of the Treasury gave notice and demand to
McCarville for the payment of federal income taxes, penalties, and
interest for tax years 1982 through 1988. Despite the notices and
demands, though, the assessments remain due and owing.
After discovery in this case resulted in the
being provided with McCarville's copies the federal income tax returns
for 1982 through 1988 and some W-2 forms, the IRS adjusted the tax
liabilities assessed and some penalties against McCarville. As adjusted,
the assessments, with interest and additions through March 10, 2003, are
Tax Assessment Amount Accrued Total Liability
Year Date Assessed, Interest
Unpaid Balance and Additions
1982 3/15/91 $26,078.44 $0.00 $26,078.44
1983 3/15/91 $20,009.59 $0.00 $20,009.59
1984 3/15/91 $79,953.54 $0.00 $79,953.54
1985 9/10/90 $16,931.64 $31,391.23 $48,322.87
1986 5/30/90 $17,924.10 $35,157.19 $53,081.29
1987 5/30/90 $15,355.07 $30,362.66 $45,717.73
1988 4/23/90 $3,008.93 $5,824.79 $8,833.72
According to the
, the total liability (adding up the last column) owed as of March 10,
2003, was $281,997.18.
The IRS has an "integrated data retrieval system" (IDRS). IDRS
transcripts are also known as Certificates of Assessment and Payments.
has submitted IDRS transcripts regarding the amounts McCarville owes.
(Block Decl. ¶ ¶9, 17, Ex. H1-H7, J1-J7.) McCarville has presented no
evidence to contradict any of the amounts the
indicates is owed.
Notices of federal tax lien were filed against McCarville with the
Register of Deeds Office for
Tax Year Dates Notices of Tax Lien Filed
1982, 1983, 1984 6/27/91 and 2/12/01
1985, 1986, 1987 1/7/91 and 5/5/00
1988 7/3/90 and 12/24/02
McCarville submitted to the IRS two offers to compromise his federal
income tax liabilities. The first offer in compromise (OIC) covered his
liability for tax years 1983 to 1988. The OIC was accepted for
processing by the IRS on January 28 1991, and was rejected by the IRS on
June 9, 1992. The form OIC that McCarville signed included a waiver
provision by which he agreed to a tolling of the statute of limitations
while the first OIC was under consideration, plus one year afterward. 3
McCarville's second OIC covered tax liability for 1982 to 1988 and was
accepted for processing on August 1, 2000, and rejected by the IRS on
March 16, 2001.
The U.A. Local Union Chapter 400 (UA) is located in
. Its members participate in the "Money Purchase Plan of Local 400
and Mechanical Contractors Association of Central Wisconsin" (the
"Money Purchase Plan") pursuant to collective bargaining
agreements between the UA and various employers represented by the
Mechanical Contractors Association of Central Wisconsin, Inc. Defendant
Bank One is the trustee of the Money Purchase Plan. Defendant
Administrative Committee is the sponsor and plan administrator of the
Money Purchase Plan. The Money Purchase Plan is an employee benefit plan
under the Employee Retirement Income Security Act.
McCarville is a retired member of the UA and has been a member since
1966. An individual account under the Money Purchase Plan was
established on his behalf. By virtue of employers' contributions to the
Money Purchase Plan made on his behalf, McCarville accrued certain
benefits under the Money Purchase Plan starting in 1985. McCarville has
a vested interest in the Money Purchase Plan. Upon retirement,
McCarville is entitled to receive pension payments in the form of a
qualified joint survivor annuity.
On February 18, 2002, McCarville applied for normal retirement benefits
and asked that he be paid $2,000 per month. He will receive benefits as
long as there is an account balance on his behalf under the Money
Purchase Plan. His wife Evelyn consented to this election of benefits,
waived any interest in a joint survivor annuity, and is the primary
beneficiary for any death benefit. As of December 31, 2000, the vested
account balance was $165,000.58, with a lump sum value of $197,193.29. 4
Over the course of this litigation McCarville filed numerous motions to
dismiss the case on jurisdictional grounds. He argued that this court
has no jurisdiction over him because he is not liable for income taxes.
He raises those arguments again in response to the summary judgment
motion. In addition, McCarville argues that the statute of limitations
has expired for the claims of the
in this case. I deal with the statute of limitations issue first, as it
would be dispositive if McCarville is right.
A. Statute of Limitations
The statute of limitations is an affirmative defense, Fed. R. Civ. P.
8(c), for which McCarville bears the burden of proof, see Law v.
Medco Research, Inc., 113 F.3d 781, 786 (7th Cir. 1997).
The IRS has three years after the filing of a "return" within
which to assess the amount of the tax. 26 U.S.C. §6501(a).
"`[R]eturn' means the return required to be filed by the taxpayer
and does not include any return filed by a person from whom a
taxpayer has received income.
When a person fails to file his return as required, the Secretary of the
Treasury "shall make such return from his own knowledge and from
such information as he can obtain through testimony or
otherwise." 26 U.S.C. §6020(b)(1).
(For example, employers are required to report to the IRS the wages paid
to employees and the amount withheld for federal income tax.) But the
execution of a substitute return by the Secretary pursuant to §6020(b)
does not start the running of the statute of limitations period
for assessment and collection. §6501(b)(3).
If the IRS has assessed the amount of the tax within the permitted three
year period, the tax may be collected by a proceeding in court filed
within ten years after the assessment of the tax. 26 U.S.C. §6502(a)(1).
The Secretary has the authority to compromise any civil case arising
under the Internal Revenue Code prior to referral for prosecution of
such a case in court. 26 U.S.C. §7122(a).
An OIC must be submitted to the IRS on and according to its forms in
order to be accepted. ( See Third Kosmatka Decl., Ex. EE.)
Generally, when an OIC is accepted for processing by the IRS, the
running of the statute of limitations is suspended at least while the
OIC is pending. See 26 U.S.C. §6331(l)(5),
(k)(1). An OIC is pending beginning on the date the Secretary accepts
such offer for processing. §6331(k)(1).
For an OIC rejected before January 1, 2000, the running of the statute
of limitations was suspended during the period that an OIC was pending
with the Secretary plus one year. See, e.g., Treas. Reg. §301.7122-1(f)
(1960). Consideration of an OIC was conditioned on the taxpayer
executing a waiver of the statute of limitations for that period.
v. Harris Tr. & Sav. Bank [ 68-1
USTC ¶12,512], 390 F.2d 285, 288 (7th Cir. 1968). ( See
also Third Kosmatka Decl., Ex. EE at 1.) For an OIC rejected on or
after January 1, 2000, the running of the statute of limitations was to
be suspended during the period that an OIC was pending plus thirty days.
(1998). However, as of December 21, 2000, Congress eliminated the
suspension of the statute of limitations during the pendency of an OIC.
Community Renewal Tax Relief Act of 2000, Pub. L. 106-554 App. G. §313(b)(3),
114 Stat. 2763. ( See also the discussion in Pl.'s Reply at
McCarville argues that the United States has missed the statute of
limitations because it is now 2003 and the tax years at issue were
fifteen to twenty years ago. But the date of filing (in this case August
3, 2001) rather than the current date is the dispositive one for statute
of limitations purposes. And McCarville's contention does not address
the specific statute of limitations provisions of the tax code. If the
filed its complaint within the time period allowed by the statutes, the
action is not barred.
McCarville also argues that the dates upon which the statute of
limitations started running for the various tax years were the dates his
employer filed W-2s regarding the amounts McCarville was paid.
McCarville cites 26 U.S.C. §6103(b)(1)-(2)
as support for his argument. Section
6103(b)(1) provides a definition of "return" that
includes any tax return required by and filed with the Secretary by or
on behalf of a person. According to McCarville, his employer's W-2s
constituted returns filed on his behalf, in lieu of form 1040.
Therefore, the assessments for tax years 1982 through 1986 were all
outside the three year period when made in 1990 and 1991.
Even assuming that a W-2 would constitute a return under the definition
that subsection itself states that the definition McCarville cites
applies only to §6103,
which governs confidentiality and disclosure of tax returns and return
information. McCarville's contention flies in the face of §6501(a),
which defines "return" for purposes of the starting of the
limitations period as the return required to be filed by McCarville,
not his employer. That "return" is the return on the form
described in 26 U.S.C. §6011
Reg. §1.6012-1(a)(6) (describing 1040 and 1040A). The filing
of a W-2 does not constitute the filing of a tax return for purposes of
the statute of limitations. Bachner v. Comm'r [ 96-1
USTC ¶50,217], 81 F.3d 1274, 1279-81 (3d Cir. 1996); see
v. Birkenstock [ 87-2
USTC ¶9416], 823 F.2d 1026, 1030 (7th Cir. 1987). The
substitute returns filed by the Secretary do not start the period,
McCarville does not provide evidence contradicting, nor does he even
dispute, the calculations proffered by the
in the Declaration of Pat Kosmatka, filed April 2, 2003, regarding the
periods during which the OICs were pending and their effect on the
statute of limitations dates. Thus, those calculations are taken as
He does contend that the IRS Restructuring and Reform Act of 1998 (RRA)
eliminated any ability for a taxpayer to agree to an extension of the
statute of limitations. The portions of the law that he cites, though,
appear to apply to an installment agreement, which both parties here
agree they did not have. The RRA did amend §6502
by limiting the IRS's ability to secure agreements from taxpayers to
extend the statutory period for collection, but the revision, see
Pub. L. 105-206, 112 Stat. 685, even if applicable to OICs, cannot
affect the validity of the OIC waiver McCarville signed back in 1991.
McCarville did not file any return for 1982, so the statute of
limitations period did not commence (and thus could not have expired)
assessed taxes on March 15, 1991. McCarville filed his returns for 1983
through 1987 in February 1990, so the three-year statute of limitations
period had not expired when the
assessed the taxes on March 15, 1991 (1982-1984), September 10, 1990
(1985), and May 30, 1990 (1986-1987). McCarville filed his return for
1988 on February 13, 1990. The
then had three years to assess the taxes, which it did within about two
months, on April 23, 1990.
Based upon these assessment dates, the United States then initially had
ten years from each assessment date (March 15, 2001, September 10, 2000,
and May 30, 2000, and April 23, 2000) to file this case, pursuant to §6502.
An additional two years, four months, and eleven days are added on,
though, for 1985 through 1988 for the period of time during which
McCarville's first OIC was pending (January 28, 1991, to June 9, 1992
--one year, four months, eleven days) and for one year afterward.
Because the assessments for 1983 and 1984 were not made until the first
OIC was already pending, the tolled time runs only from the assessment
date of March 15, 1991, meaning that an additional one year, two months,
and twenty-four days, plus one year, are added. An additional four
months and twenty days are added on for 1982 through 1988 for the period
of time during which McCarville's second OIC was pending from August 1,
2000, to December 21, 2000, the effective date of Congress' elimination
of the provision suspending the statute of limitations during the
pendency of an OIC.
thus had to file this case by the times indicated in the following
Liability for Assessed Taxes
Other than his jurisdictional and statute of limitations arguments,
McCarville has not really argued any other defense to liability for
assessed taxes, so I can assume he has none. In any event, the
has established that no reasonable jury could find for McCarville on
Federal tax assessments are presumptively correct. Advo Delta Corp.
Canada Ltd. v. United States [ 76-2
USTC ¶9570], 540 F.2d 258, 262 (7th Cir. 1976). Once the
puts forth evidence that federal tax assessments have been made and
balances are due, a prima facie case of tax liability has been
established and the burden shifts to the taxpayer to refute it. Id.;
accord Pittman v. Comm'r [ 96-2
USTC ¶50,658], 100 F.3d 1308, 1313 (7th Cir. 1996); United
States v. Stonehill [ 83-1
USTC ¶9285], 702 F.2d 1288, 1293-94 (9th Cir. 1983). 6
Certificates of Assessments and Payments carry a presumption of validity
and are sufficient evidence to show that assessments were made against a
taxpayer, in accordance with statutory and regulatory requirements.
Hefti v. IRS [ 93-2
USTC ¶50,591], 8 F.3d 1169, 1172 (7th Cir. 1993); Long v.
USTC ¶50,431], 972 F.2d 1174, 1181 (10th Cir. 1992). To
rebut the presumption of correctness, the taxpayer must show that the
assessments are incorrect; he cannot meet his burden by simply denying
liability generally. Advo Delta Corp. [ 76-2
USTC ¶9570], 540 F.2d at 262. The United States has
submitted certified Certificates of Assessments and Payments reflecting
adjusted outstanding federal income tax assessments against McCarville
for 1982 through 1988, with a total amount due as of March 10, 2003, of
McCarville has filed nothing that draws into dispute the evidence
proffered by the United States. McCarville implicitly admits that he did
not file returns or pay the amount of taxes owed. He submits nothing
even suggesting that the evidence of the United States regarding the
assessments is incorrect. His arguments regarding the court's
jurisdiction do not rebut the prima facie case established by the
United States. No rational jury could fail to find for the United States
on this issue.
Summary judgment will be granted for the United States on the matter of
reducing the assessed amounts to judgment.
Liability for Fraud Penalty
In addition, the United States seeks to reduce to judgment the civil
fraud penalties assessed against McCarville under 26 U.S.C. §6653(b)
for 1982, 1983, and 1984. Section
6653(b) provides that "if any part of the underpayment
... of tax required to be shown on a return is due to fraud, there shall
be added to the tax an amount equal to 50 percent of the
Although the certificate of assessments and payments is proof of the
assessment, the United States admits that the burden of proof does not
shift to the taxpayer on this issue. The United States admits that it
has the burden to prove fraud by clear and convincing evidence. (Pl.'s
Mem. in Supp. at 6-7.) See also Pittman [ 96-2
USTC ¶50,658], 100 F.3d at 1319. To prove fraud, the United
States needs to establish that a person intended to evade taxes that he
knew or believed were owed. Id. The United States does not need to prove
the precise amount of the underpayment resulting from fraud, but only
that some part of the underpayment is attributable to fraud. Id.
In support of its motion, the United States points to a several pieces
of evidence from which a factfinder could reasonably conclude that
McCarville's underpayment of his taxes for the years in question was due
to fraud. While not conclusive, failure to file tax returns for an
extended period of time is persuasive circumstantial evidence of an
intent to defraud the United States. Marsellus v. Comm'r [ 77-1
USTC ¶9129], 544 F.2d 883, 885 (5th Cir. 1977); Stoltzfus
v. United States [ 68-2
USTC ¶9499], 398 F.2d 1002, 1005 (3d Cir. 1968); Castillo
v. Comm'r [ CCH
Dec. 41,940], 84 T.C. 405, 409 (1985). Here, McCarville
admits he failed to file returns for seven years. The United States has
provided evidence that McCarville did file a 1981 income tax return,
establishing that McCarville knew about the need and had the ability to
file. In addition, McCarville was convicted for willful failure to file
a tax return for 1984 and thus is collaterally estopped from contesting
that his failure to file for that year was willful. Castillo [ CCH
Dec. 41,940], 84 T.C. at 409-10.
But a willful failure to file an income tax return is not the same as
fraud. Fraud denotes an intent to obtain an advantage by deceiving
another with material misstatements of fact. McCarville claims that he
is not liable for the taxes assessed against him. He claims he ceased
filing returns after he "realized that [he] was a person not liable
for the tax...." (Def.'s Obj'n to Summ. J. at 4; Def.'s Opp'n to
Summ. J., Ex. 10 at 1.)
