Conflicts of Law Page1

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John A. Greene, Receiver for the Great Global Assurance Company, in Liquidation, Plaintiff v. United States , Defendant.

U.S. Court of Federal Claims; 96-169-T, October 7, 2004 .

[ Code Secs. 815 and 6323]

Life insurance companies: Insolvent insurers: Policyholders' surplus accounts: Amount taxable: Priority of claims: State insurance guaranty fund: Federal tax claims. --

The entire amount of an insolvent insurer's policyholders' surplus account (PSA) became taxable when the insurer failed to qualify as a life insurance company for two consecutive years. The full amount of the PSA was subject to federal tax, without any reduction for amounts that would be used to pay policyholders's claims. However, the receiver for the insurer was entitled to a refund of taxes paid on the PSA because under applicable state ( Arizona ) law, the claims of the state guaranty fund had priority over the unsecured claims of the federal government. Monat Capital Corp. (DC Kan.), 94-2 USTC ¶50,626, distinguished.

Douglas J. Schmidt, Kathryn B. Bussing, Blackwell Sanders Peper Martin LLP, for plaintiff. Eillen J. O'Connor, Assistant Attorney General, Mildred L. Seidman, Chief, Mary M. Abate, Department of Justice, for defendant.

OPINION

HORN, Judge: This case arises out of a dispute concerning a tax refund allegedly owed by the United States to the Great Global Assurance Company (Great Global). The plaintiff, John A. Greene, ¹ Receiver for the Great Global Assurance Company, a life insurance company, alleges that the defendant, the United States, acting through the Department of the Treasury, Internal Revenue Service (IRS), erroneously withheld a tax refund due to Great Global. The plaintiff seeks relief in the amount of $699,849.00 plus interest, costs, attorney's fees, and such other costs as the court deems proper.

In an earlier decision, this court dismissed plaintiff's complaint, holding that Great Global failed to file its refund claim with the Internal Revenue Service within the required statutory period. See Greene v. United States [ 98-2 USTC ¶50,777], 42 Fed.Cl. 18 (1998). The Federal Circuit reversed and remanded the case, holding that the plaintiff filed its claim within the three-year statute of limitations provided by 26 U.S.C. §6511. See Greene v. United States [ 99-2 USTC ¶50,778], 191 F.3d 1341 (Fed. Cir. 1999). The decision below addresses the parties' cross-motions for summary judgment, filed by the parties pursuant to Rule 56 of the Rules of the United States Court of Federal Claims (RCFC).

BACKGROUND

Before 1959, life insurance companies were taxed only on that portion of their investment income which was in excess of the funds reserved to satisfy their obligations to policyholders. In 1959, Congress enacted tax legislation applicable to life insurance companies which attempted to measure the total income of a life insurance company, rather than just its investment income. Due to the difficulties in calculating the true annual income of a life insurance company, the Life Insurance Company Income Tax Act of 1959 (the 1959 Tax Act), Pub. L. No. 86-169, 73 Stat. 112 (codified as amended at 26 U.S.C. §801-20), introduced a three-phase procedure for taxing life insurance companies. ² The 1959 Tax Act allowed insurance companies to shelter a portion of their income to enable insurers to build sufficient reserves. This tax sheltered money was to be placed in a "policyholders surplus account" designed to contain enough money to satisfy the insurance company's obligations to policyholders. The income taxed under Phase I of the three-phase tax procedure includes "the portion of the net income from interest, dividends, rents, royalties and other investment sources which is in excess of the amount required as interest additions to reserves or as interest paid." H.R. Rep. No. 34, 86th Cong., 1st Sess. 15 (1959), 1959-2 C.B. 736, 741.

The Phase II portion of the tax base is calculated at 50 percent of the excess of total net income from all sources over the taxable investment income. This is referred to as an underwriting gain and represents "mortality and loading savings, or savings resulting from longer life expectancies than assumed in establishing premiums and reserves, and also savings from reductions in expenses of servicing policies and expenses incurred in 'putting policies on the books.'" Id. The 50 percent untaxed portion of the underwriting gain is placed in a policyholders surplus account. The Phase III portion of the tax base was designed to assure that amounts previously deferred under Phase II were added to the tax base and, therefore, subject to taxation when they were no longer used to comply with the insurance company's obligations to policyholders. The Phase III tax "is designed to give assurance that underwriting gains made available to shareholders will be subject to the full payment of tax. Thus, this phase is concerned with the half of underwriting income which under Phase II is not added to the tax base." Id. The Phase III tax liability for that amount of money, which life insurance companies previously excluded from the tax base, is triggered by one of several events, including the failure of an insurance company to qualify for two successive years as a "life insurance company" pursuant to the statutory definition included in 26 U.S.C. §801(a) (1982). See 26 U.S.C. §815(d)(2)(A)(ii) (1982). ³

FINDINGS OF FACT ⁴

The plaintiff, Great Global Assurance Company, has its principal place of business in Scottsdale , Arizona . Great Global requested an extension of time until September 17, 1984 to file its 1983 tax return. Great Global filed a federal Life Insurance Company Income Tax Return, Form 1120L, for tax year 1983, on September 17, 1984 . On that tax return, Great Global reflected zero tax liability for tax year 1983. ⁵

During the following two tax years, 1984 and 1985, Great Global failed to qualify as an insurance company. ⁶ Therefore, Great Global became liable to the IRS for taxes on the money in the policyholders surplus account (PSA), and was required to add the amount remaining in the PSA to its taxable income for the last preceding tax year in which it had qualified as an insurance company. In this case, Great Global had qualified as an insurance company in tax year 1983, but had not qualified in 1984 or 1985. ⁷ As a result, Great Global filed an amended 1983 return on July 9, 1990 , which included in the tax base funds held in the PSA.

