Bona Fide Purchaser for
Value Page 3
October 14, 1992
, Watt transferred his interest in real property at
8799 North State Route
(the "Property") to his wife, Patricia Watt, by a quit claim
deed recorded in
October 19, 1992
, a decree of dissolution of Watt's marriage to Patricia Watt was
November 9, 1992
, the IRS filed its Notice of Tax Lien for the previously listed
, a county other than where the property is located.
December 19, 1992
, the Property was sold by Patricia Watt to John Nolan, II
January 7, 1993
, the IRS properly filed its Notice of Tax Lien for these assessments in
the amount of $12,258.18 in
, the county where the property is located.
February 24, 1993
, Watt filed for relief under chapter 7 of the Bankruptcy Code.
8. On May 3,
1993, the chapter 7 trustee (the "Trustee") obtained, from the
IRS, proceeds from an auction of the debtor's personal property which
the IRS had levied upon immediately prior to Watt's filing for
July 16, 1993
, the Trustee filed an adversary proceeding against Patricia Watt
alleging causes of action under 11 U.S.C. §547
10. The IRS
filed its proof of claim on
August 19, 1993
. The IRS asserts a secured claim in the amount of $11,671.55, a
priority claim in the amount of $5,964.30, and an unsecured claim in the
amount of $1,007.84 for a total claim of $18,643.69.
February 24, 1994
, the Trustee settled the adversary proceeding filed against Patricia
Watt for the amount of $5,750.00. (Doc. 40-1).
Trustee objected to the claim of the IRS on
March 17, 1994
. The Trustee objected to "all of the claim in excess of
$5,964.30," the priority claim. (Doc. 45-1). The IRS filed a
April 15, 1994
. (Doc. 46-1). In addition, the Trustee filed a memorandum. (Doc. 48-1).
The court held a hearing on
June 8, 1994
to consider these pleadings. To allow the parties to clarify the facts
and issues in this proceeding, the court ordered that the parties file
supplemental documents. (Doc. 49-1).
to this order, the Trustee filed an amended report of assets (Doc.
51-1). In this report, the Trustee stated that the following assets
exist in the debtor's estate: 1) monies from the settlement of an
adversary proceeding against Patricia Watt filed pursuant to 11 U.S.C. §547
and §548 in the amount of $5,750.00 (the "Settlement
Monies"), 2) proceeds from an auction sale turned over to the
Trustee by the IRS in the amount of $3,336.01 (the "Auction
Proceeds"), and 3) interest in the amount of $89.56. The IRS filed
a memorandum in support of its proof of claim (Doc. 53-1). The Trustee
filed another objection to the IRS proof of claim (Doc. 55-1), and the
IRS filed its reply (Doc. 56-1) to the Trustee's objection.
proceeding presents the following issues: 1) whether the IRS has a lien
on the Settlement Monies, 2) whether the IRS has a lien on the Auction
Proceeds, and 3) if the IRS does have a lien on any of the assets held
by the Trustee, whether the IRS liens are to be subordinated under 11
U.S.C. §724 .
The Settlement Monies
asserts that it is secured with respect to the Settlement Monies because
it had a lien on Watt's property prior to his filing for bankruptcy
relief. The IRS further argues that, had it not been for the bankruptcy,
it could have recovered from the debtor's wife, Patricia Watt, as a
transferee of the Property under 26 U.S.C. §6901
, which addresses the liability of transferees. The Trustee disputes
that the IRS is secured. He asserts that the IRS had not properly filed
its Notice of Lien until after Patricia Watt transferred the Property to
a bona fide purchaser.
whether the IRS has a lien on the Settlement Monies, the court must
initially determine the nature of the lien asserted by the IRS. Pursuant
to §6321 of the
Internal Revenue Code, if a taxpayer fails to pay taxes there
"shall be a lien in favor of the
upon all property and rights to property, whether real or personal,
belonging to such person." 26 U.S.C. §6321
. "[T]he lien imposed by section
6321 shall arise at the time the assessment is made and shall
continue until the liability for the amount so assessed (or a judgment
against the taxpayer arising out of such liability) is satisfied or
becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322
. Furthermore, in general, " '[p]roperty subject to a Federal
tax lien which has been sold or otherwise transferred by the taxpayer
may be seized while in the hands of the transferee or any subsequent
transferee.' " TKB International, Inc. v. United States [93-1
USTC ¶50,346 ], 995 F.2d 1460, 1463-64 (9th Cir. 1993) (quoting 26
). See also United States v. Carson, 741 F.Supp. 92 (E.D. Pa.
1990). In fact,
created by Congress in 1866, a tax lien on a delinquent taxpayer's
property "defeated even a bona-fide purchaser of realty without
notice or knowledge or an unfiled tax lien." The rule holding
"secret" tax liens were good as against a purchaser for value
without notice continued to be enforced through the beginning of the
twentieth century, a period of history in which tax liens were few.
shortly after the ratification of the Sixteenth Amendment in 1913,
Congress began a "retreat from the pre-amendment harsh rule in
order to protect specified interests from the operation of the
lien." [sic] Congress amended the tax lien statutes so that a
"tax lien 'shall not be valid as against any mortgagee, purchase,
or judgment creditor until notice of such lien shall be filed by the
collector (in the designated place for filing).' "
the Federal tax lien statutes were amended by Section 3672 of the
Internal Revenue Code [in 1939] to protect mortgagees, pledgees,
purchasers and judgment creditors where proper notice of the lien was
not given as provided by the statutes." The prime purpose of this
section, now 26 U.S.C. 6323, was "to mitigate the rigors of Sec.
 by protecting from secret liens the persons described in Subd.
(a) of that section." [sic] The rule remains, however,
"[u]nless a federal statute requires a government tax lien to be
recorded, the unrecorded lien may be enforced against subsequent
Int'l, Inc. [93-1
USTC ¶50,346 ], 995 F.2d at 1463-64 (citations omitted). Section
imposed by section
6321 shall not be valid as against any purchaser, holder of
security interest, mechanic's lienor, or judgment lien creditor until
notice thereof which meets the requirements of subsection (f) has been
filed by the Secretary or his delegate.
U.S.C. 6323(a) (emphasis added). 1
6323(h)(6) defines purchaser:
"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.
Here, the IRS'
liens attached to Watt's real and personal property at the time of
assessment. This property remained subject to the liens even though it
was transferred from
ert Watt to Patricia Watt. However, Patricia Watt sold the Property to
Nolan on December 19, 1992, prior to the date by which the IRS had filed
its Notice of Tax Lien as required by §6323(f)
Both the IRS
and the Trustee characterize Nolan as a bona fide purchaser. "A
bona fide purchaser is one who has purchased property for value without
notice of any defects in the title of the seller."
v. Hunter (In re Walter ) [93-2
USTC ¶50,604 ], 158 B.R. 984, 985 n. 3 (N.D. Ohio 1993) (citing Black's
Law Dictionary 177 (6th ed. 1990)). Consistent with the plain
language of §6323(h)(6)
, the court finds that Nolan was a bona fide purchaser. Accordingly,
because the IRS did not properly file its Notice of Tax Lien prior to
Nolan's purchase of the Property, its lien was no longer secured by the
Property transferred to Nolan.
The IRS states
that it is not seeking to assert its lien against the rights of Nolan as
a bona fide purchaser but is seeking to assert its lien against property
recovered from Patricia Watt, the transferee of the fraudulent transfer.
The IRS asserts that once the Trustee avoided the transfer to Patricia
Watt, it was no different than if Watt had held the Property until he
filed his petition. (Doc. 56-1, p.4). 2
IRS states that it is not asserting its lien against the purchaser Nolan
or the Property itself, the fact that the Property, the subject of the
Trustee's recovery, was transferred prior to the time the IRS properly
filed its Notice of Tax lien is legally significant. The IRS is correct
in that the successful exercise of a trustee's avoiding power causes the
affected transfer to become void, allowing the trustee to recover the
transferred property or its value under 11 U.S.C. §550. However, even
if the transfer of the Property is avoided, and the Property or its
value is added to the debtor's estate, the IRS is still not secured by
legislation removing the "secret" tax lien position that had
been accorded to the IRS, Congress chose to protect purchasers of
property subject to IRS assessment liens and chose to leave the IRS with
only a cause of action against a transferee who was not a bona fide
purchaser and with no cause of action against the previously secured
real property which was transferred. Here, prior to the date on which
the IRS properly filed its Notice of Tax Lien, the Property was sold to
a bona fide purchaser. The assessment lien no longer had any real
property to which it could attach; and, to that extent, the IRS
assessment lien was no longer a lien secured by the Property.
Accordingly, because the IRS assessment lien was not secured by the
Property itself, the IRS assessment lien is not secured by the
Settlement Monies, which were obtained from the transfer of the Property
as a compromise of the trustee's various causes of action pursuant to §547
(preference) and §548 (fraudulent conveyance). Any other
determination would defeat the statutory requirement that for an
assessment lien to be secured against real property transferred to a
bona fide purchaser the IRS must properly record its lien and would be
tantamount to giving the IRS a lien on property it would not have had if
Watt had not filed a bankruptcy petition. 3
IRS, as it suggests, may have a cause of action against Patricia Watt
under 26 U.S.C. §6901 for
transferee liability and may even be secured against property of hers,
this does not elevate the IRS position in the debtor
ert Watt's bankruptcy to that of a creditor secured by the funds
obtained in a compromise of the trustee's claims against Patricia Watt.
The IRS argues
that Staats v. Barry (In re Barry ), 31 B.R. 683 (Bankr.
S.D.Ohio 1983) supports their position. To the extent that Barry
may support the IRS position, it is not determinative in this
proceeding. Although Barry involved the fraudulent transfer of
real property prior to the IRS filing its Notice of Tax lien, it did not
involve a "purchaser" under 26 U.S.C. §6323
. Likewise, other authorities cited by the IRS involve cases where
the creditor held a lien that was properly perfected, prepetition, in
the property which was the subject of the trustee's action. 4
In this proceeding, as a result of the transfer of the Property to a
bona fide purchaser, the IRS no longer had a lien on the Property; nor,
accordingly, on the proceeds obtained by the Trustee in compromise of
his various causes of action.
Based upon the
foregoing, the court concludes that the IRS is not secured with respect
to the Settlement Monies.
The Auction Proceeds
also asserts that the IRS is not secured in the Auction Proceeds. The
government has several methods for collecting unpaid taxes. See
United States v. Nat'l Bank of Commerce [85-2
USTC ¶9482 ], 472 U.S. 713, 719, 105 S.Ct. 2919, 2924, 86 L.Ed.2d
565 (1985); United States v. Bank of Celina [83-2
USTC ¶9688 ], 721 F.2d 163, 166 (6th Cir. 1983). "One method
is to levy 'upon all property and rights to property . . . belonging to
[the taxpayer] or on which there is a lien. . . .' 26 U.S.C. §6331(a)
." Celina [83-2
USTC ¶9688 ], 721 F.2d at 166. A levy is merely the
istrative method for collecting property encumbered by a federal tax
lien. A "levy does not determine whether the Government's rights to
the seized property are superior to those of other claimants; it,
however, does protect the Government against diversion or loss while
such claims are being resolved." National Bank of Commerce [85-2
USTC ¶9482 ], 105 S.Ct. at 2924. The release of a levy does not
release an underlying lien. See Wessel v.
(In re Wessel ) [93-2
USTC ¶50,549 ], 161 B.R. 155, 161 (Bankr. D.S.C. 1993).
have not stated the date of the levy; however, the IRS stated that
"[i]mmediately prior to the filing of his bankruptcy petition, some
of the debtor's personal property was sold at auction." (Doc. 56-1,
p.5). As previously stated, the IRS lien attached to Watt's personal and
real property under 26 U.S.C. §6321
. Further, the IRS properly filed a Notice of Tax lien prior to the
date Watt filed for bankruptcy relief. Although the IRS released its
levy of the auction proceeds, it did not release its lien. The IRS
remains secured as to these auction proceeds.
determined that the IRS is not secured with regard to the Settlement
Monies but is secured with regard to the Auction Proceeds, the court
examines how the Trustee must distribute the estate assets. The IRS
claim is in the total amount of $18,643.69, with a secured claim of
$11,671.55; a priority claim of $5,964.30; and an unsecured general
claim of $1,007.84. The Trustee has only objected to the IRS claim to
the extent that the IRS argues that it is secured. The Trustee does not
dispute that the IRS claims are priority claims.
724 expressly pertains to priority and distribution problems
involving property of the estate.
v. Darnell (In re Darnell ) [88-1
USTC ¶9123 ], 834 F.2d 1263, 1268 (6th Cir. 1987). Section
724(b) provides that property encumbered by a tax lien shall be
distributed in the following manner:
(1) first, to
any holder of an allowed claim secured by a lien on such property,that
is not avoidable under this title and that is senior to such tax lien;
(2) second, to
any holder of a claim of a kind specified in section
507(a)(1) , 507(a)(2)
, 507(a)(3), 507(a)(4), 507(a)(5), or 507(a)(6) of this title, to
the extent of the amount of such allowed tax claim that is secured by
such tax lien;
(3) third, to
the holder of such tax lien, to any extent that such holder's allowed
tax claim that is secured by such tax lien exceeds any amount
distributed under paragraph (2) of this subsection;
(4) fourth, to
any holder of an allowed claim secured by a lien on such property that
is not avoidable under this title and that is junior to such tax lien;
(5) fifth, to
the holder of such tax lien, to the extent that such holder's allowed
claim secured by such tax lien is not paid under paragraph (3) of this
(6) sixth, to
Pursuant to §724
, property is not distributed to the estate (§724(b)(6)) until all
liens are satisfied. Darnell [88-1
USTC ¶9123 ], 834 F.2d at 1268. Under §724(b)
, a tax lien becomes the source of payment for
istrative expenses up to the amount of the tax liens. King v. Board
of Supervisors of
(In re A.G. Van Metre, Jr., Inc. ), 155 B.R. 118, 122 (Bankr.
E.D.Va. 1993); Wurst v. City of
(In re Packard Properties, Ltd. ), 112 B.R. 154, 156 (Bankr.
The IRS does
not dispute that their lien is subject to subordination under §724(b)
. Further, to the extent that the IRS sets forth a secured claim
which remains unpaid, the tax and interest portion is allowed as a
priority claim, and the penalty portion is allowed as a general
unsecured claim. However, no distributions for
istrative claims have been requested from these proceeds. Once such
istrative claims have been filed and the issue of distribution is ripe
for decision, the IRS may, at that time, dispute the amount by which
their claims are to be subordinated.
reasons set forth, the Trustee's objection to the proof of claim filed
by the Internal Revenue Service is GRANTED IN PART AND DENIED IN
PART. It is granted to the extent that the court determines that the
IRS does not hold a valid lien against the Trustee's recovery of his
claims against Patricia Watt. It is denied to the extent that the IRS
does hold a lien against the Auction Proceeds; however, the IRS lien
shall be subordinated under §724(b)
. Further, to the extent that the IRS has set forth a secured claim
which will remain unpaid, the tax and interest portions are allowed as a
priority claim, and the penalty portion is allowed as a general
An order in
accordance with this decision is simultaneously entered.
Subsection (f) of 6323 sets forth the requirements for filing proper
notice of a federal tax lien. TKB Int'l [93-1
USTC ¶50,346 ], 995 F.2d at 1464. Section
(1) Place for
filing.--The notice referred to in subsection (a) shall be filed--
property.--In the case of real property, in one office within the State
(or the county, or other governmental subdivision), as designated by the
laws of such State, in which the property subject to the lien is
property.--In the case of personal property, whether tangible or
intangible, in one office within the State (or the county, or other
governmental subdivision), as designated by the laws of such State, in
which the property subject to the lien is situated. . . .
. . . .
2) Situs of
property subject to lien.--For purposes of paragraphs (1) and (4),
property shall be deemed to be situated--
property.--In the case of real property, at its physical location; or
property.--In the case of personal property, whether tangible or
intangible, at the residence of the taxpayer at the time the notice of
lien is filed.
law, "[n]otices of liens for internal revenue taxes . . . shall be
filed for record . . . in the office of the county recorder of the
county in which the property subject to the lien is situated."
O.R.C. §317.09. See also In re Ray, 48 B.R. 534, 536 (Bankr.
S.D.Ohio 1985). The IRS appears to concede that the proper place for
filing its Notice of Lien against the Property was in
The court notes that the Trustee did not "avoid" the transfer
to Patricia Watt, but rather "compromised" various causes of
action against Patricia Watt.
The court notes that, in the context of §552
, courts have held that even creditors with properly perfected
security interests are not secured in recoveries made by a trustee in
preference actions. See, e.g., Mellon Bank (East ),
N.A. v. Glick (In re Integrated Testing Products Corp.), 69
B.R. 901 (D. N.J. 1987); In re Tek-Aids Indus., Inc., 145 B.R.
253 (Bankr. N.D.Ill. 1992); Hennessy v. Kennedy (In re
Foods ), 125 B.R. 615 (Bankr. D.Hawaii 1991). As the court stated in
action can only be initiated in the context of a bankruptcy case after
the filing of a bankruptcy case. Even if all of the elements spelled out
by §547(b) are
present, no one can recover the preferential transfer as preferential
unless some voluntary or involuntary bankruptcy petition is filed.
rule otherwise would give every secured creditor with a properly
perfected security interest in all of the debtor's personal property a
lien on recoveries by the trustee in preference actions. This would not
only defy logic, but would undermine the policy behind the avoidance
powers as well.
at 256 (citations omitted; emphasis in original).
