Bona Fide Purchaser for Value Page 2

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Against this considerable body of precedent, and after an exhaustive search of caselaw, relevant and otherwise, the Court was only able to locate two cases directly supporting Defendants' position. The first case, In re Smith, involved the IRS' refusal to remit the debtor's income tax withholding, post-discharge. 35 B.R. 451 (Bankr. N.D. Ga. 1983). The court held that the IRS' claim was provided for in the debtor's Chapter 13 plan, and upon discharge, the debtor is entitled to have the IRS tax lien canceled. Id.

The second case, In re Campbell, is procedurally similar to the instant action, also arising under Chapter 13. 160 B.R. 198 (Bankr. M.D. Fla. 1993). It is worth recounting the background of Campbell as it parallels the case at bar. The government initially filed a claim for unpaid taxes composed primarily of a secured claim. An amended claim was filed changing the composition of the government's claim by reducing the amount initially asserted as secured to reflect the debtor's free assets to which a tax claim could attach. Id. at 199. The court entered an order determining the amount of the government's secured claim. Id. at 200. After the allowed secured claim was paid in full, the debtors filed a motion and sought an order to compel the government to release the tax lien on the grounds that there was no longer an underlying obligation validly secured by a lien. Id. The government failed to appear at the scheduled motion hearing, the motion was granted and the government subsequently moved to set aside the court's order. Id. In analyzing the issue, the Campbell court attempted to reconcile 11 U.S.C. §506 with 26 U.S.C. §6325(a)(1). Finding that a contradiction arises because Section 506 provides that "an allowed claim of a creditor secured by a lien on property in which the estate has an interest, . . . is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim," whereas Section 6325(a)(1) provides that the tax lien shall remain and shall not be released until the obligation of the taxpayer is paid in full or became unenforceable. Id. Further, Section 506(d) provides, "to the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void . . ."

Chief Judge Paskay considered the government's concerns that although there was no existing property to which the lien could attach, if the Chapter 13 plan were to abort and be dismissed the debtor might encumber the estate by granting liens to parties who would then not be on notice of the federal tax liens. Id. at 201. Finding the government's fears too remote, and following the "Congressional mandate that the provisions of Chapter 13 shall be construed liberally in favor of Debtors who are making a sincere effort to repay their debts either in full, or, at least, in part," the court reaffirmed its order compelling the government to release the federal tax lien. Id. at 201-02.

The government appealed to the district court which issued a terse affirmance holding that the "lien must be voided as to the unsecured claim" pursuant to Section 506(d). Internal Revenue Service v. Campbell , 180 B.R. 686, 687 (M.D. Fla. 1995).

Although the case at bar and Campbell are facially similar, the factual discrepancies and the overwhelming body of opposing precedent dictate divergent results. In Campbell, the IRS was not asserting a claim against remaining property of the debtor, rather, its sole concern was protecting its lien in the event the reorganization plan failed. There were no other assets to potentially attach. This limitation of Campbell is further buttressed by Chief Judge Paskay's decision some three years later in Aylward. Therein, Judge Paskay granted the government's summary judgment motion dismissing debtor's claim that a discharge in bankruptcy extinguished an IRS tax lien on the debtor's property. [97-2 USTC ¶50,796], 208 B.R. at 568. Moreover, as indicated supra, the Second Circuit does not consider property fraudulently conveyed property of the estate until a judicial determination has been rendered to that effect. If the Government's fraudulent conveyance argument is upheld, the property will now be subject to the federal tax lien, notwithstanding the bankruptcy's discharge of the parents' personal liability. See Johnson, 501 U.S. at 84, 111 S. Ct. at 2154.

There is an opposing body of caselaw standing for the general proposition that a debtor is entitled to a release of a lien after paying off the secured portion of a creditor's claim pursuant to a reorganization plan. See, e.g., In re Johnson, 213 B.R. 552, 558 (Bankr. N.D. Ill. 1997) (finding that a Chapter 13 plan may require an undersecured creditor to release its lien on a debtor's personal property after full payment of its allowed secured claim); In re Nicewonger, 192 B.R. 886, 889 (Bankr. N.D. Ohio 1996) (finding that the holder of a secured claim can be required to release its lien upon receiving payment through the chapter 13 plan of the value of its interest in estate property that is not surrendered); In re Jones, 152 B.R. 155 (Bankr. E.D. Mich. 1993) (holding that a debtor cannot require an undersecured creditor to release its lien until debtors have made all payments under the chapter 13 plan); In re Murry- Hudson , 147 B.R. 960 (Bankr. N.D. Cal. 1992) (holding that debtor can require an undersecured creditor to release its lien while Chapter 13 still pending). These cases typically apply the "cram down" provisions of Section 1325(a) as a method of lien avoidance to confirm the plan. Another case, In re Butler, allowed a Chapter 13 debtor to avoid a tax lien to the extent that the tax claim exceeded the value of the debtor's property. 139 B.R. 258, 259 (Bankr. E.D. Ok. 1992). That holding was predicated upon a rejection of the application of Dewsnup to Chapter 13 cases.

However, the case at bar is not a characteristic "lien-stripping" case in which the value of the collateralized property is determined at the bankruptcy proceeding and the lien is stripped as the debtor pays the value of the collateral securing the undersecured creditor's claim and the lien is released. The property at issue was never before the bankruptcy court.

What is the effect, if any, of the Government's failure to address the parents' interest in the property during the confirmation proceeding. This issue has indirectly arisen in the context of a creditor's knowledge of the debtor's fraudulently prepared bankruptcy plan, and the courts have regularly held that the creditor cannot sit back and wait till after confirmation before attempting to revoke the confirmation order. See, e.g., In re Ritacco, 210 B.R. 595, 598 (Bankr. D. Ore. 1997) (recognizing the distinctions between Sections 1329(a) and 1328(e), notwithstanding, the court held that only when discovery of the fraud occurs after confirmation can the motion for revocation be brought by creditors); In re Kouterick, 161 B.R. 755, 760 (Bankr. D. N.J. 1993) ("Where a creditor knows of a basis for challenging confirmation and fails to object, the creditor cannot be permitted to use that basis to claim fraud under Code §1330 after confirmation."). However, the IRS is not challenging the confirmation or seeking its revocation. Cf. Young v. Internal Revenue Serv., 132 B.R. 395, 397 (S.D. Ind. 1990) (holding error in classification of priority claim was insufficient ground for reconsideration of confirmation order).

In light of the overwhelming precedent permitting a federal tax lien to survive a discharge in bankruptcy, the Court is obliged to grant Plaintiff's motion for summary judgment based on the lien theory of recovery.

IV. FRAUDULENT CONVEYANCE CLAIM

Plaintiff also avers a claim based on the premise that an intervening bankruptcy cannot perfect a fraudulent conveyance. Plaintiff moves to set aside the conveyance of the property pursuant to Sections 273 and 276 of the New York State Debtors and Creditors Law. Plaintiff turns to state law because the validity of the conveyance is governed by New York law. See United States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 323 (2d Cir. 1994) (citing Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 512-13, 80 S. Ct. 1277, 1279, 4 L. Ed. 2d 1365 (1960) ("federal . . . courts must look to state law" to ascertain whether a taxpayer has a property interest in property subjected to a federal tax lien)); see also Rodgers [83-1 USTC ¶9374], 461 U.S. at 683, 103 S. Ct. at 2137 ("It has long been an axiom of our tax collection scheme that, although the definition of underlying property interests is left to state law, the consequences that attach to those interests is a matter of federal law.").

In determining the merits of Plaintiff's motion, it must be determined whether the parents' conveyance to the Defendants was fraudulent. This is so because "the lien imposed by section 6321 shall not be valid as against any purchaser . . . until notice . . . has been filed by the Secretary," 26 U.S.C. §6323(a), and it is undisputed that the IRS did not file a lien before the parents conveyed the property to the Defendants as the tax lien arose in or about September and October of 1986, and the property was conveyed on or about October 17, 1983. Therefore, the Government must prove either that the Defendants are not "purchasers" within the meaning of the code or that the conveyance was fraudulent and must be set aside, or else, the IRS is without a claim against the property. See McCombs [94-2 USTC ¶50,363], 30 F.3d at 322 (finding absent a set aside of the pre-assessment conveyance under state law, the taxpayer did not have a legal interest in the property at the time the tax lien attached).

1. Fraudulent Conveyance Pursuant to Section 273

Section 273 states, in relevant part:

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regards to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.

N.Y. Debt.&Cred. Law §273. This section has been interpreted to cover constructive fraud. See e.g., Elgin Sweeper Co. v. Melson Inc., 884 F. Supp. 641, 649 (N.D.N.Y 1995) (holding that under New York law, plaintiff can recover for fraudulent conveyance without directly proving intent, by establishing "constructive fraud," which can be proven merely by showing that the transfer was made without fair consideration, thus it constitutes a fraudulent conveyance regardless of transferor's intent).

Therefore, to establish a fraudulent conveyance under this section, the Government must prove that: (1) the property was conveyed from Nicholas J. Alfano and Rita Alfano to Nicholas A. Alfano and Lisa Marie Alfano; (2) Nicholas and Rita were or would become insolvent at the time of the conveyance, and (3) the conveyance was made without fair consideration. There is no dispute that the property was so conveyed and the first element is established.

Insolvency, the second element, is defined in Section 271, and a person is deemed insolvent when:

The present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured.

N.Y. Debt.&Cred. Law §271. The parents as much as admit their insolvency at the time of the conveyance. During Nicholas J. Alfano's deposition testimony the following pertinent examination occurred:

Q. Back in 1983, what assets did you own? A. I didn't have any assets. You mean before I transferred the home? Q. At the time of the transfer. We know about the house, that it was in yours and your wife's name before and your children's name after the transfer. Correct? A. You mean did I have any stocks, bonds, things like that? Q. Anything. A. No.

Q. Did you own any other property? A. No. Q. Did you have any cars? A. I have cars, yes. Q. Did you have cars in 1983? A. Yes. Q. Were those cars in your name or your children's? A. My name. Q. At some point did you transfer the title to one of the cars to Lisa? A. No. Q. Do you have a guess as to how much the cars would have been worth at the time? A. Couple thousand. Q. Total? A. Probably. Q. More than five or less than five thousand dollars? A. Probably less than five. Q. Is it likely that you had savings at that time? A. I don't know. I don't recall having a savings account. Q. Any other types of bank accounts, checking account or anything like that, savings and loan or savings bank? A. No. No. Q. Money market, mutual fund, anything like that? A. No, I never had any of that. Q. No other real property anywhere? A. No. Q. No vacation homes? A. No. Q. Do you understand now that you owed the IRS taxes back then? A. Oh, I understand it now, yes. Q. Did you have more in assets then than you owed to the IRS in taxes? A. Then? Q. Right. A. No.

(N.J. Alfano's Dep. at 46-49.) Rita Alfano's deposition testimony is consistent with Nicholas J. Alfano's, she recollects having less than $ 1,000.00 in the bank, and furnishings and jewelry worth less than an additional $ 1,000.00 each. At the time of the transfer, the parents owed approximately $ 22,181.00 in income taxes for 1980 and 1981.

Moreover, the element of insolvency is presumed when a conveyance is made without fair consideration, and the burden of overcoming such presumption is on the transferee. See Snyder v. United States, 1995 U.S. Dist. LEXIS 13283, *30, No. 88-CV-2136, 1995 WL 724529, at *10 (E.D.N.Y. 1995). As discussed below, fair consideration was not provided in exchange for the property. Accordingly, for all the aforementioned reasons, the element of insolvency has been established.

With respect to the element of fair consideration, the Debtor and Creditor law definition is found in Section 272, which provides:

Fair consideration is given for the property, or obligation, (a) When in exchange for such property, or obligation, as a fair equivalent thereof, and in good faith, property is conveyed or an antecedent debt is satisfied, or (b) When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property, or obligation obtained.

N.Y. Debt.&Cred. Law §272.

Courts view intrafamily transfers made without any signs of tangible consideration as presumptively fraudulent. Thus, in McCombs, the court found that "shifting the burden of persuasion to an intrafamily transferee is triggered under New York law by the presence of one of two factors in the conveyance: (1) the absence of any tangible consideration, or (2) a clandestine transfer of property designed to conceal the nature and value of the consideration." [94-2 USTC ¶50,363], 30 F.3d at 325. In the case at bar there is no allegation that the transfer was effectuated in a clandestine manner. Rather, the conveyance was recorded in accordance with the laws of the State of New York . However, the deposition testimony of the parents and the deed recording the transfer support the conclusion that there was no tangible consideration given. The following deposition testimony of Nicholas J. Alfano is telling:

Q. First, what did your children pay for the house, if anything? A. I don't believe there was any payment.

(N.J. Alfano's Dep. at 29.) Nor was the transfer payment for an antecedent debt.

Q. Did your son or your--did you or your wife owe your son or daughter money at the time of the transfer? A. No. Q. Was there anything that they gave you of any value in exchange for this transfer; that is, the transfer of the house to your kids? A. I don't remember. I don't remember. Q. Would you look at Exhibit 1? At the top left is says "zero consideration." Do you see that? A. Yes. Q. And a little bit lower, in the middle it says "witnesseth that the party for the first part, in consideration of $ 10 and other valuable consideration," and goes on from there. Do you see that? A. Yes. Q. Do you have anything that would lead you to believe that anything more than zero or $ 10 was paid for that house by your children? A. I guess not. Q. Let me be clear with you. There may be a trial in this case, When we go to trial and I ask you what has been paid for the house, are you going to say "zero" or is there going to be something else? A. We just transferred the house to the children for the reasons I gave. Q. It wasn't a business deal of any sort? A. No. Q. And it wasn't a sale? A. No. Q. It was a gift? A. I guess so.

(N.J. Alfano's Dep. at 31-33.) Although the parents provided an explanation for the conveyance which does not suggest a motivation to evade tax liability, a showing of actual fraudulent intent is specifically not required by the statutory language of Section 273.

Q. Whose idea was it to transfer the property? A. Both me and my wife. Q. Why? A. We were having marriage problems and we were talking about divorce. Q. And so? A. We decided to give the house to the children so that they would have a roof over their heads. We didn't want to--we didn't want it to go to court, and that is what we did.

(N.J. Alfano's Dep. at 12.) However, although the conveyance satisfied the formal legal requisites, the parents still treated the property as their own for tax purposes.

Q. Did you make the payments for real estate taxes and mortgage? A. I don't remember. Q. Did your wife? A. I don't know. Q. What about for 1985? Were you living in the house? A. I don't remember--was I living in the house? Q. Right. A. I think I had come back sometime in '85. I don't remember when. Q. Were you making--were you paying the real estate taxes for the house that year, 1985? A. I don't know. I don't remember. I believe my son was, but I don't know. Q. What about the mortgage payments? A. I don't know if there were any. Q. I would like to show you what has been marked Exhibit Number 5. At the top of the form it says "1040 U.S. Individual Tax Return, 1984," and has the names Nicholas and Rita Alfano. Do you see that? A. Yes. Q. Is this your 1984 tax return? A. Yes. Q. Did you own any real estate in 1984? A. No. Q. Do you see where it says "real estate taxes"? A. Yes. Q. It says that $ 1,442 were paid in real estate taxes in 1984. Do you see that? A. Yes. Q. Is that the amount of real estate tax that you paid for that year? A. I don't remember. Q. Could you look at line 11. . . . It says $ 672 in home mortgage interest was paid that year. Do you see that? A. Yes. Q. Did you pay that amount for home mortgage? A. I don't know. I don't remember. Q. Was there any other home mortgage that you might have been paying in 1984 other than the house on Alden Lane ? A. No. Q. Was there any other property you would be paying real estate taxes on in 1984 other than the house on Alden Lane ? A. No. Q. So when you filed this tax return, you honestly thought that you paid a home mortgage interest of $ 672 and real estate taxes of $ 1,442?

A. I don't know. I guess so. I don't know.

(N.J. Alfano's Dep. at 36-40.) A similar inquiry pertaining to his 1985 tax return took place, culminating in the following inquiry: you see where it says that you paid $ 1,542 in real estate taxes? A. Yes. Q. Do you know what property that was on? A. 11 Alden Lane , I guess. Q. The house that you transferred to your children? A. Yes. to financial institutions, it says $ 657. Do you see that? A. Yes. Q. For which home was that interest paid? A. On the 11 Alden Lane .

(N.J. Alfano's Dep. at 41.) The parents testified that they paid rent to the transferees, Defendants herein, who paid all of the bills including the underlying mortgage and real estate taxes, however, this was done in an informal manner.

Q. Did your son formally take on the mortgage of the house after the transfer? A. What do you mean formally? Q. Did you sign any papers so that you were off the mortgage and he was on it? A. No. Q. Other than fill out a deed, which we showed you earlier as Exhibit 1, were there any other documents created in connection with the transfer of the house to your children? A. No. Q. So there is nothing that would show that your children took on the mortgage on 11 Alden Lane . A. No. Q. Did your children assume the mortgage? A. You mean legally? Q. Yes. A. No.