Filing false W-4 forms also indicates an intent to evade the collection
of taxes. Granado v. Comm'r [ 86-1
USTC ¶9453], 792 F.2d 91, 92 (7th Cir. 1986); Castillo
Dec. 41,940], 84 T.C. at 410. In Granado, the Seventh
Circuit upheld the assessment of civil fraud penalties under §6653(b),
where the taxpayer filed false W-4 forms and failed to file tax returns.
McCarville filed W-4 forms during 1982, 1983, and 1984, in which he
claimed to be exempt and avoid the withholding of federal income tax
from he wages, when he was not so exempt. His W-4 for 1982 indicated
that he had not paid taxes in 1981, which he had. Under Granado,
McCarville's false statements on his W-4s would support a finding of
fraud under §6653(b).
However, McCarville argues that his employer required him to fill out
the W-4s in order to be employed and that he checked the statements that
he did not incur a tax liability in the previous years and did not
expect liability in those current years because those statements
"were the closest language to not subject to available."
(Def.'s Opp'n to Summ. J. at 2-3.) In other words, McCarville argues
that he filled out the W-4s as he did because he believed he was not
subject to taxation at all, not because he intended to deceive the
government. He contends that "[a]ny mistakes, if there were any,
were inadvertant, not fraud." ( Id. at 3.)
McCarville's claim that he truly believes he does not owe income taxes
constitutes evidence from which a factfinder could conclude that his
underpayment was not due to fraud. His claim that any false statements
in his W-4s were inadvertent and constitute mistakes likewise raises an
issue of fact that is not easily or properly resolved on summary
judgment. While these self-serving claims may seem incredible in the
face of the other evidence the United States has highlighted, the record
does not disclose McCarville's education or level of sophistication. I
am unable to conclude as a matter of law that no rational jury could
find his claims to be sincere. Accordingly, summary judgment will not be
granted on this issue.
Validity of Federal Tax Liens
If a person liable for federal taxes fails to pay them after assessment,
notice and demand, the amount of the unpaid taxes and any interest and
penalties "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." 26 U.S.C. §6321.
"[A]ll property and rights to property" is "broad and
reveals on its face that Congress meant to reach every interest in
property that a taxpayer might have. Stronger language could hardly have
been selected to reveal a purpose to assure the collection of
taxes." United States v. Nat'l Bank of Commerce [ 85-2
USTC ¶9482], 472 U.S. 713, 719-20 (1985) (citation omitted)
(internal quotation marks omitted). The federal tax lien arises at the
time the tax is assessed; it continues until the liability is satisfied
or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322.
In the present case, the federal tax liens thus arose on the same dates
as the unpaid taxes were assessed: March 15, 1991, for the liabilities
for the 1982, 1983, and 1984 tax years; September 10, 1990, for the
liability for the 1985 tax year; May 30, 1990, for the liabilities for
the 1986 and 1987 tax years; and April 23, 1990, for the liability for
the 1988 tax year. McCarville provides no evidence to dispute that the
United States gave proper notice and demanded payment of the assessment.
As the liens reach "all property and rights to property,"
there can be no dispute whatsoever that the liens reach all of
McCarville's right and property interest in the Money Purchase Plan.
Under 26 U.S.C. §6323,
the liens are valid against certain persons when a Notice of Federal Tax
Lien is filed. Here, the notices of federal tax lien for 1982 to 1984
were filed on January 7, 1991, and timely refiled on February 12, 2001.
The notices of federal tax lien for 1985 to 1987 were filed on June 27,
1991, and timely refiled on May 5, 2000. The notice of federal tax lien
for 1988 was filed on July 3, 1990, but lapsed. Another notice of
federal tax lien for 1988 was filed on December 24, 2002. The notices of
federal tax liens were filed in Waupaca County, where McCarville
On January 7, 1991, and June 27, 1991, the IRS perfected its lien
against the pension plan and related benefits by filing a tax lien in
the personal property records of Waupaca County. See 26 U.S.C. §6323(f)(2)(B).
McCarville argues that the notices of federal tax liens are not
certified as required by Wisconsin law and not properly signed. ( See
Def.'s Opp'n to Summ. J., Ex. 8.) The matter of federal tax liens is one
of federal, not state, law, however. United States v. Union Cent.
Life Ins. Co. [ 62-1
USTC ¶9103], 368 U.S. 291, 293-94 (1961); Kivel v. United
States [ 89-2
USTC ¶9415], 878 F.2d 301, 303 (9th Cir. 1989). Title 26
provides that the Secretary prescribes the form and content of the
notices and that such notices shall be valid notwithstanding any other
provision of law. Delegation authority to sign notices of tax liens is
set out in IRS Delegation Order 196 ( see Locke Decl., Ex.) and
McCarville has provided no evidence contradicting the evidence of the
United States that the IRS officers who authorized the notices at issue
in this case were proper designees.
The United States seeks summary judgment on its claim as well as on
McCarville's counterclaim seeking release of the tax liens. Because the
United States has established upon undisputed facts that the tax liens
are valid, summary judgment must be granted against McCarville on his
Summary judgment must be granted against Timothy McCarville in favor of
the United States. The United States has not, however, moved for summary
judgment against the other defendants and has not dismissed its claims
against Evelyn McCarville even though it indicated in its opening brief
that it no longer seeks a money judgment against her. McCarville also
filed a crossclaim, which must be addressed. Therefore, I will set a
telephonic status conference call to discuss the resolution of the
remainder of this case.
For the foregoing reasons, IT IS ORDERED that the motion for
summary judgment filed by the United States against Timothy McCarville
is granted in part and denied in part. The motion is denied as to the
civil fraud penalties. In all other respects the motion of the United
States for summary judgment is granted.
IT IS ORDERED that McCarville's counterclaim is dismissed.
IT IS ORDERED that a telephonic status conference will be held on
September 19, 2003, at 9:30 a.m. to discuss further proceedings in the
Because McCarville proceeds pro se, I have been generous and have
considered both briefs filed in response to the motion for summary
The United States did not seem to have these returns until McCarville
provided the United States during discovery with copies stamped
"received" by the IRS on February 27, 1990. Taking the facts
in McCarville's favor, those returns were indeed filed on February 27,
1990. No "received"-stamped copy was provided regarding 1982,
though, and McCarville has not sworn in his summary judgment filings
that it was ever filed with the IRS.
Although a copy of the first OIC no longer exists (it was apparently
destroyed after six years), the United States has presented evidence
that the form at that time contained the waiver provision and that it
would not have accepted the OIC if the waiver had not been made.
McCarville has produced no contrary evidence.
The proposed finding of fact submitted by the United States on this
point indicates an amount of $197,193.99, but the exhibit itself,
Choudoir Decl., Ex. F, indicates $197,193.29.
The period provided by §6502(a)(1)
was expanded from six years to ten years, effective for taxes assessed
after November 5, 1990, and taxes assessed before that date if the prior
six-year period had not expired by November 5, 1990. Omnibus Budget
Reconciliation Act of 1990, Pub. L. 101-508 §11317(a)(1), (c), 104
Stat. 1388. As the assessments against McCarville occurred in 1990 and
1991, the ten year period applies for all tax years at issue in this
The burden of proof provision of 28 U.S.C. §7491
does not apply here, as examination of McCarville's tax liability
commenced before the effective date of that provision. RRA, Pub. Law
105-206 §300(c), 112 Stat. 685.
Since the years in issue, §6653
has been amended and this provision was deleted.
States of America: Criminal Action v. Anthony J. Grico: Beneficial
U.S. District Court, East. Dist. Pa.; 99-202-01, May 22, 2003.
Secs. 401 and 6321]
Tax liens: Property subject to tax liens: Qualified pension plans:
Assignment or alienation of benefits: Prohibition not applicable. --
The government was entitled
to garnish the individual retirement account (IRA) of an individual
convicted of conspiracy to defraud the U.S., tax evasion and filing a
false federal income tax return in order to satisfy the criminal fine
imposed on him. The taxpayer contended that IRAs were not garnishable
under the Federal Debt Collection Procedures Act (FDCPA) and that
ERISA's anti-alienation provision also exempted his IRA from
garnishment. Since none of the limitations to the government's authority
to enforce judgments under the FDCPA applied, the taxpayer's IRA was
property the government could garnish. In addition, Treas.
Reg. §1.401(a)-13 stipulates that the anti-alienation
provision of ERISA does not preclude the government's collection of an
unpaid tax assessment. Finally, ERISA contains a "saving
clause," which provides that it does not change, invalidate or
supersede any other laws, including the FDCPA.
NEWCOMER, Senior Judge: Presently before the Court is the United States
of America's Motion to Approve Writ of Garnishment, the Defendant's
response as well as the parties' supplemental briefs. For the reasons
set forth below, the Government's Motion is granted.
The Defendant, Anthony J. Grico, was convicted of conspiracy to defraud
the Untied States, tax evasion, and filing a false federal income tax
return, in violation of 18 U.S.C. §371 and 26 U.S.C. Code
Sec. 7201 and Code
Sec. 7206(1). On July 19, 2000, this Court sentenced the
Defendant and ordered him to pay a criminal fine of $75,000. Pursuant to
the Third Circuit's mandate, on July 31, 2002, this Court re-sentenced
the Defendant and reimposed the $75,000 fine. The Defendant has failed
to pay a substantial portion of this fine.
The Government's financial discovery has located assets belonging to the
Defendant which include, among other things, an individual retirement
account ("IRA") in the amount of $30,065.88. Currently at
issue before this Court is whether the Government is able to garnish the
funds in the Defendant's IRA. Pursuant to 28 U.S.C. §3205(c)(5), no
hearing was held on this matter as the Defendant failed to request such
a hearing. 1
In considering this matter of first impression for this Circuit, this
Court adopts the two-prong approach as used in United States v. Sawaf
USTC ¶50,063], 74 F.3d 119, 122 (6th Cir. 1996), by the
Sixth Circuit, that is: (1) whether the property in question is the type
of property that may be reached by Federal Debt Collection Procedure Act
("FDCPA") garnishment orders; and (2) if so, whether ERISA
exempts property such as an IRA from such orders.
The Defendant's IRA is Garnishable under the FDCPA
The first prong of the garnishment test concerns the Government's
ability to garnish property such as an IRA in order to satisfy the
assessment of a criminal penalty. The FDCPA clearly answers this
question in the affirmative. In the FDCPA, Congress expressly provides
that "a judgment imposing a fine may be enforced against all
property or rights to property of the person fined. . . ." 18
U.S.C. §3613(a). This broad provision comes with limitations, none of
which are applicable to IRAs. 18 U.S.C. §3613(a). Therefore, the first
prong of the test is met. The Defendant's IRA is property that the
Government can reach through issuance of a FDCPA garnishment order.
ERISA Does Not Exempt the Defendant's IRA From Garnishment
Unsurprisingly, the Defendant argues that even though the Government has
the ability to reach his IRA via the FDCPA, actual garnishment of the
account is not permitted according to ERISA. Specifically, the Defendant
cites ERISA's anti-alienation provision which indicates that
"[e]ach pension plan shall provide that benefits provided under the
plan may not be assigned or alienated." 29 U.S.C. §1056(d)(1). The
Defendant's argument fails for the following two reasons.
First, Congress provides in 18 U.S.C. §3613(c) that "[a] fine
imposed pursuant to the provisions of [the FDCPA], is a lien in favor of
the United States on all property and rights to property of the person
fined as if the liability of the person fined were a liability for a tax
assessed under the Internal Revenue Code of 1986." In a
tax-collection context ERISA's protective provisions "give way to
the collection provisions of the Internal Revenue Code and the
FDCPA." Sawaf [ 96-1
USTC ¶50,063], 74 F.3d at 123. This is the case as Treasury
Regulation §1.401(a)-13(b)(2)(ii) specifically states that the
anti-alienation requirements of ERISA shall not preclude "[t]he
collection by the United States on a judgment resulting from an unpaid
Second, regardless of whether the above is correct, Congress broadly
directs the Government to enforce a fine against "all property or
rights to property of the defendant" with the exception of property
enumerated in 18 U.S.C. §§3613(a)(1), 3613(a)(2) & 3613(a)(3). Had
Congress intended to limit the enforceability of the FDCPA to prevent
IRAs from being garnished, IRAs would have been listed in §3613(a)
along with the other types of property immune from garnishment under the
FDCPA. In other words, Congress' decision to exclude IRAs from this list
indicates an intention to include IRAs in the types of property
susceptible to garnishment under the FDCPA. The Defendant, however,
suggests that Congress intended IRAs to be immune from garnishment when
it crafted ERISA's anti-alienation provision. Such an argument fails to
account for ERISA's saving clause which provides that ERISA's provisions
shall not "alter, amend, modify, invalidate, impair, or supercede
any law of the Untied States." 19 U.S.C. §1144(d). Congress
clearly defines its intention not to alter other laws, such as the
FDCPA, in ERISA's saving clause provision. Therefore, Defendant's
contention that ERISA somehow protects against garnishment permitted by
the FDCPA clearly fails. The notion that ERISA's saving clause permits
enforcement of a garnishment order issued under the FDCPA is not a novel
approach. Sawaf [ 96-1
USTC ¶50,063], 74 F.3d 119; United States v. Rice,
196 F.Supp.2d 1196 (N.D. Okla. 2002). Those cases relied on by the
Defendant in arguing against the ability to garnish under ERISA bear
little applicability to the matter at hand. For the reasons outlined
above, the Government's Motion to garnish the Defendant's IRA account is
AN APPROPRIATE ORDER SHALL FOLLOW.
AND NOW, this day of May, 2003, upon consideration of the Government's
Motion to Approve Writ of Garnishment, the Defendant's response and the
Government's reply, it is hereby ORDERED as follows:
1) The Motion of the Government is GRANTED.
2) The garnishee, Beneficial Savings Bank, shall immediately pay to the
United States of America all funds due and owing to the above-named
Defendant until the debt imposed in this case is paid in full; until the
garnishee no longer has custody, possession or control of any property
belonging to the Defendant; or until further Order of this Court.
3) The garnishee shall immediately forward payment by bank check or
certified funds payable to the "Clerk, united States District
Court" to the United States Attorney's Office, 615 Chestnut Street,
Suite 1250, Philadelphia, Pennsylvania, 19106-4476 (Attn: Financial
AND SO IT IS ORDERED.
The Court notes that the docket reflects an April 16, 2001, request by
the Defendant for a hearing (Document 135) and a subsequent denial by
this Court on April 23, 2001 (Document 136). Said request was denied for
failure to elicit any reason for such a hearing. More importantly,
Defendant's request came prior to the sentence in question which was not
imposed until August 12, 2002, some sixteen months after the Defendant's
hearing request. Because the Defendant's original sentence was vacated
by the Third Circuit, such a hearing would have been an exercise in
futility. Finally, with the above hearing request in mind, this Court
contacted Defendant's counsel and inquired as to whether the Defendant
wished to renew his request for a hearing. The Court's inquiry went
unaddressed by counsel.
States of America, Plaintiff v. The Northern Trust Company, as Trustee
for the Pepsico, Inc., Master Trust and Paul R. Stout, Defendants.
U.S. District Court, No. Dist. Ill., East Div.; 01 C 6597, November 26,
2002, 2002 U.S. Dist. LEXIS 23630.
Secs. 6321 and 7403]
Liens and levies: Action to enforce liens: Summary judgment:
A federal tax lien against
an individual's pension payments that arose from assessments for unpaid
federal income taxes, penalties and interest was enforced. The taxpayer
failed to produce evidence to refute the government's prima facie
case of tax liability that it created through a declaration of
assessment by an IRS employee and with the testimony of individual who
confirmed the taxpayer's right to receive pension payments. The
taxpayer's contention that the government did not have standing to bring
the claim was rejected. The government has standing under Code
Sec. 6321 pursue a delinquent taxpayer's liability.