The Maricopa County Superior Court of Arizona ruled on February 7, 1986 that Great Global was insolvent, placed the company in receivership and appointed the Director of the Arizona Department of insurance as the Receiver. Subsequently, the Receiver's efforts to rehabilitate Great Global failed. Thereafter, on June 8, 1988 , the Maricopa County, Arizona Superior Court directed the Receiver to liquidate any remaining assets of Great Global.

The Receiver filed an amended return on behalf of Great Global on July 9, 1990 , and paid $699,849.00 to the IRS. The amount paid consisted of $357,392.00 in revised tax liability and interest thereon of $342,457.00. This increased tax liability resulted from the addition of $820,961.00 to Great Global's 1983 income base from funds previously held in the PSA. Approximately three months later, on September 24, 1990 , the IRS assessed the additional tax and interest on Great Global pursuant to 26 U.S.C. §6501(c)(6) (1982). ⁸

On July 8, 1993, Great Global filed a second amended tax return for the tax year 1983 and requested a refund of the $699,849.00, including taxes and interest pursuant to 26 U.S.C. §6402(a) (1982). ⁹ In its claim for a refund, Great Global stated that:

1. Under Arizona law for the relevant period, which is binding on Great Global and the IRS because of the McCarran-Ferguson Act, 15 U.S.C. §1012(b), the Taxpayer's Receivership has insufficient funds to satisfy claims of policyholders, whose priority to payment in the Receivership is senior to the claim of the IRS.

2. No Phase III tax is applicable in a receivership where shareholders receive nothing, since such tax "is designed to give assurance that underwriting gains made available to shareholders will be subject to the full payment of tax." H.R. Rep. No. 34, 86th Cong., 1st Sess. 15 (1959), 1959-2 C.B. 736, 741, 742.

The IRS District Director, Mark Cox, responded by letter dated March 1, 1995 , and denied the claim for the refund on two counts. The IRS concluded that Great Global had not timely filed the refund claim and that, even if the claim had been timely, it would have been denied because a partial or complete liquidation of an insurance company is one of the events that trigger Phase III tax liability pursuant to 26 U.S.C. §815(d)(2)(A). Thereafter, the taxpayer filed a supplemental claim dated March 7, 1995 , and a protest, dated March 23, 1995 , which requested that the appeals office consider the claim.

The IRS appeals officer, George Lawrence, notified Great Global that it should resubmit its claim and explain its position on the timeliness issue. Great Global responded to the IRS with its resubmitted claim and its taxpayer's position contending that the claim was timely. The appeals office rejected Great Global's argument and disallowed the claim on the ground that it was not timely.

Thereafter, Great Global filed the above-captioned complaint. The government moved to dismiss on grounds that this court lacked subject matter jurisdiction pursuant to RCFC 12(b)(1) and on grounds that Great Global failed to state a claim upon which relief can be granted pursuant to RCFC 12(b)(4). The government predicated its position regarding the court's subject matter jurisdiction on the applicable three-year statute of limitations in tax refund cases provided by 26 U.S.C. §6511(a) (1982). The government contended that Great Global filed its tax return for tax year 1983 on September 17, 1984, thus commencing the time from which to calculate the three-year statute of limitation.

According to the government, the three-year statute of limitations ended on September 17, 1987 . Moreover, according to the government, Great Global filed the amended return with the tax payment on July 9, 1990, thus commencing the running of the applicable two-year statute of limitations, pursuant to 26 U.S.C. §6511(a), which ended on July 9, 1992. Therefore, the defendant argued that the two-year statute of limitations expired nearly a year before plaintiff filed its refund claim on July 8, 1993 . In addition, defendant contended that plaintiff's actions should be dismissed pursuant to RCFC 12(b)(4) because any allowable refund necessarily would be limited to zero under 26 U.S.C. §6511(b)(2)(B) (1986). ¹⁰

Plaintiff contended that the 1984 filing for the 1983 tax year could not have triggered the starting date for computation of the statute of limitations because the facts necessary to ascertain the Phase III tax liability had not been determined at that time and subsequent events necessary to compute the tax had not yet occurred. According to the plaintiff, Great Global did not become liable for the Phase III tax until January 1, 1986 , after it failed to qualify as a life insurance company for two consecutive years (1984-85). Great Global argued that the July 9, 1990 amended return was the operative return with respect to calculating the statute of limitation on the Phase III tax in dispute and, therefore, that the statute of limitations did not expire for three years, or until July 9, 1993, one day after plaintiff filed its claim with the IRS for the tax refund at issue.

After briefing by the parties, this court held in favor of the government on the ground that the court lacked subject matter jurisdiction. See Greene v. United States [ 98-2 USTC ¶50,777], 42 Fed.Cl. at 30. The court found that the three-year statute of limitations provided by 26 U.S.C. §6511(a) (1982) began to run on September 17, 1984, the date that Great Global filed its tax return for the 1983 tax year. See id. at 28-29. Thus, the court found that the applicable statute of limitations expired on September 17, 1987 . See id. The court further found that the two-year statute of limitations from the date of payment began to run on July 9, 1990 , the date that Great Global filed its second amended return for the 1983 tax year with the accompanying tax payment. See id. The court found that the three-year statute of limitations from the date of filing and the two-year statute of limitations from the date of payment expired, respectively, almost six years and approximately one year before Great Global filed its refund claim with the IRS. See id. Great Global appealed.