The court is aware of Claussen Concrete Co., Inc. v. Walker (In
re Lively ), 74 B.R. 238 (S.D. Ga. 1987), aff'd without opinion,
851 F.2d 363 (11th Cir. 1988), in which the court found that a valid
judgment lien against the debtors' property was enforceable against the
property recovered by the trustee in settlement of the trustee's claims
against the debtor's wife for a fraudulent conveyance. Lively is,
however, distinguishable from the present case. Unlike this proceeding, Lively
involved a creditor with a valid, prepetition judgment lien secured by
real property, which was the subject of the trustee's action. See
also In re Figearo, 79 B.R. 914 (Bankr. D.Nev. 1987) (creditor who
held properly perfected security interest in debtor's jewelry inventory
prior to debtor's bankruptcy filing held a security interest pursuant to
§552 in the funds held
by the trustee as a result of a compromise of a fraudulent conveyance
¶50,206] Brice Nelson, Personal Representative of the Estate of John M.
Nelson, Deceased, and Darrel Brant, Plaintiffs v. United States of
America, Defendant Maxwell Tomlinson, Plaintiff v. United States of
District Court, East. Dist.
, So. Div., Civ. 92-70660, Civ. 92-77376,
[Code Sec. 6503 ]
Collections: Levies: Limitation period: Bankruptcy.--The IRS's
levies on bond interest coupons owned by a debtor in a chapter 7
bankruptcy proceeding were not barred by the applicable statute of
limitations. Thus, the taxpayers' motion for summary judgment was
denied. The suspension of the limitations period on collection that
normally ends six months after the bankruptcy court orders a discharge
of a taxpayer's debt was extended. The limitations period was extended
for an additional period equal to the time between the date that the
taxpayer's discharge in bankruptcy was ordered and the date that the
discharge order was set aside for the debtor's fraudulent failure to
disclose his interest in the bonds during the original bankruptcy
proceeding. Since the IRS was prohibited from collecting the tax during
the extended period, levies within such period were not time barred.
[Code Secs. 6331 ,
6332 and 6343
Levy and distraint: Ownership of property: Release of levy: Effect of
release.--The IRS's levies on bond interest coupons owned by a
delinquent taxpayer in bankruptcy were properly issued to banks acting
as transfer agents for the bond issuers. Only by issuing the levies
directly to the transfer agents was the IRS assured of reaching such
assets of the taxpayer, who had already been convicted of concealing the
bonds' existence from the bankruptcy court. The claims of persons to
whom the debtor transferred the interest coupons that the levies were
improper were without merit because the levies on the bonds and coupons
were issued before the transferees received the coupons, and the coupons
were subject to the IRS's pre-existing interest in the bonds based on
its existing tax lien. Although the IRS released its lien the day after
the debtor's discharge in bankruptcy was set aside because of his
fraudulent concealment, a levy after that time was still proper since
the debtor's tax liability had not been satisfied and the levy was not
time barred. Furthermore, the levies were effective against coupons
maturing and presentable for payment only after the levies were issued
because the obligation represented by the coupons was clearly fixed and
[Code Sec. 6323 ]
Validity of lien: Bona fide purchaser.--The IRS did not
wrongfully levy against bond interest coupons obtained by transferees
from a debtor in a chapter 7 bankruptcy proceeding who was convicted of
failing to disclose the existence of the bonds and coupons to the
bankruptcy court. Since the transferees did not timely present the issue
of whether they were bona fide purchasers of the coupons for value in
the complaint, they waived that defense. The issue could not be raised
for the first time in a response to the government's motion for summary
MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY
JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT
Maxwell Tomlinson is seeking to quiet title to some bearer bonds in his
possession which are subject to tax levies issued by defendant
. Plaintiffs Brice Nelson and Darrel Brant have brought an action under
26 U.S.C. §7426 ,
alleging that the
wrongfully levied $73,125 in bond interest coupons. Based on a joint
motion submitted by all parties, the court consolidated these two
actions. Before the court are the parties' cross motions for summary
judgment. For the reasons discussed below, the court will grant
plaintiff Maxwell Tomlinson was assessed for tax liability for his
failure to file tax returns for the years 1969 through 1979. On
June 18, 1982
, the Internal Revenue Service ("IRS") issued a Notice of
Federal Tax Lien against Tomlinson in the amount of $627,346.74. On
May 24, 1985
, Tomlinson filed a chapter 7 bankruptcy petition. As a result, an
automatic stay of the collection of all debts was set in place. On
December 11, 1985
, the bankruptcy court issued an order granting a discharge of
discharge, the IRS discovered that Tomlinson had municipal bonds valued
at approximately $1,000,000 in his possession. Tomlinson did not
disclose his interest in these bonds during the bankruptcy proceedings.
later indicted and convicted for concealing his interest in these bonds
from the IRS and the bankruptcy court by filing a fraudulent bankruptcy
petition. As a result of his conviction, Tomlinson later spent eighteen
months in prison.
Tomlinson's fraud was discovered, the bankruptcy court set aside its
order granting the discharge on
February 12, 1987
. The bankruptcy estate was closed on
March 9, 1987
. Tomlinson's petition was later dismissed on
January 5, 1993
April 6, 1989
, before entering prison, Tomlinson borrowed $200,000 from John Nelson
in order to pay the IRS some of the money that he owed. Allegedly,
Nelson was given a luxury bus worth $225,000 as security on the loan.
August 3, 1989
, the IRS issued four Notices of Levy to four different banks regarding
the municipal bonds and interest coupons held by Tomlinson. The four
banks were acting as transfer agents for the municipalities that had
issued the bonds. The levies reflect that as of
December 30, 1989
, Tomlinson owed the IRS $1,252,959.83.
In October of
1990, John Nelson died in a plane crash. Plaintiff Brice Nelson is John
Nelson's brother and the personal representative of John Nelson's
estate. After getting out of prison, Tomlinson gave Brice Nelson
$167,000 in interest coupons in partial payment of the $200,000 loan
made by John Nelson. The remaining $33,000 of the loan was allegedly
then gave approximately $131,000 in interest coupons to plaintiff Darrel
Brant. The money was apparently given as a loan for Brant's business. On
March 15, 1991
, Brant then presented the $131,000 in coupons to the Van Wert National
Bank. Of this amount, $73,125 of the coupons were from levied sources.
These coupons were forwarded for payment to the City National Bank, one
of the transfer agent banks that had been served a notice of tax levy by
the IRS. City National honored the tax levy and forwarded the $73,125 in
proceeds to the IRS.
January 21, 1992
, Tomlinson asked the IRS to release the tax lien and the levies based
on his contention that they were ineffective. Without comment, the IRS
issued a release on the $627,346.74 tax lien on
February 12, 1992
. However, the IRS has not issued a release of the
August 3, 1989
On February 7,
1992, plaintiffs Brant and Brice Nelson filed an action under 26 U.S.C. §7426
alleging that the United States wrongfully levied the $73,125,
representing the coupons presented by Brant to the Van Wert bank. On
August 31, 1992
, Tomlinson filed suit seeking to quiet title to the remaining bearer
bonds and interest coupons in his possession subject to the tax levies.
In response to a joint motion by all of the parties, the two separate
actions were consolidated by order of this court on
August 13, 1993
have filed a joint motion for summary judgment based on their claim that
the statute of limitations on collection had expired before the IRS
issued its levies, and based on the fact that the government needed
physical possession of the bonds in order for the levies to be
effective. Subsequently, the government has filed a cross motion for
summary judgment claiming that its levies were properly issued and that
the statute of limitations had not run.
Standard of Review
56(c) of the Federal Rules of Civil Procedure, summary judgment may be
granted "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 judgment as a matter of law." "A fact is
'material' and precludes grant of summary judgment if proof of that fact
would have [the] effect of establishing or refuting one of the essential
elements of the cause of action or defense asserted by the parties, and
would necessarily affect [the] application of appropriate principle[s]
of law to the rights and obligations of the parties." Kendall v.
Hoover Co., 751 F.2d 171, 174 (6th Cir. 1984) (citation omitted)
(quoting Black's Law Dictionary 881 (6th ed. 1979)). The court must view
the evidence in a light most favorable to the nonmovant as well as draw
all reasonable inferences in the nonmovant's favor. See
v. Diebold, Inc., 369
654, 655 (1962); Bender v. Southland Corp., 749 F.2d 1205,
1210-11 (6th Cir. 1984).
bears the burden of demonstrating the absence of all genuine issues of
material fact. See Gregg v. Allen-Bradley Co., 801 F.2d 859, 861
(6th Cir. 1986). The initial burden on the movant is not as formidable
as some decisions have indicated. The moving party need not produce
evidence showing the absence of a genuine issue of material fact.
Rather, "the burden on the moving party may be discharged by
'showing'--that is, pointing out to the district court--that there is an
absence of evidence to support the nonmoving party's case." Celotex
Corp. v. Catrett, 477
317, 325 (1986). Once the moving party discharges that burden, the
burden shifts to the nonmoving party to set forth specific facts showing
a genuine triable issue. Fed. R. Civ. P. 56(e); Gregg, 801 F.2d
To create a
genuine issue of material fact, however, the nonmovant must do more than
present some evidence on a disputed issue. As the United States Supreme
Court stated in Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
There is no
issue for trial unless there is sufficient evidence favoring the
nonmoving party for a jury to return a verdict for that party. If the
[nonmovant's] evidence is merely colorable, or is not significantly
probative, summary judgment may be granted.
omitted). See Catrett, 477
at 322-23; Matsushita Elec. Indus. Co. v Zenith Radio Corp., 475
574, 586-87 (1986). The standard for summary judgment mirrors the
standard for a directed verdict under Fed. R. Civ. P. 50(a). Anderson,
at 250. Consequently, a nonmovant must do more than raise some doubt as
to the existence of a fact; the nonmovant must produce evidence that
would be sufficient to require submission to the jury of the dispute
over the fact. Lucas v. Leaseway Multi Transp. Serv., Inc., 738
F. Supp. 214, 217 (E.D. Mich. 1990), aff'd, 929 F.2d 701 (6th
Cir. 1991). The evidence itself need not be the sort admissible at
trial. Ashbrook v. Block, 917 F.2d 918, 921 (6th Cir. 1990).
However, the evidence must be more than the nonmovant's own pleadings
seeking summary judgment based on their assertions that defendant
improperly issued levies beyond the statute of limitations period and
that proper procedures were not followed to perfect the levies. The
court will address each issue in turn.
Statute of Limitations
statute of limitations is found at 26 U.S.C. section
6502(a)(1) . At the time that the tax was assessed, section
6502(a)(1) held that tax money could be collected by levy issued
"within six years after the assessment of the tax."
The tax liabilities at issue in this case were assessed between
July 13, 1981
December 7, 1981
statute of limitations on collections would have run in 1987. In this
case, however, the limitations period was suspended when Tomlinson filed
his petition for bankruptcy on
May 24, 1985
. In cases involving bankruptcy, the running of limitations for the
collection of tax liability is "suspended for the period during
which the Secretary is prohibited . . . from collecting" the tax
and for six months thereafter. 26 U.S.C. §6503(h)
plaintiffs, the limitations period was suspended from
May 24, 1985
, when Tomlinson filed for bankruptcy, through
December 11, 1985
, when the bankruptcy court ordered the discharge of Tomlinson's debt
and the automatic stay on collection proceedings was lifted. Including
the additional six month period dictated by section
6503(h) , plaintiffs claim that the statute of limitations was only
suspended for one year and seventeen days. Thus, they argue that the
limitations period had run in 1988 on all of the assessments, well
before the levies were issued by the IRS on
August 3, 1989
. As a result, plaintiffs contend that the levies are improper.
plaintiffs fail to realize, however, is that the IRS was prohibited from
collecting on the taxes that Tomlinson owed well after the order of
December 11, 1985
. As a result of the discharge order, Tomlinson's tax liability was
extinguished. The IRS could no longer collect the taxes from Tomlinson.
11 U.S.C. §524. On
February 11, 1987
, however, the discharge order was set aside and within one month
Tomlinson's bankruptcy estate was closed. Thus, the IRS was actually
prohibited from collecting the tax from
May 24, 1985
February 11, 1987
. The period of limitations was thereby extended an additional fourteen
months to make up for the fourteen months during which the bankruptcy
court's discharge order was in place. Under this analysis, the
limitations period on the tax assessments began to expire in late
September of 1989. The IRS issued the four levies on
August 3, 1989
, well within the limitations period dictated by section
6503(h) . As a result, these levies are not barred by the statute of
Even if the
limitations period were not suspended during the time that the discharge
order was in effect, the principle of equitable estoppel would apply in
this case. Tomlinson fraudulently concealed assets in a scheme to use
the bankruptcy laws to discharge the taxes that he owed. The court
cannot conceive of a more classic case where equitable estoppel would
block the assertion of the statute of limitations. Plaintiffs are
estopped from claiming that the tax levies are barred by the statute of
second argument is that improper procedures were used by the IRS in
issuing the levies. The IRS served the levies on four banks acting as
transfer agents for the municipalities that issued the bonds held by
Tomlinson. Plaintiffs claim that the levies were ineffective because the
IRS did not have physical possession of the bonds or the interest
of tax levies is governed by 26 U.S.C. §6331
. Under section
person liable to pay tax neglects or refuses to pay the same within 10
days after notice and demand, it shall be lawful for the Secretary to
collect such tax . . . by levy upon all property . . . belonging to such
person or on which there is a lien provided in this chapter for the
payment of such tax.
The levy "extend[s] only to property
possessed and obligations existing at the time" the levy is issued.
§6331(b) . The IRS
may "seize and sell such property or rights to property (whether
real or personal, tangible or intangible)."
rely on Rev.
Rul. 75-355 , 1975-2 C.B. 478 in support of their claim that the IRS
used improper procedures when it issued the levies to the transfer
Ruling 75-355 states that a levy by the government on "funds
represented by a negotiable certificate of deposit must be made by
presentation of the negotiable certificate and the surrender of such
certificate to the maker."
; see also United States v. Bowery Savings Bank [61-2
USTC ¶9728 ], 297 F.2d 380 (2d Cir. 1961). Plaintiffs analogize the
bonds and interest coupons at issue to negotiable certificates of
In the special
circumstances presented by this case, however, the court finds that the
levies issued by the IRS to the transfer agents were proper. At the time
that the levies were issued, a tax lien was still in effect and the
obligations to Tomlinson represented by the bonds and coupons were in
existence. A levy on Tomlinson alone would not have been effective in
seizing the bonds and coupons. The coupons could still have been
presented to the banks acting as transfer agents for payment because the
banks would have no notice of the tax liability and would have no duty
to forward the proceeds to the IRS. Only by issuing the levies directly
to the banks was the IRS assured of reaching the assets retained by
Tomlinson. Tomlinson had already been convicted of bankruptcy fraud
because he had concealed over $1,000,000 in municipal bonds from the
bankruptcy court. Given these circumstances, issuing the levies to the
transfer agents was both proper and effective. In addition, any bona
fide purchasers of bonds or coupons from Tomlinson would be protected
from the levies by 26 U.S.C. §6323
without the necessity of prior seizure and possession by the
The claims of
plaintiffs Brant and Nelson are also without merit. The levies on the
bonds and coupons were issued before either Brant or Nelson received the
coupons from Tomlinson. Additionally, at the time that Brant and Nelson
received the coupons, those coupons were subject to the government's
pre-existing interest in the bonds based on the tax lien then in force
under 26 U.S.C. §§6321
further argue that because the IRS issued a release of the tax lien on
February 12, 1992
, the levies are now improper. Under 26 U.S.C. §6343(a)(1)(A)
, the IRS shall release a levy if "the liability for which such
levy was made is satisfied or becomes unenforceable by reason of lapse
of time." In this case, however, neither situation presents itself.
Tomlinson's tax liability has not been satisfied, and as the court has
already determined, collection of that liability has not become
unenforceable because of a lapse of time. As a result, the levies
continue to be proper.
also claim that the levies, if they are proper, are ineffective as to
those coupons maturing after
August 3, 1989
, because those coupons could only be presented to the transfer agents
for payment at a date after the levies were issued. Under Treasury Regulation
§301.6331-1 , however, levies attach to obligations that
"exist when the liability of the obligor is fixed and determinable
although the right to receive payment thereof may be deferred until a
later date." In this case, the obligation represented by the
coupons was clearly fixed and determinable. As a result, the levies were
effective against the coupons regardless of the date set for them to
their joint response to the government's motion for summary judgment,
plaintiffs raise for the very first time the issue of Nelson and Brant's
status as bona fide purchasers under 26 U.S.C. §6323(b)(1)(B)
. Plaintiffs did not seek protection under this section in either
their original or their amended complaint. The sole bases for plaintiffs
Brant and Nelson's complaint were the expiration of the statute of
limitations and the improper procedures used in issuing the levies.
Their alleged status as bona fide purchasers under section
6323(b)(1)(B) did not appear in either complaint or in plaintiffs'
joint motion for summary judgment. As a result, plaintiffs Brant and
Nelson are too late in presenting this issue, and the court finds that
they have waived this defense.
finds that the IRS issued the levies within the statute of limitations.