Douglas W. Snoeyenbos,
Department of Justice, Washington, D.C. 20530, for plaintiff. John B.
Kavanagh, for Quaker Oats Co. Paul R. Stout, pro se.
OPINION AND ORDER
COAR, District Judge: Plaintiff, the United States of America
("Plaintiff") brings this complaint in this Court to foreclose
the federal tax lien that attached to the rights of Defendant Paul R.
Stout ("Stout") to receive monthly payments from the PespiCo,
Inc. Master Trust under the Quaker Oats Retirement Plan. Before this
Court is Plaintiff's motion for summary judgment. For the following
reasons, the Plaintiff's motion for summary judgment is GRANTED.
Summary Judgment Standard
Summary judgment is proper "if the pleadings, depositions, answers
to interrogatories and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of
law." Fed. R. Civ. P. 56(c); Michael v. St. Joseph County, et.
al., 259 F.3d 842, 845 (7th Cir. 2001). A genuine issue of material
fact exists for trial when, in viewing the record and all reasonable
inferences drawn from it in a light most favorable to the non-movant, a
reasonable jury could return a verdict for the non-movant. Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L.Ed.2d 202, 106 S.Ct.
2505 (1986); Hedberg v. Indiana Bell Tel. Co., 47 F.3d 928, 931
(7th Cir. 1995).
Because the purpose of summary judgment is to isolate and dispose of
factually unsupported claims, the non-movant must respond to the motion
with evidence setting forth specific facts showing that there is a
genuine issue for trial. See Fed. R. Civ. P. 56(c); Michael,
259 F.3d at 845; Albiero v. City of Kankakee, 246 F.3d 927, 932
(7th Cir. 2001). To successfully oppose the motion for summary judgment,
the non-movant must do more than raise a "metaphysical doubt"
as to the material facts, see Wolf v. Northwest Ind. Symphony Soc'y,
250 F.3d 1136, 1141 (7th Cir. 2001) (citation and quotation omitted),
and instead must present definite, competent evidence to rebut the
motion, see Albiero, 246 F.3d at 932. A scintilla of evidence in
support of the non-movant's position is not sufficient to oppose
successfully a summary judgment motion; "there must be evidence on
which the jury could reasonably find for the [non-movant]." Anderson,
477 U.S. at 250.
The following facts are taken from the parties' Local Rule 56.1
Statement of Uncontested Facts. Stout is an Illinois resident who
resides in Ashton, Illinois. Defendant The PepsiCo., Inc. Master Trust
is a valid trust under Illinois and federal law. Its Trustee is the
Northern Trust Company, a corporation with its principal place of
business in Chicago, Illinois. Stout has the right to be paid by the
PepsiCo., Inc. Master Trust the sum of $ 711.38 every month for the rest
of his life pursuant to the retirement plan of The Quaker Oats Company.
Stout began working for The Quaker Oats Company in 1944 and his
employment ceased on May 5, 1978.
On July 31, 1986, a delegate of the Secretary of the Treasury made an
assessment against Stout for unpaid federal income tax, penalties, and
interest for the years 1973 and 1975 through and including 1980, in the
Year Tax Fraud Estimated Tax Interest
1973 $ 6,323.25 3,161.63 133.93 11,114.50
1975 4,231.40 2,115.70 181.76 6,536.61
1976 7,575.86 3,787.93 240.24 10,894.47
1977 8,348.25 4,174.12 297.05 11,140.34
1978 19,292.91 9,646.45 -0- 23,980.42
1979 12,350.49 6,175.25 454.31 13,989.91
1980 1,359.00 679.50 26.58 1,290.74
Notice of the assessment and demand for its payment were duly sent to
Stout on or about the date it was made. Despite notice and demand, Stout
has not fully paid his assessed liability. He owes the United States $
466,204.44 plus accrued interest and statutory additions as allowed by
law from and after May 29, 2002.
In 1996, the United States filed suit against Stout in this court,
requesting a money judgment for the unpaid balance of the assessment.
That action was assigned case No. 96 C 4683. On January 25, 2000,
judgment was entered in favor of the United States and against Stout for
the unpaid balance of the assessment.
In support of its motion for summary judgment, the United States
submitted evidence of the unpaid tax assessment against Stout in the
form of a Declaration of IRS employee Rodney Joseph. Further, as
evidence of Stout's rights to receive pension payments, the United
States submitted a Declaration of a Quaker Oats employee, Linnea Kopp,
which states that Stout will receive $ 711.38 every month for the rest
of his life pursuant to the retirement plan of The Quaker Oats Company.
Stout objects to summary judgment on several grounds. First, he argues
that the United States lacks standing to bring this claim against him.
Second, he argues that there has been no discovery in this case and
that, as a result, there are "numerous genuine issues of material
facts." Finally, he argues that the IRS cannot prove the validity
of the tax assessment against him and he submits a letter from the IRS
as evidence that a tax liability against him does not exist. This Court
addresses each of Stout's arguments in turn.
The United States is a proper party
The United States has standing to bring this claim. Under 26 U.S.C. §6321,
which provides that the amount of a delinquent taxpayer's liability
shall be a lien in the favor of the United States upon all property and
rights to property belonging to the taxpayer, the United States has a
legally protected interest. Further, 26 U.S.C. §7403 specifically
In any case where there has
been a refusal or neglect to pay any tax, or to discharge any liability
in respect thereof, whether or not levy has been made, the Attorney
General or his delegate, at the request of the Secretary, may direct a
civil action to be filed in a district court of the United States to
enforce the lien of the United States under this title with respect to
such tax or liability or to subject any property, of whatever nature, of
the delinquent, or in which he has any right, title, or interest, to the
payment of such tax or liability.
Thus, Stout's argument that the United States has no standing to bring
this suit against him is without merit.
Stout argues that summary judgment is improper because there has been no
discovery. A district court has wide discretion with respect to
discovery, Brown-Bey v. United States, 720 F.2d 467, 470 (7th
Cir. 1983), and Stout offers no explanation as to why discovery is
necessary in this case. Facts that he disputes, such as the existence of
PepsiCo., Inc. and The Northern Trust Company, do not create a genuine
issue that defeat summary judgment, especially considering that the
Declaration of Linnea Kopp is more than sufficient to establish not only
the existence of these entities but also Stout's right to receive
payments pursuant to his retirement plan. Thus, discovery on these
issues would not be useful.
Further, while Stout argues that no tax liability against him exists,
his "proof" is a letter from the IRS in response to a Freedom
of Information/Privacy Act request that states no such thing. Stout
takes issue with the IRS employee, Rodney Joseph, arguing that Joseph
has no personal knowledge of the tax assessment made against Stout in
1986. As an IRS employee who reviewed IRS records concerning Stout,
however, Joseph has demonstrated the requisite personal knowledge to
establish the existence and validity of the tax assessment. Federal tax
assessments, once demonstrated, are presumptively correct and the burden
is on the taxpayer to show by a preponderance of the evidence that the
determination is incorrect. U.S. v. Kim [ 97-1
USTC ¶50,370], 111 F.3d 1351 (7th Cir. 1997). Stout has not
met his burden, nor can he show how discovery would enable him to
question the validity of the tax assessment. Therefore, this Court finds
that there is no genuine issue of fact regarding the validity of the tax
assessment or the existence of Stout's right to receive retirement
benefits pursuant to his Quaker Retirement Plan; summary judgment is
granted in favor of the United States.
For the foregoing reasons, this Court GRANTS the United States' motion
for summary judgment in the amount of $ 466,204.44 plus accrued interest
and statutory additions as allowed by law from and after May 29, 2002.
As such, a federal tax lien has attached to Stout's right to receive
pension payments, in the amount of $ 711.38 every month, from The
Northern Trust Company, trustee to the PepsiCo., Inc. Master Trust which
holds the funds used to make payments according to Stout's Quaker Oats
Retirement Plan. This case is closed.
In re Lawrence Ray McCubbins, aka Larry McCubbins,
Debtor. Lawrence Ray McCubbins, Plaintiff v. United States of America,
Internal Revenue Service, Defendants
Bankruptcy Court, Dist. Alas., A93-00284-HAR, 3/3/2000
Sec. 6871 ]
Tax liens: Dischargeability: Penalties, civil: Fraud.--
Delinquent taxes and interest assessed against a debtor were not
discharged by his subsequent bankruptcy since he filed fraudulent
returns for two of the eleven years at issue and failed to file returns
for the remaining years. The Tax Court's decision that the taxpayer
willfully filed fraudulent returns for the purpose of evading taxes was
binding on the Bankruptcy Court and fell within the exception to
discharge in the case of fraud. However, since the penalties against the
taxpayer were assessed more than three years prior to his bankruptcy
petition, they were dischargeable. Related case at 57 TCM 481, Dec.
45,711(M) , TC Memo 1989-245.
Secs. 6321 and 7402
Tax liens: Property subject to lien: Employee pension plan:
Jurisdiction: Partial summary judgment: Factual issue remaining.--
The IRS's levy against a debtor's pension was not discharged by his
subsequent bankruptcy, since the discharge of a debt in bankruptcy does
not discharge a lien of a creditor. A factual issue remained, however,
as to the degree that the taxpayer's pension was vested at the time of
the levy and whether the IRS was entitled to the full amount collected
from the retirement proceeds. If full ownership of the pension was
vested in the taxpayer, then the IRS's receipt of the pension payments
was proper. BACK REFERENCES: ¶38,136.555
MEMORANDUM GRANTING PARTIAL SUMMARY JUDGMENT TO THE INTERNAL REVENUE
ROSS, Bankruptcy Judge:
January 1991, the IRS levied on Lawrence McCubbins' pension fund for
almost $970,000 for back taxes. McCubbins filed a chapter 7 bankruptcy
in April 1993, and was discharged in September 1993.
After McCubbins retired in
1997, the IRS began collecting the monthly pension benefits based on its
1991 levy. McCubbins filed the present adversary proceeding: (a) for a
declaration that the taxes involved were discharged and the ERISA
qualified pension fund proceeds are exempt; (b) to recover the amounts
paid to the IRS under its levy; and, (c) to hold the IRS in contempt for
violating the discharge injunction.
The IRS countered that the
debtor had filed fraudulent income tax returns for one year and had
failed to file returns for others, making the taxes nondischargeable. It
also claims its levy was valid despite the bankruptcy.
While the penalties are
dischargeable because they were more than three years old when McCubbins
filed bankruptcy, 1 the taxes and interest are not because McCubbins filed a
fraudulent return and failed to file other returns. Moreover,
dischargeability of the penalties does not abrogate the IRS prepetition
levy for the full amount of the levy (including penalties) against the
pension rights of the debtor, which are not subject to an exemption
under the Tax Code. There is still a factual issue as to the degree the
pension was vested at the time of the levy.
FACTS AND PROCEDURE--Lawrence McCubbins has been a tax protestor
for years. In 1989, the tax court held that he filed a fraudulent tax
return in 1976, failed to file tax returns in 1977 and 1978, and
assessed the following deficiencies and penalties against him: 2
YEAR DEFICIENCY PENALTY PENALTY TOTALS
1976 ............... 2,767.00 1,384.00 0.00 4,151.00
1977 ............... 87,924.00 43,932.00 2,919.00 134,775.00
1978 ............... 14,727.00 7,364.00 47.00 22,138.00
TOTALS ............. 105,418.00 52,680.00 2,966.00 161,064.00
failed to file federal income tax returns for the years 1980 through
1987. The IRS filed substitute tax returns for those years, and assessed
taxes, interest and penalties. The following is a table of the amounts
owed by McCubbins for the tax years 1980 through 1987. 3
These figures were accrued at various times in 1989-1990, so would need
to be adjusted to arrive at a true total.
of the balances due required as a condition of levying 4
appear to have been sent to McCubbins for each of the eleven tax years
at various times well before the 1991 levy. 5
The IRS prepared a tax levy in January 1991, having a balance of about
$970,000 as of February 1, 1992. The levy was served on the trustee of
McCubbins' pension fund, the Operating Engineers Employers Retirement
Fund, on January 8, 1991. 6
filed a chapter 7 bankruptcy on April 12, 1993. 7
He was discharged on September 7, 1993. 8
parties have not informed me whether McCubbins, after the January 1991,
levy, continued to work and contribute to the pension fund until he
retired and the pension fund went into pay status sometime in 1997. In
his bankruptcy petition's Statement of Affairs, he indicates he had no
income for the two years immediately preceding 1993. 9
In 1997, the IRS began collecting the retirement proceeds from the
trustee, and has collected over $50,000. 10
is not clear from the record how much of the pension fund was vested
when the levy was served in January 1991, or when the petition was filed
in April 1993, but McCubbins listed an interest in the pension fund in
his-bankruptcy schedules. 11
filed this adversary proceeding seeking: (a) to have a determination
that the taxes, interest and penalties for the years 1976-78 and 1980-87
were discharged by his bankruptcy; (b) that the pension fund is exempt
from the IRS's levy; (c) that the IRS should return the funds it has
garnished; and, (d) that the IRS should be held in contempt and pay some
penalty for having violated Mr. McCubbins' discharge.
IRS moved for summary judgment. 12
The motion does not explicitly spell out the relief sought, but seems to
ask that relief be denied to McCubbins, that the taxes be declared
nondischargeable, and that its past and continuing levy on Mr.
McCubbins' pension fund is legally justified.
filed an opposition 13
in which he admits "[t]he Plaintiff never filed returns for tax
years 1979 through 1993, because the law did not require that he do
He also alleges "[n]o legally sufficient levy has ever been issued
against the Plaintiff by the Internal Revenue Service," 15
because the pension is exempt and was never properly seized.
ISSUES--The main issues are:
Are the taxes, interest and penalties nondischargeable for filing a
fraudulent tax return for 1976, and for failing to file tax returns for
1977, 1978, and 1980-1987?
Even if they are discharged, is the IRS's prepetition levy on the
debtor's pension rights, made before the pension rights entered into pay
The Tax Penalties are Dischargeable--All the tax penalties that I
am aware of occurred or were assessed more than three years prior to Mr.
McCubbins' 1993 bankruptcy petition. The latest stemmed from 1987 taxes,
for which a return would have been due (if there was no extension) in
April 1988, five years before the bankruptcy. The penalties are thus
dischargeable under 11 U.S.C. §523(a)(7)(B) which provides that tax
penalties are dischargeable if they are "imposed with respect to a
transaction or event that occurred before three years before the date of
filing the petition." 16
bankruptcy court is an appropriate forum to determine that the penalties
are dischargeable. 17
1976-1977 Taxes and Interest are Nondischargeable--In the tax
court case filed by McCubbins, the tax court judge found that his 1976
tax return was fraudulent in many respects, and that he did not file
1977 or 1978 tax returns. 18
The determination is binding on me in the present proceeding. 19
1976 taxes, therefore, fall squarely within the exception to discharge
for a fraudulent return. 20
1977 and 1978 tax obligations were liquidated by the tax court, which
found that returns had not been filed. These taxes are nondischargeable
because of the failure to file tax returns. 21
indicated in Part 4.1.1, the penalties associated with these years are
1980-1987 Taxes and Interest are Nondischargeable--The debtor has
admitted that he did not file tax returns for the years 1980-1987. The
IRS did file substitute tax returns for the debtor, 22
but these do not qualify as filing a tax return for the purposes of 11
U.S.C. §523(a) to entitle McCubbins to dischargeability of the
1980-1987 taxes. 23
the amount of the levy is steep, McCubbins has not questioned the IRS's
computations of taxes for these years per se; he has only made a
generalized tax-protestor type attack on the system. The IRS produced
admissible evidence establishing the amount McCubbins owed for these
years by a Form 4340. 24
defeat the motion for summary judgment, the nonmovant must produce some
factual rebuttal to the evidence produced by the movant. 25
Although the court will not impose the requirement of procedural
perfection on him because he is acting pro se, 26
McCubbins must still abide by the basic rules in responding to the IRS's
summary judgment motion. 27
His failure to rebut the information for the 1980-1987 tax years in any
meaningful way allows this court to adopt the IRS's factual contentions
about these years.
in a case with facts quite similar to the present proceeding, a
bankruptcy court held that debtors were estopped or barred by laches
from challenging the IRS's computations. 28
the taxes and interest for 1980 through 1987 are nondischargeable
because no returns were filed. The penalties are dischargeable per Part
The IRS's January 1991, Levy--
The Levy Was Valid--McCubbins makes a scatter gun attack on the
levy. Principally, he says it was incorrect because the pension fund was
not seized. 29
The pension fund was an intangible, not subject to physical seizure.