The United States Court of Appeals for the Federal Circuit reversed and remanded. The Federal Circuit reasoned:

In this case, where the events giving rise to the tax necessarily took place after the taxable year, the return that starts the running of the statute is the return in which the taxpayer is required to or does report the income. Here, both parties concede that the Phase III income was not required to be reported on GGAC's 1983 tax return; in fact, it could not be so reported because GGAC's liability had not been established at the time of the filing of that return. Therefore, contrary to the conclusion of the Court of Federal Claims, the 1983 return cannot be the return that starts the running of the three-year limitations period. Because there apparently was no date on which the return showing the Phase III income was required to be filed, and hence no other such return was filed, the 1990 amended return is the only return that could have started the running of the limitations period. It reported the "overpayment of [the] tax in respect of which tax [the] taxpayer [was] required to file [the] return."

Greene v. United States [ 99-2 USTC ¶50,778], 191 F.3d at 1343 (quoting 26 U.S.C. §6511(a) (1994) (alterations in original)). The appellate court found that the plaintiff's refund action was not time barred and that jurisdiction regarding plaintiff's complaint was properly lodged and remanded the case to the trial court.

Following the remand, in its motion for summary judgment, the plaintiff argues that under the McCarran-Ferguson Act, 15 U.S.C. §1012(b) (1982), Arizona law, in particular, Arizona Revised Statutes §20-629 (1997), which it applies retroactively as applicable to the relevant time period, takes priority over the federal priority statute. The Arizona statute cited by plaintiff requires that policyholders' claims and claims by guarantee funds are senior to claims of the Internal Revenue Service. From this, plaintiff concludes that the government must refund the disputed tax payment because the money appropriately should be used to satisfy Great Global's outstanding policyholders' claims.

In its cross-motion for summary judgment, the government argues that Phase III tax liability for the 1983 tax year was triggered when Great Global failed to qualify as a life insurance company for two consecutive years. The government states that the Receiver's payment of the tax and interest does not qualify as an overpayment. Therefore, according to the defendant, the plaintiff properly satisfied its tax liability with the 1990 payment and is owed no refund. The government also contends that it is immaterial under 26 U.S.C. §815(d)(2)(A)(ii) whether Great Global would use the refund to satisfy claims of policyholders as opposed to shareholders' claims.

DISCUSSION

The parties have filed cross-motions for summary judgment on the plaintiff's complaint pursuant to RCFC 56. RCFC 56 is patterned on Rule 56 of the Federal Rules of Civil Procedure (Fed. R. Civ. P.) and is similar both in language and effect. Both rules provide that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." RCFC 56(c); Fed. R. Civ. P. 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986); Adickes v. S. H. Kress & Co., 398 U.S. 144, 157 (1970); Telemac Cellular Corp. v. Topp Telecom, Inc., 247 F.3d 1316, 1323 (Fed. Cir.), reh'g denied and reh'g en banc denied (2001); Monon Corp. v. Stoughton Trailers, Inc., 239 F.3d 1253, 1257 (Fed. Cir. 2001); Avenal v. United States , 100 F.3d 933, 936 (Fed. Cir. 1996), reh'g denied (1997); Creppel v. United States , 41 F.3d 627, 630-31 (Fed. Cir. 1994). A fact is material if it will make a difference in the result of a case under the governing law. Irrelevant or unnecessary factual disputes do not preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. at 247-48; see also Monon Corp. v. Stoughton Trailers, Inc., 239 F.3d at 1257; Curtis v. United States, 144 Ct.Cl. 194, 199, 168 F.Supp. 213, 216 (1958), cert. denied, 361 U.S. 843 (1959), reh'g denied, 361 U.S. 941 (1960).

When reaching a summary judgment determination, the judge's function is not to weigh the evidence and determine the truth of the case presented, but to determine whether there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. at 249; see, e.g., Ford Motor Co. v. United States, 157 F.3d 849, 854 (Fed. Cir. 1998) (the nature of a summary judgment proceeding is such that the trial judge does not make findings of fact); Johnson v. United States, 49 Fed.Cl. 648, 651 (2001), aff'd, No. 01-5143, 2002 WL 31724971 (Fed. Cir. Dec. 3, 2002 ); Becho, Inc. v. United States , 47 Fed.Cl. 595, 599 (2000). The judge must determine whether the evidence presents a disagreement sufficient to require submission to fact finding, or whether the issues presented are so one-sided that one party must prevail as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. at 250-52; Jay v. Sec'y of Dep't of Health and Human Servs., 998 F.2d 979, 982 (Fed. Cir.), reh'g denied and en banc suggestion declined (1993). When the record could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial, and the motion must be granted. See, e.g., Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Hall v. Aqua Queen Mfg., Inc., 93 F.3d 1548, 1553 n.3 (Fed. Cir. 1996). In such a case, there is no need for the parties to undertake the time and expense of a trial, and the moving party should prevail without further proceedings. Summary judgment:

[S]aves the expense and time of a full trial when it is unnecessary. When the material facts are adequately developed in the motion papers, a full trial is useless. "Useless" in this context means that more evidence than is already available in connection with the motion for summary judgment could not reasonably be expected to change the result.

Dehne v. United States, 23 Cl.Ct. 606, 614-15 (1991) (citing Pure Gold, Inc. v. Syntex, Inc., 739 F.2d 624, 626 (Fed. Cir. 1984)), vacated on other grounds, 970 F.2d 890 (Fed. Cir. 1992); United States Steel Corp. v. Vasco Metals Corp., 394 F.2d 1009, 1011 (C.C.P.A. 1968).