(N.J. Alfano's Dep. at 44-45.) Assumption of mortgage debt may constitute fair consideration, where, for example, the debt assumed nearly approaches the relative value of the property, See McCombs [94-2 USTC ¶50,363], 30 F.3d at 326, or where the conveyance satisfied an antecedent debt. See In re Fair, 142 B.R. 628, 631 (Bankr. E.D.N.Y. 1992) (although the deed indicated that the property was conveyed for "no consideration," the prior divorce decree indicated that the wife agreed to make no claim for maintenance in consideration of her husband signing over his interest in the property to their daughter, and this amounted to fair consideration). However, where the property was taken subject to the mortgage, or where transferors received nothing for their equity, fair consideration was not given. See, e.g., McCombs [94-2 USTC ¶50,363], 30 F.3d at 327 (vacating district court's decision, in part, because purchasers did assume mortgage and did not just take property subject to the mortgage); In re Davis, 169 B.R. 285, 300 (E.D.N.Y. 1994) (finding a fraudulent conveyance because debtors received nothing for their equity in the house and therefore did not receive fair consideration, notwithstanding fact that mortgage and mortgage arrears were paid off).

In the instant action, the evidence supports a singular conclusion; the property was not transferred for fair consideration. A conservative estimate of the value of the property at the time of the conveyance was approximately $ 50,000.00. The IRS and Nicholas J. Alfano so estimated. (Pl.'s 56. 1 P 15.) The Defendants made application for a loan approximately two years later and valued the property at $ 140,000.00. (Pl.'s 56. 1 P 15.) The pre-existing mortgage had a face value of $ 15,000.00, and an outstanding balance of $ 9,100.00 at the time of the aforementioned loan application, and the Defendants did not assume the mortgage. (Pl.'s 56. 1 P 15.)

Although some courts have considered the issue of fair consideration inappropriate for summary adjudication, see United States v. Sitka [94-1 USTC ¶50,283], 1994 U.S. Dist. LEXIS 7690, No. 2:90CV00268, 1994 WL 389473, at *6, 7 (D. Conn. 1994), it is an available remedy, readily employed. See, e.g., Snyder, 1995 WL 724529, at *12 (granting summary judgment on government's fraudulent conveyance claim); U.S. v. Bushlow [93-2 USTC ¶50,556], 832 F. Supp. 574, 581-82, (E.D.N.Y. 1993) (holding that sufficient evidence established that taxpayers' transfer of their house to their son was fraudulent under New York law, and could be set aside in an action by the United States to collect income taxes owed, where the language of the instrument of transfer indicated that the consideration was "ten dollars and other valuable consideration," and the taxpayers' joint liability exceeded $ 200,000 at the time of the transfer); United Sates v. Nirelli [97-2 USTC ¶50,751], 1997 U.S. Dist. LEXIS 15451, No. 92-CV-563C, 1997 WL 718443, at *5 (W.D.N.Y. 1997) (finding no record of release of antecedent support payments serving as consideration for transfer of residence from husband to wife and granting government's motion to set aside the conveyance).

In the instant action, Defendants' have failed to challenge the Government's fraudulent conveyance claim. As indicated above, and according to the deed, the parents conveyed the property to the Defendants for ten dollars, and although the Defendants agreed to make the monthly payments, they did not assume the existing mortgage. Additionally, the facts show that the parents were rendered insolvent by this transfer.

Accordingly, the Court holds that Defendants have presented no credible evidence to meet their burden of proving that the property was conveyed for "fair consideration" as defined under prevailing New York State law. Summary adjudication is appropriate "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which the party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S. Ct. 2548, 2552, 91 L. Ed. 2d 265 (1986). Therefore, the Court finds that the transfer from Nicholas J. Alfano and Rita Alfano to Nicholas A. Alfano and Lisa Alfano of the property located at 11 Alden Lane , Centereach , New York , was a fraudulent conveyance as defined by Section 273 of the Debtor and Creditor Law of New York.

2. Fraudulent Conveyance Pursuant to Section 276

The Government also moves to set aside the transfer pursuant to Section 276 of the New York State Debtors and Creditors Law. Section 276 provides: Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder delay or defraud either present or future creditors, is fraudulent as to both present and future creditors.

N.Y. Debt.&Cred. Law §276. As explained by the Second Circuit, "unlike section 273 which creates constructive fraud by virtue of the lack of fair consideration, section 276 focuses on the "actual intent" of the transacting parties. Indeed, where actual intent to defraud creditors is proven, the conveyance will be set aside regardless of the adequacy of the consideration given." McCombs [94-2 USTC ¶50,363], 30 F.3d at 327-28. However, intent can be inferentially proven. See In re Montclair Homes, 200 B.R. 84, 97 (Bankr. E.D.N.Y. 1996) (finding that intent does not need to be shown by direct evidence, and is normally inferred from the circumstances surrounding the transfer). Still, actual intent to defraud must be proven by the party seeking to set aside the conveyance by clear and convincing evidence. McCombs [94-2 USTC ¶50,363], 30 F.3d at 328 (citing Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 126, 508 N.Y.S.2d 17, 20 (2d Dep't 1986 ) & ACLI Gov't Sec. v. Rhoades, 653 F. Supp. 1388, 1394 (S.D.N.Y. 1987)).

Factors utilized by courts to circumstantially infer actual intent--which have been termed "badges of fraud"--include: (1) whether the consideration received was adequate or existent at all; (2) whether the transferee was a relative; (3) whether the debtor retained possession; and (4) whether the debtor's financial condition change after the transfer. In re Kaiser, 722 F.2d 1574, 1582-83 (2d Cir. 1983). More recently the Second Circuit noted that the " 'fraudulent nature of a conveyance may be inferred from the relationship among the parties to the transaction and the secrecy of the sale, or from inadequacy of consideration and hasty, unusual transactions.' " McCombs [94-2 USTC ¶50,363], 30 F.3d at 328 (quoting In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1041 (2d Cir. 1984)). Although a strong argument could be made to support the conclusion that these factors have been established herein, because the parents proffered a plausible non-fraudulent explanation for the conveyance--namely, to ensure that their children, the Defendants, would have a home impervious to the vagaries of divorce proceedings--their intent becomes a factual issue unsuited for summary adjudication. See United States v. Digiulio [97-2 USTC ¶50,987], 1997 U.S. Dist. LEXIS 19062, No. 95-CV-219S, 1997 WL 834820, at *11 (W.D.N.Y. 1997) (denying fraudulent conveyance claim because evidence did not convince the court that the transfer qualified as an "exception to the well-established rule that summary judgment is normally inappropriate when deciding questions of intent").

Accordingly, because Plaintiff has establish a fraudulent conveyance claim pursuant to Section 273, the Court need not decide at trial whether Plaintiff can establish a fraudulent conveyance claim pursuant to Section 276.

3. Defendants Are Not Purchasers Excepted From the Lien

Although not raised by the Government, if the Defendants are not bona fide purchasers of the subject property, they are not entitled to protection from the lien. The IRS code specifically provides that a federal tax lien "shall not be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor[s]" unless notice of that lien has been properly filed. See 26 U.S.C. §6323(a). A purchaser is defined therein as "a person who, for adequate and full consideration in money or money's worth, acquires an interest in property. . . ." See 26 U.S.C. §6323(h)(6). As described above, the evidence shows that the Defendants did not give adequate and full consideration for the property, and are therefore not entitled to statutory protection as purchasers. See United States v. O'Day [97-1 USTC ¶50,250], 1996 U.S. Dist. LEXIS 19633, No. 95-86-CIV-ORL-18, 1996 WL 814496, at *5 (M.D. Fla. 1996). In O'Day, as in the instant action, the government sought to foreclose on federal tax liens and to set aside a conveyance of real property. The taxpayer conveyed his property to his sons for no consideration and later voluntarily filed for Chapter 7 bankruptcy protection. Id. at *3. The court granted the government's summary judgment motion, holding that the federal tax liens survived bankruptcy and the sons were not purchasers under §6323(a). Id. at *5. The court also concluded that property was fraudulently conveyed. Id.

Defense counsel's failure to address the Government's tax lien and fraudulent conveyance analyses reflects either an acknowledgment of the perceived futility of Defendants' position, or abject inept advocacy, nonetheless, for all the aforementioned reasons, Plaintiff's motion for summary judgment is granted with respect to its claim pursuant to the lien theory and with respect to the fraudulent conveyance theory pursuant to Section 273.

V. PLAINTIFF'S MOTION FOR ATTORNEYS' FEES

Plaintiff also moves for attorneys fees pursuant to New York Debtor and Creditor Law §276-a, which provides in relevant part:

In an action or special proceeding brought by a creditor . . . to set aside a conveyance by a debtor, where such conveyance is found to have been made by the debtor and received by the transferee with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, in which action or special proceeding the creditor . . . shall recover judgment, the justice . . . presiding at the trial shall fix the reasonable attorney's fees of the creditor . . . in such action. N.Y. Debt.&Cred. Law §276-a. However, because the Court has found genuine issues of material fact respecting the parents intent, actual fraud cannot be established by summary adjudication, and accordingly, Plaintiff's motion for costs is hereby denied.

VI. ENFORCEMENT OF THIS ORDER

Having determined that the parents' tax liability, although personally discharged in bankruptcy, remains as a valid tax lien against the property at issue, which was fraudulently conveyed to the Defendants, the Court must determine the proper resolution of this action. Clearly, pursuant to 26 U.S.C. §7403, the Court may decree a sale of such property and distribute the proceeds in respect to the interests of the parties and the United States, however, because "financial compensation may not always be a completely adequate substitute for a roof over one's head," Rodgers [83-1 USTC ¶9374], 461 U.S. at 703, 103 S. Ct. at 2148, it would be preferable if the parties could reach an agreement resolving this action without requiring the forced sale of the property. Although Rodgers has provided guidelines for a court to consider when weighing the interests of third parties before authorizing a forced sale, id. at 709-11, [83-1 USTC ¶9374], 103 S. Ct. at 2151-52, analysis thereof is not presently necessary. Accordingly, a settlement conference will be scheduled by the Court.

CONCLUSION

Accordingly, for all the aforementioned reasons, Defendants' motion for summary judgment is denied in its entirety and Plaintiff's motion for summary judgment is granted to the extent provided in this Memorandum and Order. Plaintiff's motion for attorneys' fees is denied.

Plaintiff's enforcement of this Memorandum and Order is stayed until further instructions of the Court.

SO ORDERED.

¹ The only documents pertaining to the 1991 Chapter 13 proceeding provided to the Court were copies of the United States' Response to Debtors' Motion to Reclassify Claims of IRS and the Order Discharging Debtor After Completion of Chapter 13 Plan. (Exs. D&F of Defs.' Aff. in Support of Summ. J.)

 

 

[97-2 USTC ¶50,822] United States of America , Plaintiff v. Gerald J. Landsberger, et al., Defendants

U.S. District Court, Dist. Ariz. , CIV 94-0883-PHX-SMM, 9/30/97

[Code Sec. 6321 ]

Property subject to lien: Trusts: Nominee or alter ego: Economic realty: Sham transactions.--The IRS was entitled to foreclose on residential property that was held in a married couple's nominee or alter ego trust. The nominee or alter ego theory applied because the creation of the trust did not coincide with economic realty and the trust was, in effect, a sham. The husband admitted that the trust was set up as a shell for the purpose of keeping his property at arm's length from potential creditors, including the IRS, and the undisputed facts established that he maintained active and substantial control over the trust. Since the trust was the nominee or alter ego of the couple, the timing of its creation was irrelevant.

[Code Sec. 6323 ]

Validity of lien: Priority over third-party interests: Bona fide purchaser.--Pursuant to both federal and state ( Arizona ) law, federal tax liens on residential property took priority over any interest held by alleged bona fide purchasers who took title with full knowledge of the tax liens.

ORDER

I. INTRODUCTION

MCNAMEE, District Judge:

On September 29, 1995 , this Court entered an Order holding that the United States ' tax assessments against Defendants Gerald and Betty Landsberger for the years of 1979, 1980, 1981 and 1982 could be reduced to judgment. Additionally, the Court held that the United States could foreclose its tax liens on the Landsberger's residential property related to the assessments made against them for the years of 1979 and 1980. However, subsequent to the entry of judgment, the United States moved to enter default judgment against Defendants Nancy Fieldman and Jeffrey Fadden as trustees of the trust that held the residential property. The Court denied the motion for default judgment and order and decree of foreclosure with respect to the property, and set discovery deadlines for this action to proceed forward on the issue of foreclosure of the property.

Currently pending before this Court is Plaintiff's Renewed Motion for Summary Judgment on a different theory again seeking an Order that would allow the United States to foreclose on the tax liens arising from the 1979 and 1980 income tax assessments. ¹

II. RELEVANT FACTS

The following facts are undisputed. In October of 1961, Defendants Gerald and Betty Landsberger took title to property at 1677 West County Road F in St. Paul , Minnesota ("St. Paul Property"), and lived in the property until March of 1982. In January of 1981, the Landsbergers transferred the St. Paul property to the G. J. Landsberger Family Trust 2-372 ("Trust #2-372") for "$1.00 and other good and valuable consideration"). See Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of Gerald J. Landsberger ("Depo. G. Landsberger"), at p. 19 at ll. 2-4, p. 23 at ll. 6-23, and Exh. 2. The St. Paul property was worth in excess of $100,000 at the time of the transfer. See id. at p. 25, ll. 4-7. Gerald Landsberger was the trustee of Trust #2-372 and directed the activities of the trust. See id. at p. 24, ll. 2-4, and p. 3, ll. 6-20.

Mr. Landsberger has maintained and espoused tax protester-type beliefs since the late 1970's. See id. at p. 20, ll. 1-15, p. 21, ll. 7-21, p. 22, ll. 8-17, p. 52, ll. 1-7, p. 53, ll. 7-23, and Exhs. 13-15; see also United States v. Gerald Landsberger [82-1 USTC ¶9171], 534 F.Supp. 142 (D. Minn. 1981). Mr. Landsberger had many trusts set up in 1977, the purpose of which was to keep himself an "arms length" from any transaction related to the subjects of the trust, in order to protect the properties from potential creditors including the IRS. See Depo. of G. Landsberger, at p. 49, l. 9-p. 51, l. 25. Mr. Landsberger did not at that time have any tax deficiency assessments against him. See id. at p. 51, ll. 1-2.

Shortly after the transfer of the St. Paul property to Trust #2-372, the trust sold the property to an unrelated third party for a cash down payment of approximately $37,000, plus monthly payments and assumption of the mortgage. See id. at p. 29, ll. 23-25, p.30, ll. 1-20, and Exh. 3. After the sale of the property, the proceeds and all future payments for the property were transferred to Gerald Landsberger Investments, a Trust under Trust #2-988 (Trust #2-988), with the beneficiary being Constitutional Trust #1-988. Second Declaration of Gerald J. Landsberger ("Sec. Decl. G. Landsberger"), at ¶4; see also, Depo. G. Landsberger, at p. 30, ll.21-25, p. 31, ll. 1-25, p. 32 ll. 1-25, and p. 34, ll. 6-18. Mr. Landsberger was also the trustee of Trust #2-988, and directed the trust's activities. See id. at p. 32, ll. 12-14, p. 33, ll. 21-25, p. 34, ll. 1-2 and 19-25, and p. 35, ll. 1-4.

Sometime in 1981 or 1982, Trust #2-988 used the proceeds of the sale of the St. Paul property to purchase the residential real property at 4502 Cortez in Phoenix Arizona , also referred to as Lot No. 127, Village Fairways ("Cortez property"). See id. at p. 34, ll. 6-18, and Exh. 4. The Landsbergers resided at the Cortez property. See id. at p. 6, ll. 10-21; Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of Nancy (Landsberger) Fieldman ("Depo. N. Fieldman"), at p. 6, ll. 11-24.

On or around November 21, 1984 , Mr. Landsberger received a Notice of Deficiency from the IRS pertaining to the tax years of 1979 and 1980. See Depo. G. Landsberger, at p. 16, ll. 13-25, p. 17, ll. 1-17, and Exhs. 14 & 15. On January 4, 1985 , Trust #2-988 transferred the Cortez property to Esther, a Trust under Trust #2-1703 (the "Esther trust"). See id. at p. 37, ll. 1-10, and Exh. 17; Sec. Decl. of G. Landsberger, at ¶5.

Nancy Fieldman, the Landsberger's daughter, and Jeffrey Fadden were co-trustees of the Esther trust. Depo. G. Landsberger, at p. 38, ll. 5-7. Fieldman never had a communication with Fadden, and knew of him only by her father's mention of him. See Depo. N. Fieldman, at p. 12, ll. 1-10. Fieldman became a co-trustee of the Esther trust at the behest of her father. See id. at p. 10, ll. 10-25.

In July of 1985, Fieldman signed a "Joint Tenancy Deed" as trustee of the Esther trust conveying the Cortez property to an unrelated third party. In June of 1986, the Esther trust used the proceeds of the Cortez property sale to purchase the residential real property located at 11815 North 91st Place , Scottsdale , Arizona (" 91st Place "). Sec. Decl. G. Landsberger, at ¶6; see also, Depo. N. Fieldman, at p. 17, ll. 23-25, p. 18, ll. 1-11, and Exh. 5. The Landsbergers then moved into the 91st Place property where they continue to reside today. See Sec. Decl. G. Landsberger, at ¶5; Depo. G. Landsberger, at p. 5, ll. 18-25, p. 6, ll. 1-2.

The Landsbergers do not pay rent to live on the 91st Place property. See Depo. G. Landsberger, at p. 56, ll. 21-23; Depo. J. Wilde, at p. 55, ll. 2-25, and p. 56, ll. 18-24. The Landsbergers pay all the utilities and maintenance costs of the property as they did with the Cortez property. See Depo. G. Landsberger, at p. 56, ll. 24-25, and p. 57, ll. 1-10; Deposition Transcripts Filed in Support of the United States Renewed Motion for Summary Judgment, Deposition of John Wilde ("Depo. J. Wilde"), at p. 56, ll. 1-20.