Service of the levy on the trustee was sufficient, even though the right
to payment was deferred to a future date. 30
The Prepetition Levy on Debtor's Pension Rights, Prior to Their Going
Into Pay Status, Remains Effective After Discharge--Even if all the
taxes, interest and penalties had been discharged, the prepetition levy
on McCubbins' pension rights was not avoided by the discharge. The
bankruptcy discharge of a debt does not normally discharge the lien
rights of a creditor. 31
listed an interest in the pension fund, worth an unknown amount, on his
bankruptcy schedules. 32
Thus, he was probably at least partially vested at the time of his
petition, which was about twenty-seven months after the January 1991,
levy. How much he was vested at the time of the levy and at the later
date of the petition, is not apparent in the record.
the court knows whether he was fully vested, it may not be possible to
determine if all of the money received by the IRS under its levy, the
$50,000 plus, was appropriately taken. If part of the vesting occurred
due to work and contributions to the pension fund after the levy, it
might not be covered by the levy. For example, if he was vested for $500
a month in pension payments (payable upon retirement) when the levy
occurred in January 1991, and later became entitled to $750 due to
subsequent contributions, the additional $250 in monthly pension
payments might not be covered under the levy. A levy only applies to
property owned by the tax debtor when the levy is served, and not
after-acquired property. 33
do not know if the IRS has filed subsequent levies on the pension
trustee. If there were none, and there was vesting that took place after
the levy, it is possible the IRS is only entitled to a pro rata share of
the pension payments it has already received. 34
as I suspect, McCubbins was fully vested in January 1991, the IRS's
receipt of all the pension payments was proper. McCubbins argues that
the IRS's levy on his pension fund rights was avoided when he filed
bankruptcy. He contends that the IRS cannot levy against his ERISA
qualified pension fund because of its anti-alienation provision. 35
This is not correct. In re Raihl, the 9th Circuit BAP, in a case
arising out of Alaska, held that the anti-alienation provisions of ERISA
do not trump the federal tax lien law. 36
the present case, Raihl's pension rights were not in pay status at the
time of the lien. They were, however, vested--I do not know if
McCubbins' rights were vested in 1991 when the IRS levied on his pension
fund. The BAP emphasized that the "unqualified contractual right to
receive property is itself a property right," implying that vesting
is important. 37
the IRS must supplement the record to establish the information about
the state of vesting of McCubbins' pension rights in January 1991.
is nothing to stop the IRS now from issuing a new levy, but it should
not include the penalty amounts if the court is correct in its analysis
in Part 4.1.1 of this Memorandum.
CONCLUSION--The taxes and interest described in Parts 4.1.2 and
4.1.3 of this Memorandum, adjusted for the passage of time, are
nondischargeable. The penalties are dischargeable per Part 4.1.1. I do
not know if it is necessary or desirable to arrive at a precise
calculation of these amounts. Unless the parties request that one be
established, I will not attempt to do so in this proceeding.
appropriateness of the IRS levy cannot yet be resolved by summary
judgment because the court does not know if McCubbins was fully vested
when the levy was served on the pension trust fund. If he was fully
vested in his pension on January 8, 1991, the date of the IRS's levy,
the funds received to date by the IRS rightfully belong to it to apply
to McCubbins' tax obligations described in Parts 4.1.1, 4.1.2 and 4.1.3,
as well as the penalties mentioned in Part 4.1.1. The continued receipt
of funds from the pension to apply to these tax obligations would also
he was not fully vested, the parties should advise the court regarding
the status of vesting, and the legal ramifications of McCubbins not
being fully vested at the time of the levy.
will enter a non-final order based on this Memorandum.
GRANTING PARTIAL SUMMARY JUDGMENT TO THE INTERNAL REVENUE SERVICE
the reasons stated in the Memorandum Granting Partial Summary
Judgment to the Internal Revenue Service being filed concurrently,
IS ORDERED that,
Taxes, Interest and Penalties Related to 1976-1978 and 1980-1987
Federal Income Taxes--The taxes and interest related to the
1976-1978 and 1980-1987 federal income taxes owed by plaintiff-debtor,
Lawrence Ray McCubbins, are not dischargeable in his bankruptcy pursuant
to 11 U.S.C. §523(a)(1)(C) as to 1976, and 11 U.S.C. §523(a)(1)(B)(i)
for the rest of the years.
IRS's January 8, 1991, Levy--Summary judgment on the issues
regarding the IRS's January 8, 1991, levy on plaintiff's pension fund is
held in abeyance until questions regarding the date the pension rights
vested are resolved.
Not a Final Order--This is not a final order that the parties
need to appeal at this time.
REQUIRING PLAINTIFF TO DISCLOSE FACTS ABOUT HIS PENSION RIGHTS AND
AUTHORIZING THE PENSION TRUST TO DISCLOSE INFORMATION
March 3, 2000, the court issued a memorandum regarding partial summary
to the Internal Revenue Service (IRS) and a related order. 2
The court concluded that there was an unresolved factual issue about the
date that plaintiff, Lawrence Ray McCubbins', pension rights vested in
his Operating Engineers Employers Retirement Fund. On its own motion,
the court enters the following order.
IS ORDERED that,
DISCLOSURE OF INFORMATION--Plaintiff, Lawrence Ray McCubbins,
shall disclose to the attorney in this proceeding for the Internal
Revenue Service, information regarding the vesting of his rights in his
pension fund with the Operating Engineers IUOE Local 302 Retirement
Trust. This includes identifying when his pension rights vested, and
producing any documents reasonably requested by IRS counsel. 3
2. COMFORT ORDER FOR
PENSION TRUST--The representatives of IUOE Local 302 Retirement
Trust are authorized by this order to release to a representative of the
IRS, information and documents concerning the pension account or rights
of Lawrence Ray McCubbins. This provision is made for the benefit of the
pension trust, and is without prejudice to the pension trust asserting a
right not to disclose this information.
3. WARNING ABOUT
SANCTIONS--Should plaintiff fail to, in good faith, cooperate in
providing this information, the court may deem it appropriate as a
sanction to deem that his pension rights were fully vested prior to
January 1991, when a levy was served on the representative of the
pension trust. This is advance warning to Mr. McCubbins that he must
cooperate in producing the information the court has identified in this
The IRS may serve a
"request for admissions" on plaintiff to seek an admission
which would be binding in this proceeding that the pension rights of
plaintiff were vested before January 8, 1991. If a request for
admissions as to the vesting date is requested, the plaintiff must
respond truthfully, and if he denies that this is so, it should be based
on the actual facts. A failure to respond at all may result in the
matter involving the date of vesting to be established against him.
1 11 U.S.C. §523(a)(7)(B).
Lawrence R. McCubbins v. Commissioner of Internal Revenue [CCH
Dec. 45,711(M)], 57 TCM 481, TCM (P-H) 89,245 (1989).
See, Declaration of Keith S. Blair, Exhibit 2, Docket Entry 14,
filed December 22, 1999, containing two Form 4340, Certificate of
Assessments and Payments regarding McCubbins for Individual Income
Tax Returns (1040) for tax periods December 31, 1980, through December
26 U.S.C. §6331(a).
See, notations on two Form 4340, Certificate of Assessments
and Payments regarding McCubbins for Individual Income Tax Returns
(1040) for tax periods December 31, 1980, through December 31, 1987,
attached to Declaration of Keith S. Blair, Exhibit 2, Docket
Entry 14, filed December 22, 1999.
Notice of Levy on Wages, Salary and Other Income, attached as
Exhibit A to Declaration of Mike Mida, Docket Entry 15, filed
December 22, 1999.
In re Lawrence Ray McCubbins, aka Larry McCubbins, Case No.
A93-00284-HAR, Voluntary Chapter 7 Petition, Main Case Docket Entry 1,
filed April 12, 1993.
Discharge of Debtor, A93-00284-HAR Main Case Docket Entry 24,
filed September 7, 1993.
Statement of Affairs, Question 1, attached to Voluntary
Petition, Main Case Docket Entry 1, filed April 12, 1993.
See, Complaint--Adversarial Proceeding, Docket Entry 1 at page 5,
filed October 7, 1999; Declaration of Mike Mida, Docket Entry 15,
filed December 22, 1999.
See, Schedule B, attached to the Voluntary Petition filed by
debtor, Main Case Docket Entry 1, filed April 12, 1993.
United States' Motion for Summary Judgment, Docket Entry 12,
filed December 22, 1999.
Plaintiff's Brief in Opposition to Motion for Summary Judgment,
Docket Entry 20, filed January 21, 2000.
Id, page 2.
McKay v. United States [92-1 USTC ¶50,228], 957 F2d 689, 693-94 (9th
Cir 1992); Frary v. United States (In re Frary), 117 BR 541
(Bankr D Alaska 1990); Wright v. United States (In re Wright)
[2000-1 USTC ¶50,259], 2000 WL 137454, *5, ____ BR--(Bankr ND Cal
11 U.S.C. §505; see, generally, 15 Collier on Bankruptcy,
Chapter TX5: Litigation with the IRS in Bankruptcy Court.
Lawrence R. McCubbins v. Commissioner of Internal Revenue [CCH
Dec. 45,711(M)], 57 TCM (CCH) 481, TCM (P-M) 89,245 (1989).
11 U.S.C. §505(a)(2)(A).
11 U.S.C. §523(a)(1)(C); McKay v. United States [92-1 USTC ¶50,228],
957 F2d at 691.
11 U.S.C. §523(a)(1)(B)(i).
See, 26 U.S.C. §§6012, 6020(b).
Bergstrom v. United States (In re Bergstrom) [91-2 USTC ¶50,558],
949 F2d 341, 342-43 (10th Cir 1991); United States v. Hatton (In re
Hatton), 216 BR 278, 280 (9th Cir BAP 1997).
Exhibit 2 attached to Declaration of Keith S. Blair, Docket Entry
14, filed December 22, 1999; FRE 803(B); Hughes v. United States
[92-1 USTC ¶50,086], 953 F2d 531, 535, 539-40 (9th Cir 1992).
Security Farms v. International Broth. of Teamsters, Chauffers,
Warehousemen & Helpers, 124 F3d 999, 1011 (9th Cir 1997); Patterson
v. International Broth. of Teamsters, Local 959, 121 F3d 1345, 1350
(9th Cir 1997), cert den 118 SCt 1675 (1998); Lewis v. Scott
(In re Lewis), 97 F3d 1182, 1187 (9th Cir 1996).
McCabe v. Arave, 827 F2d 634, 640 fn 6 (9th Cir 1987).
Carter v. Commissioner [86-1 USTC ¶9279], 784 F2d 1006, 1008-09
(9th Cir 1986).
Allison v. United States (In re Allison), 232 BR at 201-02, aff'd
245 BR 705.
Plaintiff's Brief in Opposition to Motion for Summary Judgment,
pages 8-15, Docket Entry 20, filed January 21, 2000.
United States v. Hemmen [95-1 USTC ¶50,210], 51 F3d 883, 887
(9th Cir 1995).
Isom v. United States [90-1 USTC ¶50,216], 901 F2d 744 (9th Cir
1990); 11 U.S.C. §524(e).
See, Schedule B, attached to the Voluntary Petition filed by
debtor, Main Case Docket Entry 1, filed April 12, 1993.
26 U.S.C. §6331(b).
See, United States v. Rice (In re Rice), 1998 WL 939695, *5 and
fn 10 (Bankr ED Va 1998), which cites Connor v. United States (In re
Connor) [94-2 USTC ¶50,296], 27 F3d 365, 366 (9th Cir 1994).
Plaintiff's Brief in Opposition to Motion for Summary Judgment,
page 7, Docket Entry 20, filed January 21, 2000.
Raihl v. United States (In re Raihl) [93-1 USTC ¶50,290], 152 BR
615, 618 (9th Cir BAP 1993), affirming [92-1 USTC ¶50,016], 1991
WL 322632, 71A AFTR2d 93-4236 (Bankr D Alaska 1991); see, also,
Shanbaum v. United States [94-2 USTC ¶50,512], 32 F3d 180, 183 (5th
Raihl v. United States (In re Raihl) [93-1 USTC ¶50,290], 152 BR
at 618; see, also, Allison v. United States (In re Allison), 232
BR at 205-08, aff'd 245 BR 705.
Memorandum Granting Partial Summary Judgment to the Internal Revenue
Service, dated March 3, 2000.
Order Granting Partial Summary Judgment to the Internal Revenue
Service, dated March 3, 2000.
FRBP 7026, incorporating FRCP 26(a)(A), (B).
Nordstrom, Inc., Plaintiff v. Nicole Fall, et al.,
District Court, West. Dist. Wash., at Seattle, C97-1667D, 8/13/98
Sec. 6321 ]
Liens and levies: Interpleader action: Property subject to lien:
Employee pension plans: Employee profit sharing plans: Vestment:
Beneficiary: Contingent beneficiary.--The IRS's lien against married
taxpayers' estate in order to encumber funds from the deceased wife's
two retirement plans was valid. Even though the husband died soon after
his wife and before receiving any payment from the funds, the benefits
rights vested in him rather than in their sole surviving daughter. The
wife did not designate a beneficiary under either plan, thus, under the
plans' terms as controlled by state (Washington) law, the husband as the
widower was the deemed beneficiary. Accordingly, the benefits rights
vested in him prior to his death, thus cutting off the rights of the
contingent beneficiary, the daughter.
Christian N. Oldham, Lane,
Powell, Spears, Lubersky, 1420 Fifth Ave., Seattle, Wash. 98101-2338,
for plaintiff. Harold B. Coe, Coe, Nordwall, Liebman & Friend, 720
Olive Way, Seattle, Wash. 98101-1812, Deirdre A. Donnelly, Department of
Justice, Washington, D.C. 20530, for defendants.
ON INTERPLEADED FUNDS
DIMMICK, District Judge:
THIS MATTER is
before the Court on cross motions for summary judgment. Alternatively,
defendant United States has moved for dismissal for lack of subject
matter jurisdiction. As indicated orally, following argument in open
court, the Court concludes (1) that it has jurisdiction; (2) that the
United States is entitled to execute on tax liens; and (3) plaintiff in
interpleader may deposit with the registry of the Court the funds in
Nordstrom, Inc. filed its
complaint in interpleader seeking to deposit with the Court funds held
in the Nordstrom Employee Deferral Retirement Plan and the Nordstrom
Profit Sharing Retirement Plan following the death of Marilyn Fall,
Nordstrom employee. Nicole Fall is the daughter of decedents Marilyn and
Robert Fall. She claims the rights to these benefits; defendant United
States asserts a tax lien on the benefits.