Summary judgment, however, will not be granted if "the dispute about a material fact is 'genuine,' that is, if the evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. at 248; Eli Lilly & Co. v. Barr Labs., Inc., 251 F.3d 955, 971 (Fed. Cir. 2001), cert. denied, 534 U.S. 1109 (2002); Gen. Elec. Co. v. Nintendo Co., 179 F.3d 1350, 1353 (Fed. Cir. 1999). In other words, if the nonmoving party produces sufficient evidence to raise a question as to the outcome of the case, then the motion for summary judgment should be denied. Any doubt over factual issues must be resolved in favor of the party opposing summary judgment, to whom the benefit of all presumptions and inferences runs. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. at 587-88; Monon Corp. v. Stoughton Trailers, Inc., 239 F.3d at 1257; Wanlass v. Fedders Corp., 145 F.3d 1461, 1463 (Fed. Cir.), reh'g denied and en banc suggestion declined (1998).

The initial burden on the party moving for summary judgment to produce evidence showing the absence of a genuine issue of material fact may be discharged if the moving party can demonstrate that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986); see also Trilogy Communications, Inc. v. Times Fiber Communications, Inc., 109 F.3d 739, 741 (Fed. Cir.) (quoting Conroy v. Reebok Int'l, Ltd., 14 F.3d 1570, 1575 (Fed. Cir. 1994), reh'g denied and en banc suggestion declined (1995)), reh'g denied and en banc suggestion declined (1997); Lockwood v. Am. Airlines, Inc., 107 F.3d 1565, 1569 (Fed. Cir. 1997). If the moving party makes such a showing, the burden shifts to the nonmoving party to demonstrate that a genuine dispute regarding a material fact exists by presenting evidence which establishes the existence of an element essential to its case upon which it bears the burden of proof. See Celotex Corp. v. Catrett, 477 U.S. at 322; Am. Airlines v. United States [ 2000-1 USTC ¶50,236], 204 F.3d 1103, 1108 (Fed. Cir. 2000); see also Schoell v. Regal Marine Indus., Inc., 247 F.3d 1202, 1207 (Fed. Cir. 2001).

Pursuant to RCFC 56, a motion for summary judgment may succeed whether or not accompanied by affidavits and/or other documentary evidence in addition to the pleadings already on file. Celotex Corp. v. Catrett, 477 U.S. at 324. Generally, however, in order to prevail by demonstrating that a genuine issue for trial exists, the nonmoving party must go beyond the pleadings by use of evidence such as affidavits, depositions, answers to interrogatories and admissions. Id.

Even if both parties argue in favor of summary judgment and allege an absence of genuine issues of material fact, however, the court is not relieved of its responsibility to determine the appropriateness of summary disposition in a particular case. Prineville Sawmill Co. v. United States , 859 F.2d 905, 911 (Fed. Cir. 1988) ( citing Mingus Constructors, Inc. v. United States , 812 F.2d 1387, 1391 (Fed. Cir. 1987)); Chevron USA, Inc. v. Cayetano, 224 F.3d 1030, 1037 n.5 (9th Cir. 2000), cert. denied, 532 U.S. 942 (2001). "[S]imply because both parties moved for summary judgment, it does not follow that summary judgment should be granted one or the other." LewRon Television, Inc. v. D.H. Overmyer Leasing Co., 401 F.2d 689, 692 (4th Cir. 1968), cert. denied, 393 U.S. 1083 (1969); see also B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d 587, 593 (6th Cir. 2001); Massey v. Del Labs., Inc., 118 F.3d 1568, 1573 (Fed. Cir. 1997). Cross-motions are no more than a claim by each party that it alone is entitled to summary judgment. The making of such inherently contradictory claims, however, does not establish that if one is rejected the other necessarily is justified. B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d at 593; Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1148 (10th Cir. 2000); Allstate Ins. Co. v. Occidental Int'l., Inc., 140 F.3d 1, 2 (1st Cir. 1998); Reading & Bates Corp. v. United States [ 98-1 USTC ¶50,290], 40 Fed.Cl. 737, 748 (1998). The court must evaluate each party's motion on its own merits, taking care to draw all reasonable inferences against the party whose motion is under consideration. DeMarini Sports, Inc. v. Worth, Inc., 239 F.3d 1314, 1322 (Fed. Cir. 2001); Gart v. Logitech, Inc., 254 F.3d 1334, 1338-39 (Fed. Cir. 2001), cert. denied, 534 U.S. 1114 (2002).

In the instant case, the parties claim that there are no material issues of fact in dispute. Moreover, the court has found no disputed material issue of fact. Therefore, the court's analysis begins with the plain language of the statute. See Duncan v. Walker, 533 U.S. 167, 172 (2001) ("Our task is to construe what Congress has enacted. We begin, as always, with the language of the statute."); Carter v. United States, 530 U.S. 255, 257 (2000) ("[T]he Court's inquiry begins with the textual product of Congress' efforts, not with speculation as to the internal thought processes of its Members."). In interpreting the plain meaning of the statute, it is the court's duty, if possible, to give meaning to every clause and word of the statute. See Duncan v. Walker, 533 U.S. at 173; Williams v. Taylor, 529 U.S. 362, 404 (2000) (describing as a "cardinal principle of statutory construction" the rule that every clause and word of a statute must be given effect if possible). Similarly, the court must avoid an interpretation of a clause or word which renders other provisions of the statute inconsistent, meaningless, or superfluous. See Duncan v. Walker, 533 U.S. at 167 (noting that courts should not treat statutory terms as "surplusage"). "'[W]hen two statutes are capable of co-existence ... it is the duty of the courts, absent a clearly expressed congressional intention to the contrary, to regard each as effective.'" Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 515 U.S. 528, 533 (1995) ( quoting Morton v. Mancari, 417 U.S. 535, 551 (1974)); see also Hanlin v. United States , 214 F.3d 1319, 1321 (Fed. Cir.), reh'g denied (2000).

