Bona Fide Purchaser for Value Page 3

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2. On October 14, 1992 , Watt transferred his interest in real property at 8799 North State Route 68, West Liberty , Ohio in Champaign County , Ohio (the "Property") to his wife, Patricia Watt, by a quit claim deed recorded in Champaign County .

3. On October 19, 1992 , a decree of dissolution of Watt's marriage to Patricia Watt was entered.

4. On November 9, 1992 , the IRS filed its Notice of Tax Lien for the previously listed assessments in Logan County , Ohio , a county other than where the property is located.

5. On December 19, 1992 , the Property was sold by Patricia Watt to John Nolan, II ("Nolan").

6. On January 7, 1993 , the IRS properly filed its Notice of Tax Lien for these assessments in the amount of $12,258.18 in Champaign County , the county where the property is located.

7. On 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 bankruptcy relief.

9. On July 16, 1993 , the Trustee filed an adversary proceeding against Patricia Watt alleging causes of action under 11 U.S.C. §547 and §548.

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.

11. On February 24, 1994 , the Trustee settled the adversary proceeding filed against Patricia Watt for the amount of $5,750.00. (Doc. 40-1).

12. The 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 response on 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).

13. Pursuant 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.

ISSUES

This 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 .

DISCUSSION

A. The Settlement Monies

The IRS 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.

In determining 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 United States 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 C.F.R., §301.6331-1(a)(1) ). See also United States v. Carson, 741 F.Supp. 92 (E.D. Pa. 1990). In fact,

When first 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.

However, 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).' "

"Subsequently, 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. [6321] 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 transferees."

TKB Int'l, Inc. [93-1 USTC ¶50,346 ], 995 F.2d at 1463-64 (citations omitted). Section 6323(a) provides:

The lien 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.

26 U.S.C. 6323(a) (emphasis added). ¹ Section 6323(h)(6) defines purchaser:

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

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 Rob 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." United States 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

Although the 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 the Property.

By enacting 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

Although the 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 Rob 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.

B. The Auction Proceeds

The Trustee 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 admin 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. United States (In re Wessel ) [93-2 USTC ¶50,549 ], 161 B.R. 155, 161 (Bankr. D.S.C. 1993).

The parties 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.

C. Distribution

Having 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.

Section 724 expressly pertains to priority and distribution problems involving property of the estate. United States 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 subsection; and

(6) sixth, to the estate.

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 admin istrative expenses up to the amount of the tax liens. King v. Board of Supervisors of Fairfax County (In re A.G. Van Metre, Jr., Inc. ), 155 B.R. 118, 122 (Bankr. E.D.Va. 1993); Wurst v. City of New York (In re Packard Properties, Ltd. ), 112 B.R. 154, 156 (Bankr. N.D.Tex. 1990).

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 admin istrative claims have been requested from these proceeds. Once such admin 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.

CONCLUSION

For the 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 unsecured claim.

An order in accordance with this decision is simultaneously entered.

¹ 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 6323(f) provides:

(1) Place for filing.--The notice referred to in subsection (a) shall be filed--

(A) Under State laws.--

(i) Real 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 situated; and

(ii) Personal 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--

(A) Real property.--In the case of real property, at its physical location; or

(B) Personal 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.

Under Ohio 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 Champaign County .

² The court notes that the Trustee did not "avoid" the transfer to Patricia Watt, but rather "compromised" various causes of action against Patricia Watt.

³ 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 Sun Island Foods ), 125 B.R. 615 (Bankr. D.Hawaii 1991). As the court stated in Tek-Aids:

A preference 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.

Indeed, to 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.

Id. at 256 (citations omitted; emphasis in original).

⁴ 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 action).

 

 

[94-1 USTC ¶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 America, Defendant

U.S. District Court, East. Dist. Mich. , So. Div., Civ. 92-70660, Civ. 92-77376, 3/30/94

[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 determinable.

[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 judgment.

MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

GADOLA, District Judge:

Plaintiff Maxwell Tomlinson is seeking to quiet title to some bearer bonds in his possession which are subject to tax levies issued by defendant United States . Plaintiffs Brice Nelson and Darrel Brant have brought an action under 26 U.S.C. §7426 , alleging that the United States 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 defendant's motion.

I. Background

In 1981, 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 Tomlinson's debt.

After the 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.

Tomlinson was 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.

When 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 .

On 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.

On 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 forgiven.

Brice Nelson 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.

On 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 levies.

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 .