The initial issue is
whether this Court has subject matter jurisdiction. If it does, then the
second question is whether under the language of the two plan contracts,
the benefits pass to Marilyn Fall's husband who died before receiving
payment. There are no disputes as to applicable Washington law or the
Plaintiff Nordstrom, Inc.
brought its complaint for interpleader, asserting this Court's
jurisdiction pursuant to 28 U.S.C. §2410, which provides that the
"United States may be named a party in any civil action or suit in
any district court . . . of interpleader or in the nature of
interpleader with respect to, real or personal property on which the
United States has or claims a mortgage or other lien."
The United States submits
that this is not sufficient to confer jurisdiction. The United States
insists that because this interpleader is not based on diversity of
citizenship (28 U.S.C. §1335), but only Fed. R. Civ. P. 22, there must
be a federal statutory basis for the action--a federal question under 28
U.S.C. §1331. The issue here is purely one of state insurance law. See
Gelfgren v. Republic Nat'l Life Ins. Co., 680 F.2d 79, 81 (9th Cir.
1982). Thus, the argument continues that once it is determined that the
funds go into the estate of Robert Fall, the government simply enforces
its tax liens.
Defendant Fall has made
numerous arguments for an alternative basis for subject matter
jurisdiction (e.g., federal jurisdiction exists where a cause of action
anticipated by plaintiffs in an interpleader or declaratory judgment
action "would arise under federal law." Morongo Band of
Mission Indians v. Cal. State Board of Equalization, 858 F.2d 1376,
1384 (9th Cir. 1988)). That is, Rule 22 interpleader may be used to
precipitate a coercive action by a defendant.
In a last minute two-page
brief, Nordstrom points out that the two plans in which the disputed
funds are held are governed by 29 U.S.C. §1101, et seq.,
Employee Retirement Income Security Act ("ERISA") and pursuant
to 29 U.S.C. §1132(e) and (f), federal courts have jurisdiction. 1
This Court concludes that it has jurisdiction pursuant to ERISA for an
action brought by an employer benefit plan fiduciary.
As noted above, the facts
are not in dispute. Defendant Nicole Fall lost her entire family in a
tragic automobile accident. Her mother was killed instantly on December
9, 1995. Her father, Robert Fall, was critically injured and died 33
Marilyn Fall was employed
by Nordstrom at the time of her death and was a participant in the two
Nordstrom plans. Her vested benefits at the time of her death are now
over $90,000. She had not designated a beneficiary for either plan. Both
defendant Fall and defendant United States agree that where no
beneficiary has been named, identical provisions in the Nordstrom plans
provide a "deemed beneficiary." They also agree that Robert
Fall would have been the beneficiary, but he died before receiving any
The United States Internal
Revenue Service has assessed tax liabilities going back to 1991 against
Marilyn and Robert Fall for a total of $72,342.52 as of June 30, 1998.
The IRS has filed a notice of tax lien on the estates of Marilyn Fall
and Robert C. Fall. Pursuant to 26 U.S.C. §6321, Internal Revenue Code
of 1986, the government claims a lien for unpaid taxes on "all
property which belonged to Robert Fall at the time the liens arose and
all property he thereafter acquired." CP 20 at 8. 2
Nicole Fall does not
dispute the validity of the tax lien, but argues that the funds in
question never became the property of Robert Fall, but vested directly
in her--thus the lien cannot encumber the Nordstrom benefits. A notice
to creditors for the estate of Robert Fall (CP 10, Ex. 8) indicates
there are few assets other than the Nordstrom benefits.
Under the terms of both
Nordstrom plans, did Marilyn Fall's entitlement to benefits vest in her
husband who outlived her, even though he never received payment; or did
entitlement transfer directly to her daughter Nicole Fall?
The two defendants agree on
the applicable law, both relying on Federal Old Line Ins. Co. v.
McClintick, 18 Wn. App. 510 (1977). The McClintick court
explained the law under the general rule:
when the death of the beneficiary named in a life insurance policy
occurs after that of the insured but before payment of the insurance
proceeds, the fund becomes a part of the beneficiary's personal estate,
since it is regarded as having vested in the beneficiary, upon the
when the policy has a contingent beneficiary, if the policy does not
contain a provision to the contrary, the same rule pertains, the result
being that when the primary or direct beneficiary survives the insured,
by however short a time, the rights of contingent beneficiaries are cut
514 (citations omitted). The court, however, went on to explain that the
terms of a policy can vary the general rule. "The policy may
expressly provide for payment to the contingent beneficiary upon the
death of the primary beneficiary even though the primary beneficiary had
survived the insured." Id. at 514 (quoting 4 R. Anderson, Couch
Cyclopedia of Insurance Law §27:138, at 683 (2d ed. 1960)). Thus,
the Washington court recognized that the effect of the following
provision in the McClintick policy postponed vesting of the
policy until proceeds were given to the primary beneficiary:
death of the last surviving principal Beneficiary, whether such
death occurs before the Insured or after the Insured and before the
full amount due hereunder shall have been paid, the interest of such
principal Beneficiary last surviving shall pass to the surviving
Contingent Beneficiary or Contingent Beneficiaries, share and share
at 515 (Washington court's italics).
Under Washington law, the
meaning of contract language is to be determined by the court. Millican
of Wash., Inc. v. Wienker Carpet Service, Inc., 44 Wn. App. 409, 413
(1986), citing Kelly v. Aetna Casualty & Surety Co., 100
Wn.2d 401, 407 (1983). Moreover, the contract should be read as a whole,
"giving force and effect to each clause." McClintick,
18 Wn. App. at 515.
It is agreed between the
defendants that Article IX, ¶9.3-2, in the Nordstrom Profit Sharing
Retirement Plan ("PSP") and Article VII, §7.3-2 in the
Nordstrom Employee Deferral Retirement Plan ("DRP") apply
where no designation of beneficiary has been made. These two provisions
are identical in each plan as follows:
Beneficiary. If no designation has been made, or if the designee has
predeceased the Participant, then the Participant will be deemed to have
designated the following as his or her beneficiaries and contingent
beneficiaries with priority in the order named below:
first, to his widow or her widower, as the case may be;
next, to his or her children and the children of deceased children, per
stirpes;. . . .
The United States argues
that this ends the issue. Robert Fall, as widower, was the deemed
beneficiary, and benefit rights vested in him prior to his death, thus
cutting off rights of contingent beneficiary Nicole Fall.
Nicole Fall counters that
because actual payment was not made to Robert Fall while he was alive,
the proceeds did not vest in him, and pass to his estate at his death.
Rather, with his death, Nicole Fall became the primary beneficiary (as
the sole surviving child), and all accrued benefits should be paid to
her. Defendant Fall relies on the language in PSP 11.3-3 and DRP 9.3-3.
These are also identical provisions which read as follows:
of Surviving Spouse. For purposes of 11.3 above, if the surviving
spouse dies after the Participant, but before payments to such spouse
begin, the provisions of 11.3, with the exception of 11.3-2 therein,
shall be applied as if the surviving spouse were the Participant.
11.3-3. Defendant Fall contends that this language operates in the same
manner as the policy provision in McClintick to preclude vesting
until payment has been made.
The government rejoins that
the contract should be read in its entirety and that 9.3 and ¶11.3
relate only to payments of benefits, not the vesting of rights.
Art. IX of the DRP and Art.
XI of the PSP are entitled, "Limitations on Distributions"; ¶9.3
and ¶11.3 are entitled, "Post-Death Distributions." In
reading each plan as a whole, the Court concludes that these latter two
provisions should be read as governing payments of the benefits only.
The plans' method of distribution does not modify the two plans'
provisions for designating a beneficiary, or, as in Marilyn Fall's case,
the provisions for "Deemed Beneficiary."
THEREFORE, the Court
GRANTS the motion of defendant United States as to its right to
execute on the tax lien. Defendant Nicole Fall's motion is DENIED.
Plaintiff in intervention, Nordstrom, Inc., accordingly, may deposit the
funds held in decedent Marilyn Fall's employee benefit plans with the
Court and be relieved of further liability for these funds.
The Clerk of the Court is
directed to send copies of this order to counsel of record.
The United States has not responded to defendant Fall's or Nordstrom's
arguments on jurisdiction.
The government has not argued that its tax liens apply to Marilyn Fall's
interest in her retirement benefits and continue after her death.
In re Larry Wesche, Debtor
Bankruptcy Court, Mid. Dist. Fla., Jacksonville Div., 95-1224-BKC-3F3,
3/13/96, 193 BR 76, 193 BR 76
6321 and 6323
Tax liens: Pension: Valuation: Bankruptcy.--
IRS tax liens against the Civil Service Retirement System pension
benefits of a debtor in bankruptcy attached to his post-petition pension
payments and were valued at the present actuarial value of his future
payments. There was no support in the case law for the debtor's argument
that the IRS had a lien only on the amount of one month's pension
payment. Since the debtor introduced no evidence to rebut the opinion of
the IRS's actuarial expert, that determination of the pension's value as
of the petition filing date was sustained.
Anne Payne, 76 S. Laura
St., Jacksonville, Fla, for debtor. Bruce T. Russell, Department of
Justice, Washington, D.C. 20530, for I.R.S.
OF FACT AND CONCLUSIONS OF LAW
FUNK, Bankruptcy Judge:
This case is before the
Court upon Debtor's Objection to Claim Number 1 of the Internal Revenue
Service. A response was filed by the IRS and a hearing was held on the
Objection on November 8, 1995. Based upon the evidence presented the
Court makes the following Findings of Fact and Conclusions of Law.
The Debtor is a retired
federal employee. He draws a Civil Service Retirement System pension
(hereinafter "CSRS"). His right to receive benefit payments
under that pension is vested. He currently receives benefit payments
totaling $2,156.00 per month. The pension benefit payments will
terminate upon his death, and they are not assignable to a third party.
The Debtor filed a
voluntary petition under Chapter 7 of the Bankruptcy Code on December
21, 1993, and he subsequently received a discharge on March 31, 1994.
The Debtor then filed the present Chapter 13 case on March 20, 1995. The
only creditor in this Chapter 13 is the United States of America on
behalf of the IRS who filed a claim in the amount of $101,339.92.
$96,528.92 of that amount is a secured claim and $4,811.00 is a priority
claim. The claim is based upon assessed and unpaid federal income tax
liabilities for tax years 1983 through 1990. Pre-petition Notices of
Federal Tax Liens were properly filed in Clay County, Florida on the
dates listed on the proof of claim.
The Debtor has objected to
the IRS claim "to the extent it purports to be secured to any
greater extent than one month's federal retirement benefit." The
Debtor's Objection further reads:
In support of this
Objection, debtor would show that federal retirement (sic)
benefits have no vested value in that they do not continue after the
retiree's death or have any lump sum or surrender value; the only
ascertainable value of the benefit as of the date of the filing was the
value of the monthly benefit.
Debtor's bankruptcy schedules describe the Debtor's federal pension and
personal property as exempt property on Schedule C. The Debtor's Chapter
13 Plan, which has not yet been confirmed, provides for a three-year
payment to the IRS, the only creditor. At the hearing, Debtor's counsel
suggested that the Debtor's health was infirm, but offered no evidence
to show he suffered from a terminal illness or any other medical
At the hearing, Cleveland
Parker, an IRS employee benefits specialist, testified that the present
value of the CSRS pension under which the Debtor is currently receiving
benefit payments could be valued as of the date of the Chapter 13
petition. The IRS introduced into evidence an Annuity Valuation which
gives the present actuarial value of the Debtor's pension as of the
petition filing date. Given the Debtor's date of birth on December 19,
1934, the Debtor's life expectancy as determined from generally accepted
actuarial tables, an interest rate assumption of 8% and the Debtor's
current monthly benefit payments of $2,156.00, the IRS determined that
the present value of the Debtor's vested pension benefits as of the
petition date was $258,565.00. Debtor offered no rebuttal evidence on
the valuation issue.
Mr. Parker further
testified that the benefits the Debtor draws are payable for his
lifetime only and cannot be reduced to a lump sum or in any way be
withdrawn in advance of being accrued by passage of time. Should the
Debtor die next week, Mr. Parker indicated that neither the Debtor's
personal or bankruptcy estates would receive anything on account of his
participation in the federal retirement program.
A lien in favor of the
United States for unpaid taxes, interest and penalties arises on demand
upon all real and personal property belonging to a taxpayer. 26 U.S.C. §6321
. The lien is perfected under state law by filing of a notice
of a tax lien in circuit court for the jurisdiction in which the
taxpayer resides. 26 U.S.C. §6323(f)(1)
. The lien remains in effect until the taxes are paid. 26
. Robinson v. United States of America (In re Robinson) [84-2 USTC ¶9632 ], 39 B.R. 47 (Bankr. E.D. Va. 1984). The IRS
complied with each of these provisions in the instant case by filing its
notice of lien in the Clay County circuit court.
It is not in dispute that
the federal tax lien attached to Debtor's pension. It is firmly
established in case law that a "federal tax lien attaches to a then
existing right to receive property in the future." Wessel v.
United States of America (In re Wessel) [93-2
USTC ¶50,549 ], 161 B.R. 155 (Bankr. D.S.C. 1993).
Rul. 55-210 as quoted in the Wessel case states,
Where a taxpayer has an
unqualified or fixed right, under a trust or contract, or through a
chose in action, to receive periodic payments or distributions of
property, a Federal Lien attaches to the taxpayer's entire right, and a
notice of levy based upon such lien is effective to reach, in addition
to payments or distributions then due, any subsequent payments or
distributions that will become due thereafter, at the time such payments
or distributions become due.
federal tax liens attached to Debtor's right to receive his pension
payments prior to his filing his bankruptcy petition; therefore, the
liens continue to attach to his right to receive the pension payments.
Debtor does not dispute that. The issue of disagreement between Debtor
and the IRS, is the extent of the lien on the pension payments, and
hence, the amount of the secured claim of the IRS under 11 U.S.C. §506.
Valuation is the basic issue in this case. Debtor claims that the IRS
lien is not secured to any greater extent than the value of one month's
federal retirement payment, or in other words, $2,156. The IRS, on the
other hand, claims a secured claim of lien on the Debtor's right to
lifetime pension benefits. This is the issue before the Court.
Debtor's counsel in her
proposed Findings of Fact and Conclusions of Law submitted to the Court
does not cite any statutory or case law at all in support of her
argument that the IRS lien is only secured by one month's pension
payment. She argues that the value of the pension to the Debtor at any
given time is only equal to the benefit he is entitled to receive for
that month. Debtor's counsel points out that the plan does not create
any lump sum fund from which the Debtor could draw more than just the
one month's benefit, and that the benefits terminate upon the death of
Debtor. If Debtor were to die tomorrow, the bankruptcy estate would
receive no distribution from the pension plan. This is the basis for
Debtor's argument that the value of the IRS lien is limited to one
month's benefit payment.
However, the reported case
law on this issue is to the contrary. The earliest reported case the
Court could discover is the factually similar case of Robinson v.
United States (In re Robinson) [84-2 USTC ¶9632 ], 39 B.R. 47 (Bankr. E.D. Va. 1984) in which
a Debtor objected to an IRS tax lien on his military pension. The issue
in Robinson was also one of valuation. The Debtor argued not that
the value of the lien was limited to one month's military pension
payment, but instead that the lien was limited to the extent of pension
payments received over the life of his Chapter 13 plan. The Court
discounted that argument, and instead ruled that the value of the IRS
lien was equal to the present actuarial value of the pension payments
Debtor would expect to receive over his lifetime.