The levies were properly issued and are valid. The bonds and interest
coupons still held by plaintiff Tomlinson remain subject to the levies.
The court also finds that plaintiffs Brant and Nelson cannot show
pursuant to 26 U.S.C. §7426
that the interest coupons in their possession were wrongfully levied
upon by the IRS.
THEREFORE, IT IS HEREBY ORDERED that plaintiffs' joint motion for
summary judgment is DENIED.
IT IS FURTHER
ORDERED THAT defendant's motion for summary judgment is GRANTED. Both
complaints are DISMISSED on the merits. SO ORDERED.
¶50,063] United States of America, Plaintiff v. Leslie Grable,
individually and as Independent Personal Representative of the Estate of
Irene Grable, L. David Grable, Valerie Grable, George E. Johnson, Joyce
M. Johnson, Grable and Sons Metal Products, Inc., a Michigan
corporation, and State of Michigan, Department of Treasury, Defendants
District Court, West. Dist. Mich.,
[Code Secs. 6323 ,
7403 , 7422
, and 31 USC Sec.
Lien for taxes: Res judicata: Executors and
istrators: Personal liability.--Judgment against the personal
representative of a decedent's estate was entered for the unpaid balance
of the decedent's income tax assessment. The doctrine of res judicata
prohibited the representative from contesting the IRS's assertion that
it had properly sent notice of, and a demand to pay, the outstanding
assessment. Foreclosure of federal tax liens upon property in the
decedent's estate was ordered and the proceeds were applied against the
decedent's tax liabilities. A valid tax lien also attached to property
that had been transferred by the representative to his own estate for no
consideration or money. In addition, the representative was held
personally liable for distributions of assets from the estate in payment
of creditors, other than the
, and for disbursements made in exchange for no consideration.
This case is
before the Court on plaintiff's motion for summary judgment. On
April 29, 1992
filed a motion for summary judgment. By that motion, plaintiff seeks
several rulings: (1) that the Court reduce to a judgment the unpaid
balance of the income tax assessment for the 1979 and 1980 tax years
against now deceased Irene Grable; (2) that the doctrine of res judicata
prohibits taxpayers from contesting plaintiff's assertion that they
received notice of and a demand to pay that outstanding income tax
assessment; (3) that plaintiff may foreclose on its federal tax lien
upon certain property that was owned by Grable at the time of her death;
and (4) that judgment against Leslie Grable, in his individual capacity,
pursuant to 31 U.S.C. §3713, shall be entered because of his failure,
as personal representative of the Estate of Irene Grable, to pay the
outstanding income tax liabilities of Irene Grable before making
distributions, or payments, of assets from the Estate.
background of this dispute is fairly straightforward. Simply put, this
case is about the failure to pay taxes. The Court notes that it has a
couple of cases before it involving the Grable family. For the most
part, all of the defenses asserted by the Grables in all of these cases
are frivolous. Moreover, the facts in these cases are nearly identical.
The relevant facts here are as follows: On
October 25, 1984
, the United States Tax Court entered a decision which found,
"[T]hat there are deficiencies in income taxes due from petitioners
[Earl K. Grable and Irene Grable] for the taxable years 1979 and 1980,
in the amounts of $25,999.00 and $1,621, respectively." Plaintiff's
Brief at Exhibit A. On
November 28, 1984
, the Internal Revenue Service made an assessment against Irene Grable
for the income tax deficiencies found due the
pursuant to the Tax Court decision.
at Exhibits B&C. Notices of the assessments and demand for payment
November 28, 1984
, were mailed to Earl K. and Irene Grable on
November 28, 1984
No payments have been made with respect to the income tax deficiencies
that were assessed against Earl and Irene Grable pursuant to the Tax
There remains due and owing to the
from Earl and Irene Grable, jointly and severally, for the tax years
1979 and 1980, the total amount of $48,536.97, plus statutory additions
November 28, 1984
August 18, 1986
, both Earl and Irene Grable were deceased. Plaintiff's Brief, Dep.
Exhibit 9; see also Dep. of Leslie Grable. Thus, on
January 20, 1987
, Leslie Grable was appointed the Independent Personal Representative of
the Estate of Irene Grable (hereinafter "Estate"). Dep. of
Leslie Grable. Leslie Grable was aware of the Tax Court Decision against
Irene Grable and also knew of her income tax liabilities prior to her
capacity as personal representative of the Estate of Irene Grable,
Leslie Grable either directly disbursed or transferred assets from the
Estate, or authorized their disbursal or transfer, but never paid, or
authorized a payment to, the
initially listed the total fair market value of its property as
$151,600.00. Plaintiff's Brief, Dep. Exhibit 35. Presently, the value of
the properties in the Estate is well below the total tax liabilities of
In reviewing a
motion for summary judgment, this Court should only consider the narrow
questions of whether there are "no genuine issues as to any
material fact and [whether] the moving party is entitled to judgment as
a matter of law." Fed. R. Civ. Proc. 56(c). On a Rule 56 motion,
the Court cannot try issues of fact, but is empowered to determine only
whether there are issues in dispute to be decided in a trial on the
merits. Gutierrez v. Lynch, 826 F.2d 1534, 1536 (6th Cir. 1987); In
re Atlas Concrete Pipe, Inc., 668 F.2d 905, 908 (6th Cir. 1982). The
crux of the motion is "whether the evidence presents a sufficient
disagreement to require submission to a jury or whether it is so
one-sided that one party must prevail as a matter of law." Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986); see Booker
v. Brown & Williamson Tobacco Co., Inc., 879 F.2d 1304, 1310
(6th Cir. 1989).
A motion for
summary judgment requires this Court to view " 'inferences to be
drawn from the underlying facts . . . in the light most favorable to the
party opposing the motion.' " Matsushita Electric Ind. Co. v.
Zenith Radio Corp., 475
574, 587 (1986) (quoting United States v. Diebold, Inc., 369
654, 655 (1962)), quoted in Historic Preservation Guild of Bay View
, 896 F.2d 985, 993 (6th Cir. 1989). The opponent, however, has the
burden to show that a "rational trier of fact [could] find for the
non-moving party [or] that there is a 'genuine issue for trial.'
" Historic Preservation, 896 F.2d at 993 (quoting Matsushita,
As the Sixth
Circuit has recognized and heartily supported, recent Supreme Court
decisions have encouraged the granting of summary judgments. Historic
Preservation, 896 F.2d at 993 (citing Celotex Corp. v. Catrett,
477 U.S. 317 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S.
242 (1986)). The Courts have noted that the summary judgment motion may
be an "appropriate avenue for the 'just, speedy and inexpensive
determination' of a matter." Cloverdale Equipment Co. v. Simon
Aerials, Inc., 869 F.2d 934, 937 (6th Cir. 1989) (quoting Celotex,
at 327). Consistent with the concern for judicial economy, "the
mere existence of a scintilla of evidence in support of the [non-moving
party's] positions will be insufficient." Anderson, 477
at 252. "Mere allegations do not suffice." Cloverdale,
869 F.2d at 937. "[T]he party with the burden of proof at trial is
obligated to provide concrete evidence supporting its claims and
establishing the existence of a genuine issue of fact."
Response to Plaintiff's Motions
responses are lacking in that (1) they have provided very little case
law in support of their arguments and (2) they have provided irrelevant,
immaterial or no evidence by way of affidavits, deposition testimony,
answers to interrogatories, admissions, or anything else which this
Court is directed to consider in its determination of whether genuine
issues of material fact exist under Fed. Rule Civ. Proc. 56. For the
most part, all I have to rely on in defendants' favor are their bare
allegations and unsupported assertions of law. For instance, defendants
submitted one affidavit, signed by Leslie Grable, which essentially
states that the Estate of Irene Grable does not have any tax liability.
In other words, Leslie Grable is of the opinion that the Estate does not
owe any taxes. This affidavit is completely ineffective because it
assumes the conclusion. To draw an analogy, suppose Mr. Doe is involved
in a lawsuit with the State of Ames in which the issue is whether the
world is flat or round. In a motion for summary judgment, the State of
Ames presents scientific data proving that the world is round. In
response, Mr. Doe submits a signed and sworn affidavit that he believes
the world is flat. Mr. Doe provides the Court with nothing other than
his opinion that the world is flat. In such a case would summary
judgment in favor of the State be proper? The answer is
easy--absolutely; there are no issues of material fact. A bald assertion
made by a party either in the brief or in an affidavit does not rise to
the level of creating a material issue of fact. "Mere allegations
do not suffice." Cloverdale, 869 F.2d at 937.
example the Court would like to note is on page 3 of defendants' brief
where defendants state: "The Courts have held that even if this is
a proper Tax Court decision all this does is determine a deficiency or a
number, and does not create any sort of liability." Defendants'
Brief at 3. Unfortunately, defendants fail to inform this Court which
"Courts" have so held. They provide absolutely no legal
support for this statement.
to Reduce to Judgment the 1979 & 1980 Assessments
seeks to reduce to judgment its 1979 and 1980 assessments made pursuant
to the tax court's determination as to the amount owed. See Grable v.
Commissioner of IRS, reprinted in Motion of United States for
Partial Summary Judgment,
May 16, 1990
, Ex. A. The tax court issued a decision in that case finding a
deficiency of $25,999.00 and $1,621.00 in income taxes due from
taxpayers. Plaintiff argues that this decision is res judicata as to the
claims raised by defendants.
fail to address the issue raised by plaintiff that the Tax Court
Decision is res judicata. Instead, defendants make a fairly unclear
argument which essentially states that there has never been a finding of
liability or deficiency by any court or other government body against
Irene Grable. In the alternative, defendants appear to argue that, if
there was a finding of liability against Irene Grable, then the
failed to properly send notices and demand. 1
For the most part, these arguments have already been addressed by this
Court in United States v. David Grable, 1:89-CV-1145 (W.D. Mich.
1991), as well as in this case, see Defendants' Motion to Dismiss
(filed December 27, 1990).
only argument concerning the Tax Court Decision is that the decision is
not admissible evidence because it does not contain a file stamp.
However, the decision and the docket sheet were attached to a
certification of authenticity made by the clerk of the Tax Court, under
seal. Therefore, I find that the Tax Court Decision and docket sheet are
both admissible pursuant to Federal Rules of Evidence 902(1) and 803(8).
other argument from defendants, I find that the Tax Court Decision is
res judicata to defendants' claims. The tax years are the same in both
the Tax Court Decision and in the current proceeding. Thus, the judgment
entered by the Tax Court is res judicata as to the tax claims in the
current proceeding "whether or not the basis of the agreements on
which they rest reached the merits." United States v.
International Building Co. [53-1
USTC ¶9366 ], 345 U.S. 502 (1953). The defendants can not attack
the underlying basis for the liability established by the Tax Court
Decision: Irene and Earl Grable's tax returns were deficient for the tax
years 1979 and 1980 in the amounts of $25,999.00 and $1,621.00
to the alternative argument posed by defendants (if there was a tax
court decision, then there was not notice), Section
6215(a) of the Internal Revenue Code provides that "[i]f the
taxpayer files a petition with the Tax Court, the entire amount
redetermined as the deficiency by the decision of the Tax Court . . .
shall be assessed and shall be paid upon notice and demand from the
Secretary." 26 U.S.C §6215(a)
. Defendants here filed a prior lawsuit alleging that the government
failed to give proper notice and demand. Judge Gibson ruled on
July 19, 1988
that the IRS had satisfied the statutory requirements. Any arguments as
to those elements of the statute are barred by the doctrine of res
judicata. Brown v. Felsen, 442
127, 131 (1979); Commissioner v. Sunnen [48-1
USTC ¶9230 ], 333 U.S. 591, 597 (1948).
has amply demonstrated that the Estate of Irene Grable has unpaid income
tax liabilities for the years 1979 and 1980 by showing, among other
things, the filing of Forms 4340. Defendants have failed to provide any
contrary evidence. Because the assessment in this case was simply a
matter of entering the tax court's judgment, evidence of the Form 4340
satisfies plaintiff's burden of showing that such an entry was made. In
addition, courts have consistently relied on the Certificate of
Assessments and Payments forms as establishing at least prima facie
evidence that an assessment was made. United States v. Chila [89-1
USTC ¶9299 ], 871 F.2d 1015, 1017-18 (1989); United States v.
USTC ¶9710 ], 658 F.2d 710, 714-15 (9th 1981); Psaty v. United
USTC ¶9346 ], 442 F.2d 1154, 1159 (1971); Cohen v. United States
¶9202 ], 297 F.2d 760 (9th Cir.), cert. denied, 369 U.S. 865
Certificate of Assessments and Payments form shows that on
November 28, 1984
, the IRS made an assessment against taxpayers for $25,999.00 and
$1,621.00 in past taxes due, pursuant to the tax court's judgment. With
the addition of penalties and interest accrued since the tax court's
judgment in October 1984, plaintiff now seeks more. I find that
defendants have not satisfied their burden to prove the existence of a
genuine issue of fact. Accordingly, I grant summary judgment in favor of
plaintiffs on this issue, Count I of plaintiff's amended complaint.
of the Federal Tax Liens
6303 provides that within 60 days of the assessment, the IRS must
provide taxpayer with notice of the assessment and demand for payment.
26 U.S.C. §6303 . Section
6321 , 26 U.S.C. §6321
creates a lien on the property of taxpayer in favor of the United States
after demand has been made. Berman v. United States [87-2
USTC ¶9460 ], 825 F.2d 1053, 1056 (1987).
above, pursuant to Judge Gibson's decision, notice and demand were
sufficient. As a result, I find as a matter of law that plaintiff has a
valid tax lien on all defendants' property.
to Foreclose Liens
seeks to attach its federal tax lien to the following property:
property located at
116 Bridge Street
property, house and four lots, located in
shares of stock in Grable and Sons Metal Products, a Michigan
property located in
estate in Dimondale and Bradenton, as well as the stock was transferred
by Leslie Grable, as the personal representative of the Estate of Irene
Grable, to Leslie Grable, individually and L. David Grable for no
consideration or money. Additionally, the Dimondale property was also
transferred in part to Valerie Grable for no consideration or money. The
property in Caspian is still in the estate.
tax liens attach to every interest in property a taxpayer may have, . .
. regardless whether that interest is less than full ownership or is
only one among several claims of ownership." United States v.
USTC ¶9227 ], 870 F.2d 338, 341 (6th Cir. 1989). A valid tax lien
generally continues until taxpayer's deficiency is satisfied. 26 C.F.R. §601.104(c)(3)
(1990). Under this authority, it is clear to the Court that any
interest that Irene Grable, or the Estate of Irene Grable, had at the
time of her death in the parcels of real estate in question is subject
to federal tax liens. Defendants do not make any argument in their brief
to counter this legal authority.
liens are not valid against purchasers until notice thereof has been
filed in accord with 26 U.S.C. §6323(f)
. "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." 26 U.S.C. §6323(h)
; United States v. Scovil [55-1
USTC ¶9137 ], 348 U.S. 218, 221 (1954).
argues that with respect to the Dimondale and
real property, as well as the stock in Grable and sons, Leslie Grable,
individually, L. David Grable and Valerie Grable are not purchasers, and
therefore they took the property subject to federal tax liens. See, e.g.,
, 741 F.Supp. 92 (E.D. Pa. 1990). The
further points out that because the property in
is still within the Estate, the federal tax liens have attached to this
property and is subject to foreclosure.
plaintiff argues, the Court should order that the federal tax liens on
these properties be foreclosed. I agree. The Court will order
foreclosure on the properties in question and the proceeds of the
foreclosure sale shall be applied against the income tax liabilities of
the deceased Irene Grable. For the record, I note that defendants do not
present any legal or factual argument to the Court on this specific
matter. The Court will grant summary judgment in favor of the plaintiff
as to Counts II, III, V & VI of plaintiff's amended complaint.
Liability of Leslie Grable
States argues that Leslie Grable, as the personal representative of the
Estate of Irene Grable, should be held personally liable for the
outstanding tax liabilities of Irene Grable under 31 U.S.C. §3713.
provides, in part:
(a)(1) A claim
of the United States Government shall be paid first when--
the estate of a deceased debtor, in the custody of the executor or
istrator, is not enough to pay all debts of the debtor.
In order to be
subject to Section 3713(a)(1)(B), the
must show: (1) that the Estate of Irene Grable was indebted to the
; and (2) that the Estate of Irene Grable was insolvent. This statute
provides, "that the
shall be accorded and absolute priority over the claims of all general
lienholders." W.T. Jones & Company v. Foodco Realty, Inc.,
318 F.2d 881, 885 (4th Cir. 1988). The burden is on the person who
argues that the government's priority does not apply to show that they
are not within the provisions of Section 3713.
v. Cole, 733 F.2d 651, 654 (9th Cir. 1984).
argues that defendants fall within the provisions of Section 3713.