On June 16, 1988 , Nancy Fieldman signed her resignation as trustee of the Esther trust. See Depo. N. Fieldman, at p. 29, ll. 2-10, and Exh. 27. She was replaced by Jimmy C. Chisum. Sec. Decl. G. Landsberger, at ¶9.

On September 29, 1988 , the Arizona Tax Court upheld the deficiency determination for the tax years of 1979 and 1980, and found Betty and Gerald Landsberger liable for deficiencies of $13,554.00 for the taxable year of 1979 and $55,631.00 for the taxable year of 1980, with a fraud addition of $34,593.00. See Court's Order of Sept. 29, 1995 , at p. 3. On February 13, 1989 , the IRS assessed Gerald and Betty Landsberger's deficiency for 1979 and 1980, plus interest, and sent a demand for payment to the Landsbergers. Id.

In November of 1995, the title to the 91st Place property was transferred to John Wilde and Eileen Lipari for "ten dollars and other valuable considerations." See Depo. J. Wilde, at p. 10, ll. 3-9, p. 59, ll. 9-25, p. 62, ll. 17-21, and Exhs. 10 & 11. John Wilde is a "very good friend" of Mr. Landsberger who also assists Mr. Landsberger in this litigation although he is not a lawyer. See Depo. J. Wilde, at p. 13, ll. 17-25, and p. 14, ll. 1-13. Mr. Wilde decided that the property should be transferred to him, and his friend Eileen Lipari, as a litigation tactic to so that they could join in this action as defendants and proceed pro se as the owners of the property. See id. at p. 59, l. 9-p. 60, l. 18. At the time of the transfer the property was worth in excess of $100,000. See id. J. Wilde, at p. 65, ll. 12-18.

Around October of 1995, the Arizona Tax Court ordered Mr. Landsberger incarcerated for failure to comply with the court's order compelling him to comply with a subpoena for tax records. Declaration of James A. Susa ("Susa Decl."), at ¶3. In an attempt to comply with the subpoena and to have him released from jail, in December of 1995, Mr. Landsberger's attorney submitted a document to James M. Susa, an Assistant Attorney General for the State of Arizona . Id. at ¶4. The document, signed under penalty of perjury on, lists the 91st Place property under Real Estate assets of Mr. Landsberger, and states that he is the one half owner of the property. See id., Exh. A. ²

III. STANDARD OF REVIEW

A court must construe a pro se litigant's pleadings and papers liberally. McGuckin v. Smith, 974 F.2d 1050, 1055 (9th Cir. 1992). Nevertheless, a pro se litigant is held to the same legal standard in determining whether summary judgment should be granted. See King v. Atiyeh, 814 F.2d 565, 567 (9th Cir. 1987). Where a motion to dismiss contains matters outside the pleadings, a court must construe the motion as a motion for summary judgment and give the parties "reasonable opportunity" to present all material pertinent to a motion for summary judgment. Fed. R. Civ. P. 12(b) (1995).

A court must grant summary judgment if the pleadings and supporting documents, viewed in the light most favorable to the nonmoving party, "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c) (1995); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Jesinger v. Nevada Federal Credit Union, 24 F.3d 1127, 1130 (9th Cir. 1994). Substantive law determines which facts are material. Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986); see also Jesinger, 24 F.3d at 1130. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson, 477 U.S. at 248. The dispute must also be genuine, that is, "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id.; see also Jesinger, 24 F.3d at 1130.

A principal purpose of summary judgment is "to isolate and dispose of factually unsupported claims." Celotex, 477 U.S. at 323-24. Summary judgment is appropriate against a party who "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." Id. at 322; see also Citadel Holding Corp. v. Roven, 26 F.3d 960, 964 (9th Cir. 1994). The moving party need not disprove matters on which the opponent has the burden of proof at trial. Celotex, 477 U.S. at 317. The party opposing summary judgment "may not rest upon the mere allegations or denials of [the party's] pleadings, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see also Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 585-88 (1986); Brinson v. Linda Rose Joint Venture, 53 F.3d 1044, 1049 (9th Cir. 1995).

IV. DISCUSSION

Plaintiffs are attempting to foreclose on the tax lien on the 91st Place property for the tax assessments made on Defendants for the tax years of 1979 and 1980 reduced to judgment on February 13, 1989 . Section 6321 of Title 26 of the United States Code reads:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real of personal, belonging to such person.

26 U.S.C. §6321. Defendants in this action allege that the 91st Place property belonged to another since before the time of the assessment through today, and that accordingly, the government cannot foreclose on the lien on the property.

The United States seeks to foreclose on the tax lien on the 91st Place property under three alternative theories. The government first argues that the Esther Trust was the nominee of the Landsbergers who held equitable title to the property on the date that the tax assessments were made. Accordingly, under 26 U.S.C. §6321, the government may foreclose on the property. Alternatively, Plaintiff argues that the transfer of the Cortez property from Trust #2-998 was fraudulent, and should be set aside under the Arizona Uniform Fraudulent Transfer Act, A.R.S. §44-1001, et seq. Finally, Plaintiff argues that any interest held in the property by John Wilde and Eileen Lipari is inferior to the Federal tax liens under 26 U.S.C. §6323(a) and Arizona property law.

Defendant makes three counter arguments. First, Defendant argues that Plaintiff impermissibly amends its Complaint in this action without leave of Court by including its claim under the Arizona Fraudulent Transfer Act. Secondly, Plaintiff argues that under Arizona law the "nominee/alter ego theory" can only arise against a corporation. In any event, the theory is not available where the transfer took place before the tax assessment. Finally, Plaintiff argues that assuming arguendo that either the nominee/alter ego theory or the fraudulent transfer theory can be raised, genuine issues of material fact exist precluding summary judgment.

A. Nominee/Alter Ego Theory

The "nominee/alter" ego theory is clearly viable in this instance even though the assets are held by a trust, and not a corporation. See e.g., F.P.P. Enterprises and D & S Trust v. United States [87-2 USTC ¶9536], 830 F.2d 114 (8th Cir. 1987); Neely v. United States [85-2 USTC ¶9791], 775 F.2d 1092 (9th Cir. 1985). The underlying principle is the "sham" nature of the arrangement. See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 117 ("A transaction will not be given effect according to its form if that form does not coincide with the economic reality and is, in effect, a sham."); Neely [85-2 USTC ¶9791], 775 F.2d at 1094 (sham transaction will not be recognized for tax purposes).

In addition, there is no requisite that the nominee/alter ego arrangement come into existence after the assessment of the tax liability. If the Court finds that the Esther trust was the alter ego of the Defendant existing at the time of the assessment simply to avoid creditors, then the timing of its creation has no import. See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 97 S.Ct. 619, 627 (1977) (under §6321 assets of alter ego are properly levied as assets to satisfy tax liability of tax payer) (F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 118 (property held by alter ego trusts not held by "separate persons" apart from taxpayer, and therefore, my be levied). The timing of the trust arrangement, may however, be a factor for the Court to consider in determining whether the trust is actually a nominee or alter ego.

"Property held in the name of an entity which is the alter ego of the taxpayer may be levied on to satisfy the tax liabilities of the taxpayer." F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.3d at 118; See G.M. Leasing Corp. v. United States [77-1 USTC ¶9140], 97 S.Ct. 619, 627-28 (1977); Shades Ridge Holding Co, Inc. v. United States [89-2 USTC ¶9472], 888 F.2d 725, 728 (11th Cir. 1989). The Court may find that an entity is the alter ego of the taxpayer where:

(1) the taxpayer treats the property as it belongs to him, See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116, Shades Ridge Holding Co., Inc. [89-2 USTC ¶9472], 888 F.2d at 729;

(2) minimal or no consideration is paid by the entity in consideration for the property, see e.g., F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116;

(3) the taxpayer has expressed the intent to shelter the asset via the trust mechanisms, see, F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 116,

(4) the taxpayer maintains "active" or "substantial" control over the operations and decisions of the property, see Valley Finance, Inc. v. United States [80-2 USTC ¶9554], 629 F.2d 162, 172 (1980), Shades Ridge Holding Co. [89-2 USTC ¶9472], 888 F.2d at 728 (11th Cir. 1989);

(5) a family or close relationship exists between the taxpayer and the holding entity, see Shades Ridge Holding Co. [89-2 USTC ¶9472], 888 F.2d at 729.

There is substantial evidence in this action that the Esther trust, as well as the many other Landsberger trusts, existed as the alter ego or nominee of Mr. Landsberger. He specifically states that the trusts were set up as "shells" for the purpose of keeping his property at an "arms length" to shelter them from potential creditors including the IRS. Nor has he attempted to argue any other reason for the existence of his trusts. Under these facts alone it is difficult to see how any court could find a question of fact with respect to the alter ego/nominee status of the Landsbergers' trusts.

Further, the Landsbergers continued to treat the property as their own at all times. See F.P.P. Enterprises [87-2 USTC ¶9536], 830 F.2d at 117. Despite living in the 91st Place property for over 10 years, they never paid rent, and they paid all the utilities, upkeep, and maintenance costs of the property. See Depo. G. Landsberger, at p. 56.

The main issue Defendants raise as a genuine issue of material fact is in relation to the contradicting testimony of Mr. Landsberger and his daughter, Nancy Fieldman, regarding her role as a trustee. Fieldman testifies that she became trustee at the request of her father, that she felt obligated to do so because she was living in their home, that she believed he chose her because she was family which allowed him to maintain control over the trust. Mr. Landsberger does not dispute any of these facts.

However, in addition, Fieldman testified that she performed no duties as trustee other than signing her name as trustee wherever and whenever her father requested, that she never had control over the trust or made any decisions regarding the transactions of the trust, that her father made all decisions regarding the trust including the decision to sell the Cortez property and purchase the 91st Place property. See Depo. Fieldman, at p. 12, ll. 11-18, pp. 13-15, pp. 17-25. She testifies that she never had any checks for the Trust account, and that she never saw nor had control over the $100,000 used by the trust as a downpayment on the 91st Place property. Id. at 23-25. Additionally, she testifies that Mr. Landsberger signed her signature on at least two documents conducting trust business without her knowledge or permission. See Depo. p. 27, ll. 23-25; p. 28, ll. 11-17; Exhs. 24 & 25.

Mr. Landsberger admits that he signed his daughter's signature on several occasions, but testifies that he did so to help her out and with her permission. He testifies that because she was inexperienced in her knowledge and duties as trustee, that she relied heavily on his advise and guidance as she carried out her duties. He also testifies that he drafted the majority of the trust documents in the record. Ultimately, however, Mr. Landsberger states that his daughter had control over the trust and could do whatever she wanted. Depo. G. Landsberger, at p. 43.

With respect to the Cortez property, Mr. Landsberger testifies that he had nothing to do with the transfer of the property, and that Mr. Fadden and his daughter, as co-trustees handled the transfer. The deed transferring the Cortez property to the third party, however, bears only the signature of Nancy Landsberger (Fieldman). Mrs. Fieldman testifies that she never had a conversation with Mr. Fadden. Plaintiff provides no evidence to support Mr. Fadden's involvement or otherwise controvert Mrs. Fieldman's statements that she never spoke with Mr. Fadden. From the evidence, the Court must conclude the no reasonable jury could find that Mr. Fadden was involved in the transaction where the relevant trust transaction documents bear only the signature of Nancy Landsberger as co-trustee, and avers that she never had a conversation with Mr. Fadden.

Nonetheless, accepting as true Mr. Landsberger's testimony, the remaining undisputed facts show that he maintained active and substantial control over the trust through his involvement. Moreover, the degree of control Mr. Landsberger maintained is not dispositive. There are a multitude of undisputed facts in this litigation supporting the conclusion that the Esther trust, and others, were alter egos of Mr. Landsberger. Mr. Landsberger's own admission as to his purpose and intent for creating and operating the trust is the most probative of all. Nowhere does Mr. Landsberger provide controverting evidence establishing any legitimate purpose for the trust. Accordingly, Plaintiff is entitled to summary judgment in its favor on the theory that the Esther trust was a mere nominee/alter ego of the Landsbergers at the time the tax was assessed in February of 1989.

B. John Wilde and Eileen Lipari's Interest

The Internal Revenue Code provides that a federal tax lien takes priority over an interest held by an alleged bonafide purchaser when the purchaser acquired the property with notice of the lien. 26 U.S.C. §6323(a). Arizona law on judgments is consistent with this principle. See Warren v. Whithall Income Fund, 823 P.2d 689 (Ariz. App. 1991); Hatch Companies contracting Inc. v. Arizona Bank, 826 P.2d 1179 (Ariz. App. 1991).

The property was conveyed to Wilde and Lipari for "ten dollars and other valuable considerations." See Depo. J. Wilde, at p. 10, ll. 3-9, p. 59, ll. 9-25, p. 62, ll. 17-21, and Exhs. 10 & 11. It is undisputed that Mr. Wilde and Ms. Lipari took title to the 91st Place property with full knowledge that the property was subject to the federal tax liens. See Depo. J. Wilde, at p. 59, l. 9-p. 60, l. 18. Accordingly, any interest these third parties may have in the property is clearly subordinate.

V. CONCLUSION

There is no genuine issue of material fact in dispute that precludes summary judgment in Plaintiff's favor on the issue of the trust functioning as the alter ego or nominee of Gerald Landsberger. In addition, there is no dispute that any interest in the 91st Place property the current title holders may have is subordinate to the federal tax liens. ³ Accordingly, Plaintiff is entitled summary judgment as a matter of law, and may foreclose on the 91st Place property accordingly. For the foregoing reasons,

IT IS THEREFORE ORDERED Defendant's Renewed Motion for Summary Judgment filed on September 3, 1996 is GRANTED. [doc. #106].

IT IS FURTHER ORDERED the United States shall lodge and serve a copy upon all Defendants, a Proposed Order and Decree of Foreclosure pursuant to 28 U.S.C. §2001 no later than October 31, 1997.

IT IS FURTHER ORDERED the Clerk of the Court shall MAIL copies of the Order to each Defendant and to all counsel of record.

¹ This motion was stayed pending resolution of a series of motions that may ultimately have affected its resolution. See Order of August 19, 1997 . The previous issues now resolved, the Court lifts the stay as to Defendant's renewed motion for summary judgment.

² Mr. Landsberger disputes the accuracy of this document on the grounds that the information was provided by his wife, and that she does not understand how the Trusts operate. See Depo. G. Landsberger, at pp. 85-88.

³ Because it is unnecessary to the resolution of this action, the Court declines to determine the remaining issues raised by the parties pleadings.

 

 

[97-2 USTC ¶50,885] Internal Revenue Service, Plaintiff v. Jack B. Larsen, Defendant. Jack B. Larsen and Adele E. Larsen, Petitioners

U.S. District Court, West. Dist. Pa. , 95-326 ERIE , 10/20/97

[Code Sec. 6323 ]

Wrongful levy action: Bona fide purchaser for value: Adequate and full consideration.--Since an individual received only nominal consideration for the transfer of real property to his wife, she did not qualify as a bona fide purchaser for value. Therefore, the IRS levy against the property to satisfy the husband's outstanding tax liability was not wrongful. Her claim that forgiveness of loans to her husband constituted adequate and full consideration was not credible as the funds were used to purchase a family vehicle, no documentation of the loans existed, and no repayment was ever made.

MEMORANDUM AND ORDER

PROCEDURAL HISTORY

MCLAUGHLIN, District Court Judge:

This is a civil action for wrongful levy on real property located at 334 West Eighth Street . Erie , Pennsylvania (hereinafter the Eighth Street property). On May 24, 1993 the Internal Revenue Service (IRS) assessed Jack B. Larsen ("Mr. Larsen") a delinquency for unpaid Federal Income taxes for the years 1987-1991. As a result of this failure, a lien arose in failure of the United States against all of his property. 26 U.S.C. §6321. The lien related back to the date of assessment. 26 U.S.C. §6322. The lien was perfected on April 29, 1994 by filing in the prothonotary's office of Erie County , Pennsylvania . On January 28, 1994 , Mr. Larsen, by quit claim deed, transferred the Eighth Street property to himself and his wife, Adele E. Larsen (Mrs. Larsen) as tenants by the entireties. Although the deed recited consideration of $1.00, the Larsens' claim that the consideration actually given was forgiveness of a debt in the amount of $15,225.00 that Mr. Larsen owed Mrs. Larsen.

When the IRS served a levy for the property on October 18, 1995 , the Larsens erroneously filed a "Petition for Rule to Show Cause Why the Court Should Not Stay Execution" in the Court of Common Pleas for Erie County . ¹ On December 7, 1997 , the United States removed the matter to this Court. Thereafter, the United States moved for summary judgment contending that Mrs. Larsen had not produced sufficient evidence to demonstrate that she paid "adequate and full consideration" for the property. By Memorandum Order dated January 17, 1997, this Court denied the Motion for Summary Judgment finding that there were material issues of fact as to whether the actual consideration for the property was forgiveness of loans totalling $15.225.00 as alleged by the Larsens.

A non-jury trial was held before this Court on March 12, 1997 . The following are the Court's Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. On July 19, 1978 , Mr. Larsen acquired real estate located at 334 West Eighth Street , Erie , Pennsylvania for the sum of $30,000.00. A single story, concrete block, commercial building is situated on the real property.

2. The Larsens were married on September 19, 1979 .

3. The real estate at 334 West Eighth Street , Erie , Pennsylvania was owned solely by Mr. Larsen from 1978-1993.

4. Jack B. Larsen filed federal income tax returns for the years 1988-1991 with the filing status of "married filing separately".

5. In May, August, October and December 1993, the IRS assessed federal income taxes against Mr. Larsen for the tax years 1987-1991.