A court must not stray from the statutory definition of a term. See Stenberg v. Carhart, 530 U.S. 914, 942 (2000); Meese v. Keene, 481 U.S. 465, 484-485 (1987); Colautti v. Franklin, 439 U.S. 379, 392 n.10 (1979). "It is axiomatic that the statutory definition of the term excludes unstated meanings of that term." Meese v. Keene , 481 U.S. at 484-85. As the United States Court of Appeals for the Federal Circuit stated in AK Steel Corporation:

When Congress makes such a clear statement as to how categories are to be defined and distinguished, neither the agency nor the courts are permitted to substitute their own definition for that of Congress, regardless of how close the substitute definition may come to achieving the same result as the statutory definition, or perhaps a result that is arguably better.

AK Steel Corp. v. United States , 226 F.3d 1361, 1372 (Fed. Cir. 2000). When a word is undefined, courts regularly give that term its ordinary meaning. Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 187 (1995); AK Steel Corp. v. United States , 226 F.3d at 1371.

A singular term may not be read in isolation, however. See Pollard v. E.I. du Pont de Nemours & Co., 532 U.S. 843, 852 (2001) ( citing Gade v. Nat'l Solid Wastes Mgmt. Assn., 505 U.S. 88, 99 (1992)). The "meaning of a provision is 'clarified by the remainder of the statutory scheme ....'" United States v. Cleveland Indians Baseball Co. [ 2001-1 USTC ¶50,341], 532 U.S. 200, 217 (2001) ( quoting United Sav. Assn. of Tex. v. Timbers of Inwood Forest Assocs, Ltd., 484 U.S. 365, 371 (1988) and describing statutory construction as a "holistic endeavor"). "Words are not pebbles in alien juxtaposition; they have only a communal existence; and not only does the meaning of each interpenetrate the other, but all in their aggregate take their purport from the setting in which they are used." King v. Saint Vincent's Hosp., 502 U.S. 215, 221 (1991) ( quoting NLRB v. Federbush Co., 121 F.2d 954, 957 (2d Cir. 1941) (L. Hand, J.)).

When the statute provides a clear answer, the court's analysis is at an end. Harris Trust and Sav. Bank v. Salomon Smith Barney, Inc., 530 U.S. 238, 254 (2000) ( quoting Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 438 (1999)). Thus, when the "'statute's language is plain, "the sole function of the courts is to enforce it according to its terms."'" Johnson v. United States, 529 U.S. 694, 723 (2000) ( quoting United States v. Ron Pair Enterps., Inc. [ 89-1 USTC ¶9179], 489 U.S. 235, 241 (1989) ( quoting Caminetti v. United States , 242 U.S. 470, 485 (1917))). In such an instance, the court will not consider "conflicting agency pronouncements" or "extrinsic evidence of a contrary intent." Weddel v. Sec'y of Dep't of Health and Human Servs., 23 F.3d 388, 391 (Fed. Cir. 1994) ( citing Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 476 (1992) (noting that courts must not defer to agency interpretation contrary to the intent of Congress evidenced by unambiguous language) and Darby v. Cisneros, 509 U.S. 137, 147 (1993)). "[O]nly language that meets the constitutional requirements of bicameralism and presentment has true legal authority." Weddel v. Sec'y of Dep't of Health and Human Servs., 23 F.3d at 391 ( citing INS v. Chadha, 462 U.S. 919 (1983)). "'[C]ourts have no authority to enforce [a] principl[e] gleaned solely from legislative history that has no statutory reference point.'" Shannon v. United States, 512 U.S. 573, 583- 84 (1994) ( quoting Int'l Bhd. of Elec. Workers, Local Union No. 474 v. NLRB, 814 F.2d 697, 712 (D.C. Cir. 1987)). Consequently, if a statute is plain and unequivocal on its face, there is usually no need to resort to the legislative history underlying the statute. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 119 (2001) ( citing Ratzlaf v. United States [ 94-1 USTC ¶50,015], 510 U.S. 135, 147-148 (1994) ("[W]e do not resort to legislative history to cloud a statutory text that is clear.")). There are select instances when resort to legislative history is proper. For example, a court may consider legislative history if:

the plain meaning produces a result that is not just "harsh," Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 576, 102 S.Ct. 3245, 3252, 73 L.Ed.2d 973 (1982), "curious," Tennessee Valley Auth. v. Hill, 437 U.S. 153, 172, 98 S.Ct. 2279, 2291, 57 L.Ed.2d 117 (1978), or even "stark and troubling," Estate of Cowart, 505 U.S. at [483], 112 S.Ct. at 259[8], but "so bizarre that Congress 'could not have intended' it," Demarest v. Manspeaker, 498 U.S. 184, 186, 190-91, 111 S.Ct. 599, 601-02, 603-04, 112 L.Ed.2d 608 (1991).