Defendants, in response, only argue one point: that the Estate of Irene
Grable is not liable for any taxes. Other than this argument, which has
been disposed of above, defendants provide the Court with no other
factual or legal authority to counter the argument of the
. Accordingly, I find that the Estate of Irene Grable falls within
argues that Leslie Grable is personally liable under section 3713(b),
representative of a person or an estate (except a trustee under Title
11) paying any part of a debt of the person or estate before paying a
claim of the Government is liable to the extent of the payment for the
unpaid claims of the Government.
presents a very thorough, well-reasoned argument--with a lot of legal
support--as to why Leslie Grable falls under this statute. In response,
Leslie Grable again fails to provide the Court with any legal or factual
authority to counter the argument of the
. In fact, Leslie Grable does not even cite one case in support of his
I find that
Leslie Grable is liable under this provision. In support of this
finding, I rely on the following facts:
Grable was named the personal representative of the Estate of Irene
January 21, 1987
(2) In this
capacity, Leslie Grable was responsible for, among other things,
disbursing or transferring the assets of the Estate to pay its creditors
or to comply with the will of his deceased mother;
(3) The Estate
of Irene Grable was indebted to the
for unpaid income tax liabilities for the 1979 and 1980 tax years;
Grable knew of this unpaid liability prior to his mother's death;
(5) In spite
of this knowledge, Leslie Grable admits that he paid, or authorized his
daughter (Leslie Graham), to pay creditors other than the
Estate's income tax liabilities were not contingent, but rather, the
obligations were "fixed and independent of 'events after
insolvency' [with] only the precise amount of that obligation await[ing]
77, 85 (1975).
all distributions and disbursements of assets from the Estate by, or
authorized by, Leslie Grable in payment of creditors, other than the
, or for no consideration make him individually liable. See, e.g.,
Lakeshore Apartments, Inc. v.
, 351 F.2d 349, 353 (9th Cir. 1965). Thus, plaintiff's motion for
summary judgment as to Count IV of plaintiff's amended complaint is
defendant taxpayers owe plaintiff $48,536.97 in past income tax due plus
statutory accruals of interest from
November 28, 1984
. As a result of the tax deficiency, the
has a valid lien against all property and rights to property of the
defendant taxpayers, as discussed above. Furthermore, Leslie Grable is
personally liable for all distributions and disbursements of assets from
the Estate in payment of creditors, other than the
, or for no consideration.
The defendants primarily make this argument in conjunction with the
foreclosure on tax liens issue. Nonetheless, they hint at this argument
in this first section. Thus, I will address this matter in both
Section 6321 provides 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, whether real or
personal, belonging to such person." 26 U.S.C. §6321
United States of America
, Plaintiff v. Laycher Gonzales, a/k/a Eliseo Gonzales, Maxine P.
Maxine Gonzales and Assembly of Yhwhhoshua, Defendants
District Court, Dist. Colo., Civ. 89-F-1740, 2/6/91
[Code Secs. 61 ,
1402 , 6651
, 6653 , prior to
amendment by P.L. 101-239, and Code Sec.
Self-employment taxes: Ministers: Penalties, civil: Estimated
taxes.--A self-employed taxpayer who failed to report his income or
keep income tax records was liable for self-employment tax, interest,
penalties and additions to tax. An exemption from tax applied only to
income received by the taxpayer as a minister. Additionally, imposition
of the taxes did not violate the taxpayer's first amendment rights. The
taxpayer's assertion that his religion prohibited the payment of taxes
was without merit because payment of taxes is not voluntary.
[Code Sec. 6323 ]
Lien for taxes: Priorities: Bona fide purchaser for value: Fraudulent
conveyance.--The IRS could foreclose federal tax liens on real
property even though the taxpayer had quit claimed the property to his
church prior to the time the IRS filed notice of a tax lien. The church
could not avoid the lien because it did not qualify as a bona fide
purchaser for value under state (
) law. Only nominal consideration was paid for the land. Additionally,
the transfer to the church constituted a fraudulent conveyance and was
void under state law. The transfer, which was made almost immediately
after the tax assessment, but before the notice of lien was filed, was
made with the intent to defraud the
[Code Secs. 7401 and
Jury trial, right to: Lien enforcement: Suit for collection or
recovery of unpaid taxes.--Taxpayers did not have a right to a jury
trial with respect to an action brought by the IRS to foreclose a tax
lien and set aside a fraudulent conveyance. Although the taxpayers had a
right to jury trial with respect to the defense of a suit for collection
and recovery of unpaid taxes, the request was neither timely nor set
forth in writing.
MEMORANDUM OPINION AND ORDER
action was brought by the United States of America on October 6, 1989,
(i) to reduce federal tax assessments against defendant Laycher Gonzales
to judgment, (ii) to set aside a fraudulent conveyance of real property
at 1998 58th Lane, Boone, Colorado, or for a finding that the Assembly
of Yhwhhoshua holds title to an undivided one-half interest in the
relevant parcel as the nominee of Laycher Gonzales, and (iii) to
foreclose federal tax liens on the real property. Jurisdiction is based
on 28 U.S.C.A. §1345 (West 1976).
answered and counterclaimed on
October 30, 1989
. The counterclaim has not been pursued by defendants. After a series of
unsuccessful settlement discussions and the withdrawal of defendants'
counsel, defendants filed a motion for summary judgment or dismissal.
The motion was denied on
November 20, 1990
. A trial was held to the court on
December 14, 1990
. The following constitutes our findings of fact and conclusions of law
as required by Fed. R. Civ. P. 52(a). 1
For the reasons stated below, we find on behalf of the plaintiff and
against the defendants.
Laycher Gonzales is the pastor of the Assembly of Yhwhhoshua, a named
defendant in this action. His wife, defendant Maxine Gonzales, is also a
member of the Assembly. In 1974, Pastor and Mrs. Gonzales moved to
1998 58th Lane
, executing a declaration of homestead in 1976. Plaintiff's Exhibit 6.
At some point after the initial purchase of the land, Mr. Gonzales
announced during a religious service that he was giving the property to
the Assembly. Plaintiff's Exhibit 18 at 49. This decision was never
memorialized in writing. Plaintiff's Exhibit 18 at 52. No assets or
property were exchanged. Plaintiff's Exhibit 18 at 46-47. The Gonzaleses
continued to live on the property.
through 1977, Mr. Gonzales filed federal income tax returns and paid the
appropriate assessments. Plaintiff's Exhibit 2. Beginning in 1978 and
continuing through 1981, Pastor Gonzales stopped keeping records of his
income and did not file federal income tax returns. Plaintiff's Exhibit
17 at 38. The religious tenets of the Assembly forbid its members to pay
income tax. Plaintiff's Exhibit 11 at XXV. During those years, Mr.
Gonzales was self-employed. He performed electrical, construction, and
carpentry work for individuals in the
area, and was paid in cash for those services. See generally Plaintiff's
Exhibit 17. Mr. Gonzales also served as Pastor of the Assembly, but was
not paid for this job. Plaintiff's Exhibit 17 at 20.
this period, Mr. Gonzales was the sole source of support for anywhere
from four to eleven individuals. Plaintiff's Exhibit 17 at 23-25. In
accordance with the beliefs of the Assembly, Pastor Gonzales provided
these people only with organic foods, at an increased cost to him.
Plaintiff's Exhibit 17 at 29, 54-55. Mr. Gonzales also paid for
clothing, telephone service, electricity, propane, wood for heating, a
stove, a washing machine, maintenance and repairs for the home, gasoline
for two automobiles, repairs and parts for the vehicles, real property
taxes, and water. Plaintiff's Exhibit 17 at 32-35, 46 and Plaintiff's
Exhibit 18 at 24.
In 1983, the
Internal Revenue Service ("the IRS") audited Mr. Gonzales for
the aforementioned period. Mr. Gonzales did not cooperate with the
audit. As financial records had not been maintained during this period,
none were provided to the IRS.
receiving several notices from the IRS, Mr. and Mrs. Gonzales
quitclaimed the Boone property on
November 18, 1983
, and transferred the land to the Assembly. A deed was duly recorded on
the same day. Plaintiff's Exhibit 7. On
November 21, 1983
, the IRS recorded a notice of federal tax lien against Pastor Gonzales.
Plaintiff's Exhibit 8. Mr. Gonzales and his family continued to live on
and improve the Boone property. Moreover, Mr. Gonzales used his money to
pay property taxes on the land. Plaintiff's Exhibit 18 at 39. On
November 4, 1988
, the IRS recorded a notice of federal tax lien against the Assembly as
nominee, agent, or transferee of Mr. Gonzales. The current action was
October 6, 1989
law, all taxpayers have a duty to maintain adequate and accurate tax
records. 26 U.S.C.A. §6001
(West 1989); Jones v. Commissioner [90-1
USTC ¶50,280 ], 903 F.2d 1301, 1303 (10th Cir. 1990). As Mr.
Gonzales is required to pay income tax, 2
he is not exempt from this mandate.
Gonzales did not keep tax records. Under this scenario, the federal
government is entitled to reconstruct his gross receipts and costs to
arrive at an assessment for the unreported income.
; Anson v. Commissioner [64-1
USTC ¶9293 ], 328 F.2d 703, 705-06 (10th Cir. 1964). In this case,
the IRS used Bureau of Labor statistics to estimate Mr. Gonzales's gross
income for the relevant years. While this method may result in some
inaccuracies, such imperfections are permissible. Jones [90-1
USTC ¶50,280 ], 903 F.2d at 1305-06.
has presented a certificate of assessment and payments for 1978 through
1981 for Mr. Gonzales. This certificate establishes a prima facia case
of liability against Mr. Gonzales. G.M. Leasing Corp. v. United
USTC ¶9435 ], 514 F.2d 935, 941 (10th Cir. 1975), aff'd in part
and rev'd in part on other grounds, [77-1
USTC ¶9140 ], 429 U.S. 338 (1977). The certificate establishes that
taxes, penalties, and interest were assessed pursuant to 26 U.S.C.A. §§6201
-6203 (West 1989). Notice and demand for payment was properly made
under 26 U.S.C.A. §6303(a)
of these steps results in the burden of persuasion shifting to Pastor
Gonzales. Zell v. Commissioner [85-2
USTC ¶9698 ], 763 F.2d 1139, 1141 (10th Cir. 1985); G.M. Leasing
¶9435 ], 514 F.2d at 941. The plaintiff's determination will not be
disturbed unless Mr. Gonzales demonstrates that it was arbitrary and
erroneous. Jones [90-1
USTC ¶50,280 ], 903 F.2d at 1304. Mr. Gonzales did not present the
court with any evidence to meet this burden. Instead, he asserted that
(i) this court did not enjoy jurisdiction over the matter, (ii) he and
his wife were not subject to the Internal Revenue Code since they were
not federal employees, (iii) the first amendment 3
prevents the imposition of income taxes upon him, (iv) a jury trial was
required, and (v) the Boone property belonged to the Assembly, not he
and his wife. Each argument will be considered individually.
With regard to
the first and second arguments, these issues have previously been
addressed by the court and found to be without merit. United States
v. Gonzales, No. 89-F-1740, slip op. at 2-3, 5 (D. Colo. Nov. 20,
1990). Under the doctrine of law of the case, they need not be
revisited. Fox v. Mazda Corp., 868 F.2d 1190, 1194 (10th Cir.
1989); Deutsche Credit Corp. v. Pearson, No. 90-F-1492, slip op.
at 2 n.1 (D. Colo. Jan. 3, 1991).
Gonzales also claims that the first amendment prohibits the imposition
of income taxes upon him. Imposing income taxes on individuals whose
religious tenets forbid the payment of those taxes does not violate the
first amendment. United States v. Lee [82-1
USTC ¶9205 ], 455 U.S. 252, 257-60 (1982); Ballinger v.
USTC ¶9280 ], 728 F.2d 1287 (10th Cir. 1986). While the defendant's
religious beliefs may be sincerely held, the payment of income taxes is
not voluntary. Lonsdale v. United States [90-2
USTC ¶50,581 ], 919 F.2d 1440, 1448 (10th Cir. 1990).
Mr. and Mrs.
Gonzales additionally allege that they enjoyed a right to a jury trial
under the seventh amendment. 4
Plaintiff's action requests (i) the collection or recovery of unpaid
taxes pursuant to 26 U.S.C.A. §7401
(West 1989), (ii) enforcement of a tax lien, and (iii) setting aside
the conveyance of the Boone property as fraudulent.
No right to a
jury trial attaches in an action seeking the enforcement of the tax
lien. United States v. Annis [80-2
USTC ¶9801 ], 634 F.2d 1270, 1272 (10th Cir. 1980). Nor do
defendants enjoy the right to a jury trial in an action to set aside the
conveyance of the Boone property as fraudulent. In re Mozer, 10
Bankr. 1002, 1004 (Bankr. D.
individual may be granted a jury trial when defending a suit for the
collection or recovery of unpaid taxes, the demand must be timely. United
States v. Anderson [78-2
USTC ¶9731 ], 584 F.2d 369, 372-74 (10th Cir. 1978). In the
pretrial order, filed on
June 12, 1990
, defendants' former counsel agreed to a trial to the court. Although
defendants may have changed their position after discharging counsel,
Fed. R. Civ. P. 38(b) mandates that a demand for a jury trial must be
made in writing and served within ten days after service of the last
pleading directed to such issue. The first time defendants requested a
jury trial was during the trial to the court. A written request was
never offered. Hence, defendants' demand for a jury trial was properly
stricken since it was untimely.
individual is liable for past taxes to the federal government, a lien
against all property and rights to property may be created in favor of
26 U.S.C.A. §6321 (West
1989). If the taxpayer fails to pay the assessment after notice and a
demand for payment, the IRS may levy upon all property that belongs to
the taxpayer and is subject to the lien. Eskanos v. Alpha 76, Inc.
¶50,344 ], 712 F.Supp. 819, 821 (D.
A federal tax
lien arises when unpaid taxes are assessed. 26 U.S.C.A. §6322
(West 1989); United States v. Cache Valley Bank [89-1
USTC ¶9157 ], 866 F.2d 1242, 1244 (10th Cir. 1989). Pastor
Gonzales's unpaid taxes were assessed on October 10 and 17, 1983.
Plaintiff's Exhibit 1. Under 26 U.S.C.A. §6323(a)
however, a lien imposed under §6321
is not valid against any (i) purchaser, (ii) holder of a security
interest, (iii) mechanic's lienor, or (iv) judgment creditor until
notice of the lien is properly filed. Although the IRS may have filed
their notice of lien on
November 21, 1983
, Plaintiff's Exhibit 8, Mr. and Mrs. Gonzales quitclaimed the Boone
property in favor of the Assembly on
November 18, 1983
. Plaintiff's Exhibit 7. As the Boone property purportedly belonged to
the Assembly before the lien was filed, defendants allege that plaintiff
cannot foreclose upon the land to satisfy Mr. Gonzales's tax debt.
the tax lien by the Assembly can only occur if it falls under one of the
four categories enumerated above. The Assembly has alleged that it was a
purchaser of the Boone property. Section
6323(h)(6) defines "purchaser" as "a person who for
adequate and full consideration in money or money's worth, acquires an
interest which is valid under local law against subsequent purchasers
without actual notice." 26 U.S.C.A. §6323(h)(6)
(West 1989). Nominal cash consideration that is remarkably below the
fair market value for the land is not adequate and full consideration. United
States v. Mac Cement Finishing Corp. [83-1
USTC ¶9183 ], 546 F.Supp. 52, 53-54 (N.D.N.Y. 1982); United
States v. Galvin, 199 F.Supp. 4, 6 (E.D.N.Y. 1961); see United
States v. Morgan, 554 F.Supp. 582, 585-87 (D.
1982). As the Assembly only paid one dollar for the plot of land,
Plaintiff's Exhibit 7, it is not a purchaser under the statute.
Moreover, this transaction was not a valid purchase under local law
against subsequent purchasers without notice. In
, any conveyance made with the intent to hinder, delay, or defraud
creditors is void. Colo. Rev. Stat. §38
While intent may be shown by circumstantial evidence, Fish v. East,
114 F.2d 177, 183 (10th Cir. 1940), defendants bear the ultimate burden
of showing that the transfer was completed without this illicit intent. Morgan,
554 F.Supp. at 586. Defendants offered no testimony as to why they
quitclaimed their interest in the Boone property in favor of the
Assembly almost immediately after the tax assessment had been made and
directly before the notice of the lien was filed. Without any
explanation, the court is constrained to find that defendants have
failed to satisfy their burden. Hence, we conclude that the transfer was
committed with the intent to defraud the
. Because the property was not transferred to a bona fide purchaser
under local law, it does not fall under §6323(a)
, is void, and must be set aside as a fraudulent conveyance.
Assembly has not claimed to be the holder of a security interest,
mechanic's lienor, or judgment creditor. It therefore does not benefit
from these exceptions and falls outside the purview of §6323(a)
As a result,
the federal tax lien attached on October 1O, 1983, for the amounts due
for 1978, 1979, and 1980, and on
October 17, 1983
, for the monies due for 1981. The transfer of the Boone property on
November 18, 1983
, was not to a purchaser, was a fraudulent conveyance, and must be set
aside as void under
law. Hence, the Assembly cannot claim an interest sufficient to defeat
the federal lien under the exceptions of §6323(a)
. The federal tax liens are foreclosed against the Boone property.
For the noted
reasons, the court finds Pastor Gonzales is liable for income tax for
tax years 1978 through 1981.
Self-Employment Tax Liability: 26 U.S.C.A. §1401
(West 1989) imposes a tax on the self-employment earnings of every
While Mr. Gonzales does enjoy an exemption from paying self-employment
taxes on any income he may have received in his capacity as minister of
the Assembly, Defendants' Exhibit B, Mr. Gonzales is obligated to pay
taxes on all other sources of income discussed above.