6. Pursuant to 26 U.S.C. §7426(c), the assessments of tax against Mr. Larsen are conclusively presumed to be valid.

7. In 1988, the IRS selected the Larsen's 1987 joint return for an audit.

8. From 1988-1991 Mr. Larsen failed to timely file federal income tax returns. In March, June, August and October 1993, Mr. Larsen separately filed delinquent returns prepared by a local certified public accountant, for the years 1988-1991 respectively. These returns reflected a significant amount of tax due. Including the 1987 liability, Mr. Larsen owed the IRS approximately $190,000.00. (Defendant Exhibits D5, D6 and D12)

9. The IRS had forwarded to Mr. Larsen collection notices in March, June, August, October, and January 1994 asking for payment of the delinquent taxes. (Defendant's Exhibit D5)

10. On January 28, 1994 , Mr. and Mrs. Larsen executed a deed transferring the real property at 334 West Eighth Street , Erie , Pennsylvania to Jack B. Larsen and Adele E. Larsen as husband and wife. The deed recited consideration of $1.00.

11. On January 6, 1992 , Mrs. Larsen wrote a check (#5343) payable to Mr. Larsen for $7,000.00 and on December 14, 1992 , she wrote a check (#5783) payable to Mr. Larsen for $5,000.00. In July 1993, a separate draft in the amount of $225.00 (#6074) was allegedly made payable to Jack B. Larsen and signed by Adele E. Larsen for a personal loan. (Plaintiff's Exhibit 1)

12. The $5,000.00 check was utilized by Mr. Larsen to purchase a 1992 Isuzu Trooper.

13. The vehicle was utilized both in Mr. Larsen's business and as a family vehicle.

14. At the time of the purchase of the 1992 Isuzu Trooper, Mrs. Larsen purchased a matching vehicle and the payment of the $5,000.00 enabled the Larsens to obtain a more favorable deal on both vehicles.

15. The check was not documented as a loan and no writings of any kind memorializing the alleged loans were made.

16. With respect to the $7,000.00 check it was not designated as a loan nor was there any type of writing memorializing the alleged loan transaction.

17. No single payment was ever made by Mr. Larsen relative to either the $5,000.00 or $7,000.00 alleged loans.

18. With respect to the $225.00 alleged loan, the testimony revealed that Mr. Larsen signed his wife's name on the check and neither party at trial had any recollection as to what the proceeds were for or whether they constituted a "loan" as contended by the Larsen's pretrial.

19. On a prior occasion, in 1988, Mrs. Larsen had provided monies to her husband but the monies were not repaid as a loan.

20. With respect to the alleged $3,000.00 loan Mrs. Larsen could not recall what it was for or when it was made.

21. No written documentation of this loan exists.

22. The Court finds no credible evidence that such a loan was ever made.

23. Having observed the demeanor of Mr. and Mrs. Larsen and the previously described circumstances surrounding the alleged loan transactions, the Court concludes the above-described proceeds were not considered by the Larsens to have been loans.

24. The Court further finds that the transference of the real property at 334 West Eighth Street , Erie , Pennsylvania to Jack B. Larsen and Adele E. Larsen as husband and wife, was unsupported by adequate consideration as it did not represent a repayment of any loans allegedly made by Mrs. Larsen to Mr. Larsen.

CONCLUSIONS OF LAW

25. Under 26 U.S.C. §6321, a lien arises in favor of the United States upon all of the taxpayers property and rights to property, whether real or personal. When that taxpayer neglects or refuses to pay a tax liability after notice and demand. The lien relates back to the date of assessment. 26 U.S.C. §6322.

26. Section 6321 of the Internal Revenue Code provides as follows:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, additional 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.

27. The IRS may lawfully enforce its liens by levying on property of the taxpayer, including seizing and selling real property. 26 U.S.C. §6331(a) and (b).

28. Pursuant to Section 6321 of the Internal Revenue Code, federal tax liens arose on May 24, 1993 the date of the earliest tax assessments against Mr. Larsen, and automatically attached to all property and rights to property acquired by Mr. Larsen during the life of the lien. 26 U.S.C. §6322; Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 268 (1946); In Re Atlantic Business and Community Dev. Corp. [93-1 USTC ¶50,333], 994 F.2d 1069, 1071-72 (3d. Cir. 1993).

29. State law determines whether the taxpayer has an interest in the property which can be reached by the federal tax lien. United States v. Durham Lumber Company [60-2 USTC ¶9539], 363 U.S. 522 (1960); Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509 (1960).

30. Federal law determines the consequences of the existence of a federal tax lien, and whether it will, in fact, attach to the property. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51 (1958), and the priority of the federal tax liens in relation to competing liens. United States v. Pioneer American Insurance Company [63-2 USTC ¶9532], 374 U.S. 84 (1963); United States v. City of New Britton [54-1 USTC ¶9191], 347 U.S. 81, 86 (1954).

31. 26 U.S.C. §6323(a) provides that:

A lien imposed by Sections 6321 shall not be valid as against any purchaser . . . until notice thereof which meets the requirements of subsection (f) has been filed by the secretary.

32. 26 U.S.C. §6323(a) (supp. 1996). A "purchaser" is further defined as:

A person who, for adequate and full consideration in money or monies worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against a subsequent purchaser without actual notice. 26 U.S.C. §6323(h)(6) (supp. 1996).

33. Nominal consideration is insufficient as a matter of law. U.S. v. Carson , 741 F. Supp. 92, 95 (W.D.Pa. 1990).

34. Mrs. Larsen bears the burden of proving that the IRS levy was wrongful. 26 U.S.C. §7426; Valley Finance, Inc. v. United States [80-2 USTC ¶9554], 629 F.2d 161, 171 (D.C. Cir. 1980), cert. den., sub. nom., Pacific Development, Inc. v. United States , 451 U.S. 1018 (1981).

35. The term "adequate and full consideration" is defined in the Treasury Regulations as "consideration in money or monies worth having a reasonable relationship to the true value of the interest in property acquired." 26 C.F.R. 301.6323(h)-1.

36. As previously indicated the Court finds that Mrs. Larsen's claim of "debt satisfaction" relative to the transfer of the West Eighth Street Property is not credible and as such she has failed to establish that she was a "purchaser" within the meaning of 26 U.S.C. §6323(a)(6) as she did not pay "adequate and full consideration" for her interest in the property.

37. Since the federal tax liens attached to the property at the time of the transfer and the liens are valid liens against the property, the property was properly seized in October, 1995 to satisfy Mr. Larsen's unpaid federal income tax liabilities and the United States may proceed to sell the property.

¹ An action to challenge a wrongful levy must be brought in a district court of the United States . 26 U.S.C. §§7246(a)(1). The Court of Common Pleas issued a Rule and later issued an Order staying issuance of a levy, execution or sale of the Eighth Street property until December 27, 1995 .

 

 

[97-1 USTC ¶50,270] United States of America , Plaintiff v. Maggie Inez Thompson, et al., Defendants

U.S. District Court, So. Dist. Ala. , No. Div., 95-0431-BH-C, 1/21/97, 966 FSupp 1140, 966 FSupp 1140

[Code Sec. 6323 ]

Liens: Property: Foreclosure: Sale to third party: Bona fide purchaser for value.--The IRS could not foreclose federal tax liens on real property sold by married taxpayers to the husband's mother because she was a bona fide purchaser entitled to protection under Code Sec. 6323(h)(6) . Although the property was purchased for an amount less than its fair market value, the purchase amount represented valuable consideration and bore a reasonable relationship to the property's value. Moreover, the husband's mother, who received a bank loan to purchase the property, which she rented to the taxpayers, was indebted to the bank and obligated to repay the loan. The fact that the parties seemed to have arranged for the loan payment to equal the rent paid by the taxpayers did not change the mother's ownership of the property or her duty to discharge the loan.

William R. Sawyer, Mobile, Ala. 36602, Carol Ide Koehler, Lynne M. Murphy, Department of Justice, Washington, D.C. 20530, for plaintiff. Rob ert R. Blair, P.O. Box 976 , Selma , Ala. 36702-0976 , for defendant. J. Garrison Thompson, P.O. Drawer 537, Selma , Ala. 36702-0537 , for Sweet Water State Bk.

ORDER

HAND, Senior District Judge:

This is an action brought by the government to foreclose federal tax liens on real property. This case came on for non-jury trial on January 6, 1997 . Upon careful consideration of the arguments and the testimony presented, the court concludes as follows.

FINDINGS OF FACT

1. Each year from 1984 to 1990, Paul and Sharon Thompson failed to pay some or all of their personal income taxes (assessments were made in June of every year, 1985-1991, to no avail). As of July 28, 1995 , the Thompsons owed the federal government $88,774.49 in income taxes, interest, and penalties. In addition, as of March 13, 1995 , Paul Thompson owed the federal government $34,613.10 for unpaid employment taxes, interest, and penalties for the years 1986 to 1989.

2. The Thompsons were discharged from all personal liability for these debts by order of the Bankruptcy Court on January 8, 1996 , except for Paul Thompsons personal liability for the trust fund portion of his employment taxes in the amount of $7,751.12 as of July 28, 1995 . ¹ The Bankruptcy order also did not relieve the Thompsons from any government liens on their real property arising out of non-payment of taxes.

3. On February 15, 1979, the defendants Paul and Sharon Thompson owned or had an interest in real property near Thomasville, Alabama, in Marengo County Alabama (hereinafter "Marengo Property").

4. Paul Thompson's wood pulp business had failed by August 21, 1991 , and the Thompsons decided to sell their house. By deed dated August 26, 1991 , the defendants Paul and Sharon Thompson purportedly conveyed their interest in the Marengo property to James Leroy Thompson (now deceased) and Maggie Inez Thompson, the parents of Paul Thompson.

5. The elder Thompsons took out a $15,000 loan from Sweetwater Bank to purchase the property. Sweetwater secured the loan--with a mortgage recorded on September 6, 1991 , with the Judge of Probate in Marengo County. Approximately $10,000 of the loan proceeds went to pay off the prior mortgage on the real property, and the remaining proceeds went to James Leroy Thompson and Maggie Thompson.

6. On November 1, 1991 , a Notice of Federal Tax Lien was filed with the Judge of Probate, Marengo County, Alabama, with respect to the federal personal income tax liabilities mentioned in paragraph one. This was the first Notice of Federal Tax Lien filed in Marengo County for the personal income tax liabilities of the Thompsons, some of which dated back to 1985.

7. Subsequent to the sale of the house to the elder Thompsons, Paul and Sharon Thompson continued to live in the house and paid $300.00 per month in rent to Paul's parents.

8. The monthly note to pay off the loan from Sweetwater Bank used to purchase the house amounted to $300.00 a month.

9. Sharon Thompson testified that the house was worth "about $20,000" at the time it was transferred to the elder Thompsons. A real estate appraisal, dated August 19, 1991 , conducted by Sweetwater Bank estimated the value of the house and land to be $27,500. Both Paul and Sharon Thompson testified that the house had deteriorated considerably since they sold it.

CONCLUSIONS OF LAW

1. When Paul and Sharon Thompson failed to pay their assessed tax liabilities, liens arose in favor of the government on all property and rights to property of the Thompsons, including the Marengo property. 26 U.S.C. §§6321, 6322. These liens arose as early as the first assessment, June 3, 1985 .

2. Even though the bulk of the Thompson's assessed federal tax liabilities were discharged in their bankruptcy case, the discharge does not prohibit the Government from seeking to foreclose the tax liens arising out of those liabilities. "A bankruptcy discharge extinguishes only one mode of enforcing a claim--namely, an action against the debtor in personam--while leaving intact another--namely, an action against the debtor in rem." Dewsnup v. Timm, 502 U.S. 410, 418 (1992).

3. Federal tax liens, however, do not automatically have priority over other liens or other rights to the property. "Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right.'" United States v. McDermott, 507 U.S. 447, 449 (1993).

4. In the present case, the Internal Revenue Code provides that, "[t]he lien imposed by section 6321 shall not be valid as against any purchaser ... until notice thereof ... has been filed by the Secretary." 26 U.S.C. §6323(a). A "purchaser" is defined as,

a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice.

26 U.S.C. §6323(h)(6).

5. It is undisputed that James Leroy and Maggie Inez Thompson purportedly "purchased" and acquired title to the Thompson property at issue prior to the filing of the Notice of Federal Tax Lien. The only issue in this case is whether Maggie Inez Thompson is a "purchaser" so as to be afforded the protection granted by §6323(a).

6. The government first contends that because the Thompsons still live in the house and because the rent payment owed by Paul and Sharon Thompson to Maggie Inez Thompson is the same amount that Maggie Inez Thompson owes to the bank on the loan, that the house was never actually sold. It is undisputed, however, that it is Maggie Inez Thompson who is indebted to the bank and who must satisfy the obligation. The fact that the parties seemed to have arranged for the loan payment to equal the rent does not change Maggie Inez Thompson's ownership of the house or her duty to discharge the house loan.

7. The government next argues, without citing any legal authority, that the house was actually purchased for approximately $10,000, not $15,000, because approximately $5,000 of the proceeds from the sale of the house was returned to the buyers. The evidence indicates, however, that the actual price of the house was $15,000. The fact that Paul and Sharon Thompson paid approximately $5,000 from the sale of the house to the elder Thompsons does not indicate that the actual consideration for the house is reduced by that amount. Both Sharon and Maggie Inez Thompson testified that the house was sold and purchased for $15,000 and that the proceeds of the sale were used to pay off a prior mortgage ² and to satisfy "other indebtedness." See e.g., Affidavits of Sharon Thompson and Maggie Inez Thompson. The court therefore finds that the house was sold for $15,000.

8. The question remains whether $15,000 is enough to qualify the elder Thompsons as bona fide purchasers. The evidence indicates that the house certainly was worth more than $15,000. The appraisal done contemporaneously with the 1991 sale indicates that the property was worth $27,500. Sharon Thompson's own estimate is closer to $20,000. There is little case law actually defining "adequate and full consideration" under 26 U.S.C. §6323(h)(6). `Full and adequate consideration' is interpreted by Treasury regulations to be an amount 'having a reasonable relationship to the true value of the interest in property acquired.'" Rodeck v. United States , 697 F.Supp. 1508, 1511 (D.Minn. 1988) (citing 26 C.F.R. §301.6323(h)-1(f)(3)). The property involved is in rural Alabama . Sharon Thompson has testified that the family needed money after her husband's business failed and the $15,000 price was the best they could get on short notice. See Affidavit of Sharon Thompson. Under these circumstances, the court concludes that $15,000 represents valuable consideration and bears a reasonable relationship to the value of the Thompson's property. The fact that the house was purchased for an amount somewhat less than its value does not mean that Maggie Inez Thompson is not a bona-fide purchaser entitled to the protection of §6323(h)(6).

CONCLUSION

The court holds that the government is not entitled to foreclose the tax liens by selling the real property sold by Paul and Sharon Thompson to James Leroy and Maggie Inez Thompson. The government is, however, entitled to a personal judgment against Paul Thompson for the unpaid trust fund tax liabilities of which there is no dispute among the parties.

SO ORDERED.

¹ The parties agree that Paul Thompson is indebted to the government for the trust fund portion of employment taxes in the amount of $7,751.12 as of July 28, 1995 .

² The first mortgage was to Mid-State Homes. The balance owed to Mid-State at the time of the sale was $9,953.76. See Affidavit of Sharon Thompson.

 

 

[96-2 USTC ¶50,702] Gary Rogers, Plaintiff v. United States of America , Defendant

U.S. District Court, So. Dist. Calif. , CIV 94-1305-BTM(AJB), 6/5/96

[Code Secs. 6323 and 7426 ]

Liens and levies: Third persons: Bona fide purchaser: Priority of claims.--An interest in a business purchased by an individual taxpayer from a debtor was subject to IRS liens because the liens had attached to the property before the sale. Moreover, the taxpayer did not qualify as a purchaser for purposes of establishing superior priority over a tax lien because the taxpayer did not give adequate consideration for the property.

[Code Sec. 7426 ]

Wrongful levy suit: Ownership of assets: Evidence.--Summary judgment was denied on the issue of whether IRS liens attached to fax machines, paper and checks for services rendered to a business that had been owned by a debtor. Questions of fact existed as to whether the taxpayer purchased the business from the debtor, whether the taxpayer purchased the assets after the sale and whether the checks were for work performed by the taxpayer.

[Code Secs. 6103 and 7431 ]

Wrongful disclosure: Confidentiality of returns: Debtor's tax liabilities.--The IRS did not wrongfully disclose return information when it contacted customers who owed money to a business the taxpayer had bought from a debtor and instructed them to pay the IRS directly. Notices of tax liens were filed against the debtor prior to the sale of the business. Therefore, the debtor's tax liabilities were a matter of public record. The information lost its protected status, and IRS agents were permitted to disclose tax return information necessary to collect taxes.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

MOSKOWITZ, District Judge:

This matter came before the Court on Defendant's motion for summary judgment, which was orally argued on May 6, 1996 . Supplemental briefs were submitted by both parties and further oral argument took place on June 3, 1996 . Based on the papers submitted by all parties, upon oral argument and for good cause shown, for the reasons set forth below, Defendant's motion is granted in part and denied in part.

David S. Beggs owed assessed federal taxes for the years 1982 to 1992, and Revenue Officer Stephen Silverman was assigned to collect the outstanding tax liabilities. Silverman determined that Beggs owned Axis Printing, a printing company located in downtown San Diego . On January 8, 1993 Beggs informed Silverman that he had sold Axis Printing to an employee named Marie Nicoletti. On December 28, 1993 , Silverman was told by Beggs that Axis had now been sold to plaintiff Gary Rogers, effective December 1, 1993 .