Weddel v. Sec'y of Dep't of Health and Human Servs., 23 F.3d at 391. Moreover, legislative history may be introduced into the analysis to resolve an ambiguous statute. Ratzlaf v. United States [ 94-1 USTC ¶50,015], 510 U.S. at 148 n.18 (citing Barnhill v. Johnson, 503 U.S. 393, 401 (1992)); Patterson v. Shumate, 504 U.S. 753, 761 (1992).

"If legislative history is to be considered, it is preferable to consult the documents prepared by Congress when deliberating." Gustafson v. Alloyd Co., 513 U.S. 561, 580 (1995). "[T]he authoritative source for finding the Legislature's intent lies in the Committee Reports on the bill, which 'represen[t] the considered and collective understanding of those Congressmen involved in drafting and studying proposed legislation.'" Garcia v. United States, 469 U.S. 70, 76 (1984) ( quoting Zuber v. Allen, 396 U.S. 168, 186 (1969)). "'[T]he fears and doubts of the opposition are no authoritative guide to the construction of legislation'" because of the likelihood that those in opposition tend to overstate the reach of the bill in question. Bryan v. United States, 524 U.S. 184, 196 (1998) ( quoting Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 394 (1951)). Moreover, statements by individual legislators should not be given controlling weight, although such statements may evidence congressional intent when consistent with statutory language and other pieces of legislative history. Brock v. Pierce County, 476 U.S. 253, 263 (1986) ( citing Grove City Coll. v. Bell , 465 U.S. 555, 567 (1984)).

"'[S]ubsequent history is less illuminating than the contemporaneous evidence.'" Solid Waste Agency of N. Cook County v. United States Army Corps of Eng'rs, 531 U.S. 1359, 170 (2001) ( quoting Hagen v. Utah, 510 U.S. 399, 420, reh'g denied (1994)); see also United States v. X-Citement Video, Inc., 513 U.S. 64, 77 n.6 (1994) ("[T]he views of one Congress as to the meaning of an Act passed by an earlier Congress are not ordinarily of great weight ... and the views of the committee of one House of another Congress are of even less weight."). But cf. Loving v. United States, 517 U.S. 748, 770 (1996) ("'"Subsequent legislation declaring the intent of an earlier statute is entitled to great weight in statutory construction."'") ( quoting Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 118 n.13 (1980) ( quoting Red Lion Broad. Co. v. FCC, 395 U.S. 367, 380-81 (1969))).

Although the Court in Loving cited the Consumer Product Safety Commission decision for the proposition that subsequent legislation may be used to interpret an earlier statute, the Court in Consumer Product Safety Commission adhered to the principle that "the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one." Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. at 118. It cited the proposition regarding reliance on subsequent legislation only for the purpose of declining to adopt it, stating that "even when it would otherwise be useful, subsequent legislative history will rarely override a reasonable interpretation of a statute that can be gleaned from its language and legislative history prior to its enactment." Id. at 118 n.13.

In this regard, a court should give little weight to attempts to infer congressional intent to adopt judicial interpretations of a statutory provision when Congress revises the statutory scheme but fails to amend the provision in question. See Alexander v. Sandoval, 531 U.S. 1049, 1523 (2001). Similarly, "'failed legislative proposals are "a particularly dangerous ground on which to rest an interpretation of a prior statute."'" Solid Waste Agency of N. Cook County v. United States Army Corps of Eng'rs, 531 U.S. at 170 ( quoting Cent. Bank of Denver , N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 187 (1994) ( quoting Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 650, (1990))).



A. Phase III Tax Liability as Applied to PSA Accounts

The plain language of the statutory sections which impose Phase III tax liability are contained in 26 U.S.C. §§802 and 815 (1982). Section 802(b)(3) states: "For purposes of this part, the term 'life insurance company taxable income' means the sum of ... the amount subtracted from the policyholders surplus account for the taxable year, as determined under section 815." 26 U.S.C. §802(b)(3). Section 815(d)(2)(A) ¹¹ states:

Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if- ... (ii) for any two successive taxable years the taxpayer is not a life insurance company, then the amount taken into account under section 802(b)(3) for the last preceding taxable year for which it was a life insurance company shall be increased (after the application of subparagraph (B)) by the amount remaining in its policy holders surplus account ¹² at the close of such last preceding taxable year.

26 U.S.C. §815(d)(2)(A). Thus, section 815(d) describes several events that trigger Phase III tax liability, thereby ending the tax deferred status of money previously held in the PSA. The relevant triggering event in this case is the failure of an entity previously qualified as a life insurance company to qualify as a life insurance company for two consecutive years, as described in section 815(d)(2)(A)(ii). Other events, described in section 815(d)(2)(B), however, may trigger Phase III tax liability, as discussed below.

In sum, section 815(d)(2)(A)(ii) requires a former life insurance company to "subtract" the full balance of its PSA and include the amount subtracted as taxable income in the last year in which the company qualified as a life insurance company. This subtraction reduces the PSA to zero and triggers the taxation of the full balance under section 802(b)(3), which defines "life insurance company taxable income" as the amount subtracted from the PSA for the taxable year. The PSA's balance must then be calculated, however, "after the application of subparagraph (B) [of 26 U.S.C. §815(d)(2)]," which addresses, separately, distributions made to shareholders. 26 U.S.C. §815(d)(2)(A)(ii).