Penalty: As a result of Pastor Gonzales's failure to pay taxes as
required by §1401 ,
he is subject to a delinquency penalty under 26 U.S.C.A. §6651(a)
(West 1989). The penalty equals five percent of the underpayment per
month, not to exceed twenty-five percent in the aggregate. 26 U.S.C.A. §6651(a)(1)
Penalty: 26 U.S.C.A. §6653(a) (West 1974 and Supp. 1980, 1981, 1982,
1983), as codified in the relevant tax years, imposes a penalty of five
percent of the underpayment resulting from negligence or a disregard for
these rules. Mr. Gonzales filed tax returns and paid the required taxes
from 1973 through 1977, Plaintiff's Exhibit 2, evidencing knowledge of
his duty to comply with the tax laws. His intentional defiance of the
responsibility to file income tax returns and pay the appropriate
assessments mandate the imposition of this penalty.
inson's Dairy, Inc. v. Commissioner [62-1
USTC ¶9447 ], 302 F.2d 42, 44 (10th Cir. 1962); see also White
v. Commissioner, 537 F.Supp. 679, 686-87 (D.
Tax Penalty: 26 U.S.C.A. §6654
(West Supp. 1990) provides for a penalty pursuant to 26 U.S.C.A. §6621
(West Supp. 1990) for any underpayment of estimated tax by an
individual. As Mr. Gonzales did not pay any tax for the relevant years,
he is subject to this penalty.
IT IS ORDERED:
Laycher Gonzales is liable for all taxes, penalties, interest, accrued
interest, and statutory additions as provided by law for tax years 1978,
1979, 1980, and 1981.
November 18, 1983 transfer of 1998 58th Lane, Boone, Colorado, from Mr.
and Mrs. Laycher Gonzales to the Assembly of Yhwhhoshua is void and set
aside as a fraudulent conveyance.
(3) The tax
lien filed on
November 21, 1983
is foreclosed against
1998 58th Lane
. The Boone property is to be sold and the expenses of the sale
deducted. One-half of the balance of the proceeds are to be applied to
Mr. Gonzales's tax liabilities. The remaining portion is to be given to
deficiency judgment is entered against Mr. Gonzales if the proceeds of
the sale do not satisfy his tax liabilities.
post-trial motions are hereby DENIED.
government is DIRECTED to submit a proposed judgement in accordance with
this order within ten days of entry of this opinion. The government is
DIRECTED to provide the court with the exact monies owed, categorized
under each relevant provision of the Internal Revenue Code.
Fed. R. Civ. P. 52(a) states, in pertinent part, that "[i]n all
actions tried upon the facts without a jury or with an advisory jury,
the court shall find the facts specially and state separately its
conclusions of law thereon, and judgment shall be entered pursuant to
Rule 58." Fed. R. Civ. P. 52(a).
citizens and resident aliens must pay federal income tax. 26 C.F.R. §1.1-1(b)
; 33 Am. Jur. 2d Federal Taxation ¶1001 (1991). Since Mr.
Gonzales has not asserted that he is not citizen or resident of the
, he is subject to federal taxation. United States v. Gonzales,
No. 89-F-1740, slip op. at 5 (D. Colo. Nov. 20, 1990).
The first amendment to the United States Constitution provides, in
pertinent part, "Congress shall make no law respecting an
establishment of religion, or prohibiting the free exercise
thereof;" U.S. Const. amend. I.
The seventh amendment provides,
Suits at common law, where the value in controversy shall exceed twenty
dollars, the right of trial by jury shall be preserved, and no fact
tried by a jury, shall be otherwise reexamined in any Court of the
United States, than according to the rules of the common law. "
U.S. Const. amend. VII.
State law controls in determining the nature of the legal interest which
a taxpayer holds. United States v. Cache Valley Bank [89-1
USTC ¶9157 ], 866 F.2d 1242, 1244 (10th Cir. 1989); Bigheart
Pipeline Corp. v. United States [88-1
USTC ¶9110 ], 835 F.2d 766, 767 (10th Cir. 1987).
Colo. Rev. Stat. §38 -10-117
conveyance or assignment in writing or otherwise of any estate or
interest in lands, goods, or things in action or of any rents and
profits issuing thereupon, and every charge upon lands, goods, or things
in action or upon the rents and profits thereof made with the intent to
hinder, delay or defraud creditors or other persons of their lawful
suits, damages, forfeitures, debts, or demands, and every bond or other
evidence of debt given, suits commenced, or decree or judgment suffered
with the like intent as against the person so hindered, delayed, or
defrauded shall be void." Colo. Rev. Stat. §38
Net earnings from self-employment is defined in 26 U.S.C.A. §1402
¶9401] William M. Rodeck and Rosemarie M. Rodeck, Plaintiffs v. United
States of America, State of Minnesota, and Jeannine Mary Viray,
, Fourth Div., Civ. 4-87-1009,
, (697 F.Supp. 1508).
[Code Secs. 6323 ,
6331 , and 6332
Lien for taxes: Priority: Bona fide purchaser for value: Fact
finding: Levy and distraint: Effect of levy.--In an interpleader
action filed by contract purchasers of real estate, it was decided that
the transferee of the taxpayer, not the IRS, had a superior lien to the
property. The transferee's acceptance of the real estate in return for a
release of the taxpayer from his obligations of child support
constituted a transfer for adequate and full consideration in money or
money's worth. Recitation in deed of transfer for "one dollar and
other good and valuable consideration" did not affect the facts,
nor did payment of minimum transfer tax based on the value of the
, 71-1 USTC
¶9425 , 328 FSupp 1343, distinguished. The contract purchaser's
interest in the real estate was itself a real estate interest under
state law and the doctrine of equitable conversion did not apply. Thus,
the purchasers' interest was perfected before the IRS filed its notice
of lien in the county in which the real estate was located. Further, the
IRS's notice of levy could not serve as an alternative method of
perfecting its lien. A levy does not determine whether the government's
rights to the secured property are superior to those of other claimants.
Southern Rock, Inc., CA-5, 83-2
USTC ¶9529 , 711 F2d 683 followed.
Malush, Hyatt Legal Services,
, for plaintiffs. Jerome G. Arnold, United States Attorney, Mary Jo
Madigan, Assistant United States Attorney, Minneapolis, Minn. 55401. Amy
J. Sargent, Peter V.
, Department of Justice,
, O'Connor & Hannan,
80 S. 8th St.
, for J.M. Viray.
have stipulated to the facts and present this case for resolution on
cross motions for summary judgment. This interpleader action concerns a
priority dispute between a federal tax lien and a vendor's interest in
an executory contract for land. Summary Judgment will be granted in
favor of Jeannine Mary Viray.
claims tax liens on all property and rights to property belonging to
Thomas J. Ponchik, a/k/a Thomas J. Shallon, by virtue of unpaid federal
taxes plus statutory additions, in the amounts and for the periods
Type of Period Date of Tax on
Tax Ending Assessed
1040 ............... 12/31/80 09/14/81 $42,919.67 $2,874.20 $45,793.87
1040 ............... 12/31/81 10/11/82 1,833.13 636.59 2,469.72
1040 ............... 12/31/82 11/21/83 1,480.71 160.81 1,641.52
August 7, 1980
, Ponchik sold a parcel of residential property located in
to William M. and Rosemarie Rodeck. Under the terms of the contract for
deed, the Rodecks were to make monthly payments of $447.56, with a
balloon payment coming due on
August 15, 1987
made assessments against Ponchik on
September 14, 1981
October 11, 1982
November 21, 1983
. Subsequently, on
May 11, 1984
, a notice of federal tax lien was filed with the Milwaukee County
Register of Deeds relative to those three assessments. At the time,
Ponchik was in a federal prison in
. His last known address was a
address listed on his 1982 income tax return. The United States Court of
Appeals for the Eighth Circuit has found that a mailing to Ponchik's
Milwaukee address was sufficient for the purpose of mailing the notice
of deficiency required by 26 U.S.C. §6212(a)
. Ponchik v. Commissioner of Internal Revenue [88-2
USTC ¶9488 ], 854 F.2d 1127 (8th Cir. 1988).
July 18, 1984
mailed a notice of levy to the Rodecks. The notice of levy was received
August 4, 1984
and, pursuant to the levy, the Rodecks began making their monthly
payments to the Internal Revenue Service.
August 15, 1984
, Ponchik assigned his vendor's interest in the contract for deed to
Jeannine Mary Viray in satisfaction of a child support obligation. About
one year earlier, Viray had given birth to a daughter by Ponchik. See
Affidavit of Paternity dated
August 11, 1984
. The assignment was recorded with the Hennepin County Recorder's Office
August 20, 1984
. The instrument of assignment listed the value of Ponchik's interest as
$49,675.26 and stated that Ponchik assigned his interest for "One
Dollar and othe good and adequate consideration." The minimum
transfer tax, applicable to transfers involving $1,000.00 or less, was
January 4, 1985
, a notice of federal tax lien was filed with the Hennepin County
filed this interpleader action on
October 28, 1987
. The interpleaded fund of $47,376.80 represents the balloon payment
under the contract for deed. Pursuant to the Magistrate's Order of
January 21, 1988
, the Rodecks deposited an amount equal to the balloon payment with the
Court and, in exchange, Viray has delivered the deed to the Rodecks. All
that remains to be decided is the priority dispute between the
determines the priority status among competing creditors where a federal
tax lien is the basis of a government claim. Aquilino v. United
USTC ¶9538 ], 363 U.S. 509, 513-14, 80 S.Ct. 1277, 1280-81, 4
L.Ed.2d 1365 (1960). A tax lien arises when a taxpayer fails to pay a
tax liability after demand for payment. Under 26 U.S.C. §6321
, the tax lien attaches to "all property and rights to
property" belonging to the taxpayer. The lien attaches at the time
of assessment. United States v. Vermont [64-2
USTC ¶9520 ], 377 U.S. 351, 355, 84 S.Ct. 1267, 1269-70, 12 L.Ed.2d
370 (1964). The 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.
which must be decided in this case can be outlined as follows. Because
Viray's interest in the fund arose after the tax lien had attached,
Viray must first show that she qualifies for protection under section
6323(a) to establish priority relative to the tax lien. Viray claims
to qualify for protection under section
6323(a) as a "purchaser." If Viray is a purchaser, she
must then establish that her interest was perfected before notice of the
federal tax lien was filed in accordance with section
6323(f) . The tax lien will have priority over a purchaser if notice
of the lien was filed before the purchaser perfected her interest.
6232(f) , the manner and place of filing a notice of federal tax
lien is determined by the nature of the property subject to the lien.
Briefly stated, a notice of federal tax lien is effective against real
property only if it is filed where the property is located. For personal
property, a notice is effective if filed where the taxpayer resides at
the time of filing. Because Viray's interest was perfected between the
filed notice where Ponchik resides and the time it filed notice where
the property is located, Viray's priority, as a purchaser, depends on
whether her interest was one of reality or one of personalty.
effect of the levy must be determined. The
served a notice of levy on the Rodecks eleven days before Ponchik
transferred his interest to Viray. The
argues that a notice of levy is a second means of perfecting a federal
tax lien. If the
is correct, the notice of levy would serve to give the tax lien priority
over Viray's subsequently created interest.
Whether Viray is a Purchaser Within the Meaning of Section
A federal tax
lien arises on the date of assessment and, as of that date, is
enforceable against all creditors except for the four types of creditors
protected by 26 U.S.C. §6323(a)
--purchasers, holders of security interests, mechanics lienors, and
judgment creditors. As to these four groups, a federal tax lien will
have priority only if notice has been filed in accordance with section
to qualify as a purchaser. Section
6323(h)(6) defines that term as follows:
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.
the burden of proving that she fits the statutory definition of
purchaser. Coventry Care, Inc. v. United States [74-1
USTC ¶9163 ], 366 F.Supp. 497, 500-01 (W.D.Pa. 1973). By recording
the assignment, Viray made her interest valid against subsequent
purchasers without notice. The
argues however that Viray did not acquire her interest for "full
and adequate consideration in money or money's worth."
furnishes little guidance on the measure of full and adequate
consideration. The phrase "full and adequate consideration"
was intended to change the former law which and had enabled persons to
qualify as purchasers by paying amounts "so small as to have little
relation to the value of the property acquired." Sen.Rep. No. 1708,
89th Cong., 2d Sess., reprinted at, 1966 U.S. Code, Cong. &
Admin.News 3722, 3735. "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." 26 C.F.R. §301.6323(h)-1(f)(3)
. This standard may be satisfied by a "bona fide bargain
argues that the consideration which Viray received is not "full and
adequate" by focusing on the representations made on the instrument
of assignment, rather than the value of Ponchik's child support
obligation. The instrument states that Ponchik assigned his interest for
"One Dollar and other good and valuable consideration," and
also indicates that the minimum transfer tax, applicable to transfers
involving $1,000 or less, was paid. The instrument, however, also lists
the value of Ponchik's interest as $49,675.26. Despite the latter fact,
and despite the fact that the government has stipulated that Viray
received Ponchik's interest in satisfaction of his child support
the government argues that the instrument of assignment "clearly
indicates that the value of the consideration given does not bear any
relationship to the value of the property transferred." Memorandum
in Support of
Motion for Summary Judgment at 14.
government's reliance on the statements in the instrument of assignment
is misplaced. The value of the interest assigned is correctly stated and
Ponchik's release from any obligation for child support plainly is
"good and valuable consideration." Thus, the government's
argument hinges on the statement of value implied from payment of the
minimum transfer tax. Perhaps the statement was a misrepresentation on
Viray's part. Even so, it will not serve to bind her in this action. The
value of Ponchik's interest was $49,675.26, as listed, and that is
approximately half of the estimated cost of raising a child in an urban
area of the
to age eighteen. 2
Therefore, by releasing all claims against Ponchik for child support in
exchange for Ponchik's interest in the contract for deed, Viray
furnished consideration having a reasonable relationship to the value of
the property acquired.
also argues that Viray did not provide consideration "in money or
money's worth," as required by the statutory definition of
purchaser. 26 U.S.C. §6323(h)(6)
. Treasury regulations define "money or money's worth" as
"money, a security . . ., tangible or intangible property,
services, and other consideration reducible to a money value." 26
argues that the consideration Viray gave is not reducible to a money
value, relying on Fritz v. United States [71-1
USTC ¶9425 ], 328 F.Supp. 1343 (D.Minn.1971). In Fritz, a
taxpayer's former wife was assigned the wages and bonuses payable by the
taxpayer's former employer in consideration for the taxpayer's release
from jail. 328 F.Supp. at 1344. The taxpayer was being held on a writ of
ne exeat, obtained to prevent the taxpayer from leaving the
country and defeating his wife's claim for delinquent alimony and child
asserted a claim to the taxpayer's wages and bonuses under a federal tax
Although the United States had filed effective notice of the lien, under
the law then existing the wife had priority if she had acquired her
interest "for full and adequate consideration in money or money's
worth" without actual notice of the tax lien.
at 1345. The court concluded, without any analysis, that the wife's
agreement to release the taxpayer from custody in return for the
assignment of his wages and bonuses did not constitute either "full
and adequate consideration" or "money or money's worth."
is not analogous to this case. Although the assignment of the taxpayer's
wages and bonuses was ultimately for the purpose of satisfying the
taxpayer's alimony and child support obligations, the assignment was not
the result of a bargain freely struck because of the writ's coercive
effect. The taxpayer in Fritz was negotiating for his liberty.
Unlike a person's interest in liberty, child support obligations are
sadly, but obviously, reducible to a money value. Thus, Viray did
provide "full and adequate consideration" in money or money's
worth and qualifies as a purchaser under section
Whether Viray's Interest is in Real or Personal Property
U.S.C. §6323(a) ,
a federal tax lien is not valid against a purchaser until notice of the
lien has been filed in accordance with the requirements of section
6323(f) . That section, at (f)(1)(A)(i) and (ii), provides that
notice shall be filed in the office designated by the state "in
which the property subject to the lien is situated." Under section
6323(f)(2)(A) , real property is deemed situated "at its
physical location." Under the companion provision, section
6323(f)(2)(B) , personal property is deemed situated "at the
residence of the taxpayer at the time the notice of lien is filed."
In this case,
filed a notice of federal tax lien with the Milwaukee County Register of
Deeds, the office designated by
, the state of Ponchik's residence, on
May 11, 1984
. Viray received her interest in the contract for deed on
August 15, 1984
and perfected that interest five days later. Subsequently, on
January 4, 1985
filed a notice of federal tax lien with the Hennepin County Recorder's
Office, the office designated by
, the state where the land is located. Whether the notice filed in
perfected the government's interest before the assignment depends on
whether a vendor's interest in a contract for deed is realty or
conflicts involving federal tax liens are governed by federal law, but
state law controls in determining the nature of the legal interest in
the property at stake. Aquilino v. United States [60-2
USTC ¶9538 ], 363 U.S. 509, 512-13, 80 S.Ct. 1277, 1279-80, 4
L.Ed.2d 1365 (1960).
defines real property as "[e]states of inheritance and for
life." Minn.Stat. §500.05. This definition encompasses a vendor's
interest in an executory contract for land. In re Consolidation of
School Districts, 146
403, 178 N.W. 892 (1920). The
argues however that the doctrine of equitable conversion operates to
convert that interest into personal property.