Meanwhile, the IRS notified Beggs that his assets would be levied upon under 26 U.S.C. §6672 . Unable to obtain consent to levy, the United States obtained a writ of entry on July 1, 1994, and the IRS seized the business on July 14, 1994, by placing a padlock on the door to the premises.

It is uncontroverted that taxes were assessed against Beggs before either Rogers or Nicoletti supposedly purchased Axis. Defendant submits an affidavit by Nicoletti in which she states that the initial sale to her from Beggs was a sham sale for the purpose of avoiding tax liability. Plaintiff submits affidavits from himself, from Beggs, and from an Axis employee contradicting Nicoletti's testimony. Plaintiff Gary Rogers contends that he purchased the business on December 1, 1993, and therefore the IRS wrongfully levied on property he owned for which he was not compensated, that the levy precluded him from operating his business for over a month, that numerous mistakes were made during the execution of the levy, that valuable consideration was present in both sales, and that his tax return information was disclosed to his customers.

A federal tax lien arises upon assessment and demand, and attaches to all property or rights to property of the taxpayer, including property acquired after the date of the assessment. 26 U.S.C. §§6321 and 6322 ; Shawnee State Bank v. U.S. [84-1 USTC ¶9513 ], 735 F.2d 308, 309 (8th Cir.1984). A properly filed Notice of Federal Tax Lien validates a tax lien as to purchasers, holders of a security interest, and judgment lien creditors. Id. , §6323 . Any third party possessing property to which a lien has attached holds that property subject to the lien, unless the third party can claim an exception under 26 U.S.C. §6323 , ¹ and once a federal tax lien has attached, it follows the property into the hands of third parties. U.S. v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958). If a person other than the taxpayer claims an interest in property seized by the government, that party may bring an action challenging the seizure under 26 U.S.C. §7426 . In a wrongful levy action under §7426 , the plaintiff carries the initial burden of showing an interest in the property. The burden then shifts to the government to prove by substantial evidence the nexus between the property and the delinquent taxpayer. The plaintiff retains the ultimate burden to prove that the levy was wrongful. Xemas, Inc. v. U.S. [88-1 USTC ¶9282 ], 689 F.Supp. 917, 922 (D. Minn.1988).

The Government contends that the property levied upon belonged to Beggs because the sales of Axis were either shams calculated to avoid tax liability, or were otherwise invalid. They also contend that even if the sales were valid, the tax liens were attached to the property at the time of any purported sales, and Rogers took the property subject to the liens.

The Court agrees that any interest Rogers acquired in Axis was subject to the attached liens. Defendant attaches certified copies of the Notices of Federal Tax Liens to the declaration of Jeffrey R. Meyer filed with their supplemental brief in support of the motion for summary judgment which clearly establishes that the tax liens had attached to Axis' property as early as 1983. A valid tax lien continues in force until the liability is paid in full or becomes unenforceable due to lapse of time, and once effective, follows the property. United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 59 (1958). It is clear that the liens attached prior to the sale of Axis to either Nicoletti or Rogers.

Plaintiff may be able to establish superior priority over a federal tax lien if the interest is acquired before the Government has filed its notice of federal tax lien. 26 U.S.C. §6323(h)(6) ; Newnham v. United States [87-1 USTC ¶9255 ], 813 F.2d 1384 (9th Cir.1987). In order to qualify as a purchaser, a person must "for adequate and full consideration in money or money's worth," acquire an interest (other than a lien or security interest) in property which is valid under local law against a subsequent purchaser without actual notice. 26 U.S.C. §6323(h) ; Newnham v. U.S. [87-1 USTC ¶9255 ], 813 F.2d 1384, 1385 (9th Cir. 1987). The statute provides that "a written executory contract to purchase or lease property ... which is not a lien or security interest shall be treated as property." 26 U.S.C. §6323(h)(6)(B) . Defendant contends Plaintiff's purchase was not for valuable consideration as he supposedly paid only $1,000 (Silverman Decl. ¶4(a) and (1)) for a business with assets which were eventually auctioned off for $53,816.50, and which Beggs valued at $12,500 in a bankruptcy petition filed September 21, 1992 . Plaintiff submits an affidavit in which he states that he purchased the business, which he contends had a net worth at the time at $45,000, subject to the responsibility to pay the liabilities and obligations of Nicoletti. He contends he paid over $15,000 towards liabilities of the business, which were obligations of Nicoletti, including various taxes which were received by the IRS. However, even assuming plaintiff paid $15,000, and assuming Axis was valued at $45,000 as plaintiff contends in his affidavit, this is still inadequate consideration, as it would be a mere 35.55% of the value of the assets. Thus, under either analysis, Rogers took Axis subject to the tax liens.

Next, Plaintiff contends that although liens on an asset follow the asset, he contends that any new assets purchased, or new interests obtained in property by making payments on the assets purchased, remain the property of the purchaser. Plaintiff contends that apart from the initial purchase of Axis, he later purchased additional assets which were seized along with all the other assets, and that he made installment payments on others. ( Rogers Dec. ¶¶16-17). He also contends he purchased a computer (which was stolen while the premises was padlocked), two fax machines and all the stock paper in the shop at the time of the seizure. Rogers also contends that the padlocking of the premises was a wrongful levy because he owned the leasehold on the premises by virtue of the sale. However, anything Beggs or Nicoletti sold Rogers was affected by the liens. In a wrongful levy suit under 26 U.S.C. §7426 , plaintiff must establish: 1) he had an interest in the property; and 2) that the interest in the property was wrongfully levied upon. 26 U.S.C. §7426(a)(1) ; 26 CFR §301.7426-1(b) ; Sessler v. U.S. [93-2 USTC ¶50,599 ], 7 F.3d 1449, 1451 (9th Cir. 1993).

As the Sessler court stated: "As the IRS has expounded in its regulations, a levy is wrongful if: 1) it's placed on property exempt under §6334 ; 2 ) it wasn't placed on property in which the delinquent taxpayer had an interest; 3) it's invalid under §6323 or 6324(a)(2) or (b) ; or 4) the plaintiff's interest in the property is senior to the federal lien and will be destroyed by the levy. 26 CFR §301.7426-1(b) ." Id. , at 1451. Rogers does not have a senior property interest to any of the property purportedly purchased from Beggs or Nicoletti because the liens attached before he purchased the property. The second exception may apply if plaintiff can show some of the property levied on was purchased by him after the sale. According to his declaration, Rogers purchased a computer (which was stolen so it was not seized or levied upon), two fax machines, and stock paper. He paid installments on the Heidelberg press, the "folder", and possibly the film processor. He was prevented from doing business for a month which caused him to lose business, lose customers, lose three sub-tenants he was sub-leasing to, and lose well over $15,000 in orders that customers were not allowed to pick up, and for which he never collected. Also, there were at least three checks seized which are identified in count one of Plaintiff's Second Amended Complaint, written by customers paying for completed orders. Rogers has contended these items were seized and sold.

The type of business entity Axis is legally considered to be and the validity of the sales of Axis are disputed issues of fact precluding summary judgment as to property acquired after the sale of Axis. This property includes the two fax machines and the stock paper. The checks identified in count one of the Second Amended Complaint represent payments for work done by Rogers as the owner of Axis. Because a material issue of fact is in dispute with regard to the validity and circumstances surrounding the transfer of Axis to Rogers, and specifically what type of business entity Axis was (i.e. sole proprietorship, etc.), the income from work performed by Rogers before the seizure (i.e. the checks identified in count one of the Second Amended Complaint) may or may not have been properly levied upon. Thus, summary judgment is denied as to the two fax machines, the stock paper and the checks identified in count one of the Second Amended Complaint.

Plaintiff cannot recover for lost business while Axis was padlocked because both the business and the equipment were properly seized, and Rogers had no right to use it to carry on his business. This would include Roger's claims for loss of business, including the orders which were not picked up during the lock-out, the loss of the sub-tenants, and the installment payments on the property that originally belonged to Axis. The only remedy available to Rogers is under 26 U.S.C §7426 . Winebrenner v. U.S. [91-1 USTC ¶50,057 ], 924 F.2d 851, 854-55 (9th Cir.1991). Lost profits or general damages are not included as remedies available under §7426 . Winebrenner, at 855 n.4. Additionally, Plaintiff's Complaint does not include a prayer for lost profits or general damages. For these reasons, and because the seizure of Axis was proper, summary judgment is granted as to all other claims by Rogers for incidental damages suffered during the seizure.

Plaintiff's third cause of action is for wrongful disclosure of his tax return information. 26 U.S.C. §7431(a)(1) provides that if "any officer or employee of the United States knowingly, or by reason of negligence, discloses any return information with respect to a taxpayer in violation of section 6103 , such taxpayer may bring a civil action for damages against the United States in a district court of the United States." Defendant contends only information from Beggs' tax returns was arguably disclosed, and Rogers only has standing to bring such an action for disclosure of his own returns. Brown v. U.S. [90-2 USTC ¶50,547 ], 755 F.Supp. 285 (N.D. Cal. 1990). Plaintiff contends that during the time he owned Axis, the IRS contacted customers who owed money to Axis and instructed them to pay the IRS directly. In his opposition, plaintiff responds to defendant's standing argument with "The question that is yet unanswered is how the customers were contacted and the extent of information disclosed to the customer. The defendant interestingly has refused to disclose the customers contacted and the extent of disclosure despite discovery requests for this information." (Opp. p. 8) Plaintiff states that the reasonable assumption made by the customers contacted was that plaintiff owed back taxes, and that the IRS intentionally did nothing to make the disclosure more clear. Defendant attaches a declaration of the IRS agent Silverman stating that at no time during that collection action were there disclosures of Rogers ' tax return information. (Silverman Decl. ¶14). Fed. R. Civ. P. 56(e) requires plaintiff's opposition to be in the form of an affidavit, not mere allegations or denials in his pleadings. British Airways Bd. v. Boeing Co., 585 F.2d 946, 951 (9th Cir.1978), cert. denied, 440 U.S. 981 (1979)(legal memorandum and oral argument are not evidence and they cannot themselves create a factual dispute to defeat summary judgment). Furthermore, a Rule 56(f) request requires an affidavit by plaintiff which must include the nature of uncompleted discovery, show that the facts sought are reasonably expected to create a genuine issue of material fact, detail what efforts affiant has made to obtain those facts, and explain why those efforts were unsuccessful. Paddinton Partners v. Bouchard, 34 F.3d 1132, 1138 (2nd Cir. 1994). Plaintiff has failed to satisfy the requirements of Rule 56(f). Therefore, a denial of summary judgment based on uncompleted discovery is inappropriate.

As a further argument, defendant contends that a prerequisite to liability under §7431 is confidentiality of the disclosed information. Schrambling Accountancy Corp. v. United States [91-2 USTC ¶50,345 ], 937 F.2d 1485, 1488 (9th Cir.1991), cert. denied, 502 U.S. 1066 (1992). Defendant contends that the notices of federal tax liens were filed prior to the purported sale of Axis, and renders Beggs' tax liabilities a matter of public record. (Silverman Decl. ¶2, Exhibits A, B and C). Once there has been an authorized disclosure of tax return information on the public record, that information loses its protected status under §6103 . Schrambling; Lampert v. United States [88-2 USTC ¶9463 ], 854 F.2d 335 (9th Cir.1988), cert. denied, 490 U.S. 1034 (1989). Finally, IRS agents are permitted to disclose tax return information if necessary to collect taxes. 26 U.S.C. §6103(K)(6) . Therefore, summary judgment is granted in favor of Defendant regarding Plaintiff's third cause of action for wrongful disclosure of tax returns.

CONCLUSION

Defendant's motion for summary judgment is granted in part and denied in part as follows:

1) Summary judgment is GRANTED to Defendant as to the levy of all assets of Axis owned by Beggs and transferred to Rogers ;

2) Summary judgment is DENIED as to the fax machines, stock paper, and the checks identified in count one of the Second Amended Complaint, as disputed issues of fact exist as to whether Rogers owned Axis and purchased these items himself, and as to whether Axis was a sole proprietorship; and

3) Summary judgment is GRANTED to Defendant on count three of Plaintiff's Second Amended Complaint for wrongful disclosure of tax return information.

IT IS SO ORDERED

¹ These exception are: the property was exempt under §6334 , the levy wasn't placed on property in which the delinquent taxpayer had an interest, the levy is invalid under §6323 or 6324(a)(2) , or the plaintiff's interest in the property is senior to the federal lien and will be destroyed by the levy. Sessler v. U.S. [93-2 USTC ¶50,599 ], 7 F.3d 1449 (9th Cir.1993).

 

 

[97-1 USTC ¶50,250] United States of America , Plaintiff v. Thomas E. O'Day, David H. Eiland, Thomas E. O'Day II, and Barnett Bank of Central Florida , Defendants

U.S. District Court, Mid. Dist. Fla., Orlando Div., 95-86-CIV-ORL-18, 12/23/96

[Code Secs. 6321 , 6323 and 7403 ]

Tax liens: After-acquired property: Fraudulent conveyances: Transfers to third parties: Priority against third parties: Bona fide purchasers: Action to enforce lien: Foreclosure.--The government was entitled to foreclose on the property of a delinquent taxpayer in satisfaction of his tax liabilities. The taxpayer's transfer of the property following the issuance of assessments to his son and stepson while retaining a life estate was fraudulent under state ( Florida ) law. The taxpayer received no consideration and continued to live on the property. Therefore, the transferees acquired their interest in the property subject to the government's tax lien. Furthermore, the tax lien was superior to the transferees' interest because they were not bona fide purchasers.

[Code Sec. 6203 ]

Assessments: Presumption of correctness.--A delinquent taxpayer failed to present evidence refuting the accuracy of IRS assessments made against him. Therefore, he did not meet his burden of proving that the assessments were arbitrary or erroneous.

[Code Sec. 6871 ]

Bankruptcy: Dischargeability.--Since a delinquent taxpayer fraudulently attempted to evade tax by conveying property to his son and stepson, closing his bank accounts, and dealing solely in cash, his tax liabilities were not dischargeable in bankruptcy. Instead, the liabilities were reduced to a judgment in favor of the government.

Karen L. Gable, Orlando, Fla. 32801, Brian L. Schwalb, Department of Justice, Washington, D.C. 20530, for plaintiff. Roy L. Beach, 1415 E. Rob inson St. , Orlando , Fla. 32801 , for Thomas E. O'Day. Roy L. Beach, 1415 E. Rob inson St. , Orlando , Fla. 32801 , for David H. Eiland. Dkyes C. Everett, Winderweedle, Haines, Ward & Woodman, P.A., 390 N. Orange Ave., Orlando, Fla. 32802, for Barnett Bk. of Cent. Fla. , N.A.

ORDER

SHARP, District Judge:

The United States of America brings this instant action against Thomas E. O'Day (O'Day), David H. Eiland (Eiland), Thomas E. O'Day II (O'Day II), and Barnett Bank of Central Florida (Bank) alleging that O'Day failed to pay his federal tax liabilities owed to the federal government. In their suit, the government seeks to have the court: (1) determine and adjudge O'Day's tax liability; (2) determine the respective priorities of the federal tax liens already in place; (3) determine that a purported real property transfer was fraudulent and void pursuant to Florida Statute chapter 726.105(1); (4) order a foreclosure of the federal tax liens; and (5) grant a deficiency judgment against O'Day if the proceeds from the sale of the real property do not satisfy his indebtedness. The case is presently before the court on the United States' motion for summary judgment against defendants O'Day and Eiland, ¹ to which the defendant have responded in opposition. Following a review of the case file and relevant law, the court concludes that the United States ' motion should be granted.

I. Findings of Fact

After an examination by the Internal Revenue Service (IRS) of O'Day's federal income tax returns, they determined that O'Day owed the federal government additional taxes, plus interest and penalties for the years of 1981, 1982, 1984, 1985, 1986. Following an audit, the IRS sent O'Day a Notice of Deficiency and Report of Individual Income Tax Examination Changes for the years 1982, 1984 and 1985 which explained the basis of the proposed income tax adjustments and also advised O'Day of his right to challenge the proposed adjustments in the United States Tax Court. Additionally, O'Day signed a Revised Report of Individual Income Tax Examination Changes for the 1986 tax year acknowledging his agreement with the IRS adjustment of the 1986 tax liability and waived his right to exercise his admin istrative appellate rights or to contest the adjusted tax deficiency in the United States Tax Court. Because O'Day did not file a petition with the United States Tax Court challenging the IRS adjusted liabilities for the years of 1981, 1982, 1984 and 1985, the Secretary of the Treasury issued assessments against O'Day for his tax deficiencies, plus interest and penalties. The IRS, pursuant to 26 U.S.C. §6.303(a), also sent O'Day notice of his tax liabilities and demands for payment. Later, O'Day failed to file an income tax return for 1990 and the IRS sent him a Notice of Deficiency. Since O'Day took no action contesting the notice, the Secretary of the Treasury issued an assessment and demand for payment of his tax liability. As of November 1, 1996 , O'Day's unpaid assessed federal income tax liability for the years 1981, 1982, 1984, 1985, 1986, and 1990 totaled $55,011.57.

While O'Day was involved in his tax controversy, he worked as a modest electrical contractor, usually out of his home. O'Day has and continues to live in the same residential property which he purchased on February 27, 1969 . ² But, on March 9, 1990 , O'Day allegedly conveyed his interest in the subject property to his son, O'Day II, and his stepson, Eiland, while retaining a life estate in the property for himself. Neither O'Day II or Eiland paid O'Day any consideration for the interest in the subject property and O'Day has continued to reside on and oversee the management of the property.