Plaintiffs 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.

II. Standard of Review

Under Rule 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 United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Bender v. Southland Corp., 749 F.2d 1205, 1210-11 (6th Cir. 1984).

The movant 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 U.S. 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 at 861.

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, 249-50 (1986),

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.

(Citations omitted). See Catrett, 477 U.S. at 322-23; Matsushita Elec. Indus. Co. v Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). The standard for summary judgment mirrors the standard for a directed verdict under Fed. R. Civ. P. 50(a). Anderson, 477 U.S. 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 and affidavits. Id.

III. Analysis

Plaintiffs are 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.

A. Statute of Limitations

The applicable 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." Id. The tax liabilities at issue in this case were assessed between July 13, 1981 and December 7, 1981 .

Normally, the 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) .

According to 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.

What plaintiffs fail to realize, however, is that the IRS was prohibited from collecting on the taxes that Tomlinson owed well after the order of discharge on 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 through 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 limitations.

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 limitations.

B. Levy Procedures

Plaintiffs' 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 coupons.

The issuance of tax levies is governed by 26 U.S.C. §6331 . Under section 6331(a) ,

[i]f any 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.

Id. The levy "extend[s] only to property possessed and obligations existing at the time" the levy is issued. Id. §6331(b) . The IRS may "seize and sell such property or rights to property (whether real or personal, tangible or intangible)." Id.

Plaintiffs 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 agents. Revenue 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." Id. ; 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 deposit.

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 government.

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 -6322.

Plaintiffs 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.

The plaintiffs 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 mature.

Finally, in 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.

IV. Conclusion

The court 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.

ORDER

NOW, 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.

 

 

[93-1 USTC ¶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

U.S. District Court, West. Dist. Mich., 1:90:CV:971, 11/18/92

[Code Secs. 6323 , 7403 , 7422 , and 31 USC Sec. 3713 ]

Lien for taxes: Res judicata: Executors and admin 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 United States , and for disbursements made in exchange for no consideration.

OPINION

ENSLEN, District Judge:

This case is before the Court on plaintiff's motion for summary judgment. On April 29, 1992 , plaintiff United States 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

The factual 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 United States pursuant to the Tax Court decision. Id. at Exhibits B&C. Notices of the assessments and demand for payment thereon, dated November 28, 1984 , were mailed to Earl K. and Irene Grable on November 28, 1984 . Id. No payments have been made with respect to the income tax deficiencies that were assessed against Earl and Irene Grable pursuant to the Tax Court Decision. Id. There remains due and owing to the United States 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 from November 28, 1984 .

As of 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 death. Id.

In his 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 United States . Id.

The Estate 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 the Estate. Id.

Standard

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 U.S. 574, 587 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)), quoted in Historic Preservation Guild of Bay View v. Burnley , 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, 475 U.S. 587).

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, 477 U.S. 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 U.S. 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." Id.

Discussion

Defendants' Response to Plaintiff's Motions

Defendants' 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.

One final 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.

Entitlement to Reduce to Judgment the 1979 & 1980 Assessments

Plaintiff 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.

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 United States 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).

Defendants' 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).

Without any 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 respectively.

With respect 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 U.S. 127, 131 (1979); Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 597 (1948).

The United States 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. Voorhies [81-2 USTC ¶9710 ], 658 F.2d 710, 714-15 (9th 1981); Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159 (1971); Cohen v. United States [62-1 USTC ¶9202 ], 297 F.2d 760 (9th Cir.), cert. denied, 369 U.S. 865 (1962).

The 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.

Validity of the Federal Tax Liens

Section 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 , ² 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).

As discussed 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.

Right to Foreclose Liens

Plaintiff seeks to attach its federal tax lien to the following property:

(1) real property located at 116 Bridge Street , Dimondale , Michigan ;

(2) real property, house and four lots, located in Caspian , Michigan ;

(3) 50,000 shares of stock in Grable and Sons Metal Products, a Michigan Corporation; and

(4) real property located in Bradenton , Florida .

The real 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.

"Federal 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. Safeco [89-1 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.

Federal tax 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).

The United States argues that with respect to the Dimondale and Bradenton 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., United States v. Carson , 741 F.Supp. 92 (E.D. Pa. 1990). The United States further points out that because the property in Caspian , Michigan is still within the Estate, the federal tax liens have attached to this property and is subject to foreclosure.

Accordingly, 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.

Personal Liability of Leslie Grable

The United 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.