Similarly, in the case of In
re Perkins, 134 B.R. 408 (Bankr. E.D. Cal. 1991) a Chapter 13 debtor
objected to an IRS claim on his pension. In that case, the court stated,
Courts addressing the issue
of valuation of pensions or debtor's rights to pensions have not
hesitated to assign positive present values notwithstanding that
payments are available only upon satisfaction of contingencies. ...
Although not setting down a formula for determining present value, these
cases firmly establish that vested pension rights to future periodic
payments for life are to be assigned a present value according to the
actuarial value of the stream of payments. Perkins at 412.
court followed these cases and ruled that the IRS claim was secured by
the present value of the debtor's right to lifetime pension benefits.
The court cited the Robinson case in making its decision.
In the case of In re
Lyons, 148 B.R. 88 (Bankr. D.C. 1992), the debtors also objected to
the proof of claim filed by the IRS which consisted of a lien on the
debtors' retirement plan. The court first made the determination that
the retirement plan was property of the bankruptcy estate under §541
. The court then went on to hold that the IRS had a valid
lien on the future periodic payments of the retirement plan and stated,
"As in Robinson [84-2 USTC ¶9632 ], 39 B.R. at 49, that value is fixed at the
present value of the future stream of payments to be received." Lyons
Yet again in the case In
re Cook, 150 B.R. 439 (Bankr. E.D. Ark. 1993), the Chapter 13
debtors objected to the IRS claim of lien for unpaid federal income
taxes. The debtors in this case apparently made a similar argument to
that of Mr. Wesche in the instant case because the court stated that,
Debtors argue that the
[IRS] lien cannot attach to a right to receive property in the future.
This is legally erroneous and based upon a mischaracterization of
rights, rather than any legal concept. Indeed, debtors have presented no
authority, evidence, or even argument in support of this assertion. ...
Charles Cook has a present right to receive payments in the future,
which is a 'right to property' to which the tax lien attaches.
[Citations omitted.] The right to future benefits exists in the present,
and, most importantly, existed on the date of the filing of the petition
in bankruptcy. Accordingly, the federal tax lien attached to all of
Cook's rights in the pension benefits, including the right to future
payments. [Citing, Robinson, supra.] The United States, thus, is
secured to the extent of the present value of Cook's retirement
benefits. Cook, supra at 441.
court went on to determine the present actuarial value of the future
retirement plan benefits which determined the value of the IRS claim.
Further, in the case of Wessel
v. United States (In re Wessel) [93-2
USTC ¶50,549 ], 161 B.R. 155 (Bankr. D.S.C. 1993) the debtor
made the argument that the IRS lien for unpaid taxes did not attach to
his post-petition annuity payments. The court did not follow that
argument stating that debtor had a fixed right to receive the annuity
payments prior to filing bankruptcy, and that there was nothing else he
had to do in order to receive the payments. The debtor attempted to
argue that his staying alive was a condition precedent to receiving the
payments. The court refused to follow that reasoning, saying that being
alive was not a condition precedent to acquiring the property right in
the annuity; the right had already been acquired at the time of the
petition filing. Instead, the debtor's death was a condition subsequent
to the acquisition of the payments. "... [D]eath terminates this
previously created property right in the annuity." Wessel at
159. The court held that the tax liens validly attached to post-petition
annuity payments because the debtor had a completely fixed right in the
annuity payments as of the time that the tax liens arose.
All of these cases are
contrary to Debtor's argument that the IRS only has a lien on the amount
of one month's pension payment, not the post-petition future payments.
In its research, the Court did not discover any cases that did support
Debtor's argument. The case law seems clear cut IRS tax liens do attach
to post-petition pension payments and are valued at the present
actuarial value of the debtor's future stream of payments. This is not a
case in which there are two or more lines of cases where the Court could
choose to follow the majority or minority rule. There is no other rule
than that detailed in the above cases. The Court will follow the
reasoning in the previously cited cases, and hold that the IRS lien does
attach to Mr. Wesche's post-petition pension payments. The IRS claim is
valued as the present value of the future payments over Debtor's
lifetime. The IRS introduced into evidence the opinion of an actuarial
expert, valuing Debtor's pension as of the petition filing date of March
20, 1995 at $285,565. The Debtor offered no evidence to the contrary.
The Court concludes that the present value of the Debtor's pension, as
of the date the petition was filed, is $285,565, and that the IRS
secured claim is $96,528.92. The Debtor did not contest the priority
claim of $4,811.00.
Ameritrust Company, N.A., Plaintiff v. Iraj
Derakhshan, et al., Defendants
District Court, No. Dist. Ohio, East. Div., 1:92CVO931, 7/16/93, 830
FSupp 406, 830 FSupp 406
401 , 6321
Tax liens: Validity of lien against third party: Alienation of
pension benefits.--The government was entitled to levy on a debtor's
IRA and Keogh accounts in satisfaction of delinquent taxes even though
the accounts were qualified retirement plans. ERISA's bar against
assignment or alienation of an individual's interest in a qualified
retirement plan did not preclude a tax levy for unpaid taxes against
that interest. ERISA was not intended to alter other federal laws, and a
prohibition against the alienation of ERISA funds to satisfy a federal
levy would limit the scope of Code Sec.
6321 . Further, the federal levies were filed before the
issuance of a qualified domestic relations order that irrevocably
assigned the retirement plans to the debtor's ex-wife, and, therefore,
the IRS's levies had priority.
ALDRICH, District Judge:
On May 12, 1992, the
Ameritrust Company filed this impleader action under 28 U.S.C. §1335
against Iraj Derakhshan, the Iraj Derakhshan Retirement Plan
("Retirement Plan"), the United States of America and the
Internal Revenue Service (collectively "United States"),
alleging that there was a dispute between the United States and
Derakhshan as to the legal effectiveness of a federal tax levy entered
against certain Retirement Plan funds. Ameritrust, as custodian of the
Retirement Plan, requested this Court to allow it to deposit the funds
with the Clerk of Court, and to release Ameritrust from any further
liability to the parties.
On June 1, 1992, this Court
granted Ameritrust's request. Specifically, this Court ordered
Ameritrust to deposit the funds with the Clerk of Court; enjoined the
parties from filing other actions against Ameritrust concerning the
Retirement Plan; and ordered all defendants and other interested parties
to interplead their claims to the funds. Subsequently, Linda Jaenson,
Derakhshan's former wife, was joined as a defendant, and Ameritrust was
dismissed as a party to the motion.
Jaenson and the United
States have filed cross-motions for summary judgment. For the reasons
set forth below, this Court denies Jaenson's motion for summary
judgment, and grants the United States' motion for summary judgment.
The following facts are
undisputed. Derakhshan failed to pay various federal taxes for a number
of years. On January 2, 1987, the United States placed a levy upon
Ameritrust, the custodian of certain funds in a "Keogh"
account created by Derakhshan. The Keogh plan provided:
The value of each Member's
interest in the Fund as represented by such Member's Account shall be
100% vested in such Member at all times. However, no member shall have
any right to assign, transfer, borrow, pledge, alienate, appropriate,
encumber, commute or anticipate such member's interest in the Fund, or
any payment to be made thereunder, and no benefits, or payments, rights
or interest of a Member shall be in any way subject to any legal process
or levy upon, garnish or attach the same for payment or any claim
against a Member. . . .
Plan, Art. V, ¶7). The Retirement Plan also provided that Derakhshan,
the sole beneficiary of the Keogh account, could terminate the plan upon
sixty days notice, and receive the funds held by Ameritrust. (Retirement
Plan, Art. X, ¶3).
Ameritrust responded to the
tax levy by filing a quiet title action against Derakhshan and the
United States to determine who owned the funds in Derakhshan's IRA and
Keogh accounts. Ameritrust's claim to the assets was based on the fact
that Derakhshan owed $10,873.49 on an Ameritrust VISA credit card
account, and $50,050.99 on an Ameritrust "Goldline" credit
account as of November 6, 1986. In granting the United States' motion
for summary judgment, this Court held that because Ameritrust had failed
to perfect its interest in Derakhshan's accounts, the United States'
lien took priority over Ameritrust's interest in the accounts. (See Ameritrust
Co. v. Derakhshan et al., No. C87-2902 (N.D. Ohio Sept. 18, 1989)
(hereinafter "1989 Order")).
The United States placed
other levies upon Derakhshan's Keogh account in March of 1989 and
November of 1991. Ameritrust then filed this interpleader action. On
July 27, 1992, the Ohio Court of Common Pleas issued a Qualified
Domestic Relations Order ("QDRO"), which irrevocably assigned
Derakhshan's Retirement Plan to Jaenson. In their cross-motions for
summary judgment, the United States and Jaenson both claim that they are
entitled to the assets in the Retirement Plan.
Federal Rule of Civil
Procedure 56(c) governs summary judgment motions and provides:
The judgment sought shall
be rendered forthwith if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to a judgment as a matter of law . . .
The nature of materials
properly presented in a summary judgment pleading is set forth in
Federal Rule of Civil Procedure 56(e):
Supporting and opposing
affidavits shall be made on personal knowledge, shall set forth such
facts as would be admissible in evidence, and shall show affirmatively
that the affiant is competent to testify to the matters stated therein.
. . . The court may permit affidavits to be supplemented or opposed by
depositions, answers to interrogatories, or further affidavits. When a
motion for summary judgment is made and supported as provided in this
rule, an adverse party may not rest upon the mere allegations or denial
of the adverse party's pleading, but the adverse party's response, by
affidavits or as otherwise provided in this rule, must set forth
specific facts showing that there is a genuine issue for trial. If the
adverse party does not so respond, summary judgment, if appropriate,
shall be entered against the adverse party.
the movant is not required to file affidavits or other similar materials
negating a claim on which its opponent bears the burden of proof, so
long as the movant relies upon the absence of the essential element in
the pleadings, depositions, answers to interrogatories, and admissions
on file. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).
In reviewing summary
judgment motions, this Court must view the evidence in the light most
favorable to the non-moving party to determine whether a genuine issue
of material fact exists. Adickes v. S.H. Kress & Co., 398
U.S. 144 (1970); White v. Turfway Park Racing Assn., Inc., 909
F.2d 941, 943-44 (6th Cir. 1990). A fact is "material" only if
its resolution will affect the outcome of the lawsuit. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Determination of
whether a factual issue is "genuine" requires consideration of
the applicable evidentiary standards. Thus, in most civil cases the
Court must decide "whether reasonable jurors could find by a
preponderance of the evidence that the [non-moving party] is entitled to
a verdict." Id. at 252. Although cross-motions for summary
judgment do not necessarily demonstrate that no genuine issues of
material fact exist, United States v. Byrum [72-2
USTC ¶12,859 ], 408 U.S. 125 (1972), the resolution of this
case depends entirely upon the resolution of questions of law.
The Employee Retirement
Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. §§1001
et seq., contains a statutory prohibition against the
assignment or alienation of pension benefits. Section 206(d) of ERISA
states, in relevant part:
pension plan shall provide that benefits provided under the plan may not
be assigned or alienated.
Paragraph (1) shall apply to the creation, assignment, or recognition of
a right to any benefit payable with respect to a participant pursuant to
a domestic relations order, except that paragraph (1) shall not apply if
that order is determined to be a qualified domestic relations order.
Each pension plan shall provide for the payment of benefits in
accordance with the applicable requirements of any qualified domestic
. See General Motors Corp. v. Buha, 623 F.2d 455, 460
(6th Cir. 1980) (§206(d)(1) bar against assignment or alienation
applies to all voluntary and involuntary encroachments on qualifying
plans). The QDRO exception to the anti-alienation provision of ERISA is
the only exception recognized in the statute.
The United States Supreme
Court has interpreted §206(d) narrowly. In Guidry v. Sheet Metal
Workers Pension Fund, 493 U.S. 365, 110 S.Ct. 680, 687, 107 L.Ed.2d
782 (1990), a union sought a constructive trust against an official's
pension benefits after he pleaded guilty to embezzling funds from the
union. The district court imposed a constructive trust on the funds, and
the Tenth Circuit Court of Appeals affirmed. In reversing these
decisions, the Supreme Court wrote:
Section 206(d) reflects a
considered congressional policy choice, a decision to safeguard a stream
of income for pensioners (and their dependents, who may be, and perhaps
usually are, blameless), even if that decision prevents others from
securing relief for the wrongs done them. If exceptions to this policy
are to be made, it is for Congress to undertake that task.
As a general matter, courts
should be loath to announce equitable exceptions to legislative
requirements or prohibitions that are unqualified by the statutory text.
The creation of such exceptions, in our view, would be especially
problematic in the context of an antigarnishment provision. Such a
provision acts, by definition, to hinder the collection of a lawful
debt. The restriction on garnishment therefore can be defended only on
the view that the effectuation of certain broad social policies
sometimes takes precedence over the desire to do equity between
particular parties. It makes little sense to adopt such a policy and
then to refuse enforcement whenever enforcement appears inequitable. A
court attempting to carve out an exception that would not swallow the
fuel would be forced to determine whether application of the rule in
particular circumstances would be "especially" inequitable.
The impracticability of defining such a standard reinforces our
conclusion that the identification of any exception should be left to
S.Ct. at 687.
Two years later, in Patterson
v. Shumate, -- U.S. --, 112 S.Ct. 2242 (1992), a chapter 7
bankruptcy trustee sought to recover the debtor's interest in an ERISA
plan for inclusion in the bankruptcy estate. The Supreme Court wrote:
We previously have declined
to recognize any exceptions to ERISA's anti-alienation provision outside
the bankruptcy context. . . . Declining to recognize any exceptions to
that provision within the bankruptcy context minimizes the
possibility that creditors will engage in strategic manipulation of the
bankruptcy laws in order to gain access to otherwise inaccessible funds.
at 2250 (citation omitted) (emphasis in original).
In its motion for summary
judgment, the United States argues that this Court's 1989 Order controls
the outcome of this action, and that the various claimants to the
Retirement Plan are barred by res judicata and collateral
estoppel from denying that:
the funds in the
"Keogh" and "IRA" accounts belong to the taxpayer,
Iraj Derakhshan, that the federal tax liens for Iraj Derakhshan's tax
liabilities attach to such funds, and that the liens of the United
States are superior to the claims of any other party.
States' Motion for Summary Judgment, at 10).
In her disposivite motion,
Jaenson asserts that the 1989 Order focused on Ameritrust's failure to
perfect its security interest, and the respective priority to be
accorded the liens asserted by Ameritrust and the United States.
However, Jaenson claims that the 1989 Order did not address the issue of
the United States' ability to levy the Retirement Plan funds. Jaenson
then argues that the Retirement Plan, which is a qualified retirement
plan under ERISA, is not subject to tax levies because Congress did not
carve out an exception for federal tax levies in §206(d) of ERISA. See
29 U.S.C. §1056(d)
. Jaenson concludes that she is entitled to the Retirement
Plan funds because she was assigned the funds pursuant to a QDRO, the
only recognized exception to the anti-alienation provision of ERISA.
As an initial matter, this
Court agrees with Jaenson that the 1989 Order did not address whether
the United States was entitled to remove funds from the Retirement Plan.
Although this Court decided that the United States' interest in the
Retirement Plan had priority over Ameritrust's interest, this Court did
not consider the effect of the ERISA anti-alienation provision on the
United States' ability to levy property, the issue which is squarely
presented by the present action. Therefore, the United States' arguments
based on res judicata and collateral estoppel must fail as a
matter of law.