, while the vendor of a contract for deed retains legal title to the
property, the vendee has equitable title. Romain v. Pebble Creek
Partners, 310 N.W.2d 118, 120 (Minn.1981). Thus, through the
operation of equitable conversion, normally the vendor's interest is
considered to be personalty and the vendee's interest considered to be
v. People's State Bank, 385 N.W.2d 11, 13 (Minn.Ct.App.1986).
conversion is the constructive, not actual, change of personalty into
realty or of realty into personalty. In re Estate of Hencke, 212
407, 420-21, 4 N.W.2d 353, 359 (1942). The doctrine was developed for
the purpose of giving effect to the intention of testators, settlors or
contracting parties. 27 Am.Jur.2d Equitable Conversion §1
(1966). It is " 'a mere fiction of equity designed to
effectuate the obvious intention of the parties and to promote justice'
" which rests on the presumed intention of the owner of the
property and the maxim that equity regards as done what ought to be
done. In re Bergman, 585 F.2d 1171, 1177 (2d Cir. 1978), quoting
In re Maguire's Estate, 251 App.Div. 337, 296 N.Y.S. 528, 529 (2d
) (emphasis omitted); accord, Hencke, supra 212
at 420-21, 4 N.W.2d at 359.
that equitable conversion should not apply on the facts of this case
because her interest is a real property interest "in the same way
that a mortgage is a real property interest." Trial Brief in
Support of Claim of Jeannine Mary Viray at 6. The issue must be analyzed
in light of the purposes behind the filing requirement of section
6323(a) . Notice by public filing is the means through which
Congress sought to protect certain creditors and transferees from the
broad priority power given to a federal tax lien. See United States
v. Gilbert Associates, Inc. [53-1
USTC ¶9291 ], 345 U.S. 361, 363-64, 73 S.Ct. 701, 703-04, 97 L.Ed.
1071 (1953) (noting that the purpose of a predecessor statute was to
prevent priority of secret tax liens); United States v. Hodes [66-1
USTC ¶9232 ], 355 F.2d 746, 749 (2d Cir. 1966) (purpose of section
6323(a) "was to meet harsh effect of cases holding that a
secret tax lien was good against a subsequent bona fide
purchaser"), cert. dismissed, 386 U.S. 901, 87 S.Ct. 784, 17
L.Ed.2d 779 (1967).
A dispute very
much like that at issue here was addressed in United States v.
Delawre Trust Co. [58-2
USTC ¶9907 ], 167 F.Supp. 465 (D.Del.1958). Delaware Trust
concerned whether a notice of a federal tax lien in the state of the
taxpayer's residence served to give the government priority over an
assignee of the taxpayer's interest as the beneficiary of a trust
consisting of real property located in another state. The court noted
that, as a general rule, a trust composed entirely of realty was
regarded as real property. 167 F.Supp. at 468. The government argued
that, nevertheless, a beneficiary's interest in future income from the
trust was tantamount to personal property. 167 F.Supp. at 467. The court
rejected the government's argument, reasoning that the filing
requirement was intended to protect persons dealing in real property and
that there was no justification for according the assignee of a
beneficiary's interest in a trust of real property any lesser
protection. 167 F.Supp. at 168.
reasoning applies in this case. The priority rules of section
6323(a) and (f) were
enacted for the purpose of protecting, among others, the purchasers of
realty against unrecorded tax liens. There appears to be no reason why
that protection should not be accorded to a purchaser who receives a
vendor's interest in a contract for deed. Consequently, equitable
conversion will not operate to convert a vendor's interest in an
executory contract for land from realty into personalty in the context
of a priority dispute between a federal tax lien and the vendor's
Whether a Notice of Levy Serves as an Alternative Method of
Perfecting a Federal Tax Lien
The last arrow
in the government's quiver is its argument that the notice of levy,
which was served before Viray's interest was perfected, functioned to
establish priority against all subsequent purchasers of Ponchik's
interest in the contract for deed. This argument is based on the
contention that a levy is an alternative method of perfecting a federal
cites Rodriquez v. United States [86-1
USTC ¶9289 ], 629 F.Supp. 333, 340 (N.D. Ill. 1986) and In re
by's Pancake House, 24 B.R. 989, 997 (E.D. Tenn. 1982) in support of
its position. Both of those courts describe a levy as a contructive
possession and, apparently reasoning from the fact that under Article 9
of the Uniform Commercial Code some security interests can be perfected
by possession, conclude that a levy is an alternative means of
perfecting a federal tax lien.
conclusion is not consistent with a careful reading of the statute's
relevant provisions. As the Supreme Court has noted,
Revenue Code's levy and seizure provisions . . . are provisional
remedies that do not determine the Service's rights to the seized
property, but merely bring the property into the Service's legal
States v. Whiting Pools, Inc. [83-1
USTC ¶9394 ], 462 U.S. 198, 210-11, 103 S.Ct. 2309, 2316, 76
L.Ed.2d 515 (1983) (citations omitted). Nowhere do the levy and seizure
provisions of the Code, sections
6331 and 6332 , or
the provision discussing priority and the filing requirements, section
6323 , designate a levy as an alternative method of perfecting a
federal tax lien.
Rock, Inc. v. B&B Auto Supply [83-2
USTC ¶9529 ], 711 F.2d 683, 686-88 (5th Cir. 1983) thoroughly
analyzes this issue. In that case, the United States Court of Appeals
for the Fifth Circuit rejected the government's argument that a notice
of levy perfected its interest in accounts receivable. The court began
its analysis with section
6323(a) , which establishes that a federal tax lien does not have
priority over a perfected security interest until notice is filed in
accordance with section
6323(f) . Were the
able to gain priority over all unperfected creditors and transferees
through the service of a notice of levy, this section would, as the
Fifth Circuit stated, "have little bite." 711 F.2d at 686.
6323 and the levy provision, section
6331 , have "a meaningful role in the tax collection
process" only if a notice of levy is not allowed to have the same
effect as the filing of an effective notice of a federal tax lien.
at 687. A levy establishes the government's right to property relative
to the taxpayer and requires that persons possessing property on which a
levy has been made surrender that property to the government. 26 U.S.C. §6332(a)
a notice of levy provides powerful incentives for the recipient of the
notice to turn over the subject property to the government--something
that the filing of a lien does not do. But a levy does not, as one
leading commentator has noted, "determine whether the taxpayer
actually owes the taxes underlying the assessment, lien or levy; nor
does it determine whether the government's rights to the secured
property are superior to those of other claimants, such as the
taxpayer's other creditors." 4 B. Bittker, Federal Taxation of
Income, Estates and Gifts [par.] 111.5.5 (1981) (emphasis added).
"The levy must be honored, even if the person in possession of the
property has a lien superior to the government's tax lien; surrender of
the property does not determine the priority of the liens, which can be
settled in another forum."
F.2d at 687.
of the statute is consistent with the purpose of the filing requirement,
to protect the creditors and transferees specified in section
6323(a) from an otherwise secret encumbrance. 711 F.2d at 687-88.
Therefore, the Fifth Circuit concluded that the provisions of section
6323(a) and (f) are
the exclusive means of perfecting a federal tax lien. 711 F.2d at 688. Accord,
State of Wisconsin v. Bar Coat Blacktop, Inc. [86-2
USTC ¶9598 ], 640 F.Supp. 407, 412-13 (W.D. Wis. 1986); United
States v. Jenison [80-1
USTC ¶9195 ], 484 F.Supp. 747, 755-57 (D.R.I. 1980).
of Southern Rock is persuasive and the Court likewise holds that
a notice of levy does not provide an alternative means of perfecting a
federal tax lien.
interest in the interpleaded fund is superior to the federal tax lien.
She is a purchaser within the terms of section
6323(a) who perfected her interest in real property prior to the
filing of the notice of the federal tax lien in the office designated by
the state where the property is physically located.
based on the foregoing, and upon all the files, records, proceedings and
arguments of counsel,
IT IS ORDERED
judgment is granted in favor of Jeannine Mary Viray.
interpleaded fund shall be paid to Jeannine Mary Viray.
BE ENTERED ACCORDINGLY.
While the stipulation of facts states only that Ponchik assigned his
interest to Viray "in satisfaction of a child support
obligation," Stipulation of Facts for Submission of Case on
Cross-Motions for Summary Judgment, ¶8, the parties acknowledged at
argument that the transfer was intended to satisfy any and all claims
for child support.
This estimated cost is $95,933.00, as noted in United States Dep't of
Agriculture, Family Economics Review, No. 2 at 36 (1988).
¶9255] Patricia R. Newnham, Plaintiff-Appellant v. United States of
America, United States Treasury Department, Internal Revenue Service,
Roscoe L. Egger, George Hurst, Lila Hurst, Boris J. Baranowski, Beulah
E. Conway, Hermes Financial Corporation, Virtue & Scheck, Inc.,
Title Insurance & Trust Company, Defendants-Appellees
U.S. Court of Appeals, 9th Circuit, 86-6039, 4/1/87, 813 F2d 1384,
Reversing an unreported decision of the District Court
[Code Secs. 6323 and
7430 --Result unchanged
by the Tax Reform Act of 1986 ]
Attorneys' fees: Unreasonable positions of the IRS: Acts contrary to
statute: Liens for taxes: Interference with purchaser's property
rights.--A purchaser, who was protected under Code Sec.
6323(h)(6) against unrecorded liens by the IRS, was entitled to
recover costs and attorneys' fees from the government when it interfered
with her judgment against the taxpayer for specific performance. The IRS
took an unreasonable position when it ignored the clear language of the
statute and wrongfully characterized the purchaser as being only a
subordinate judgment lien creditor.
Hansen, Hetland & Hansen,
2600 Warring St.
, for plaintiff-appellant. Elaine Ferris, Department of Justice,
, for defendants-appellees.
KENNEDY, SKOPIL, JR. and KOZINSKI, Circuit Judges.
Newnham purchased a home by contract of sale, and when the seller
defaulted, she was forced to litigate not only with him but also with
the Internal Revenue Service, which claimed the seller's default gave
priority to its lien against the seller for unpaid taxes. The government
so insisted not because its lien was first recorded, but on the theory
that the seller's default stripped Newnham of a present interest in the
property when the lien was recorded. The district court accepted the
government's argument and dismissed Newnham's suit to enjoin enforcement
of the lien. On this appeal by Newnham, we reverse, for her interest is
protected by the plain language of the relevant Internal Revenue
statutes. We also award Newnham her attorney's fees by reason of the
government's unreasonable, yet astonishingly persistent, contentions in
the sellers made the written contract to purchase the real estate in
1976. The sellers repudiated the contract before the close of escrow,
and Newnham sued for specific performance on
January 31, 1977
. On that date she also filed a notice of pendency of action (lis
pendens), pursuant to California Code of Civil Procedure section
In March 1978
and July 1980, after Newnham's lis pendens notice, the IRS recorded tax
liens for taxes owed by the sellers. In May 1983, the IRS caused a levy
to issue and issued a notice of seizure against the property. Newnham,
meanwhile, had pursued her case against the sellers to
's appellate courts, and on
June 10, 1983
, Newnham and the sellers entered into a court-approved settlement, with
a stipulated decree of specific performance.
the government insisted on its lien, and Newnham filed the instant suit,
under authority of 26 U.S.C. §7426
, to effect release of the property and to enjoin the government
from holding a tax sale. In the district court, as here, there has been
much talk of whether the seller's interest was a vested interest subject
to divestment, the doctrine of relation back, equitable conversion, and
the like, all to determine whether the government's later recorded
interest became prior by reason of the seller's default. All this is
irrelevant, however, in face of the clear language of the statute, and
it was error for the district court to rule for the government and to
dismiss the case.
26 U.S.C. §6323
governs the priority between a federal tax lien and other interests
in the property to which the tax lien attaches. The interest of a
purchaser of property, as defined in section
6323(h)(6) , is superior to the tax lien if the purchaser's interest
is acquired before the government has filed notice of the tax lien. 26
U.S.C. §6323(a) ;
§301.6323(a)(1) ; see United States v. Gilbert Associates, Inc.
¶9291 ], 345 U.S. 361, 363-64 (1953) (noting that purpose of
statute is to prevent priority of secret tax liens).
In order to
qualify as a "purchaser" entitled to priority over a
subsequently filed tax lien, 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 subsequent purchasers without actual notice." 26 U.S.C.
The statute specifically covers executory contracts such as the one
Newnham signed. It states: "[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)
Newnham was a
purchaser and fits squarely under this definition. She had an interest
in the property by virtue of her written executory contract to purchase
it. The consideration paid by Newnham met the statutory requirements
because the term "adequate and full consideration" encompasses
a situation in which the purchaser has not completed performance of her
obligation. Treas. Reg.
§301.6323(h)-1(f)(3) . A cash deposit and obligation to pay all
remaining sums in cash constitute "money or money's worth."
does not argue that Newnham's interest was invalid under local law
against a subsequent purchaser without notice; the recordation of the
lis pendens before the government's levy was sufficient to ensure this
protection. Lee v. Silva, 197
364, 373, 240 P. 1015, 1018 (1925). Newnham acquired her status as a
purchaser under 26 U.S.C. §6323(h)(6)
before the government filed its tax lien, and she was entitled to
priority over the tax lien by virtue of 26 U.S.C. §6323(a)
accept the government's contention that the seller's repudiation of the
executory contract deprived Newnham of her status as a purchaser. Section
6323 specifically states that Newnham's interest under her written
executory contract qualified as a purchaser's interest, provided that
the other statutory conditions were met. The statute does not mention
the possibility that a qualifying interest in property created by a
written executory contract to purchase may be converted into a
nonqualifying lien or security interest by virtue of the seller's
unilateral repudiation of the contract. The government's argument has no
statutory basis; and it is equally failing in logic, for an executory
contract does not become less so by one party's default. It makes no
sense for the government to claim a windfall against the nondefaulting
purchaser simply because a delinquent taxpayer renounces a contractual
alternative status proposed by the government for Newnham, that of a
judgment lien creditor whose interest in the property was perfected when
specific performance was decreed, is inconsistent with the statutory
framework, and serves to confirm our view of Newnham's status as a
purchaser. Newnham's interest in the property was not that of a lien
creditor. From start to finish, her interest in the property was based
on the agreement for the purchase and sale of the specific parcel of
land. The interest did not arise from an attempt to collect a debt by
executing against property which secured it, or to enforce a court
judgment by levying against the property of the judgment debtor. In
these latter situations, the identity of the specific property is
unimportant, for the interest in the property arises only because a
money judgment must be satisfied. By contrast, the remedy of specific
performance is available to purchasers of land precisely because land is
considered so unique that a money judgment does not suffice for a
remedy. See, e.g., Cal. Civ. Code §3387 (West 1970 & Supp.
1987). The government's suggestion that Newnham should be treated the
same as a creditor in these other categories, in spite of the obvious
difference in the nature of the interest in the specific property,
cannot be accepted. The seller's repudiation of the agreement did not,
for the purposes of section
6323 , alter the interest in property that Newnham had acquired by
virtue of the written executory contract.
is consistent with Rodriguez v. Escambron Development Corp. [84-2
USTC ¶9698 ], 740 F.2d 92 (1st Cir. 1984). In that case, the court
held that an interest acquired by adverse possession was subordinate to
a federal tax lien filed before the adverse possession interest matured
into ownership. The basis for decision was that federal law governs the
priority of tax liens against other interests, so that no weight could
be given to a local law doctrine that the adverse possessory interest
related back to the original occupation.
at 97. In this case, we apply federal law, specifically 26 U.S.C. §6323
, and it gives the answer. It states that a written executory
contract to purchase property gives rise to a purchaser's interest in
property so long as other conditions are met. The relation back problem
does not arise because Newnham's interest arose with the contract, which
was signed and made a matter of record before the tax liens were filed.
We turn to
Newnham's request for litigation costs and attorney's fees. Under 26
U.S.C. §7430 , the
prevailing party in a lawsuit brought in connection with the
determination, collection, or refund of any tax, interest, or penalty
under the Internal Revenue Code may be awarded a judgment for reasonable
litigation costs in the proceeding. This action was commenced by
authority of the Revenue Code, 26 U.S.C. §7426
, and both parties agree that section
7430 is the provision under which Newnham must bring her request for
litigation costs, though they disagree on whether its conditions are
met. Under this provision, a prevailing party must not be a creditor of
the taxpayer involved, must establish that the position of the
was unreasonable, and must substantially prevail with respect to either
the amount in controversy or the most significant issue or issues
presented. 26 U.S.C. §7430(c)(2)
As the owner
of the property, Newnham is not a creditor of the taxpayer, and the
government's argument to the contrary merely restates its main argument
on the merits. Having previously explained our rejection of this point,
we need not revisit it here, except to note that Newnham becomes the
prevailing party, and so satisfies the third requirement of the statute.
further that the government's position throughout this litigation has
been unreasonable. Though faced with express statutory language contrary
to its position, the government nevertheless attempts to call Newnham's
interest something it is not. Alchemy will not suffice for legal
argument. It is disconcerting that the standards of excellence
attributed to the government in the collection of its revenue were so
abandoned in this case. We hold that Newnham has satisfied all of the
preconditions for recovery of costs and attorney's fees.
of the district court is reversed. Counsel for Newnham shall file a
statement of the fees she incurred in prosecuting this action, and those
fees, plus costs, will be awarded by a further order of the court.