Section 3713 provides, in part:

(a)(1) A claim of the United States Government shall be paid first when--

(B) the estate of a deceased debtor, in the custody of the executor or admin istrator, is not enough to pay all debts of the debtor.

In order to be subject to Section 3713(a)(1)(B), the United States must show: (1) that the Estate of Irene Grable was indebted to the United States ; and (2) that the Estate of Irene Grable was insolvent. This statute provides, "that the United States 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. United States v. Cole, 733 F.2d 651, 654 (9th Cir. 1984).

The United States 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 United States . Accordingly, I find that the Estate of Irene Grable falls within Section 3713(a)(1)(B).

Next, the United States argues that Leslie Grable is personally liable under section 3713(b), which provides:

A 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.

The United States 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 United States . In fact, Leslie Grable does not even cite one case in support of his argument.

I find that Leslie Grable is liable under this provision. In support of this finding, I rely on the following facts:

(1) Leslie Grable was named the personal representative of the Estate of Irene Grable on 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 United States for unpaid income tax liabilities for the 1979 and 1980 tax years;

(4) Leslie 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 United States .

(6) 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] future events." United States v. Moore , 423 U.S. 77, 85 (1975).

Accordingly, all distributions and disbursements of assets from the Estate by, or authorized by, Leslie Grable in payment of creditors, other than the United States , or for no consideration make him individually liable. See, e.g., Lakeshore Apartments, Inc. v. United States , 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 granted.

CONCLUSION

In sum, 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 United States 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 United States , or for no consideration.

¹ 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 sections.

² 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 .

 

 

[91-1 USTC ¶50,100] United States of America , Plaintiff v. Laycher Gonzales, a/k/a Eliseo Gonzales, Maxine P. Gonzales, a/k/a Petra Maxine Gonzales and Assembly of Yhwhhoshua, Defendants

U.S. 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. 6654 ]

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 ( Colorado ) 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 United States .

[Code Secs. 7401 and 7403 ]

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

FINESILVER, Chief Judge:

This civil 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).

Defendants 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.

FINDINGS OF FACT

I.

Defendant 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 in Boone , Colorado , 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.

From 1973 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 Pueblo 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.

Throughout 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.

After 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 filed on October 6, 1989 .

CONCLUSIONS OF LAW

II.

Under federal 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.

Pastor 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. Id. ; 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.

The government 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 States [75-1 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) (West 1989).

The completion 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 [75-1 USTC ¶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.

A.

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).

B.

Pastor 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. Commissioner [84-1 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).

C.

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. Colo. 1981).

While an 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.

D.

If an 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 the United States . ⁵ 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. [90-2 USTC ¶50,344 ], 712 F.Supp. 819, 821 (D. Colo. 1989).

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.

Avoidance of 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. Colo. 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 Colorado , any conveyance made with the intent to hinder, delay, or defraud creditors is void. Colo. Rev. Stat. §38 -10-117 ( Bradford 1982). ⁶ 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 United States . 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.

Finally, the 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 Colorado 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.

III.

For the noted reasons, the court finds Pastor Gonzales is liable for income tax for tax years 1978 through 1981.

A. Self-Employment Tax Liability: 26 U.S.C.A. §1401 (West 1989) imposes a tax on the self-employment earnings of every individual. ⁷ 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.

B. Delinquency 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) (West 1989).

C. Negligence 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. Rob 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. Colo. 1982).

D. Estimated 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.

IV.

ACCORDINGLY, IT IS ORDERED:

(1) Defendant 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.

(2) The 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 , Boone , Colorado . 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 Maxine Gonzales.

(4) A deficiency judgment is entered against Mr. Gonzales if the proceeds of the sale do not satisfy his tax liabilities.

(5) All post-trial motions are hereby DENIED.

(6) The 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.

¹ 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).

² All United States 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 United States , he is subject to federal taxation. United States v. Gonzales, No. 89-F-1740, slip op. at 5 (D. Colo. Nov. 20, 1990).

³ 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.

⁴ The seventh amendment provides,

"[i]n 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.

⁵ 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).

⁶ Colo. Rev. Stat. §38 -10-117 provides,

"[e]very 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 -10-117 ( Bradford 1982).

⁷ Net earnings from self-employment is defined in 26 U.S.C.A. §1402 (West 1989).