On September 25, 1995 , O'Day filed for Chapter 7 bankruptcy protection in the United States Bankruptcy Court for the Middle District of Florida, Orlando Division. As a result, this civil action was stayed until O'Day's bankruptcy proceeding had concluded. On January 4, 1996 , the Bankruptcy Court entered an order of discharge, resulting in the removal of the automatic stay and the renewal of this civil suit.

II. Legal Discussion

A. Summary Judgment Standards

Summary judgment is authorized 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); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). "[A]t the summary judgment stage the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson, 477 U.S. at 249. "[T]he substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Id. at 248.

The moving party bears the burden of proving that no genuine issue of material fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In determining whether the moving party has satisfied the burden, the court considers all inferences drawn from the underlying facts in a light most favorable to the party opposing the motion, and resolves all reasonable doubts against the moving party. Anderson, 477 U.S. at 255; see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88 (1986). The moving party may rely solely on his pleadings to satisfy this burden. Celotex, 477 U.S. at 323-24; Fed. R. Civ. P. 56(c).

"[A]ll that is required [to proceed to trial] is that sufficient evidence supporting the claimed factual dispute be shown to require a jury or judge to resolve the parties' differing versions of the truth at trial." Anderson, 477 U.S. at 249 (quoting First Nat'l Bank v. Cities Serv. Co., 391 U:S. 253, 288-89 (1968)). Summary judgment is mandated, however, "against a party who 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, 477 U.S. at 322.

B) The Merits of Plaintiff's Motion

In their motion for summary judgment against O'Day and Eiland, the government seeks to foreclose the federal tax liens placed on the subject property, and to reduce the assessed tax liabilities to judgment entered in the government's favor. The court will address each issue in their respective order.

1) Foreclosure of Federal Tax Liens

In their motion for summary judgment, the government explained how the tax lien issued against O'Day's property pursuant to 26 U.S.C. §§6321 and 6622 was lawfully executed and thus capable of a foreclosure action. Section 6321 states in pertinent part that:

[I]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321 (1994). Section 6322 goes on to state that "unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time of assessment is made and shall continue until the liability for the amount so assessed ... is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322 (1994). The government maintains that because it holds a lawful lien against any interest O'Day has in any property, that the court may force the sale of such property to satisfy the debtor's obligation to the government pursuant to 26 U.S.C. §7403. Section 7403 states that:

[T]he court shall, after the parties have been notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and ... may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according the findings of the court in respect to the interests of the parties and of the United States....

26 U.S.C. §7403 (1994). Accordingly, the government is motioning this court to allow them to foreclose on the subject property and use the sale proceeds to satisfy O'Day's federal tax obligations.

In response to the government's motion, O'Day contends that the government is not entitled to foreclose on the subject property for two reasons. First, O'Day claims that when he voluntarily filed for Chapter 7 bankruptcy protection, all creditor claims and liens against him and his property were thereby discharged. Second, O'Day contends that he conveyed his interest in the subject property to his son and stepson and thus the subject property is not susceptible to the government's foreclosure action.

While attempting to foreclose on the subject property and have the proceeds used to satisfy O'Day's tax liabilities, O'Day argues that his Chapter 7 bankruptcy and the bankruptcy court's order of discharge absolved him of payment of those liabilities. The government denies that O'Day's Chapter 7 bankruptcy discharged his federal tax liabilities, and argues that even if O'Day's assertions were true, that such a discharge does not prohibit the government from seeking to foreclose the tax liens on O'Day's interest in real property resulting from those federal tax liabilities. The government cites to several United States Supreme Court cases which support their position. See Dewsnup v. Timm, 502 U.S. 410, 418 (1992) (stating that a bankruptcy discharge extinguishes only one mode of enforcing a claim--namely, an action against the debtor in personam--while leaving intact another--namely, an action against the debtor in rem) (quoting Johnson v. Home State Bank, 501 U.S. 78, 84 (1991)) (emphasis in original); Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991) (stating that ordinarily, liens and other secured interests survive bankruptcy). See also, In Re Millsaps, 133 B.R. 547, 550 (Bankr. M.D. Fla. 1991) (holding that whether or not the personal prepetition tax obligations are discharged, however, exempt real property remains subject to any properly filed tax liens). The court agrees with the government's argument and finds that the O'Day's Chapter 7 bankruptcy does not prohibit the government from seeking to foreclose on the subject property in an effort to satisfy O'Day's tax liabilities.

Next, O'Day argues that even if the government is entitled to foreclose their federal tax liens on the subject property, he claims that he properly conveyed the property to O'Day II and Eiland while retaining a life estate interest for himself. O'Day claims that he suffers from a serious medical condition, hyperliperdemia, which was the cause of death for both of his parents. He contends that he was afraid of the same fate occurring to him, so as an estate planning exercise, he conveyed the subject property to both O'Day II and Eiland. (O'Day Aff. at 1; Doc. 52).

The government maintains that even if O'Day trasferred his interest to the subject property to O'Day II and Eiland, that it can still foreclose the property to recoup O'Day's tax liabilities for three reasons. First, the government claims that both O'Day II and Eiland transferred their interest in the subject property back to O'Day by use of a quitclaim deed, though O'Day never recorded the instrument. The government offers two documents (Doc. 34; Exh. 9, 10) which purport to show that both O'Day II and Eiland executed and delivered quitclaim deeds relinquishing all their interest in the subject property back to O'Day for the sum of $10 on May 2, 1992 , and June 10, 1992 respectively. The deeds, however, were never recorded by O'Day. The government claims that O'Day's failure to record the quitclaim deeds does not affect O'Day's ownership interest in the subject property. See Sweat v. Yates, 463 So. 2d 306, 307 (Fla. Dist. Ct. App. 1984) (holding that a deed takes effect from the date of delivery, and the recording of a deed is not essential to its validity as between the parties or those taking with notice).

Second, the government contends that if O'Day II and Eiland still possess an interest in the subject property, that they acquired the property subject to a federal tax lien which allows the government to foreclose. The government contends that both O'Day II and Eiland allegedly acquired their interests in the subject property on March 9, 1990 , after the government had already made assessments, demands for payment, and the imposition of liens against O'Day for his tax liabilities. The government relies heavily on the United States Supreme Court case of United States v. Bess, which states that a "transfer of property subsequent to the attachment of the lien does not affect the lien, for it is the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere...." United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958) (citations omitted). See also, United States v. Avila [96-2 USTC ¶50,357], 88 F.3d 229, 233 (3rd Cir. 1996) (holding that a transfer of property subsequent to the attachment of a lien does not affect the lien); accord Jarro v. United States, 830 F. Supp. 606, 608 (S.D. Fla. 1993) (holding that tax liens follow the property to which they have attached wherever it may be transferred). Thus, the court finds that O'Day II and Eiland acquired their interest in the subject property subject to a federal tax lien which allows the government to foreclose on the subject property.

The government also contends that because O'Day II and Eiland were not bona fide purchasers of the subject property, that they are not entitled to any protection. See Rodeck v. United States, 697 F. Supp. 1508, 1510 (D. Minn. 1988) (holding that a lien need not be filed to be effective against the delinquent taxpayer or against third party claimants of the taxpayer's property except for those creditors and transferees specifically protected under section 6323(a), which provides that a federal tax lien will not be superior to four particular interests unless notice of that lien has been properly filed). Section 6323(a) provides that a lien imposed by section 6321, as is the case here, shall not be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditors. 26 U.S.C. §6323(a) (1994). Section 6323 goes on to define a purchaser as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property...." 26 U.S.C. §6323(h)(6) (1994). Because the governments claims that neither O'Day II nor Eiland paid any consideration for their interest in the subject property, the two can not be considered "purchasers" for section 6323 purposes and therefore the federal lien is superior to any interest O'Day or Eiland may have in the subject property. The court agrees with the government's argument and concludes that foreclosure of the federal tax liens on the subject property is lawful and will therefore grant their motion for summary judgment on that issue.

Because the court determined that summary judgment was appropriate on the government's motion for foreclosure on the subject property, it need not analyze the government's remaining arguments, namely that O'Day's transfer of the subject property constituted a fraudulent conveyance and thus not subject to protection. The court notes however that it agrees with the government's argument and finds that O'Day's supposed transfer to O'Day II and Eiland constituted a fraudulent conveyance. In support of their argument, the government cites to Florida Statute chapter 726.101 which states in pertinent part that:

[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

Fla. Stat. Ch. 726.101(1) (1995). Prior to conveying the subject property, O'Day was indebted to the government for unpaid, assessed income tax liabilities. Neither O'Day II nor Eiland paid O'Day any consideration for the subject property, and after the conveyance. O'Day was rendered insolvent. Thus, all the elements of Florida Statute chapter 726.101 are satisfied. In addition to satisfying Florida Statute chapter 726.101, certain actions made by O'Day may constitute badges of fraud and render the conveyance fraudulent as well. The court may use various kinds of circumstantial evidence to infer fraudulent intent since direct evidence of such an intent rarely exists. In re Griffith , 161 B.R. 727, 733 (Bankr. S.D. Fla. 1993) (citations omitted). Some of these badges of fraud include: (1) inadequate financial records; (2) transfer of assets to a family member; (3) transfer for inadequate consideration; (4) transfer that greatly reduced assets subject to IRS execution; (5) transfers that were made in the face of serious financial difficulties. Id. O'Day satisfies all of these examples as evidence of badges of fraud. While O'Day contends that his transfer was simply for estate planning purposes, the court is not persuaded. The court agrees with the governments contentions outlined in their memorandum and concludes that O'Day's March 9, 1990 transfer of the subject property was fraudulent and therefore the government has the authority to foreclose their federal tax liens on the subject property.

2) Reduce Assessed Tax Liabilities to Judgment

In addition to foreclosing the federal tax liens on the subject property, the government wishes to reduce O'Day's assessed income tax liabilities to judgment. When evaluating the IRS's tax liability determinations, the court is required to consider their conclusions presumptively correct. See United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1018 (11th Cir. 1989) (stating that the Certificate of Assessment and Payment submitted by the government is presumptive proof of a valid claim); George v. United States [87-2 USTC ¶9384], 819 F.2d 1008, 1013 (11th Cir. 1987) (stating that the commissioner's determination of a tax deficiency is presumed to be correct and that the taxpayer bears the burden of proving otherwise). Once the Certificate of Assessments and Payment is filed, the burden then shifts to the taxpayer to show that the government's assessment was arbitrary or incorrect. Bar L Ranch, Inc. v. Phinney [70-1 USTC ¶9399], 426 F.2d 995, 999 (5th Cir. 1970). If the taxpayer does not present evidence indicating to the contrary, a district court may properly rely on the certificates and conclude that valid assessments were made. Guthrie v. Sawyer [92-2 USTC ¶50,391], 970 F.2d 733, 737-38 (10th Cir. 1992) (citing Hughes v. U.S., 531 F.2d 531, 535 (9th Cir. 1992)).

The government cites to numerous examples of how O'Day failed to present evidence or question the incorrectness of the assessments, and thereby fails to meet his burden of proof in this case that the assessments were erroneous. First, the government points out that O'Day voluntarily signed a Revised Report in 1986 consenting to the change in assessments made for that year. Second, the government mentions that O'Day failed to file a petition with the Tax Court regarding any of the assessments at issue in this case. The government argues that a taxpayer:

cannot rebut the Government's assessment on mere allegations that such assessment was arbitrary, excessive, invalid and illegal. The assessment can be overturned only by the taxpayer producing records and other evidence which clearly demonstrates the proper amount of tax which he owes the Government. Failing to produce such evidence, the Government's assessment is entitled to be reduced to judgment.

Ginsburg v. United States [67-2 USTC ¶15,757 ], 1967 WL 14746 (C.D. Cal. 1967), aff'd [69-1 USTC ¶15,888 ], 408 F.2d 1016 (9th Cir. 1969) (citing O'Neill v. United States [61-2 USTC ¶15,371 ], 198 F. Supp. 367, 370 ( E.D. N.Y. 1961). Because O'Day can not substantiate his expenses or deductions, or demonstrate the source of his unreported income due to the inadequacy or non existence of any records, the government argues that it is proper to reduce the assessments to judgments in favor of the government.

Without producing any records or evidence of the government's error in calculating their assessment, O'Day relies on his filing for Chapter 7 bankruptcy protection for discharging his federal income tax liabilities. The court has previously ruled that O'Day's filing for Chapter 7 bankruptcy protection did not discharge the government's lien against his real property, and now rules that his tax liabilities were not discharged either. First, because O'Day failed to file a tax return for the year 1990, the government prepared a substitute return for him. Accordingly, O'Day is not entitled to a discharge for a return that was never filed. See 11 U.S.C. §523(a)(1)(B)(i) (1994) (stating that a discharge under section 727 ... does not discharge an individual debtor from any debt for a tax ... with respect to which a return, if required--was not filed). Because O'Day presents no evidence to disprove the IRS's assessment, the court must presume it to be correct. George [87-2 USTC ¶9384], 819 F.2d at 1013.

Additionally, the government contends that a debtor is not entitled to have his tax liabilities discharged if he acted fraudulently while preparing a return or attempting to evade the tax due. See 11 U.S.C. §523(a)(1)(C) (1994) (stating that a discharge under section 727 ... does not discharge an individual debtor from any debt--from a tax or a customs duty--with respect to which the debtor made a fraudulent return or wilfully attempted in any manner to evade or defeat such tax). The government argues that O'Day fraudulently transferred his interest in the subject property to protect it from seizure; closed all of his bank accounts and began dealing solely in cash to avoid an IRS levy; in addition to filing several frivolous lawsuits. The court notes that:

[O]ne of the primary purposes of the Bankruptcy Code is to give the "honest but unfortunate" debtor a fresh start. Disallowing a discharge of tax debts owed by debtors who endeavored to evade taxes will not undermine the Bankruptcy Code's fresh start objective; however, it will promote an equally important objective expressed by Congress, namely that the Bankruptcy Code not become an inappropriate tax evasion device.

In re Spirito, 198 B.R. 624, 629 (Bankr. M.D. Fla. 1996). As recited earlier in the government's argument seeking a foreclosure on the subject property in Count I, the court agrees with the government's contentions that O'Day acted fraudulently and in an attempt to disrupt and impede the government's efforts from imposing and collecting his tax liabilities. Therefore, the court concludes that O'Day's tax liabilities were not discharged by his Chapter 7 bankruptcy filing and that his liabilities should be reduced to a judgment in favor of the government. Accordingly, the court will grant the government's motion seeking such a result.

III. Conclusion

In their motion for summary judgment, the government sought to foreclose the federal tax lien placed on O'Day's property and to reduce O'Day's assessed tax liabilities to judgment entered in the government's favor. First, the court finds that O'Day II and Eiland took whatever interest they may have in O'Day's property subject to the government's lien. Additionally, the court finds that O'Day's conveyance of the subject property was fraudulent in violation of Florida statute chapter 726.101(1). For both of the above reasons, the court concludes that the government is entitled to foreclose on the subject property to satisfy O'Day's assessed federal tax liability. Next, the court finds that the IRS' certificates and assessments are presumptively correct and that O'Day failed to meet his burden to persuade the court otherwise. Additionally, the court concludes that because both his property conveyance and attempted evasion of his tax liabilities were fraudulent activities, O'Day's tax liabilities were thereby never discharged by his filing for Chapter 7 bankruptcy protection. There being no issue of material fact to preclude the entry of judgment, the court GRANTS the government's motion for summary judgment (Doc. 42) and directs the Clerk of Court to enter judgment accordingly.

It is SO ORDERED.

¹ O'Day II is not a named party in the government's present motion for summary judgment. O'Day II has already waived service of process and because he did not answer the government's compliant within 60 days of his waiver pursuant to Fed. R. Civ. P. 12, the government is filing an application for an entry of default on O'Day II in a separate legal action.

² The subject property is more fully described as: Lot 21, SUNLAND ESTATES, FIRST ADDITION, as per plat thereof recorded in Plat Book 12 at pages 97 and 98 of the Public Records of Seminole County, Florida. The mailing address of the subject property is 307 Tucker Drive , Sanford , Florida 32773 .

 

 

[96-1 USTC ¶50,171] Internal Revenue Service, Appellant v. Sandra E. Diperna, Appellee

U.S. District Court, East. Dist. N.C., West. Div., 5:95-CV-555-BR, 2/25/96 , 195 BR 358, 195 BR 358. Reversing an unreported Bankruptcy Court decision

[Code Sec. 6323 ]

Bankruptcy: Tax liens: Superpriority: Bona fide purchaser: Trustee: Debtor.--A trustee of a Chapter 13 bankruptcy estate could not avoid tax liens on the debtor's car and household goods where notice of the liens was filed before the bankruptcy petition. Although the trustee stepped into the shoes of a bona fide purchaser for purposes of the Bankruptcy Code, the trustee was not entitled to the protection of the Internal Revenue Code's superpriority provisions regarding purchasers who do not have notice of the tax lien. In order to receive protection, the trustee needed not just purchaser status but also possession of the car before obtaining actual notice or knowledge of the tax lien. Furthermore, the trustee, as hypothetical purchaser of the household goods in a casual sale for less than $250, would be protected only if the trustee did not have actual notice or knowledge of the lien or that the sale was one of a series of sales. In addition, the debtor could not avoid the tax liens since she was not a purchaser for purposes of the superpriority provisions.