However, this finding is
not fatal to the United States' motion for summary judgment. 1
Based on a consideration of the law governing the United States'
authority to levy property and ERISA, this Court finds that the United
States' levies against the Retirement Plan are valid, enforceable, and
take precedence over Jaenson's claim.
26 U.S.C. §6321
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 person.
6321 and 6323
(which discuss the validity and priority of liens against
various persons) do not bar the United States from asserting a federal
lien against an ERISA retirement account. Moreover, in the present case,
because the federal levies were filed before the issuance of the QDRO,
the United States has priority over Jaenson's claim to the Retirement
Although §206(d) of ERISA
does not contain an exception for federal tax liens, the United States
notes that ERISA does provide that "[n]othing in this subchapter
shall be construed to alter, amend, modify, invalidate, impair, or
supersede any law of the United States . . . or any rule or regulation
issued under any such law." (Material not readable) U.S.C. §1144(d).
Thus, in order to adopt Jaenson's reading of §206(d), it would be
necessary to alter or amend 26 U.S.C. §§6321
, an act prohibited by 29 U.S.C. §1144(d).
Furthermore, this Court
finds that Guidry and Patterson are distinguishable from
the present case. In Guidry, the Supreme Court rejected an
argument that §206(d) should be read to permit equitable exceptions to
the prohibition against assignment or alienation of ERISA funds.
However, unlike this action, there was no conflict of federal law
presented in Guidry. In Patterson, the Supreme Court ruled
that the §206(d) prohibition against alienation was applicable in the
bankruptcy, as well as non-bankruptcy, context. Specifically, the
Supreme Court considered §541(a)(1)
of the Bankruptcy Code, which provides:
A restriction on the
transfer of a beneficial interest of the debtor in a trust that is
enforceable under applicable nonbankruptcy law is enforceable in a case
under this title.
Court held that the ERISA plan's anti-alienation provision constituted
an enforceable transfer restriction for purposes of the bankruptcy
code's exclusion of property from the estate. Thus, although the Court
considered the bankruptcy code and ERISA, the Court found no conflict
between the two bodies of law.
Finally, 26 C.F.R. §1.401(a)-13(b)
assignment or alienation--(1) General Rule. Under section
401(a)(13) , a trust will not be qualified unless the plan of
which the trust is a part provides that benefits provided under the plan
may not be anticipated, assigned (either at law or in equity), alienated
or subject to attachment, garnishment, levy, execution or any other
legal or equitable process.
tax levies and judgments. A plan provision satisfying the
requirements of subparagraph (1) of this paragraph shall not preclude
enforcement of a Federal tax levy made pursuant to section
collection by the United States on a judgment resulting from an unpaid
added). Jaenson argues that this Treasury regulation is invalid because
Congress failed to put an analogous federal levy exception in §206(d)
of ERISA. This Court disagrees with this assessment. See General
Motors Corp. v. Buha, 623 F.2d at 461-62 (finding Treasury
regulations authoritative); Retirement Fund Trust of the Plumbing, et
al. v. Franchise Tax Board, 909 F.2d 1266, 1284-85 (9th Cir. 1990)
(in absence of congressional intent to the contrary, definition in
Treasury regulations was permissible construction of statute). Although
strong policy considerations justify a narrow reading of the §206(d)
anti-alienation provision, see Guidry, 110 S.Ct. at 687, the
United States also has a strong interest in enforcing its tax laws, and
collecting unpaid tax assessments. Given the fact that ERISA was not
intended to alter or amend other federal laws, and the fact that a
prohibition against the alienation of ERISA funds to satisfy a federal
levy would limit the scope of 26 U.S.C. §6321
, this Court finds that the omission of a federal levy
exception in §206(d) of ERISA was an oversight rather than a considered
decision by Congress.
In sum, this Court finds
that the United States is entitled to the Retirement Plan funds, which
are the subject of this dispute. This Court denies Jaenson's motion for
summary judgment, grants the United States' motion for summary judgment,
and enters final judgment in favor or the United States and the Internal
IT IS SO ORDERED.
This Court construes the arguments raised in the United States' response
to Jaenson's motion for summary judgment as part of the United States'
In re Michael Duawayne Jacobs, Sr., and Susan Irene
Jacobs, Debtors. Michael Duawayne Jacobs, Sr., and Susan Irene Jacobs,
Plaintiffs v. Internal Revenue Service, Department of the Treasury,
United States of America, and Gary J. Gaertner, Trustee, Defendants
Bankruptcy Court, West. Dist. Pa., 91-00748E, 11/17/92
401 , 6321
Lien for taxes: Bankruptcy: Pension plans: Alienation of benefits:
Property exempt from levy.--
The non-alienation provision of Code Sec.
401(a)(13) did not preclude the IRS's tax lien on a bankrupt
debtor's assets from attaching to his pension plan. The pension plan at
issue was not included in the list of specific property items exempt
from levy under Code Sec.
6334(a) . Further, a spendthrift clause in the debtor's
pension plan that insulated the pension from claims of creditors under
state (Pennsylvania) law was inoperative with respect to the debtor's
federal tax liability.
Robert E. McBride, 504
Masonic Bldg., Erie, Pa., for debtors/plaintiffs. Richard I. Miller,
Internal Revenue Service, Washington, D.C. 20224, for defendants.
BENTZ, Bankruptcy Judge:
The facts are not in
dispute. The Internal Revenue Service ("IRS") properly filed a
tax lien on May 2, 1991 in the office of the Prothonotary of Erie
County, against Michael Duawayne Jacobs, Sr. ("Debtor") for
the years 1985 and 1986 in the amount of $5,009.45. This Chapter 13 case
was filed September 17, 1991. Included in the bankruptcy estate of
Debtor is the following property:
Savings Account #1/37160 .................................. $ 85.00
1977 Ford Thunderbird ..................................... 45.00
Wages earned, not yet paid ................................ 520.30
Zurn Industry Pension Plan ................................ Value
The dispute is whether the
IRS's lien may attach to Debtor's Zurn Industry Pension Plan. The
liability for the income taxes for the years 1985 and 1986 are
dischargeable and will be discharged in this bankruptcy, and hence, will
not be paid unless the IRS can establish that it has a lien on Debtor's
assets, including the pension plan. The value of the pension plan is far
in excess of the tax liability.
The Debtor agrees that the
pension plan is included in his estate, but believes that the
non-alienation provision of the Internal Revenue Code, 26 U.S.C. §401(a)(13)
, precludes the IRS's lien from attaching to it.
A trust shall not
constitute a qualified trust under this section unless the plan of which
such trust is a part provides that the benefits under the plan may not
be assigned or alienated. 26 U.S.C. §401(a)(13)
The IRS contends that
1.401(a)(13) (b) provides an exception to the non-alienation
provision, by allowing the IRS lien to affix to the pension plan, as
well as the other property listed above. We find it unnecessary to
address the question of the validity of the regulation.
Section 206(d) of The
Employee Retirement Income Security Act of 1974 ("ERISA"), 29
essentially provides for the same non-alienation provision as
26 U.S.C. §401(a)(13)
(A). §206(d)(1) of ERISA provides that each pension plan
"shall provide that benefits provided under the plan may not be
assigned or alienated."
of ERISA, 29 U.S.C. §1144(d) states that:
Nothing in this title shall
be construed to alter, amend, modify, invalidate, impair or supersede
any law of the United States . . . or any rule or regulation issued
under any such law.
26 U.S.C. §6334(a)
provides that "there shall be exempt from levy"
various specific items enumerated in 10 subparagraphs. Subparagraph (6)
relates to pensions under the Railroad Retirement Act, the Railroad
Unemployment Insurance Act, and various military pensions. Nowhere does
it exempt the type of pension here in question.
26 U.S.C. §6334(c)
Notwithstanding any other
law of the United States . . . no property or rights to property shall
be exempt from levy other than the property specifically made exempt by
It is apparent that the
Internal Revenue Code did not intend an exemption for pensions of the
type here in question.
We may assume that the
spendthrift clause in Debtor's pension plan would, under Pennsylvania
law, insulate the pension from claims of creditors.
But state law yields to the
federal statute in this instance. As stated in U.S. v. National Bank
of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 722, 105 S.Ct. 2919, 86
L.Ed. 2d 565 (1985):
"[I]n the application
of a federal revenue act, state law controls in determining the nature
of the legal interest which the taxpayer had in the property." Aquilino
v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513 (1960), quoting Morgan
v. Commissioner [40-1
USTC ¶9210 ], 309 U.S. 78, 82 (1940). See also Sterling
National Bank [74-1 USTC ¶9336 ], 494 F.2d, at 921. This follows from the
fact that the federal statute "creates no property rights but
merely attaches consequences, federally defined, to rights created under
state law." United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S., at 683. "[O]nce it has been
determined that state law creates sufficient interests in the [taxpayer]
to satisfy the requirements of [the statute], state law is
inoperative," and the tax consequences thenceforth are dictated by
federal law. United States v. Bess [58-2
USTC ¶9595 ], 357 U.S., at 56-57. See also Fidelity &
Deposit Co. of Maryland v. New York City Housing Authority [57-1 USTC ¶9410 ], 241 F.2d 142, 144 (CA-2 1957); Note,
Property Subject to the Federal Tax Lien, 77 Harv. L. Rev. 1485,
at page 723, in discussing the Bess case:
State law defined the
nature of the taxpayer's interest in the property, but the state-law
consequences of that definition are of no concern to the operation of
the federal tax law.
the Supreme Court in this 5-4 decision held that Arkansas state law
which protected the levied bank account from levy or attachment by
creditors, where the bank account was jointly held by the taxpayers and
third parties, should yield to the right of the IRS to levy under 26
The Debtor argues that National
Bank related to a lien on a bank account and should not be applied
to an attempted lien on an ERISA qualified plan with spendthrift
provisions. We conclude that we must follow the expressly stated rule
that state law, once having fixed the ownership of property, is
ineffective in the face of federal tax law governing the consequence of
As to the applicable
federal law, Debtor points out that the Internal Revenue Code itself
provides that a pension trust cannot be "qualified" unless it
contains spendthrift provisions, citing 26 U.S.C. §401(a)(13)
, thus evincing a legislative intent that pensions be
protected from creditors' claims. While there is merit to Debtor's
argument, we observe that 26 U.S.C. §6334
provides for specific exemptions and provides that there are
no others. Included in the specific listed exemptions are certain
pension rights, but not a pension right such as Debtor's. We must
conclude that if Congress intended all ERISA qualified plans to be
exempt from IRS levy (in addition to exemption from the levy of other
creditors), it knew how to do so and would have done so as a simple
amendment to 26 U.S.C. §6334
Debtor argues that Treasury
1.401(a)-13(b)(2) is void as being contrary to the Internal
Revenue Code. Regulation
1.401(a)-13(b)(2) is as follows:
(b)(2) Federal tax levies
and judgments. A plan provision satisfying the requirements of
subparagraph (1) of this paragraph shall not preclude the following:
(i) The enforcement of a
federal tax levy made pursuant to section
(ii) The collection by the
United States on a judgment resulting from an unpaid tax assessment.
we reach our conclusions as to the applicable rule without reference to
the Regulation. We have relied only on the statutes and the U.S. Supreme
Court. Whether the regulation is lawful or unlawful, the IRS lien in
question is valid. See also In re Perkins, 134 BR 403 (Bankr. ED
Cal. 1991); In re Connor, 1991 WL 337537 (Bankr. D. Alaska); In
re Raihl [92-1
USTC ¶50,016 ], 1991 WL 322632 (Bankr. D. Alaska).
Debtor also cites us to Patterson
v. Shumate, 112 S.Ct. 2242 (1992). Shumate, however, does not
involve the Internal Revenue Code. The issue in Shumate was
whether certain assets were excluded from or a part of the bankruptcy
estate assets. More specifically, the issue was whether the spendthrift
provisions of an ERISA qualified pension plan, constituted a restriction
on the transfer of a beneficial interest of the debtor that is
enforceable "under nonbankruptcy law," under 11 U.S.C. §541(c)(2)
, and hence, enforceable in bankruptcy. The conclusion there,
that the bankruptcy trustee cannot get access to a debtor's ERISA
qualified pension plan, does not have a significant bearing on the
rights of the IRS to reach the same assets under the Internal Revenue
The IRS had a valid lien on
all of the Debtor's assets including the pension plan in the amount of
In re Roger G. Connor, Debtor. Roger G. Connor,
Appellee v. United States of America, Appellant
U.S. Court of Appeals, 9th Circuit, 92-36972, 6/13/94, Reversing an
unreported Bankruptcy Appellate Panel decision
Tax lien: Bankruptcy: After acquired property: Retirement benefits.--A
federal tax lien attached to the vested retirement benefits of a retired
justice of the Alaska Supreme Court. Although the individual had filed
for bankruptcy after the lien was filed, his post-bankruptcy retirement
benefits were not "after acquired property" because he had an
unqualified right to receive them when the lien was filed.
M. Gregory Oczkus, 430 W.
7th Ave., Anchorage, Alas., for appellee. Bridgett Rowan, Department of
Justice, Washington, D.C. 20530, for appellant.
Before WRIGHT, SCHROEDER,
and BRUNETTI, Circuit Judges.
SCHROEDER, Circuit Judge:
The issue in this appeal is
whether a federal tax lien had attached to the vested retirement
benefits of a retired justice of the Alaska Supreme Court. We must
decide whether these vested benefits represent property within the
meaning of 26 U.S.C. §6321
to which the tax lien had attached prior to bankruptcy, or
whether the benefits should be regarded as "after acquired
property" not subject to the lien. We conclude that the lien had
attached prior to bankruptcy.
Roger G. Connor was an
associate justice of the Alaska Supreme Court from December, 1968 until
he retired in May, 1983. Upon retirement, Connor began receiving monthly
payments as provided in Alaska Statutes §§22.25.010-25.25.900. Under
the statutes, the amount of payment to which a retired justice is
unconditionally entitled depends upon the number of years the justice
was in active service, and the base salary for Alaska Supreme Court
justices in effect at the time of payment.
On November 13, 1985, the
IRS assessed Connor for unpaid income taxes for the years 1977 through
1979, totaling in excess of $65,000. A notice of federal tax lien was
filed with the Anchorage recording district on November 13, 1986. Connor
filed a Chapter 7 bankruptcy petition on March 3, 1988, at which time he
had paid approximately $12,000 of his outstanding tax debt. Connor's
personal liability for the remainder of the debt was discharged in
bankruptcy. A preexisting lien on property, however, remains enforceable
against that property even after an individual's personal liability has
been discharged. See Dewsnup v. Timm, 112 S. Ct. 773, 778 (1992).
Pursuant to 26 U.S.C. §6321
, a federal tax lien attaches to "all property and
rights to property, whether real or personal" belonging to a person
liable to pay taxes due and demanded. Although the reach of the lien is
very broad, it does not apply to property acquired after bankruptcy.
See, e.g., In re Braund, 289 F. Supp. 604 (C.D. Cal. 1968),
aff'd, United States v. McGugin (In re Braund) [70-1
USTC ¶9237 ], 423 F.2d 718 (9th Cir.), cert. denied,
400 U.S. 823 (1970); In re Fuller [92-1
USTC ¶50,119 ], 134 B.R. 945 (Bankr. 9th Cir. 1992).