 

 

[89-2 USTC ¶9401] William M. Rodeck and Rosemarie M. Rodeck, Plaintiffs v. United States of America, State of Minnesota, and Jeannine Mary Viray, Defendants

U.S. District Court, Dist. Minn. , Fourth Div., Civ. 4-87-1009, 10/18/88 , (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 property. D. Fritz , DC - Minn. , 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.

Gregory S. Malush, Hyatt Legal Services, Golden Valley , Minn. , for plaintiffs. Jerome G. Arnold, United States Attorney, Mary Jo Madigan, Assistant United States Attorney, Minneapolis, Minn. 55401. Amy J. Sargent, Peter V. Taylor , Department of Justice, Washington , D.C. 20530 , for U.S. Lawrence E. Meuwissen , O'Connor & Hannan, 80 S. 8th St. , Minneapolis , Minn. 55402-2254 , for J.M. Viray.

MEMORANDUM AND ORDER

MACLAUGHLIN, District Judge:

The parties 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.

FACTS

The United States 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 indicated below:

                                         Unpaid Balance

Type of                 Period    Date     of Tax on

 Tax                    Ending  Assessed    
7/28/87
     Additions   Total

 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

                                                                   ---------

                                                                  $49,905.11

 

On August 7, 1980 , Ponchik sold a parcel of residential property located in Hennepin County , Minnesota 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 .

As noted above, the United States made assessments against Ponchik on September 14, 1981 , October 11, 1982 and 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 Minnesota . His last known address was a Milwaukee 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).

On July 18, 1984 , the United States mailed a notice of levy to the Rodecks. The notice of levy was received on August 4, 1984 and, pursuant to the levy, the Rodecks began making their monthly payments to the Internal Revenue Service.

On 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 on 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 paid.

On January 4, 1985 , a notice of federal tax lien was filed with the Hennepin County Recorder's Office.

The Rodecks 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 United States and Viray.

DISCUSSION

Federal law determines the priority status among competing creditors where a federal tax lien is the basis of a government claim. Aquilino v. United States [60-2 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.

The issues 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.

Under section 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 time the United States 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.

Finally, the effect of the levy must be determined. The United States served a notice of levy on the Rodecks eleven days before Ponchik transferred his interest to Viray. The United States argues that a notice of levy is a second means of perfecting a federal tax lien. If the United States is correct, the notice of levy would serve to give the tax lien priority over Viray's subsequently created interest.

I. Whether Viray is a Purchaser Within the Meaning of Section 6323

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 6323(f) .

Viray claims to qualify as a purchaser. Section 6323(h)(6) defines that term as follows:

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

Viray bears 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 United States argues however that Viray did not acquire her interest for "full and adequate consideration in money or money's worth."

Existing law 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 purchase." Id.

The United States 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 obligation, ¹ 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 United States Motion for Summary Judgment at 14.

The 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 Midwest 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.

The United States 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 C.F.R. §301.6323(h)-1(a)(3) . The United States 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 support. Id. The United States asserted a claim to the taxpayer's wages and bonuses under a federal tax lien. Id. 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. Id. 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." Id. at 1345-46.

Fritz 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 6323(a) .

II. Whether Viray's Interest is in Real or Personal Property

Under 26 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, the United States filed a notice of federal tax lien with the Milwaukee County Register of Deeds, the office designated by Wisconsin , 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 , the United States filed a notice of federal tax lien with the Hennepin County Recorder's Office, the office designated by Minnesota , the state where the land is located. Whether the notice filed in Milwaukee perfected the government's interest before the assignment depends on whether a vendor's interest in a contract for deed is realty or personalty.

Priority 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). Minnesota 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 Minn. 403, 178 N.W. 892 (1920). The United States argues however that the doctrine of equitable conversion operates to convert that interest into personal property.

In Minnesota , 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 realty. Frederick v. People's State Bank, 385 N.W.2d 11, 13 (Minn.Ct.App.1986).

Equitable conversion is the constructive, not actual, change of personalty into realty or of realty into personalty. In re Estate of Hencke, 212 Minn. 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 Dep't 1937 ) (emphasis omitted); accord, Hencke, supra 212 Minn. at 420-21, 4 N.W.2d at 359.

Viray argues 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.

The same 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 assignee.

III. 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 tax lien.

The United States cites Rodriquez v. United States [86-1 USTC ¶9289 ], 629 F.Supp. 333, 340 (N.D. Ill. 1986) and In re Rob 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.

That conclusion is not consistent with a careful reading of the statute's relevant provisions. As the Supreme Court has noted,

The Internal 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 custody.

United 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.

Southern 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 United States 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.