Lawrence P. Blaskopf, Department of Justice, Washington , D.C. 20530 , for appellant. William E. Brewer, Jr., 619 N. Person St., Raleigh, N.C. 27604, Trawick H. Stubbs, Jr., Stubbs, Perdue, Chesnutt, Wheeler & Clemmons, 215 Broad St., New Bern, N.C. 28563-1654, for appellee.

ORDER

BRITT, District Judge:

Before the court is the Internal Revenue Service's ("IRS") appeal from the decision of the bankruptcy court granting the joint motion of appellee Sandra E. Diperna and the Chapter 13 trustee to avoid federal tax liens. For the reasons discussed below, the decision of the bankruptcy court is REVERSED.

I. FACTS

Appellee filed a Chapter 13 bankruptcy petition on 27 October 1994 . Thereafter, the IRS filed a proof of claim in the amount of $8140.50, claimed as secured by federal tax liens. On 14 February 1995, appellee and the trustee filed a motion to avoid the liens on appellee's automobile and on her household goods with an individual value of $250.00 or less pursuant to 11 U.S.C. §545(2) and 26 U.S.C. §6323(b) . The IRS opposed the motion. After a hearing on 2 May 1995 , U.S. Bankruptcy Judge A. Thomas Small, by order dated 8 May 1995 , granted the motion. This appeal followed.

II. STANDARD OF REVIEW

The court reviews the bankruptcy court's legal conclusions de novo. Umholtz v. Brady, 169 B.R. 569, 572 (E.D.N.C. 1993), aff'd, 27 F.3d 564 (4th Cir. 1994)(table).

III. DISCUSSION

The primary issue on appeal concerns the relationship between the Bankruptcy Code, 11 U.S.C. §545(2) , and the Internal Revenue Code ("IRC"), 26 U.S.C. §6323 . Section 545(2) provides that

[t]he trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or nor such a purchaser exists.

"Pursuant to this section, a trustee may step into the shoes of a hypothetical bona fide purchaser and claim the same defenses to statutory liens on a debtor's property as would a bona fide purchaser." United States v. Hunter (In re Walter) [95-1 USTC ¶50,072 ], 45 F.3d 1023, 1027 (6th Cir. 1995). Federal tax liens, which arise pursuant to 26 U.S.C. §§6321 ¹ and 6322, ² are statutory liens within the meaning of the Bankruptcy Code, Rob inson v. United States (In re Carolina Resort Motels, Inc.), 51 B.R. 447, 449 (D.S.C. 1985); see also 11 U.S.C. §101(53) , thus, they are subject to avoidance. In re Walter [95-1 USTC ¶50,072 ], 45 F.3d at 1027.

Although a tax lien arises automatically upon assessment, see 26 U.S.C. §6322 , the lien is not valid against third parties until the IRS files notice of the lien, see id. §6323(a) . However, the IRC does give superpriority to those who purchase certain property from the taxpayer after such notice has been filed. 4 Collier on Bankruptcy ¶545.04[3] (15th ed. Supp. 1995). The IRC, §6323(b) , states in relevant part:

Even though notice of a lien ... has been filed, such lien shall not be valid. ... (2) Motor vehicles.--With respect to a motor vehicle ... as against a purchaser of such motor vehicle, if--

(A) at the time of the purchase such purchaser did not have actual notice or knowledge of the existence of such lien, and

(B) before the purchaser obtains such notice or knowledge, he has acquired possession of such motor vehicle and has not thereafter relinquished possession of such motor vehicle to the seller or his agent....

(4) Personal property purchased in casual sale.--With respect to household goods, personal effects, or other tangible personal property ... purchased (not for resale) in a casual sale for less than $250, as against the purchaser, but only if such purchaser does not have actual notice or knowledge (A) of the existence of such lien, or (B) that this sale is one of a series of sales.

The purpose of this superpriority section is to encourage the transfer of specified properties and protect those who purchase such property without notice of the tax lien. In re Walter [95-1 USTC ¶50,072 ], 45 F.3d at 1031 n.7.

In this case, the IRS filed notice of its tax liens prior to the appellee's filing of her Chapter 13 petition. Appellee argues that "bona fide purchaser" as that term is used in the Bankruptcy Code §545(2) includes "purchasers" who are given superpriority status under the IRC §6323(b)(2) and (4) . On the other hand, appellant contends that although the trustee is a hypothetical bona fide purchaser, the trustee does not fall within the protection of the IRC's superpriority provisions so as to be able to avoid the tax liens on appellee's automobile and household goods.

At the outset, the court must address whether a "bona fide purchaser" under §545(2) is entitled to the protection afforded a "purchaser" under §6323(b) . "Purchaser" is defined as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice." 26 U.S.C. §6323(h)(6) . The Bankruptcy Code does not define "bona fide purchaser." Thus, the court will accord the term its ordinary meaning. See Reed v. Health & Human Servs., 774 F.2d 1270, 1274 (4th Cir. 1985)("The starting point for construing the statute is therefore an examination of the ordinary meaning of the undefined term; '[w]here Congress uses terms that have accumulated settled meaning ..., a court must infer ... that Congress means to incorporate the established meaning of these terms.' " (citation omitted)), rev'd on other grounds, 481 U.S. 368 (1987). "Bona fide purchaser" has traditionally been defined as "[o]ne who has purchased property for value without any notice of any defects in the title of the seller." ³ Black's Law Dictionary 177 (6th ed. 1990).

"[V]alue" is a much lower standard than "adequate and full consideration in money or money's worth." Because a bona fide purchaser is not necessarily a purchaser for purposes of [IRC] §6323(b)(2) , it follows that a trustee standing in the shoes of a hypothetical bona fide purchaser does not fall within the protection of this statute.

In re Walter [95-1 USTC ¶50,072 ], 45 F.3d at 1030-31 (footnotes omitted) (citing In re Helper, No. 93-71086, 1993 WL 453370, at *2 (Bankr. D.S.C. July 30, 1993 ); In re McNitt [92-2 USTC ¶50,427 ], 139 B.R. 21, 23 (Bankr. D. Idaho 1992); In re Bates [88-1 USTC ¶9124 ], 81 B.R. 63, 64 (Bankr. D. Or. 1987)); see also United States v. Battley (In re Berg), 188 B.R. 615, 619-20 (Bankr. 9th Cir. 1995); United States v. Weissing [95-2 USTC ¶50,449 ], No. 93-1507, 1995 WL 579928, at *4-5 (M.D. Fla. July 20, 1995). But see Askanase v. United States (In re Guyana Dev. Corp.), 189 B.R. 393, 397 (Bankr. S.D. Tex. 1995); United States v. Branch [94-2 USTC ¶50,406 ], 170 B.R. 577, 579 (E.D.N.C. 1994); United States v. Sierer, 139 B.R. 752, 755 (N.D. Fla. 1991). See generally 4 Collier on Bankruptcy, supra, ¶¶545.02-545.04; Morgan D. King & Jonathan H. Moss, Avoiding Tax Liens on Personal Property in Bankruptcy: A Look at the Interplay Between the Bona Fide Purchaser Provisions of the Tax and Bankruptcy Codes, 31 Cal. W. L. Rev. 1 (1994).

Even if the court were persuaded that a trustee was entitled to the protection of §6323(b) , the subsections of §6323(b) at issue here require something in addition to purchaser status in order for the tax lien to be invalid as to the purchaser. With respect to motor vehicles, the purchaser must have acquired possession of the vehicle before obtaining actual notice or knowledge of the tax lien. 26 U.S.C. §6323(b)(2) . Furthermore, a purchaser of personal property in a casual sale ⁴ for less than $250 is protected only if the purchaser did not have actual notice or knowledge of the lien or that the sale was one of a "series of sales." ⁵ Id. §6323(b)(4) . Although the trustee steps into the shoes of a bona fide purchaser, this is all he or she does; the court will not assume that the trustee has characteristics beyond that which a hypothetical bona fide purchaser would have. See In re Walter [95-1 USTC ¶50,072 ], 45 F.3d at 1033-34 ("[W]here a bona fide purchaser is without the power to avoid a lien because the controlling law requires something more than mere bona fide purchaser status for protection, the trustee also is without power to avoid the lien."); Weissing, at *5 (holding Bankruptcy Code does not grant the hypothetical bona fide purchaser "hypothetical possession" of a vehicle); Sierer, 139 B.R. at 755 (same); In re Williams, 109 B.R. at 181 (same); In re Bates [88-1 USTC ¶9124 ], 81 B.R. 63, 64 (Bankr. D. Or. 1987) (holding trustee is not granted hypothetical possession nor is he or she placed in the situation required by §6323(b)(4) ). But see Branch [94-2 USTC ¶50,406 ], 170 B.R. at 579.

Finally, appellant contends that the appellee-debtor lacks standing to avoid the IRS' lien. Assuming without deciding that the debtor has standing, the above analysis applies with equal force to the debtor. See In re Walter [95-1 USTC ¶50,072 ], 45 F.3d at 1033-34 (Chapter 11 debtors-in-possession are not purchasers within §6323(b)(2) ); In re Williams, 109 B.R. at 181 (Chapter 13 debtors cannot avoid tax liens); In re Bates [88-1 USTC ¶9124 ], 81 B.R. at 64 (Chapter 13 debtor, whose rights are derived from the trustee's avoiding powers, may not avoid lien when trustee not granted hypothetical possession).

For the foregoing reasons, the decision of the bankruptcy court is REVERSED.

¹ 26 U.S.C. §6321 provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (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.

² "[T]he lien imposed by section 6321 shall arise at the time the assessment is made...." 26 U.S.C. §6322 .

³ Because the statutory language of §545(2) is plain and unambiguous, the court need not resort to its legislative history. See Stiltner v. Beretta U.S.A. Corp., -- F.3d --, No. 94-1323, 1996 WL 42225, at *7 (4th Cir. Feb. 2, 1996); In re Walter [95-1 USTC ¶50,072 ], 45 F.3d at 1027 n.2. Furthermore, the history is of little assistance, as it is confusing and Congress' intent is unclear. See In re Walter [95-1 USTC ¶50,072 ], 45 F.3d at 1027 n.2 (citing Znider v. United States (In re Znider) [93-1 USTC ¶50,165 ], 150 B.R. 239, 242 (Bankr. C.D. Cal.), vacated on other grounds, 167 B.R. 603 (C.D. Cal. 1993); In re Williams, 109 B.R. 179, 182 (Bankr. W.D.N.C. 1989)). But see United States v. Sierer, 139 B.R. 752, 754 (N.D. Fla. 1991).

⁴ A casual sale is one not in the ordinary course of the seller's business. Treas. Reg. §301.6323(b)-1(D)(1) .

⁵ "[A] sale is one of a series of sales if the seller plans to dispose of, in separate transactions, substantially all of his household goods, personal effects, and other tangible personal property...." Treas. Reg. §301.6323(b)-1(D)(2) (ii).

 

 

[95-1 USTC ¶50,268] In re Rogelio Suarez, Debtor. Rogelio Suarez and Rob ert L. Roth, Trustee, Plaintiffs v. United States of America , Defendant

U.S. Bankruptcy Court, So. Dist. Fla., 93-14505-BKC-AJC, 4/17/95

[Code Sec. 6323 ]

Validity of lien: Bankruptcy: Judgment creditor: Purchaser: Exempt property.--

An IRS lien against the real property of a debtor was avoidable in bankruptcy, even though the lien was valid because the debtor, who received the property in a divorce settlement, was not a purchaser or a judgment creditor. Although the deed of conveyance was not recorded until after the IRS filed its notice of lien, the property was conveyed, under applicable state ( Florida ) law, upon the recordation of the final order of distribution of the marital assets prior to the filing of the notice of lien. However, the debtor's relinquishment of marital rights did not constitute a consideration in money or money's worth. In addition, the debtor was not a judgment lien creditor. The final order and final judgment in the divorce proceeding did not create a lien. It merely reordered pre-existing property interests and created new interests in the place of old. Alternatively, even if the final order created a lien, the final order did not have the requisite finality to give it priority over the IRS lien because the amount of the lien was not established. However, the debtor elected to exempt the property as his homestead. Therefore, because the IRS did not file its notice of tax lien until after the debtor filed for bankruptcy, the lien was avoidable.

Jordan E. Bublick, 11645 Biscayne Blvd., #208, North Miami Beach, Fla., 33181, for attorneys. Rob ert L. Roth, Keith, Mack, Lewis, Cohen & Lumpkin, 200 S. Biscayne Blvd. , Miami , Fla. 33131-2310 , for trustees.

Memorandum Decision on Complaint to Determine Extent, Validity, and Priority of Claims

CRISTOL, Chief Judge:

This Cause came before the Court on August 16, 1994 on Plaintiffs', Rogelio Suarez and Rob ert L. Roth, Trustee, Second Amended Complaint to Determine Extent, Validity, and Priority of Liens of the United States of America (hereinafter "IRS") for Federal Income Taxes, Penalties and Interest, and Complaint to Avoid Liens, if Any. The matter is before the Court on the stipulated facts as set forth in the agreed Pretrial Order, entered on August 3, 1994 , and the exhibits submitted by both parties.

Plaintiffs seek a determination by the Court that the IRS does not hold a lien on any of the property of the estate or property of the debtor, or in the alternative, to the extent that the IRS may hold a lien on any property of the estate, such lien is avoidable.

Agreed Upon Facts

1. On September 17, 1979 , Debtor and his now-former wife, Magaly Suarez, purchased the real property located at 1424 S.W. 17th Terrace, Miami , Florida (hereinafter "the Property"). Such real property is more completely described as:

Lot 8, Block 5 of Parkway Addition, as recorded in Plat Book 41 at Page 77 of the Public Records of Dade County, Florida.

2. On July 3, 1990 Plaintiff, Rogelio Suarez, filed for divorce from his wife Magaly Suarez, Case No. 90-31995 FC (26), Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida.

3. The dissolution case was bifurcated for hearing between non-economic issues and economic issues. The non-economic issues were disposed of in a Final Order dated August 8, 1991 . The economic issues, including the issue of awarding property, were disposed of in a Final Order on General Master's Concluding Report and Judgment on all Economic Issues (hereinafter "Final Order") dated December 2, 1991.

4. The Final Order of December 2, 1991 stated in pertinent part:

[T]hat the Court . . . grants the Petitioner/Husband the exclusive occupancy, possession, and ownership of the former marital home with the Wife to execute a Quit Claim Deed to the Husband of all her right, title, and interest in said real property located at 1424 S.W. 17th Terrace, Miami Florida . . . forthwith with the Husband to be thereafter responsible for the Internal Revenue Service lien, the existing mortgage and all other encumbrances on said real property. (emphasis provided) (¶3 of Final Order).

5. The Final Order was recorded December 4, 1991 in the Official Records of Dade County, Official Records Book 15290, Page 2643.

6. The following federal income taxes were assessed against both Rogelio Suarez and Magaly Suarez jointly:

Tax Year                              Date Assessed               Amount Owed

1984                                       
12-16-91
                 $2,790.22

1985                                       
11-25-91
                 $4,213.50

1986                                       
12-02-91
                 $2,051.01

1987                                       
02-24-92
                   $575.82

1988                                       
11-11-91
                 $4,649.50

 

7. The following federal income taxes were assessed against Rogelio Suarez individually:

Tax Year                              Date Assessed               Amount Owed

1989                                       
11-11-91
                 $6,049.04

1990                                       
12-09-91
                 $3,074.03

1991                                          *  1                  $2,981.00

 

8. On June 17, 1993 , Magaly Suarez delivered a quit-claim deed of her interest in the Property to Rogelio Suarez. The quit-claim deed was recorded on November 30, 1993 .

9. On November 16, 1993 , Rogelio Suarez filed a Chapter 13 petition for bankruptcy.

10. On November 17, 1993, the IRS filed its Notice of Tax Lien in the Public Records of Dade County, Florida pursuant to 26 U.S.C. Section 6323 ("I.R.C. 6323") as to the income tax assessments against Rogelio Suarez and Magaly Suarez for tax years 1984, 1985, 1986, 1987, and 1988.

11. On November 17, 1993 , the IRS filed its Notice of Tax Lien in the Public Records of Dade County, Florida pursuant to 26 U.S.C. Section 6323 as to the income tax assessments against Rogelio Suarez individually for tax years 1989 and 1990.

12. On December 9, 1993 , the IRS filed its "Notice of Inadvertently Filed Notice of Federal Tax Lien," which acknowledged that the two notices of federal tax lien filed on November 17, 1993 were mistakenly filed, in violation of the automatic stay. In its December 9th Notice, the IRS claimed that such notification "does not release the lien imposed by I.R.C. 6321."

13. On January 28, 1994 , the IRS filed an amended proof of claim declaring general unsecured claims for tax years 1984-1990 in the sum of $30,904.49; and unsecured priority claims for tax years 1990 and 1991 in the sum of $6,836.16.

14. The Court takes judicial notice of Debtor's Schedules wherein Debtor claims the Property as his exempt homestead.

Applicable Law and Discussion

A tax lien in favor of the United States arises by operation of law if a person is unable to pay a tax liability after demand is made for payment. ² This general tax lien is perfected as to the taxpayer without the filing of a Notice of Federal Tax Lien. ³ However, before a tax lien will be effective against certain third parties, a Notice of Federal Tax Lien must be recorded. Specifically, I.R.C. §6323(a) provides that the lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f). ⁴

Plaintiffs argue that pursuant to 26 U.S.C. 6323(a), the IRS does not hold a lien on the Property since Debtor constitutes both a "purchaser" and "judgment lien creditor" under the applicable definitions, and, therefore, the federal tax liens are not valid. In the alternative, Plaintiffs argue that if the Court determines the IRS holds a valid lien on the Property, such lien is avoidable pursuant to 11 U.S.C. Sections 545(2) , 544(a)(1) 544(a)(2), and/or 544(a)(3).