In the bankruptcy
proceedings in this case, Connor sought a determination that his future
retirement payments were "after acquired property," so that
the IRS's tax lien would not be enforceable against any payments
received after the bankruptcy filing. The Bankruptcy Court ruled that
Connor's personal liability for back taxes was dischargeable in
bankruptcy pursuant to a stipulation of the parties, but that the IRS's
tax lien remained valid and enforceable against Connor's future pension
payments. The Bankruptcy Court reasoned that Connor had an unqualified
statutory right to receive these monthly payments, a right that had
matured prior to bankruptcy. Therefore the right to future payments
constituted "property" of the debtor before he filed for
The Bankruptcy Appellate
Panel ("BAP") reversed, finding Connor's retirement benefits
to be "reduced salary" for what the BAP viewed as Connor's
continuing service to the State of Alaska. The United States appealed
and we now hold the BAP should have affirmed the bankruptcy court.
This case turns upon the
nature of the rights created by Alaska's judicial retirement system. It
is not disputed that Connor has enjoyed an unqualified right to receive
monthly payments from the State of Alaska since his retirement in May
1983. This right is not contingent upon any future occurrence or
service. The right fully vested prior to bankruptcy. Therefore, the
Bankruptcy Court correctly held that this unqualified right to receive
future payments constituted "property" within the meaning of §6321
. Case authority is firmly in accord. See, e.g., Seaboard
Surety Co. v. United States [62-2
ustc ¶9653 ], 306 F.2d 855 (9th Cir. 1962) (debtor's right
to receive payment under a contract is "property" to which tax
lien attached even before debtor became entitled to payment by
performing the contract); Leuschner v. First Western Bank and Trust
USTC ¶9723 ], 261 F.2d 705, 708 (9th Cir. 1958) (debtor's
interest in a spendthrift trust is "property" subject to tax
lien under §6321
); Fried v. New York Life Ins. Co. [57-1
USTC ¶9412 ], 241 F.2d 504 (2d Cir.) (disability payments to
be received in the future are "property"), cert. denied,
354 U.S. 922 (1957). It is true that Connor did not contribute any of
his own money towards a "retirement fund," and that the Alaska
statutory sections setting forth the retirement benefits for retired
judges and justices label these benefits as "retirement pay"
or "payments," but these facts do not affect his unqualified
right to receive them. That is the relevant issue in this case under §6321
. See United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 714-15 (1985); United
States v. Battley (In re Kimura) [92-2
USTC ¶50,397 ], 969 F.2d 806, 810 (9th Cir. 1992) (whether
rights created under state law constitute "property" for
purposes of §6321
is a question of federal law).
The Bankruptcy Appellate
Panel looked to Rule 23 of the Alaska Rules of Court, which provides
that retired justices may, if called upon and with their consent, serve
on a pro tempore basis in their former capacity. The BAP agreed with
Connor that this provision made the retirement status of Alaska Supreme
Court justices similar to the status of retired military personnel who
remain subject to being called back to active duty.
Some courts have held that
pension benefits received by such retired military personnel are in the
nature of reduced compensation for continued service. See, e.g., In
re Haynes, 679 F.2d 718 (7th Cir.), cert. denied, 459 U.S.
970 (1982); Costello v. United States, 587 F.2d 424, 426 (9th
Cir. 1978), cert. denied, 442 U.S. 929 (1979). No court, however,
has held that payments received by retired military personnel are exempt
, or that statute's broad definition of "property."
Moreover, the Supreme Court has recently made clear that military
retirement benefits are to be considered deferred payment for past
service rather than current compensation for current service in at least
some circumstances. See Barker v. Kansas, 112 S. Ct. 1619, 1626
(1992) (military benefits are deferred pay for past services for
purposes of state taxation).
Regardless of whether the
retirement benefits paid to military personnel may be considered after
acquired property for purposes of §6321
, it is clear that retired justices of the Alaska Supreme
Court differ from retired military personnel in that the retired
justices are not subject to any involuntary future service. There is
therefore no basis for holding that Connor's pension benefits are
property acquired after bankruptcy.
In re David March Raihl and June Shirley Raihl,
Debtors. David March Raihl and June Shirley Raihl, Appellants v. United
States of America and William Barstow, Trustee, Appellees
Bankruptcy Appellate Panel, 9th Circuit, AK-91-2200-RMJ, 4/6/93,
Affirming a Bankruptcy Court decision, 92-1
Attachment of tax liens: Retirement plans.--
A tax lien upon bankrupt individuals' retirement plan savings was valid.
The taxpayers filed for bankruptcy after the IRS assessed a tax
deficiency against them. Under state (Alaska) law, the taxpayers then
exempted their interests in several retirement plans. A fully vested
interest in a retirement plan constitutes a "right to
property" under Alaska law. As such, the taxpayers' retirement plan
interests were subject to valid attachment by federal tax lien.
Furthermore, the plans' exemption from the estate as spendthrift trusts
did not prevent the attachment of the lien. Finally, the lien was valid
despite the fact that the plans were not in pay status.
Before RUSSELL, MEYERS, and
JONES, Bankruptcy Judges.
RUSSELL, Bankruptcy Judge:
The debtors appeal the
bankruptcy court's decision to allow the attachment of a federal tax
lien on the debtors' interest in a vested company pension plan.
The facts are not in
dispute. In 1979, Debtor-Appellants David M. Raihl ("Raihl")
and June S. Raihl, husband and wife (the "Raihls"), had
invested the majority of their savings in limited partnerships. The
Raihls filed personal tax returns for the years 1980, 1981, 1983, 1984
and 1986, taking deductions in the amounts directed by the relevant
Beginning in 1987 the IRS
began adjusting the Raihls' tax returns for the above-listed years based
upon adjustments that the IRS had made to the returns of the
partnerships in which the Raihls had invested. The IRS began to assess
taxes against the Raihls in August 1988. On May 18, 1989 the IRS filed a
notice of the tax lien in the Anchorage Recording District for taxes,
penalties and interest for the above-listed years totaling $76,455.
The Raihls filed a Chapter
petition on August 9, 1990. The IRS was their major creditor. At the
petition date, debtor David Raihl was 54 years old and had been employed
by Alyeska Pipeline Service Co. ("Alyeska") since 1966. During
his 25 years of service with Alyeska he participated in the company's
Pension Plan and a 401(k) Savings and Investment Plan (the
"plans"). The pension and savings plans are governed by
standard restrictions common to such plans 2.
As of August 1, 1990 David
Raihl had accumulated $99,767 in the Savings and Investment plan. The
Pension plan would provide Raihl with approximately $2,550 a month in
income upon normal retirement. The combined statement for both the
Pension plan and the Savings and Investment plan indicate that Raihl is
"100% vested" in each. The pre-petition federal tax liens
total approximately $112,593.
The Raihls exempted their
interests in the Alyeska Plans under Alaska Stat. §09.38.017. The
Trustee had withdrawn his objection to the debtors' claim of exemption
in the plans.
The Raihls brought an
adversary proceeding seeking a determination of the validity of the
federal tax lien. The bankruptcy court found that even though the estate
no longer claimed an interest in the plans, the matter was a core
proceeding under 28 U.S.C. §157(b)(2)(I), (K) and (O). The court denied
the Raihls' motion for summary judgment, but granted the United States'
cross-motion for summary judgment. The Raihls filed a timely notice of
appeal. The IRS did not appeal.
Whether the bankruptcy
court erred in holding that a federal tax lien may attach to the
debtors' interest in a retirement savings and pension plan.
STANDARD OF REVIEW
The issue before us is
solely a question of law which is reviewed de novo. In re Bronner,
135 B.R. 645, 646 (9th Cir. BAP 1992); In re Kimura [92-2
USTC ¶50,397 ], 969 F.2d 806, 810 (9th Cir. 1992); In re
Pacific Far East Lines, Inc., 889 F.2d 242, 245 (9th Cir. 1989).
26 U.S.C §6321
creates a lien for unpaid taxes in favor of the United States upon
"all property and rights to property" of the debtor. This
broad language "reveals on its face 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, 719-720 (1985). The extent
to which a federal tax lien can reach a taxpayer's property depends upon
the nature of the taxpayer's interest, which interest is defined by
state law. Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-513 (1960). The tax lien
created by 26 U.S.C. §6321
"creates no property rights, but merely attaches
consequences, federally defined, to rights created under state
law." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958). Federal law,
however, determines whether state-created interests constitute property
to which a federal tax lien can attach. See National Bank of Commerce
[85-2 USTC ¶9482 ], 472 U.S. at 727, 105 S.Ct. at 2927; Bess
USTC ¶9595 ], 357 U.S. at 55; In re Kimura [92-2
USTC ¶50,397 ], 969 F.2d 806, 810 (9th Cir. 1992); Terwilliger's
Catering Plus, Inc. [90-2
USTC ¶50,460 ], 911 F.2d 1168, 1178 (6th Cir. 1990).
"Were federal law not determinative of the classifier of the
state-created interest, states could defeat the federal tax lien by
declaring an interest not to be property, even though the beneficial
incidents of property belie its classification." Kimura [92-2
USTC ¶50,397 ], at 810. "The federal statute relates to
the taxpayer's rights to property and not to his creditors'
rights." National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 727, 105 S.Ct. at 2927.
Further, "a lien under section
6321 cannot extend beyond the interest held by the
debtors." Kimura [92-2
USTC ¶50,397 ], at 811; See, United States v. Rodgers
[83-1 USTC ¶9374 ], 461 U.S. 677, 691 (1983); Schmit v.
United States [91-1
USTC ¶50,024 ], 896 F.2d 352, 353 (9th Cir. 1989).
The Raihls argue that the
interest held by David Raihl in the subject plans do not constitute
property or property rights under state or federal law. Although Raihl
concedes that he does have an interest in the subject pensions, he
argues that the interest is insufficient to be considered
"property" for purposes of the attachment of a federal tax
lien. We disagree.
In Alaska, property is
defined by statute and includes real and personal property.
"Personal property" is defined in Alaska Stat. 01.10.060(9) to
include money, goods, chattels, things in action, and evidences in debt.
Raihl clearly possesses
such a property interest. Raihl had a fully vested interest in the
Savings and Investment account which showed an amount of $99,767 as of
August 1, 1990. Raihl had an interest in the Pension Plan which was also
fully vested as of the petition date, the exact amount of which is
subject to change depending upon whether Raihl takes early, normal or
late retirement. While there are restrictions on immediate withdrawal 4,
as are customarily found on pensions of these types, Raihl's interest
nonetheless constitutes a "right to property." Raihl had a
right to substantial pension payments immediately, at the time of the
petition, if he should elect early retirement at that time. The subject
plans hold a sum in trust, in a discrete account, in which Raihl has a
present, vested interest. The plans contain no provision by which
Raihl's interest could ever be distributed to other employees.
contractual right to receive property is itself a property right,"
even though the right to payment has not yet matured. United States
v. National Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 725 (1985) (quoting St. Louis
Union Trust Co. v. United States [80-1 USTC ¶9282 ], 617 F.2d 1293, 1302 (8th Cir. 1980)). The
inalienability of the pension interests does not destroy their character
as property or immunize the interest from the attachment of a federal
tax lien. United States v. Rye [77-1
USTC ¶9264 ], 550 F.2d 682, 685 (1st Cir. 1977); Leuschner
v. First Western Bank and Trust Co. [58-2 USTC ¶9723 ], 261 F.2d 705, 708 (9th Cir. 1958). The
right to receive periodic payments is a right to which a tax lien may
attach. Fried v. New York Life Ins. Co. [57-1 USTC ¶9412 ], 241 F.2d 504, 505 (2nd Cir.) cert.
denied, 354 U.S. 922 (1957). Further, ERISA qualified pension
interests have been held to be "property or rights to
property" within the meaning of 26 U.S.C. §6321
. In re Perkins, 134 B.R. 408 (Bankr. E.D. Cal. 1991);
In re Reed, 127 B.R. 244, 246 (Bankr. D. Haw. 1991).
As the bankruptcy court
noted, the Raihls erroneously rely on Little v. United States [83-1 USTC ¶9343 ], 704 F.2d 1100, 1106 (9th Cir. 1983) for a
"two part test" to determine whether a property right exists. Little
is not relevant here, it simply states the test developed in California
to determine whether property or property rights arise under applicable
California law. Little held that a federal tax lien attached to
redemptive rights in real property and did not involve attachment to
401(k) plans. Id.
The Raihls also argue that
the subject pensions are not property of the estate. Whether this
property interest is property of the estate is another question
entirely--one that is not relevant for this appeal. Essentially, the
Raihls argue that because this pension qualifies as a spendthrift trust
which is excluded from property of the estate 5
or is exempted from property of the estate, it cannot be subjected to a
federal tax lien. We disagree. See In re Perkins, 134 B.R. 408
(Bankr. E.D. Cal 1991) (federal tax lien was enforceable against
debtor's interest in a spendthrift trust irrespective of its exempt
status). As the court stated in Perkins:
[T]he Ninth Circuit has
specifically held that while a spendthrift clause may be effective to
shield attachment and levy by general creditors against a beneficiary's
interest in a trust, such shield is unavailing to attachment and levy of
a federal tax lien. See Leuschner v. First Western Bank and Trust Co.
[58-2 USTC ¶9723 ], 261 F.2d 705 (9th Cir. 1958). In addition,
Congress has expressly indicated that even where a debtor may choose to
exempt rights to a pension under section 522(d)(10)(E)(iii), such
exemption does not affect a federal tax lien.
at 411. Section 522(c)(2)(B) provides that property exempted under §522
is subject to a tax lien. See Perkins, at 411.
The Raihls also assert that
applicable Revenue Rulings and Treasury Regulations establish that the
IRS cannot execute against a pension that is not in pay status. But
execution is not at issue here, the attachment of a federal tax lien is.
We hold that the Raihls' interest in the subject plans constitutes
"property" or "rights to property" that are subject
to a federal tax lien under 26 U.S.C. §6321
The Raihls' interest in the
subject plans constitute "property" or "rights to
property" that are subject to a federal tax lien under 26 U.S.C. §6321
. We AFFIRM 6.
Unless otherwise indicated, all chapter and section references are to
the Bankruptcy Code, 11 U.S.C. §§101
et seq. and to the Federal Rules of Bankruptcy
Procedure, Rules 1001 et seq.
For example, Raihl can only receive distributions from the Deferred
Income Option component and the Company Matching Contribution component
upon reaching the age of 59 and 1/2, death, retirement or hardship.
Raihl cannot sell his interest in the plans, nor is his interest
transferable. There are also percentage limitations on employee
26 U.S.C. §6321
provides in part:
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.
The Pension Plan provides that Raihl may withdraw funds prior to
retirement upon meeting the conditions of "hardship" defined
as "immediate and heavy financial need" including (1) Purchase
of a principal residence; (2) Amount necessary to prevent eviction or
foreclosure of the principal residence; (3) Unreimbursed medical expense
in the immediate family; (4) Postsecondary education of employee, spouse
or dependant children.
The Raihls have exempted the subject plans from property of the estate
by means of an affirmative claim of exemption under §522. It is unclear
whether the Raihls argued that the plans are excluded from property of
the estate pursuant to §541(c)(2)
as spendthrift trusts in the bankruptcy court below. Even
assuming arguendo that the plans are excluded from property of the
estate this fact would be irrelevant to whether a federal tax lien
The IRS asserts on appeal that the bankruptcy court has no subject
matter jurisdiction over this action. This matter is a core proceeding
under 28 U.S.C. §157(b)(2)(K) which specifically includes the
determination of the validity, extent, or priority of liens. The
bankruptcy court clearly has jurisdiction to deal with a debtor's
avoidance of a lien on exempted property. See §522(h). We note that the
IRS is not an appellant in this case because it did not file a notice of