Both section 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. Id. 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) .

Thus, serving 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." Id.

7111 F.2d at 687.

This reading 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).

The reasoning 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.

IV. Conclusion

Viray's 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.

Accordingly, based on the foregoing, and upon all the files, records, proceedings and arguments of counsel,

IT IS ORDERED that

1. summary judgment is granted in favor of Jeannine Mary Viray.

2. the interpleaded fund shall be paid to Jeannine Mary Viray.

LET JUDGMENT BE ENTERED ACCORDINGLY.

¹ 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.

² This estimated cost is $95,933.00, as noted in United States Dep't of Agriculture, Family Economics Review, No. 2 at 36 (1988).

 

 

[87-1 USTC ¶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

(CA-9), 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.

Charles Hansen, Hetland & Hansen, 2600 Warring St. , Berkeley , Calif. 94704 , for plaintiff-appellant. Elaine Ferris, Department of Justice, Washington , D.C. 20530 , for defendants-appellees.

Before KENNEDY, SKOPIL, JR. and KOZINSKI, Circuit Judges.

OPINION

KENNEDY, Circuit Judge:

Patricia 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 this litigation.

Newnham and 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 409 .

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 California '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.

Undeterred, 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) ; Treas. Reg. §301.6323(a)(1) ; see United States v. Gilbert Associates, Inc. [53-1 USTC ¶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. §6323(h)(6) . 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." Id.

The government 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 Cal. 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) .

We cannot 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 obligation.

The 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.

Our decision 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. Id. 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 United States 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.

We conclude 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.

The decision 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.

REVERSED.

Concurring Opinion

KOZINSKI, Circuit Judge

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 United States . 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.

There are 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 the future.

 

 

[95-2 USTC ¶50,449] United States of America , Appellant v. Charles L. Weissing, Trustee, Appellee

U.S. District Court, Mid. Dist. Fla., Tampa Div., 93-1507-CIV-T-17A, 7/20/95 , 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 ( Florida ) 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.

Douglas 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. , Tampa , Fla. 33611 , pro se.

ORDER

KOVACHEVICH, District Judge:

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. §158(a).

This Court 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.

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 purchaser.

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.

STANDARD OF REVIEW

In reviewing 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).

Appellant is 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).

BACKGROUND

On 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.

On 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 on 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 claim.

In its 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.

Using 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 United States (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.

The Bankruptcy 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.

Although the 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.

DISCUSSION

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 purchaser?

The Bankruptcy 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).

However, this holding is distinguishable from the case at hand. In In re Loretto Winery, Ltd., it was state law that created the tax lien. Id. 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, which stated:

[W]here a 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.

Walter 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 perfection).

Therefore, 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 Rob 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:

The trustee 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.

11 U.S.C. §545(2) .

Therefore, to 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).

The federal 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. . . ." Id.

The 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.

The Bankruptcy 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 .

There is 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 states:

Even though 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 lien, and

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

26 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 .

The exception 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.

The Sixth 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 . Id. 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 statute." Id. 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.

This Court 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.

The second 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." Id. The Bankruptcy Code does not give hypothetical possession to a hypothetical bona fide purchaser because it requires actual possession.

This Court 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

ORDERED that the judgment of the Bankruptcy Court be REVERSED, and the Clerk shall enter a final judgment of dismissal.

DONE AND ORDERED.

 

 

[88-1 USTC ¶9274] Marietta Jack, Plaintiff v. United States of America , Defendant

U.S. 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.
MEMORANDUM OPINION

CACHERIS, District Judge:

Plaintiff Marietta Jack ("Jack") brought this action to assert an interest in a 1986 Chrysler automobile ("automobile") levied by the United States in partial satisfaction of tax liabilities of Albert H. Norwood (" Norwood "). The defendant, United States (" U.S. "), asserts that its tax lien on the automobile is superior to Jack and should be used to pay the tax liabilities of Norwood .

For reasons set forth below, judgment is entered in favor of the United States .

I. Facts

The basic 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 Arlington County police for taking bets on sporting events. (Jack Dep., p. 34). In connection with the arrest, Arlington County seized approximately $30,000 in cash from Norwood and the Virginia Title Certificate to the subject automobile. At the time of his arrest, Norwood informed plaintiff of his arrest. In addition, plaintiff was aware of the subsequent trial of Norwood 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 Norwood .