I join Judge
Kennedy's lucid opinion. I write separately to express my personal
disappointment with the government lawyers who pursued this matter on
behalf of the
. Appellant here is not the taxpayer; whatever tax problems the
property's former owners had were not of her making. Nevertheless, the
government sought to discharge the prior owners' tax liability by
seizing the home Newnham had once fought and paid for. She has now been
dragged through the courts for a second time to secure what is hers.
times when statutes, particularly those involving the collection of
revenue, can work serious hardships. No one can blame government lawyers
for pressing their client's rights under such circumstances. It is a
wholly different matter, however, for government lawyers to ignore or
bend the words of Congress in pursuit of an unconscionable result. To
inflict the expense and uncertainty of litigation on citizens on such a
tenuous basis is conduct unbecoming public servants and officers of the
court. I can only hope that this matter will be brought to the personal
attention of the Assistant Attorney General for the Tax Division, the
United States Attorney for the Central District of California and the
Chief Counsel of the Internal Revenue Service so that they may each take
appropriate steps to avoid such overzealousness by their subordinates in
United States of America
, Appellant v. Charles L. Weissing, Trustee, Appellee
District Court, Mid. Dist. Fla., Tampa Div., 93-1507-CIV-T-17A,
, Reversing an unreported Bankruptcy Court decision
[Code Sec. 6323 ]
Lien for taxes: Priority: Purchasers: Motor vehicles.--A federal
tax lien that was perfected before the filing of a bankruptcy petition
by a trucking company could not be avoided by the trustee by selling
motor vehicles and trailers. A bankruptcy court erred in applying state
) law rather than federal law in determining if federal tax liens were
perfected against a bona fide purchaser. Since the federal tax lien was
created under federal law, the consequences of the lien, which attached
to the proceeds of the sale, were matters of federal law. The trustee
did not qualify for the exemption granted by Code Sec.
6323 to bona fide purchasers who obtain possession of motor vehicles
before having notice of the lien. The trustee did not qualify as a
purchaser, and he did not have possession of the property.
Frazier, 500 Zack St., Tampa, Fla. 33602, David N. Geier, Department of
Justice, Washington, D.C. 20530, for appellant. Charles L. Weissing,
5239 S. Dale Mabry Hwy.
, pro se.
This cause is
before the Court on appeal from a Final Judgment entered on
March 16, 1993
. Jurisdiction over appeals from Final Judgments, Orders, and Decrees of
the bankruptcy court is vested in the Federal District Courts. 28 U.S.C.
received the bankruptcy record on
September 8, 1993
. (Docket No. 1). Appellants filed their Brief on
October 4, 1993
. (Docket No. 7). At that time, Appellee's Brief was due
October 19, 1993
. Appellee made a motion to extend time through
November 5, 1993
(Docket No. 8), which was granted by the Court. However, as of the date
of this order, no Brief has been filed by the Appellee. Therefore, this
Court will not have the benefit of the Appellee's Brief to aid in
sharpening the issues.
1. Whether the
Bankruptcy Court erred in applying state law rather than federal law in
determining if the federal tax liens were perfected against a bona fide
2. Whether a
trustee may avoid a federal tax lien on motor vehicles when the trustee
does not have actual possession of the motor vehicles at the time the
bankruptcy petition is filed.
bankruptcy court judgments, the district court functions as an appellate
court. The district court is bound by the findings of facts made by the
bankruptcy court unless it determines them to be clearly erroneous. The
burden is on the appellant to show that the bankruptcy court's finding
is clearly erroneous. FED.R.BANKR.P.8013; In re Downtown Properties,
Ltd., 794 F.2d 647 (11th Cir. 1986); In re Fernandez, 132
B.R. 775 (Bankr. M.D. Fla. 1991).
entitled to a de novo review in all cases where the determination
is solely based on a conclusion of law. In such cases, the district
court will conduct an independent review of the case and the legal
significance accorded by the bankruptcy court to the facts. In re
Fasan-Harriss Pie Co., 71 B.R. 287, 290 (Bank. W.D. Mich. 1987); In
re Goerg, 930 F.2d 1563, 1566 (11th Cir. 1991); In re Owen,
86 B.R. 691 (Bankr. M.D. Fla. 1988).
In the instant
case, this Court has been asked to determine if the trustee may avoid a
statutory lien. As the bankruptcy trustee's power to avoid federal tax
liens is a question of law, the Court reviews this issue de novo. In
re Phillips Constr. Co., 579 F.2d 431, 432 (7th Cir. 1978).
June 12, 1989
, an authorized delegate of the Secretary of the Treasury determined
Southern Transfer and Storage, Inc.'s (hereinafter "Southern
Transfer") FICA liabilities for the first and second quarter of
1989. Notices of the Federal Tax Liens for these FICA liabilities were
then filed with the Clerk of the Recorder of Deeds of Pinellas County,
Florida in December, 1989.
January 23, 1990
, Southern Transfer filed for protection under Chapter 11 of the
Bankruptcy Code. The case was converted to a proceeding under Chapter 7
August 1, 1991
. Appellee, Charles Weissing (hereinafter "Appellee") was
appointed as trustee for Southern Transfer. The Internal Revenue Service
then filed a Proof of Claim totaling $97,379.98, and listed the FICA
liabilities, comprising $26,981.03 of the total amount, as a secured
schedules accompanying the petition in bankruptcy, Southern Transfer
listed certain motor vehicles and trailers in which it had an interest.
In October, 1991, Appellee filed a Motion to Sell Property of the estate
free and clear of liens. The bankruptcy court granted this Motion on
February 7, 1992
. The Order authorized the Appellee to sell certain vehicles, spare
trailers, and long distance trailers, which were listed on Exhibit A. In
response, Appellee sold the motor vehicles and trailer pursuant to the
Bankruptcy Court's Order.
Bankruptcy Code §545(2)
, Appellee made a Motion for Summary Judgment, seeking to avoid
federal tax liens on the proceeds from the sale of the motor vehicles
and trailers. 11 U.S.C. §545(2)
. In response, the
(hereinafter "Appellant") filed a Cross Motion for Summary
Judgment. Appellant asserted that, under §545(2)
, Appellee could not void a federal tax lien on the motor vehicles.
Furthermore, in the alternative, Appellant stated that any avoidance
provision available under the statute for motor vehicles was
inapplicable to the trailers. Appellant argued that Summary Judgment
should not be granted in favor of Appellee.
Court held a hearing in which Appellee acknowledged that Appellant held
a lien on the motor vehicles. Moreover, Appellee admitted that the sale
proceeds had not been separated between motor vehicles and trailers. The
Bankruptcy Court ordered Appellee to provide a stipulation regarding
certain facts; this included the breakdown of proceeds. The Court
deferred ruling pending receipt of the stipulation.
Appellee did not file the stipulation, the Bankruptcy Court granted the
Appellee's Motion for Summary Judgment on
March 16, 1993
. The Bankruptcy Court then granted Appellant's unopposed Motion for
Stay Pending Appeal.
1. Did the
Bankruptcy Court err in applying state law rather than federal law in
determining if the federal tax liens were perfected against a bona fide
Court stated conclusively that this issue "must be answered with
reference to applicable State law." (Order on Motion for Summary
Judgment) In re Southern Transfer & Storage Co., 157 B.R.
691,693 (Bankr. M.D. Fla. 1993). The Bankruptcy Court cited in support
of this conclusion In re Loretto Winery, Ltd., which stated that
"[w]hether [a] lien is enforceable against a bona fide purchaser is
determined under [state] law." In re Loretto Winery, Ltd.,
898 F.2d 715, 718 (9th Cir. 1990).
holding is distinguishable from the case at hand. In In re Loretto
Winery, Ltd., it was state law that created the tax lien.
Appellant's claim is a federal tax lien created by federal statute, not
state law. Since a federal tax lien is wholly a creature of federal law,
the consequences of a lien that attaches to property interest are
matters of federal law. Atlantic States Constitution, Inc. v. Hand,
Arendall, Bedsole, Greaves and Johnston [90-1
USTC ¶50,065 ], 892 F.2d 1530, 1534 (11th Cir. 1990). There is an
important distinction between federal and state law that the Bankruptcy
court overlooked. This difference was articulated in Walter v. Hunter,
statutory lien is created by state law, state law governs in determining
whether the lien can be avoided by a bona fide purchaser. . . . Where a
statutory lien is created by federal law, however, federal law governs
in determining whether the lien may be avoided by a bona fide purchaser,
and the characteristics of a bona fide purchaser will also be determined
by federal law.
v. Hunter [95-1
USTC ¶50,072 ], 45 F.3d 1023 (6th Cir. 1995); see also United
States v. Brosnan [60-2
USTC ¶9516 ], 363 U.S. 237, 240 (1960) (stating that federal law
governs the operation and enforcement of federal tax liens) ; see
also United States v. City of New Britain [54-1
USTC ¶9191 ], 347 U.S. 81 (1954) (which stated that regarding a
federal lien, it is federal law, not state, that governs the issue of
Appellee's ability to avoid federal tax liens must be tested using
federal law. To test the avoidance power under 11 U.S.C §545
, a trustee is placed in the same position as a hypothetical bona
fide purchaser. 4 COLLIER ON BANKRUPTCY, ¶545.04, at 545-24 (15th ed.
1986). In re
inson, 166 B.R. 812 (Bankr D. Vt. 1994); See Hunter [95-1
USTC ¶50,072 ], 45 F.3d at 1027. The Bankruptcy Code dictates when
a trustee, standing in the shoes of a bone fide purchaser, may avoid
statutory liens. The section states that:
may avoid the fixing of a statutory lien on property of the debtor to
the extent that such lien--
(2) is not
perfected or enforceable at the time of the commencement of the case
against a bona fide purchaser that purchases such property as the time
of the commencement of the case, whether or not such a purchaser exists.
U.S.C. §545(2) .
invalidate a lien under §545
, the liens must not have been perfected. Federal law dictates that
"[A] federal tax lien is generally perfected against the claim of a
purchaser by filing a notice of a tax lien." In re Darnell [88-1
USTC ¶9123 ], 834 F.2d 1263, 1265 (6th Cir. 1987). Furthermore, as
this Court noted in United States v. Hogue [81-1
USTC ¶9316 ], federal tax liens are perfected when notice is filed
with the Clerk of the Circuit Court. United States v. Hogue [81-1
USTC ¶9316 ], 1981 WL 1752 (M.D. Fla. 1981). Here, the notice of
the federal tax liens for the FICA liabilities was filed with the Clerk
of the Recorder of Deeds of Pinellas County, Florida in December, 1989.
Therefore, according to federal law, the liens against Southern Transfer
were perfected before the filing of the petition in bankruptcy on
January 23, 1990
. See In re Nucorp Energy, Inc., 902 F.2d 729 (6th Cir. 1990).
requirement for perfecting a tax lien dramatically alters the outcome
from the previous decision made by the Bankruptcy Court. That Court
relied upon Florida Statute §679.302, in determining when a tax lien is
perfected. Using that statute, the Court stated "to perfect a lien
on a motor vehicle the lien sought to be enforced must be noted on the
Certificate of Title issued by the Department of Motor Vehicles
Commission." (Order on Motion for Summary judgment) Southern
Transfer & Storage Co., 157 B.R. at 693. Therefore, the Court
concluded that "unless the lien sought to be enforced is properly
noted on the Motor Vehicle Certificate, it is unenforceable against the
bone fide purchaser. . . ."
Government's tax lien against Southern Transfer was not noted on the
Motor Vehicle Certificate. Consequently, when the Bankruptcy Court
applied state law, the Court reached the conclusion that the lien had
not been perfected. The Court's examination should have been based upon
the federal requirements, not the Florida Statute. The Bankruptcy
Court's holding, based on state law, is antipathetic to the conclusion
required by federal law.
Court erred in its analysis of Appellant's federal tax lien by utilizing
Florida Statutes to make its determination. Instead, the correct source
is federal law. Hunter [95-1
USTC ¶50,072 ], 45 F.3d at 1027. Applying the correct standard of
notice required by federal law, this Court concludes that the lien
against Southern Transfer was perfected before the filing of the
petition in bankruptcy. The federal tax lien could not be avoided by the
trustee under 11 U.S.C. §545
another alternative available to Appellee to avoid the federal tax liens
which was not examined by the Bankruptcy Court. That Court ended its
analysis with only the first issue. This Court finds that it is
necessary to proceed to the next issue.
2. Can a
trustee avoid a federal tax lien on motor vehicles when the trustee does
not have actual possession of the motor vehicles at the time the
bankruptcy petition is filed?
To answer this
question, it is necessary to reference 26 U.S.C. §6323
, which establishes exceptions where a trustee may avoid perfected
federal tax liens under certain circumstances. The relevant section
notice of a lien imposed by section
6321 has been filed, such lien shall not be valid . . . [w]ith
respect to a motor vehicle (as defined in subsection (h)(3)), as against
a purchaser of such motor vehicle, if--
(A) at the
time of the purchase such notice or knowledge of the existence of such
(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.
U.S.C. §6323(b)(2) .
The trustee in
this case claims that he falls under the exemptions created by this
statute. This claim raises two distinct issues in the application of §6232
. The first issue is whether the trustee may even claim protection
under §6323 .
created by the statute extends only to a "purchaser." §6323
. According to the statute, 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." §6323(h)(6)
. The trustee, standing in the shoes of a bona fide purchaser must,
in order to claim the §6323
exception, meet the definition of a purchaser.
Circuit Court of Appeals has confronted this issue. In its analysis the
court defined a bona fide purchaser as "one who has purchased
property for value without notice of any defects in the title of the
seller." Hunter [95-1
USTC ¶50,072 ], 45 F. 3d at 1030. The court determined that
"value" is a lower standard than "adequate and full
consideration in money or money's worth," which is required by §6323
The court held that "[b]ecause a bona fide purchaser is not
necessarily a purchaser for purposes of Internal Revenue Code §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
Similarly, in the case at hand, Appellee, standing in the shoes of a
hypothetical bona fide purchaser, does not fall under the protection
afforded by the statute.
adopts the Sixth Circuit Court of Appeals reasoning, and distinguishes
between a purchaser, required by §6323
, and a trustee standing in the shoes of a bona fide purchaser. A
trustee may take advantage of 11 U.S.C. §545
only to avoid unperfected federal tax liens; trustees may not use
the exceptions created under 26 U.S.C. §6323
to escape federal tax liens.
issue is whether the trustee meets the possession requirements of §6323(b)(2)
, which mandate that the purchaser have possession of the item.
There has been a dichotomy of decisions regarding whether the Bankruptcy
Code gives hypothetical bona fide purchaser "hypothetical
possession" over property upon filing of the petition. The Hunter
court analyzed these varying positions and determined that
"[s]imply filing the bankruptcy petition does not transfer actual
possession away from debtors." Hunter [95-1
USTC ¶50,072 ], 45 F. 3d at 1030. Furthermore, the court rejected
the "hypothetical possession" fiction because the
"Bankruptcy Code §545
makes clear that the trustee may only avoid a statutory lien that a
bona fide purchaser could."
The Bankruptcy Code does not give hypothetical possession to a
hypothetical bona fide purchaser because it requires actual possession.
rejects the fiction of "hypothetical possession" and adopts
the holding of the Sixth Circuit Court of Appeals. The Court concludes
that Appellee has not meet the specific requirements of the statute. The
Court also concludes that the federal tax liens cannot be avoided by
Appellee under either 11 U.S.C. §545
or 26 U.S.C. §6323
. Accordingly, it is
that the judgment of the Bankruptcy Court be REVERSED, and the
Clerk shall enter a final judgment of dismissal.
Jack, Plaintiff v.
United States of America
District Court, East. Dist. Va., Alexandria
Div., Civ. 87-0500-A, 12/23/87
[Code Secs. 6321 and
6323 --Result unchanged
by the Tax Reform Act of 1986 ]
Lien for taxes: Automobile: Conveyance to third party: Priority of
lien: Bona fide purchaser for sale test: Notice of lien.--A tax lien
filed against a delinquent taxpayer's automobile that was seized
following his arrest took priority over the interest in the car that he
conveyed to his girlfriend. Although she argued that she was a bona fide
purchaser for sale, without knowledge of the tax lien, the court ruled
that based on the facts, she failed to prove she had bona fide purchaser
status. She and the taxpayer lived together, she did not pay fair market
value for the automobile, she purportedly leased the car back to the
taxpayer, but he never paid her monthly lease payments, and he had full
possession and use of the car.
Marietta Jack ("Jack") brought this action to assert an
interest in a 1986 Chrysler automobile ("automobile") levied
in partial satisfaction of tax liabilities of Albert H. Norwood ("
"). The defendant,
"), asserts that its tax lien on the automobile is superior to Jack
and should be used to pay the tax liabilities of
set forth below, judgment is entered in favor of the
facts have been stipulated:
1. On or about
January 29, 1986
, Albert Norwood purchased a
1986 Chrysler Fifth Avenue
automobile. Mr. Norwood paid $15,994 in cash for such vehicle.
2. In January
of 1986, Albert Norwood was arrested by the
police for taking bets on sporting events. (Jack Dep., p. 34). In
connection with the arrest,
seized approximately $30,000 in cash from
and the Virginia Title Certificate to the subject automobile. At the
time of his arrest,
informed plaintiff of his arrest. In addition, plaintiff was aware of
the subsequent trial of
that occurred in connection with his arrest.