A. Does the IRS Hold a Valid Lien Under I.R.C. Section 6323 ?

In this case, the tax liens arose on the dates of assessment. However, the liens were not recorded until November 17, 1993 , almost two years after the conveyance to Debtor. Therefore, whether the liens may be enforced against the property now owned by Debtor turns on whether his interest falls within one of the four exceptions enumerated in §6323 . Since Debtor clearly is neither a mechanic's lienor not the holder of a security interest in the property, he is entitled to relief under §6323(a) only if he qualifies as a purchaser or judgment lien creditor. United States v. Brynes [94-1 USTC ¶50,180 ], 848 F.Supp. 1096 (D. R.I. 1994).

1. PURCHASER

Section 6323(h)(6) defines purchaser as follows:

(6) Purchaser. The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. (emphasis added).

Thus, a "purchaser," as defined under 6323(h)(6), will take property free and clear of federal tax liens imposed against the property if no Notice of Federal Tax Lien has been filed in accordance with the statute.

The IRS argues that Debtor does not constitute a purchaser because the conveyance by Magaly Suarez to Debtor was not "valid under local law," since the deed for the conveyance was not recorded until November 30, 1993 , after the Notices of Federal Tax Lien were filed on November 17, 1993 . The Court disagrees.

Florida Statute Section 61.075(4) provides that a judgment distributing marital assets:

"shall have the effect of a duly executed instrument of conveyance, transfer, release or acquisition which is recorded in the county where the property is located when the judgment or a certified copy of the judgment is recorded in the official records of the county in which the property is located."

Further, Florida Rule of Civil Procedure 1.570(d) provides:

"if a judgment is for a conveyance, transfer, release, or acquittance of real or personal property, the judgment shall have the effect of a duly executed conveyance, transfer, release, or acquittance that is recorded in the county where the judgment is recorded."

Magaly Suarez's interest in the property was conveyed to Debtor upon recordation of the Final Order in the Official Records of Dade County, Florida on December 4, 1991 . Fla. Stat. Section 61.075(4) (1994); Fla.R.Civ.P. 1.570(d). The recording of this instrument perfected transfer of title to Debtor as of December 4, 1991 . The delivery of the quitclaim deed dated June 17, 1993 from Magaly Suarez to Debtor which was recorded on November 30, 1993 was not dispositive. Her interest already had been conveyed upon recordation of the Final Order. Fla. Stat. Section 61.075(4) (1994); Fla.R.Civ.P. 1.570(d). The conveyance from Magaly Suarez to Debtor was "good and effectual" under Florida 's recording statute since the Final Order conveying the property was "recorded according to law." Fla. Stat. Section 691.05.

The main issue, the Court believes, in determining whether Debtor is a purchaser under §6323(a) , is whether Debtor acquired his interest in the property "for adequate and full consideration in money or money's worth." 26 U.S.C. §6323(h)(6) . The regulations promulgated pursuant to that section describe "adequate and full consideration" as consideration that bears a "reasonable relationship to the true value of the interest in the property acquired." 26 C.F.R. §301.6323(h)-1(f)(3) . The term "money or money's worth" includes money, tangible or intangible property, services, and other consideration reducible to a money value. A relinquishment or promised relinquishment of marital rights is not a consideration in money or money's worth. 26 C.F.R. §301.6323(h)1(a)(3). The validity of the latter provision is at least debatable since like the relinquishment of any other valuable legal right, a waiver of alimony has been recognized as consideration. United States v. Brynes [94-1 USTC ¶50,180 ], 848 F.Supp. 1096 (D. R.I. 1994). See, e.g., Law v. United States, 83-1 US Tax Cas. (CCH) ¶13,514, 51 A.F.T.R.2d (P-H) ¶83-1343 (N.D. Cal 1982). Moreover, there is nothing in the statute indicating that Congress intended to exclude a bona fide waiver of alimony from the definition of consideration or to delegate to the Treasure Department the authority to create such an exclusion. United States v. Brynes [94-1 USTC ¶50,180 ], 848 F.Supp. 1096 (D. R.I. 1994). The Final Order, however, purports only to grant the marital property to Debtor. While Debtor requested in his Petition for Dissolution of Marriage that he be awarded full possession and ownership of the former marital home "as lump sum alimony," the General Master's Concluding Report (ratified and approved in the Final Order) provided "[t]hat neither party be awarded alimony of any kind or description." Nowhere is "consideration" or the granting of alimony mentioned.

The Court is of the opinion that the subject real property was awarded to Debtor to compensate him for relinquishing his marital rights, and therefore was not purchased "for adequate and full consideration in money or money's worth" as required by §6323(a) and consistent with the regulations quoted above. Simpson v. United States [89-1 USTC ¶9285 ], 1989 WL 73212 (M.D. Fla.); Harris v. United States [85-2 USTC ¶9511 ], 588 F.Supp. 835 (N.D. Tex. 1984), aff'd [84-2 USTC ¶9715 ], 764 F.2d 1126 (5th Cir. Tex. 1985); United States v. Brynes [94-1 USTC ¶50,180 ], 848 F.Supp 1096 (D. R.I. 1994). Accordingly, Debtor is not a "purchaser" within the meaning of §6323(h)(6) .

2. JUDGMENT LIEN CREDITOR

As discussed above, the lien created by Section 6321 arises at the time of assessment and attaches to all the taxpayer's property, both real and personal. Therefore, the IRS has had a tax lien against Rogelio Suarez's property since November 11, 1991 , the date of the first assessment. However, Section 6323(a) of the Internal Revenue Code provides that the lien imposed by Section 6321 is not valid against "any purchaser, holder of a security interest, mechanic's lien, or judgment lien creditor until notice thereof . . . has been filed. . . ." Debtor argues that his interest in his residence is superior to the tax lien of the IRS because he was a "judgment lien creditor" by virtue of the Final Order and Final Judgment entered in the divorce proceedings and recorded in the Official Records of Dade County, Official Records Book 15290, Page 2643 on December 4, 1991, before the IRS filed its notice of tax lien. ⁵

The Regulations define a "judgment lien creditor" as

a "person who has obtained a valid judgment, in a court of record and of competent jurisdiction, for the recovery of specifically designated property or for a certain sum of money." 26 C.F.R. §301.6323(h)-1(g) .

In the case of real property, the regulations state:

If recording or docketing is necessary under local law before a judgment becomes effective against third parties acquiring liens on real property, a judgment lien under such local law is not perfected with respect to real property until the time of such recordation or docketing. 26 C.F.R. §301.6323(h)-1(g) .

The terms "lien" and "judicial lien" are also defined by the Bankruptcy Code. A "judicial lien" is a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding. 11 U.S.C. §101(36) . A "lien" is a charge against or interest in property to secure payment of a debt or performance of an obligation. 11 U.S.C. §101(37) .

To decide if Debtor has a "judicial lien," the Court must first decide if the Final Order and Final Judgment obtained in the divorce proceedings created a "lien" at all. In re Elkhatib, 108 B.R. 650 (Bankr. N.D. I11. 1989).

A divorce decree has the effect of either extinguishing or reordering pre-existing property interests of the parties and creating new interests in the place of the old. In re Wells, 160 B.R. 726 (Bankr. N.D. N.Y. 1993); see also, Farrey v. Sanderfoot, 500 U.S. 291 (1991); In re Steffen, 1992 W.L. 308378 (Bankr. N.D. Iowa May 12, 1992 ). In the instant case, Debtor was awarded sole title to the marital residence pursuant to the Final Order and Final Judgment. The Final Judgment does not give Debtor a charge against or interest in property to "secure payment of a debt or performance of an obligation." Rather it is an order "reordering pre-existing property interests of the parties and creating new interests in place of the old." In re Wells, 160 B.R. 726 (Bankr. N.D. N.Y. 1993) Therefore, as a matter of law, the Final Order and Final Judgment on All Economic Issues did not create a "lien" at all.

Moreover, even if the Court determined the Final Order obtained in the divorce proceedings created a lien, it would not have the choateness necessary to allow it priority over the federal tax lien. "[T]he fact that a lien was perfected before a federal tax lien was recorded does not necessarily entitle it to priority over the federal tax lien. To enjoy priority, the previous lien also must be sufficiently choate under federal law." United States v. Brynes [94-1 USTC ¶50,180 ], 848 F.Supp 1096 (D. R.I. 1994); see also, United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81 (1954). The concept of choateness relates to the specificity and identifiability of a lien. Liens "may also be perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established." New Britain, supra, at 84.

Here the Final Order would not have the choateness necessary to allow it priority over the federal tax lien because the amount of the lien is not established. Nor could it ever be established since there is no debt to be secured by a lien, just the redistribution of an interest in property.

Accordingly, the Court determines Debtor is not a judgment lien creditor within the meaning of §6323(h)(6) .

B. Avoidance of Liens

After a taxpayer files a title 11 petition, the presence or absence of a recorded Notice of Federal Tax Lien will control how the IRS's claim is treated in the bankruptcy case. A "secret" or unrecorded tax lien under I.R.C. §6321 is an unsecured claim in a title 11 case and may be avoided.

Plaintiffs argue that any lien held by the IRS is avoidable. The IRS argues that as a Chapter 13 debtor, Debtor does not have the power to exercise the avoidance powers granted to trustees in Sections 544 , 545 , 547 , 548, 549 and 550 of the Bankruptcy Code. The IRS submits that Debtor's avoidance power is specifically limited to exempt property as provided under §522(h) which is to be read in conjunction with §522(c)(2)(B). In re Perry, 90 B.R. 565, 566 (Bankr. S.D. Fla. 1988) (chapter 13 debtor can only avoid liens and other transfers as to exempt property).

Since the issue of a chapter 13 debtor's standing to utilize the voiding powers granted to a trustee was first addressed in 1980, courts have not developed a uniform resolution of this issue. For instance, several courts have held that the chapter 13 debtor may utilize the special voiding power granted by Section 544 . In re Boyette, 33 B.R. 10 (Bankr. N.D. Tex. 1983); In re Einoder, 55 B.R. 319 (Bankr. N.D. Ill. 1985); In re Ottavioano, 68 B.R. 238 (Bankr. D. Conn. 1986); In re Weaver, 69 B.R. 554 (Bankr. W.D. Ky. 1987); In re Colandrea, 17 B.R. 568 (Bankr. D. Md. 1982).

However, many cases have held that a chapter 13 debtor lacks standing to bring avoidance actions. In re Tillery, 124 B.R. 127 (Bankr. M.D. Fla. 1991); In re Bruce, 96 B.R. 717 (Bankr. W.D. Tex. 1989); In re Mast, 79 B.R. 981 (Bankr. W.D. Mich. 1987). In In re Tillery, supra, Judge Paskay receded from his earlier decision in In re Hall, supra, that a chapter 13 debtor may utilize the special voiding power granted by §544 , and determined that a chapter 13 debtor lacks the power to use the lien avoidance power of §544 .

The Court also is aware of Judge Britton's decision in In re Perry, 90 B.R. 565 (Bankr. S.D. Fla. 1988), wherein the court ruled that a chapter 13 debtor can only avoid tax liens and other transfers as to exempt property. In In re Perry the court determined that Congress did not intend to grant chapter 13 debtors the trustee's power to avoid tax liens.

This Court notes, however, that Section 103 of the Bankruptcy Code specifically provides that the provisions of Chapter 5 of the Bankruptcy Code are provisions of general applicability and apply to any case filed under Chapter 7, Chapter 11, Chapter 12 or Chapter 13. ⁶

Nevertheless, the Court need not address this issue at this time since even under Perry Debtor can avoid unperfected liens as to exempt property. In re Perry, supra, [chapter 13 debtor can only avoid tax liens and other transfers as to exempt property (Section 522 of the Bankruptcy Code)].

Section 522(c)(2)(B) provides:

(c) Unless the case is dismissed, property exempted under this section is not liable during or after the case for any debt of the debtor that arose . . . before the commencement of the case, except--

(2) a debt secured by a lien that is--

(B) a tax lien, notice of which is properly filed

§522(c)(2)(B) (emphasis added).

As set forth in Debtor's schedules, Debtor elected the exemptions to which he was entitled under Section 522(b)(2) (exemptions available under applicable non-bankruptcy federal laws and state or local laws) thereby exempting his homestead under F1. Const. Art. X, Sec. 4 . Accordingly, because the IRS did not properly file its notice of tax lien to secure the tax liabilities until after Debtor filed his bankruptcy petition, said liens would not be valid against debtor's real property under Section 522(c)(2)(B).

III. Conclusion

The Court's review of applicable law compels the conclusion that the tax liens at issue are avoidable as to Debtor's exempt property under the Bankruptcy Code and the IRS therefore does not hold a valid lien for federal income taxes for tax years 1984-1990 on Debtor's exempt property.

This memorandum decision contains the agreed upon facts and the Court's conclusions of law. A separate Final Judgement will be entered in conformity with this decision in accordance with Bankruptcy Rule 9021.

Final Judgment

In conformity with this Court's Memorandum Decision on Complaint to Determine Extent, validity and Priority of Claims entered on even date, it is

ORDERED: that the IRS's lien for federal income taxes for tax years 1984-1990 are avoided as to Debtor's exempt property.

DONE AND ORDERED.

¹ No assessment was made as of the Petition date for the 1991 tax year.

² This general tax lien of I.R.C. §6321 is referred to as a "secret lien" because it arises as a matter of law against the taxpayer without the necessity of the filing of a Notice of Federal Tax Lien. Stevan v. Union Trust Co. [63-1 USTC ¶9377 ], 316 F.2d 687 (D.C. Cir. 1963). The lien attaches to "all property and rights to property, whether real or personal, belonging to such person," even if some of that property cannot be seized by the IRS due to applicable exemptions. I.R.C. §6321 .

³ 1A Collier on Bankruptcy 15th Ed. P 11.04 (1994); I.R.C. Section 6323(a) ; see also, In re May Reporting Servs. [90-2 USTC ¶50,464 ], 115 B.R. 652 (Bankr. D. S.D. 1990).

⁴ After a taxpayer files a title 11 petition, the presence or absence of a recorded Notice of Federal Tax Lien will control how the IRS's claim is treated in bankruptcy. If a Notice of Federal Tax Lien is recorded, the IRS is a secured creditor and the priority rules of §507(a)(8) are inapplicable to that secured claim. In re Reichert, 138 B.R. 522 (Bankr. W.D. Mich. 1992). If, however, a Notice of Federal Tax Lien is not recorded before the Petition date, the IRS's claims are unsecured claims governed by §507(a)(8) and may be avoided. Olson v. United States (In re Olson), 154 B.R. 276, 280 (Bankr. D .N.D. 1993). The IRS does not dispute that its claims are unsecured.

⁵ A creditor that achieves the status of "judgment lien creditor" before the filing of the government's Notice of Federal Tax Lien has priority over the United States regarding property subject to the judgment lien, even if the tax assessments which perfected the tax lien occurred before judgment was rendered. Central Bank v. United States [93-2 USTC ¶50,586 ], 833 F.Supp. 892 (M.D. Fla. 1993).

⁶ §103 Applicability of chapters

(a) Except as provided in section 1161 of this title, chapters 1, 3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 of this title.

 

 

[95-1 USTC ¶50,009] In re Rob ert L. Watt, Debtor

U.S. Bankruptcy Court, So. Dist. Ohio , West. Div., 93-30673, 11/14/94, 174 BR 942, 174 BR 942

[Code Secs. 6321 and 6323 ]

Bankruptcy: Lien for taxes: Validity of lien.--

An IRS lien was not secured by a debtor's property or by the settlement amount paid to the bankruptcy trustee following a fraudulent transfer of that property, because the property was sold to a bona fide purchaser before the IRS filed its notice of tax lien. Since the property was sold following the transfer, the IRS lien had nothing to attach to once notice was filed. Accordingly, the lien was not secured by the property or the settlement amount. However, an IRS lien on personal property that was sold at auction prior to the bankruptcy filing was secured by the auction proceeds. The notice of tax lien was properly filed before the date of the bankruptcy filing. The tax and interest portions of the claim were allowed as a priority claim, while the penalty portion was a general unsecured claim.

Rob ert L. Watt, 2186 RT.68 South, Bellefontaine , Ohio 43311 , pro se.

JURISDICTIONAL STATEMENT

This proceeding, which arises under 28 U.S.C. §1334(b) in a case referred to this court by the Standing Order of Reference entered in this district on July 30, 1984, is determined to be a core proceeding pursuant to 28 U.S.C. §157(b)(2)(A)--matters concerning the admin istration of the estate, (B)--allowance or disallowance of claims against the estate, and (K)--determinations of the validity, extent, or priority of claims.

This proceeding is presently before the court to determine what, if any, assets obtained by the chapter 7 trustee in this case are subject to the lien of the Internal Revenue Service.

FACTS

Based upon the parties' pleadings, the court makes the following findings of fact:

1. Assessments against Rob ert L. Watt ("Watt") for unpaid taxes were made by the Internal Revenue Service (the "IRS") on the following dates:

Date                                        Kind of Tax  Balance at Petition

4/6/92
 .................................... WT-FICA          $    235.90

4/6/92
 .................................... WT-FICA          $  4,656.11

5/4/92
 .................................... FUTA             $    233.77

5/25/92
 ................................... WT-FICA          $  3,099.69

9/7/92
 .................................... WT-FICA          $  3,446.08

                                                         -------------------

                                                             $ 11,671.55