4. On or about June 5, 1986 , the Internal Revenue Service provided Norwood 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 Norwood , a Federal tax lien arose upon all property and rights to property of Norwood . 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 , Norwood 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 , Norwood received the title to the subject automobile back from Arlington County . 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.

8. Although 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).

11. On June 25, 1986 , Albert Norwood filed a County of Fairfax Personal Property Tax Return , Vehicle Decal Application with Fairfax County , Virginia , 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.

12. The Virginia 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 about 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 about 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 plaintiff to Norwood for the subject automobile was $7,500.

15. By 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 and June 26, 1986 . (Jack Dep., at p. 40).

16. Under the terms of the Standard Car Lease Agreement entered into between plaintiff and Norwood , 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, Norwood 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 Norwood 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 Norwood or his attorney, William Davidson, as opposed to plaintiff. (Jack Dep., p. 9).

20. On or about 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 , Springfield , Virginia . 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 United States 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 United States from sale of the subject vehicle in partial payment of the tax liabilities of Norwood .

22. By Stipulation entered by the court on May 26, 1987 , the United States 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 United States . If, on the other hand, the United States 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.

23. On August 13, 1987 , the United States took the deposition of Albert Norwood pursuant to service of a deposition subpoena upon Mr. Norwood. At that deposition, Norwood 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 Norwood Dep.

24. The 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 .

25. The 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)

-------

$14,000  Total

 

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, Norwood kept his official domicile in Falls Church . (Jack Dep., pp. 15-18).

27. (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.

28. The Internal Revenue Service's assessment against Norwood , 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.

29. The plaintiff had no personal contact with any employee of the Internal Revenue Service regarding the tax liabilities of Norwood prior to obtaining possession of the automobile which is the subject of this proceeding.

30. The Internal Revenue Service did not provide plaintiff with notice of the assessment made against Norwood or with any demand for payment thereof prior to plaintiff's obtaining possession of the automobile which is the subject of this proceeding.

31. The 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 retail value:

   $200  AM/FM Stereo/tape player

   $150  Power door locks

   $150  Tilt steering wheel

   $150  Cruise control

   $275  Leather seats

   $400  Low Mileage Credit

-------

$13,000  Total

II. Discussion

The U.S. 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 U.S. 's tax lien, that she paid a fair price for the automobile and that she has not relinquished possession.

The U.S. seized the automobile pursuant to 26 U.S.C. §6331 in partial satisfaction of the tax liabilities of Norwood .

Jack argues 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:

b. Protection 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-- . . .

2. Motor vehicles.--With 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 purchaser did not have actual notice of knowledge of the existence of such lien, and

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

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, Jack and Norwood live together. (Jack Dep., pp. 17-19). The automobile, at the time of transfer on 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 Norwood $7,500 for the automobile from funds obtained through a used car loan from the Sovran Bank.

Between June 18, and June 26, 1986 , plaintiff leased the used automobile back to Norwood for the sum of $300 per month. Norwood took actual possession of the automobile on June 1, 1986 . Norwood failed to make the monthly payments when due. It was only after IRS seized the automobile that Norwood made full payment of the lease amount. Payments were in cash, with only six receipts.

On May 5, 1987 , the IRS levied upon the automobile at 8664 Cromwell Drive , Springfield , Virginia , the residence of both Jack and Norwood .

The court 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.

Accordingly, 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).

Under Section 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 Norwood for $300 per month. The Standard Car Lease Agreement provided that possession was to be transferred from Jack to Norwood . Norwood had possession of the automobile during the Standard Car Lease Agreement and used the vehicle.

The court concludes that, under the Standard Car Lease, Jack relinquished possession of the automobile to Norwood .

III. Conclusion

The United States is entitled to retain $13,700, plus interest, from the cash bond posted by plaintiff. Plaintiff shall retain possession of the automobile.

An appropriate Order shall issue.

ORDER

In accordance with the accompanying Memorandum Opinion, it is accordingly

ORDERED:

(1) that 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 defendant, United States , 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 automobile.

(3) that the Clerk shall forward copies of this Order together with the accompanying Memorandum Opinion to all counsel of record.

 

 

[86-1 USTC ¶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

U.S. District Court, East. Dist. Pa. , 85-0605, 3/27/86

[Code 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.

DECISION

KELLY, District Judge:

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.

Following the 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 findings:

FINDINGS OF 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.

3. On 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 annuity.

4. On 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. Commissioner [Dec. 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 $741,111.60.

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.

6. On 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.

7. On 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.

8. In 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 "purchaser".