Section 815(d)(2)(B) provides that "[i]f for any taxable year the taxpayer is an insurance company but not a life insurance company, then any distribution to shareholders during such taxable year shall be treated as made on the last day of the last preceding taxable year for which the taxpayer was a life insurance company." When applied, the plain meaning of sections 815(d)(2)(A)(ii) and 815(d)(2)(B) require that an insurance company first treat any distributions made to shareholders as if they were made on the last day the company qualified as a life insurance company. Then, after any distributions to shareholders are taken into account, the company's taxable income is increased by whatever amount remains in its PSA. Thus, by its plain meaning, even if an insurance company makes no distributions to shareholders, as identified under section 815(d)(2)(B), the company must increase its taxable income by the amount remaining in its PSA when it fails to qualify as a life insurance company for two successive years.

The government argues that the plain language of sections 802(b)(3) and 815(d)(2)(A)(ii) require that, with the one (not applicable) enumerated exception for carryovers, an entity that fails to qualify as a life insurance company for two consecutive years must "subtract" from the PSA the full balance of the PSA, rendering it taxable. The defendant argues that this subtraction, and consequential taxation, exists independent of, and in addition to any distributions made to shareholders or policyholders. Moreover, the government contends that there is no ambiguity in the language of either of these provisions.

Plaintiff argues that an exception to Phase III taxation exists for amounts in PSAs intended to be paid to policyholders, thus preventing those amounts from being taxed. However, section 815 does not contain an exception for insolvent life insurance companies that would use PSA funds to pay policyholders' claims. Section 815 contains only a single exception, "as provided in [26 U.S.C. §381(c)(22)] (relating to carryovers in certain corporate readjustments)." 26 U.S.C. §815(d)(2)(A). That Congress included an exception related to carryovers in certain corporate readjustments allows the court to infer that Congress intended to exclude other exceptions. See United States v. Johnson, 529 U.S. 53, 58 (2000) ("When Congress provides exceptions in a statute, it does not follow that courts have authority to create others. The proper inference, and the one we adopt here, is that Congress considered the issue of exceptions and, in the end, limited the statute to the ones set forth."). Contrary to plaintiff's contentions, the court finds no ambiguity in the language of section 815(d)(2)(A)(ii). Instead, the court agrees with the government that the statute's plain language requires that an insurance company's failure to qualify as a life insurance company for two years renders its entire PSA balance taxable as income for the last year in which the company qualified as a life insurance company.

Plaintiff, in its brief supporting its motion for summary judgment, does not identify what portion of the statute it considers to be the source of the ambiguity. The extent of plaintiff's identification in that brief of the alleged ambiguity is a subheading which summarily concludes that "[t]he 1959 Act's Language is Ambiguous and Requires Reference to the Legislative History." Furthermore, in its brief in opposition to defendant's motion for summary judgment, plaintiff summarily cites the title of section 815, "distributions to shareholders," as the source of the ambiguity, giving no further explanation as to how the title renders the language of the statutory section ambiguous. The only support that plaintiff offers for its conclusion regarding ambiguity, and seemingly the only case law addressing plaintiff's argument, is a citation to a non-precedential United States District Court case, Monat Capital Corporation v. United States [ 94-2 USTC ¶50,626], 869 F.Supp. 1513 (D. Kan. 1994) and reference to another non-precedential United States District Court case, GE Life & Annuity Company v. United States [ 2001-1 USTC ¶50,192], 127 F.Supp.2d 794 (E.D. Va. 2000), judgment modified, 89 A.F.T.R.2d 2002-1815 (E.D. Va. Mar. 25, 2002).

In GE Life, the court was asked to determine whether a corporate stock election under 26 U.S.C. §338 triggered Phase III tax liability under 26 U.S.C. §815(d). See GE Life & Annuity Co. v. United States [ 2001-1 USTC ¶50,192], 127 F.Supp.2d at 800. Whether or not a company that fails to qualify as an insurance company for two years should be taxed on the balance of its PSA was not at issue in the GE Life case. However, plaintiff quotes the proposition in GE Life that states, "if monies held in such PSAs were ultimately needed to provide for payments of benefits to the company's policyholders, such monies would never be subject to tax as profits of the company." Id. at 795. Plaintiff does not continue the quotation in its brief, but the District Court does, stating that: "However, the Code outlines three 'triggering events' relevant to this case. Upon the happening of any such event all or part of a life insurance company's PSA balance became taxable income." Id. Thus, contrary to plaintiff's claim that the GE Life decision stands for the proposition that amounts intended to pay policyholders claims could not be taxed, or that the statute is ambiguous, the GE Life court identified that upon the triggering of one of the three scenarios, including termination of either insurance or life insurance company status, the amounts in the company's PSA could be taxed. See id. at 798.

Although plaintiff cites GE Life, plaintiff relies heavily on the Monat court's decision to support its argument. In Monat, the court examined the PSA and Phase III tax provisions under the 1984 Act and found them to be ambiguous. A revised version of section 815 titled "Distributions to Shareholder from pre-1984 Policyholder Surplus Account," became effective on December 31, 1983 , pursuant to the 1984 Act. The court in Monat explored the 1984 Act, which replaced the 1959 Act at issue in the instant case. The Monat court was charged with interpreting certain provisions of the 1984 Act, some of which referred to the 1959 Act's provisions regarding Phase III liability and PSA accounts. In its opinion, the Monat court first explored the literal language of both the 1984 and 1959 Acts, finding that, "[u]nder a literal reading of the 1959 Act, if, for any two successive years an insurance company failed to qualify as a life insurance company for federal tax purposes, all amounts in its PSA were to be included in Phase III taxable income under section 802(b)(3) for the last year in which the company qualified as a life insurance company." Id. at 1518. Thus, the Monat court recognized that, read literally, the 1959 Act regarded the entire PSA balance as taxable under these circumstances without regard to whether the PSA balance would otherwise be used to satisfy policyholders' claims. See id.