3. On or about
June 2, 1986
, the Internal Revenue Service made a jeopardy assessment for a
deficiency of wagering excise taxes against
4. On or about
June 5, 1986
, the Internal Revenue Service provided
with notice of the jeopardy assessment and made demand for payment
thereof. Such action was undertaken pursuant to the jeopardy assessment
procedures of 26 U.S.C., §6861
, et seq.
5. As a result
of the assessment against
, a Federal tax lien arose upon all property and rights to property of
. 26 U.S.C., §6321 .
6. Notice of
the Federal tax lien was properly filed by the Internal Revenue Service
on or about
June 5, 1986
. (Plaintiff's Exh. No. 9).
7. On or about
May 30, 1986
offered to sell the subject automobile to plaintiff for $7,500. At that
time he indicated he was in need of cash due to his arrest, referred to
above. On or about
June 25, 1987
received the title to the subject automobile back from
. On or about
June 26, 1986
, Albert Norwood transferred title to the
1986 Chrysler Fifth Avenue
with the Virginia Department of Motor Vehicles to plaintiff. At the time
of the transfer, the subject vehicle had an odometer reading of 4,555
miles. The subject vehicle has a vehicle identification number of
1C3BF666PIGX54607 and is equipped with the following accessories: AM/FM
stereo with tape player, power door locks, tilt steering wheel, cruise
control, leather seats and a N.E.C. Model cellular car phone.
plaintiff agreed to purchase the subject vehicle for $7,500, she did not
remit that amount to Albert Norwood on the date of purchase. See
Stipulation No. 14, below.
9. At the time
plaintiff purchased the subject vehicle from Albert Norwood, it was in
"excellent shape" with "very low mileage." (Jack
Dep., pp. 6, 7).
10. Upon the
sale of the vehicle to plaintiff on
June 26, 1987
, Albert Norwood took all the necessary steps to transfer title and
register the vehicle in the name of plaintiff. (Jack Dep., p. 5). Jack
did not assist in any way in getting the title of the subject vehicle
legally transferred to her. (Jack Dep., p. 9).
June 25, 1986
, Albert Norwood filed a
Fairfax Personal Property Tax Return
, Vehicle Decal Application with
, listing the owner of the subject vehicle as Marietta Jack. Plaintiff's
Exhibit No. 6 indicates that Albert Norwood paid the vehicle
registration fee in cash on behalf of Marietta Jack.
Department of Motor Vehicle Registration records on the vehicle title
show only those liens that have either been reported by the vehicle
owner to the Department or placed upon the title certificate by a
lending institution. The Virginia Department of Motor Vehicles makes no
independent investigation of any liens filed against the vehicle seller.
13. On or
August 9, 1986
, plaintiff received a used car loan from Sovran Bank, N.A. in the
amount of $7,500. (Plaintiff's Exh. No. 3).
14. On or
August 9, 1986
, plaintiff turned over the proceeds of the loan from Sovran Bank, N.A.
to Albert Norwood in full payment for the subject automobile.
(Plaintiff's Exh. No. 4). Thus, the total purchase price paid by
for the subject automobile was $7,500.
Standard Car Lease Agreement dated
June 1, 1986
, plaintiff leased the subject automobile back to Albert Norwood for a
monthly payment of $300.00 (Plaintiff's Exh. No. 8). Although Marietta
Jack signed the Standard Lease indicating her signature was executed on
June 1, 1986
, in reality that document was signed by Marietta Jack between June 18
June 26, 1986
. (Jack Dep., at p. 40).
16. Under the
terms of the Standard Car Lease Agreement entered into between plaintiff
, plaintiff transferred possession of the subject vehicle back to the
seller, Albert Norwood as of
June 1, 1986
. (Plaintiff's Exh. No. 8).
17. As of
July 31, 1987
, all payments due under the Standard Car Lease Agreement had been made
by Albert Norwood. As of May, 1987,
paid plaintiff arrearages that had occurred under the Standard Car Lease
Agreement. It is undisputed that Albert Norwood made no payments to
plaintiff pursuant to the lease by check but such payments were made in
cash. Plaintiff has provided
with receipts for only 6 lease payments to date. (Plaintiff's Exh. No.
13). Plaintiff included the lease payments as income in her 1986 Federal
income tax return.
18. During the
term of the Standard Car Lease Agreement, by which plaintiff transferred
possession of the vehicle back to Albert Norwood, plaintiff had use of
the subject automobile and did in fact make use of the vehicle. (Jack
Dep., pp. 30-31).
19. The idea
to lease the subject vehicle back to the seller, Albert Norwood,
originated with either
or his attorney, William Davidson, as opposed to plaintiff. (Jack Dep.,
20. On or
May 5, 1987
, the Internal Revenue Service levied upon the subject automobile. The
subject automobile was seized by the Internal Revenue Service from
8664 Cromwell Drive
. On the date of the seizure, both plaintiff and Albert Norwood resided
at such address. (Jack Dep., p. 29).
21. On or
about May 21, 1987, plaintiff filed her complaint in this action
asserting that the United States' seizure of the subject automobile
constituted a wrongful levy within the meaning of 26 U.S.C. §7426
. Plaintiff based this allegation upon the assertion that she was
entitled to a super priority over the federal tax lien filed by the
pursuant to 26 U.S.C. §6323(b)
. In addition, on the same date plaintiff filed a motion for
preliminary injunction seeking to enjoin the
from sale of the subject vehicle in partial payment of the tax
Stipulation entered by the court on
May 26, 1987
released the subject automobile to the possession of plaintiff in
exchange for a cash bond in the amount of $15,000. By that Stipulation,
plaintiff withdrew her motion for injunctive relief. In addition, under
the terms of the stipulation should plaintiff prevail in the instant
wrongful levy action the $15,000 posted as a cash bond would be refunded
to her by the
. If, on the other hand, the
is successful in this action it shall be entitled to collect from the
cash bond the amount determined by the court to be the fair market value
of the subject automobile.
August 13, 1987
took the deposition of Albert Norwood pursuant to service of a
deposition subpoena upon Mr. Norwood. At that deposition,
refused to answer virtually all of the questions propounded to him based
upon his assertion of Constitutional privilege under the Fifth
Amendment. Nor did Albert Norwood produce any of the documents requested
pursuant to the subpoena. See
Fairfax County, Virginia, 1986, Personal Property Tax Bill listed the
subject vehicle as having an assessed value of $13,980 as of
February 13, 1987
N.A.D.A. Official Used Car Guide for December, 1986, issued six months
after the transfer of ownership from Albert Norwood to plaintiff, lists
the average retail value of the vehicle in question as $12,300. To this
value, the N.A.D.A. Used Car Guide adds the following additions to the
average retail value:
$250 AM/FM Stereo/tape player
$200 Power Door locks
$200 Tilt Steering wheel
$200 Cruise control
$350 Leather Seats
$600 Low mileage credit (See Plaintiff's Exh. 2 for mileage)
In addition to
the accessories listed in the N.A.D.A. Used Car Guide, the vehicle in
question has a N.E.C. Model Cellular Car Phone. (Plaintiff's Exh. Nos.
14 and 15).
26. At all
times relevant to the facts giving rise to the instant proceeding,
plaintiff and Albert Norwood have resided in the same residences. Prior
to March, 1986,
kept his official domicile in
. (Jack Dep., pp. 15-18).
(Supplemental Statement of Uncontested Facts, Nos. 27 through 31). The
parties to this action request the court decide upon the merits of this
action based upon the pleadings filed herein, including the instant
Supplemental Statement of Uncontested Facts, and the Deposition of
Marietta Jack (the original of which was filed concurrently with this
statement) taken on July 31, 1987. The parties do not desire to present
testimony or to make oral argument in aid of the court's consideration
of this matter.
Internal Revenue Service's assessment against
, referred to in paragraphs 3 through 5 of the Statement of Uncontested
Facts, was for wagering excise taxes in excess of the value of the
automobile which is the subject of this proceeding. In addition, such
assessment remains in excess of the value of the subject automobile.
plaintiff had no personal contact with any employee of the Internal
Revenue Service regarding the tax liabilities of
prior to obtaining possession of the automobile which is the subject of
Internal Revenue Service did not provide plaintiff with notice of the
assessment made against
or with any demand for payment thereof prior to plaintiff's obtaining
possession of the automobile which is the subject of this proceeding.
N.A.D.A. Official Used Car Guide for July, 1987, lists the average
retail value of the vehicle in question as $12,375. To this value, the
N.A.D.A. Used Car Guide adds the following additions to the average
$200 AM/FM Stereo/tape player
$150 Power door locks
$150 Tilt steering wheel
$150 Cruise control
$275 Leather seats
$400 Low Mileage Credit
argues that the federal tax lien has priority over plaintiff's interest
in the automobile. Jack argues that she is purchaser of the automobile
without knowledge of
's tax lien, that she paid a fair price for the automobile and that she
has not relinquished possession.
seized the automobile pursuant to 26 U.S.C. §6331
in partial satisfaction of the tax liabilities of
that as a bona fide purchaser she is entitled to protection as set forth
in 26 U.S.C. §6323 which
provides in pertinent part:
for certain interests even though notice filed.--even though notice of a
lien imposed by section
6321 has been filed, such lien shall not be valid-- . . .
Motor vehicles.--With respect to a motor vehicle (as defined in
subsection (h)(3)), as against a purchaser of such motor vehicle, if--
at the time of the purchase such purchaser did not have actual notice of
knowledge of the existence of such lien, and
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.
The burden of
proof is on Jack to demonstrate that she has superior priority over the
Federal tax lien filed on
June 5, 1986
. See STV Engineers, Inc. v. ASH [86-1
USTC ¶9352 ], 57 AFTR 2d ¶86-1137, 86-1140 (U.S.D.C. E. Pa. 1986);
Coventry Care, Inc. v. U.S. [74-1
USTC ¶9163 ], 366 F.Supp. 497, 500-01 (W.D. Pa. 1973).
In order to be
entitled to her superior priority over the U.S. tax lien, Jack must meet
the requirement of 26 U.S.C. §6323(h)(6)
which defines a purchaser as ". . . a person who, for adequate
and full consideration in money or money's worth, acquires an interest
(other than a lien in security interest) in the property . . ."
In this case,
live together. (Jack Dep., pp. 17-19). The automobile, at the time of
June 26, 1987
, was in excellent condition and had only 4,555 miles. In July, 1987,
the car had a value of $13,700.00. On
August 9, 1986
, Jack paid
$7,500 for the automobile from funds obtained through a used car loan
from the Sovran Bank.
June 26, 1986
, plaintiff leased the used automobile back to
for the sum of $300 per month.
took actual possession of the automobile on
June 1, 1986
failed to make the monthly payments when due. It was only after IRS
seized the automobile that
made full payment of the lease amount. Payments were in cash, with only
May 5, 1987
, the IRS levied upon the automobile at
8664 Cromwell Drive
, the residence of both Jack and
concludes that Jack was not a purchaser within the meaning of 26 U.S.C.
6323(h). First, paying $7,500 for a $13,700 automobile, a great discount
from fair market value, does not give rise to bona fide purchaser status
under 26 U.S.C. §6323 .
U.S. v. Mac Cement Finishing Corporation [83-1
USTC ¶9183 ], 546 F.Supp. 52, 53-54 (N.D. N.Y. 1982); District
Devine Science Church of Allen County v. U.S. [80-1
USTC ¶9119 ], 45 AFTR 2d 80-412 (N.D. Ind. 1979). Second, transfer
of title on
June 5, 1986
, and payment of the purchase price more than a month later on
August 9, 1986
, raises suspicion about the bona fides of the transaction. Third, no
evidence was offered by Jack to show that the $300 per month lease
represented fair market value lease payments.
the court finds that Jack has not carried her burden of proving that she
was a purchaser within the meaning of 26 U.S.C. 6323(h).
6323(b) , for the purchaser to be entitled to a superior priority
over the Federal tax lien, the purchaser must not have relinquished
possession back to the seller. In this case, Jack by the Standard Car
Lease Agreement of
June 1, 1986
, leased the automobile to
for $300 per month. The Standard Car Lease Agreement provided that
possession was to be transferred from Jack to
had possession of the automobile during the Standard Car Lease Agreement
and used the vehicle.
concludes that, under the Standard Car Lease, Jack relinquished
possession of the automobile to
is entitled to retain $13,700, plus interest, from the cash bond posted
by plaintiff. Plaintiff shall retain possession of the automobile.
Order shall issue.
with the accompanying Memorandum Opinion, it is accordingly
Judgment be, and it hereby is, ENTERED in favor of the defendant,
United States of America
, and against the plaintiff, Marietta Jack. The plaintiff's Complaint is
DISMISSED with prejudice.
(2) that the
, is entitled to retain $13,700.00, plus interest, from the cash bond
posted by the plaintiff. Plaintiff shall retain possession of the
1986 Chrysler Fifth Avenue
(3) that the
Clerk shall forward copies of this Order together with the accompanying
Memorandum Opinion to all counsel of record.
¶9352] STV Engineers, Inc. v. Sandra C. Ash, a/k/a Sandra C. Heilman,
John V. Scala, Trustee and Internal Revenue Service, Department of the
Treasury of the United States
District Court, East.
Sec. 6323 ]
Lien for taxes: Interpled annuity fund: Bona fide purchaser for
value.--A statutory lien on the property and rights to property of a
taxpayer permitted the IRS to claim an interpled fund consisting of an
annuity payable to the taxpayer. Since the trustee of the annuity did
not purchase the taxpayer's rights to the annuity for full and adequate
consideration, he was not a purchaser within the meaning of Code Sec.
6323(h)(6) and his claim to the annuity did not have priority over
the IRS's lien.
This case is
an interpleader action filed by STV Engineers, Inc. ("STV").
The interplead fund consists of an annuity payable to defendant Sandra
Heilman ("Sandra") under an employment agreement between STV
and F. William Heilman ("Heilman"), its Chief Executive
Officer at the time. The claimants are the Internal Revenue Service
("IRS") and John Scala ("Scala"), the trustee of the
STV annuity. The IRS' claim is based on a statutory lien on the property
and rights to property of Sandra Heilman. The trustee's claim is based
on his purchase (or "attempted purchase", according to the
IRS) of Sandra's interest in the employment agreement.
The IRS claims
the tax lien attached to Sandra's interest in the annuity. Defendants
Sandra and Scala claim Scala has priority over the federal tax lien
because he is a "purchaser", pursuant to Section
6323 of the Internal Revenue Code of 1954 ("Code"), who
paid "adequate and full consideration in money or money's
worth" to Sandra in exchange for her rights under the employment
agreement. Scala promised to make monthly payments to Sandra of
$2,346.67 per month in exchange for her rights to the STV annuity. The
dispute in this case centers on the comparative values of the two
annuities: Sandra's interest in the short term annuity paid by STV
("STV annuity") and Sandra's interest in the private life
annuity given to her by Scala ("life annuity") in exchange for
the STV annuity.
December 17, 1985
trial of this matter and having considered the findings of fact and
conclusions of law proposed by the parties, I make the following
FACT. 1. Defendant Sandra Ash Heilman was born on
February 10, 1942
. During 1970, Sandra was married to Omar L. Ash ("Ash"), and
Sandra and Ash filed a joint federal income tax return for the year
1970. During 1981, Sandra was married to F. William Heilman, Jr.
2. On or about
August 10, 1981
, Heilman entered into an Employment Agreement with STV, which extended
Heilman's employment as STV's chief executive officer through
September 30, 1986
. This Employment Agreement provided, inter alia, that in the
event Heilman died before he retired and his wife survived him, STV
would provide his wife with monthly annuity payments at a rate of 50% of
his final salary for a period of fifteen years or until her death,
whichever first occurred.
October 26, 1981
, Heilman died. His salary at that time was $132,250; thus, on
November 1, 1981
, Sandra began receiving monthly payments of $5,510.42 under the STV
August 10, 1982
, a delegate of the Secretary of the Treasury made a joint assessment
against Ash and Sandra for income tax and statutory additions for the
year 1970. The validity of this assessment had already been litigated
and established by judicial determination. Estate of Ash v.
38,319(M) ], T.C. Memo. 1981-575, 42 TCM 1310 (
Sept. 30, 1981
), appeal dismissed (3rd Cir. unreported,
Oct. 22, 1982
). As of July, 1984, the unpaid balance on this assessment was
5. As of
April 18, 1983
, 18 payments had been made to Sandra under the STV Annuity; thus, as of
that date, up to 160 payments remained to be made under that annuity, in
the event Sandra survived for the full term of that annuity.
April 18, 1983
, Sandra purported to assign to defendant trustee John V. Scala her
remaining interest under the STV annuity, in exchange for the life
annuity under which Scala would make monthly payments to her of
$2,346.67 per month.
July 17, 1984
the IRS served a levy upon STV, seizing all moneys due to Sandra from
STV, in aid of collection of the tax liability.
February, 1985 STV filed this interpleader action, interpleading the
payments due under the STV Annuity, and naming as defendants Sandra,
Scala, and the IRS. The IRS moved for summary judgment, and Sandra and
Scala ("the Family") filed a joint cross-motion for summary
judgment. The IRS asserted that Scala was not a "purchaser"
pursuant to the Code; the Family asserted that Scala was a