The Monat court rejected the literal language of both Acts because it found in the 1984 Act an ambiguity that caused it to examine the legislative history of the 1984 Act. As stated by the Monat court: "[t]he 1984 Act carried forward the triggering events provision of the old statute ( I.R.C. §815(d)), but did not carry forward the mechanism for imposing a Phase III tax ( I.R.C. §802(b)(3)). Because of this ambiguity it is necessary to look outside the language of the 1984 Act." Id. The court stated: "Therefore ... the termination of life insurance company status triggered a subtraction of the PSA balance and imposition of Phase III tax, even when the company had been declared insolvent and all available funds had been earmarked to pay policyholder claims." Id.

The court turned to the language of the 1959 Act for additional guidance, finding that:

The 1959 Act defined certain "triggering events," in former Section 815(d), which would end the tax deferred status of money held in a PSA. These events all resulted in money being "subtracted" from the PSA. Upon the occurrence of one of these events, the money subtracted from the PSA would treated [sic] as income and subject to the Phase III tax, under former Section 802(b)(3). The 1984 Act carried forward the triggering event provision of the old statute ( I.R.C. §815(d)), but did not carry forward the mechanism for imposing a Phase III tax ( I.R.C. §802(b)(3)).

Id. at 1517-18. In examining the 1959 Act, the Monat court also observed that the title of the section, "Distributions to Shareholders," and references to distributions to shareholders, caused it to view the section as ambiguous. Id. at 1518. Explaining its conclusions regarding the ambiguities in the 1959 Act, the Monat court stated:

[F]ormer Section 815, the section that defined the triggering events in which money is "subtracted" from a PSA and thus subject to the Phase III tax, is entitled "Distributions to Shareholders." In addition, Section 815(c) provided that the amount "subtracted" from a PSA is equal to the amount "distributed" out of the PSA. This use of the terms "distributed" and "distribution" was continued by the 1984 Act which defines the current version of the Phase III tax amounts as "direct and indirect distributions ... to shareholders from such account." I.R.C. §815(a)(2).

 

These repeated references to distributions to shareholders lead the court to conclude that the 1959 Act's language is ambiguous on the question of whether termination of life insurance company status automatically results in the PSA balance becoming taxable, even if earmarked solely for policyholder claims. Therefore, the court is required to look beyond the plain language of the statute to determine congressional intent.

Id. at 1518-19.

In examining the legislative history of the 1959 Act, the court found no clear indication of Congress's intent regarding Phase III tax liability in the event that the money used to pay the PSA taxation would otherwise end up in the hands of policyholders rather than shareholders. The court stated:

It is clear from the legislative history that Congress intended to tax any distribution from the tax-deferred PSA balance that benefitted shareholders in any way. The legislative history does not, however, provide any meaningful explanation for the provision that upon termination of a life insurance company's status as such, the PSA balance would be taxed.

Id. at 1519.

The court, therefore, adopted an interpretation of the Phase III PSA taxation provision that it found to be more consistent with its perception of the general purpose of the Phase III life insurance company taxation scheme. The Monat court summarized its perception of the congressional intent as preventing "shareholders from taking advantage of the tax deferral system by closing the company's doors but continuing to avoid tax liability on PSA amounts not needed for policyholder claims." Id. at 1520. From that, the Monat court concluded that Congress must not have intended to tax PSA dollars earmarked for receipt by policyholders because PSAs provide a "'desirable 'cushion' for special contingencies which may arise in the case of the policies involved.'" Id. at 1519 (citing S. Rep. No. 291, 86th Cong., 1st Sess. (1959), reprinted in 1959 U.S.C.C.A.N. 1575, 1601). According to the Monat court, "[i]t would be contrary to Congressional intent to allow the Government to tax the cushion merely because it existed at the time the company became insolvent if doing so pulls the cushion out from under the policyholders it was established to protect." Id. at 1519. The court, therefore, held that: "For these reasons, the court concluded that termination of life insurance company status does not trigger taxation of the PSA balance under the 1959 Act when none of [the PSA] balance will be distributed directly or indirectly to shareholders." Id. at 1520.

This court finds three problems with the rationale used by the Monat court. First, the court in Monat found ambiguity in the statute and resorted to the legislative history, despite finding a literal meaning supported by the plain language of the statute. See id. at 1517. The Monat court itself wrote: "The problem with applying the literal statutory language to the question in this case... ." Id. By disregarding the literal language of the statute, the Monat court ignored the basic principles of statutory interpretation that counsel against this approach. If a statute is plain and unequivocal on its face, there is usually no need to resort to the legislative history underlying the statute. See Circuit City Stores, Inc. v. Adams, 532 U.S. at 119 ("[W]e do not resort to legislative history to cloud a statutory text that is clear.") (quoting Ratzlaf v. United States [ 94-1 USTC ¶50,015], 510 U.S. at 147-148).

Second, the Monat court used the absence of specific language in the statute and the absence of "meaningful explanation" in the legislative history to bolster an interpretation that is supported by neither. Monat Capital Corp. v. United States [ 94-2 USTC ¶50,626], 869 F.Supp. at 1519. Regarding the absence of any provision in the plain language of the statute regarding distributions to policyholders, "'courts have no authority to enforce [a] principl[e] gleaned solely from legislative history that has no statutory reference point.'" Shannon v. United States, 512 U.S. at 583-84 (quoting Int'l Bhd. of Elec. Workers, Local Union No. 474 v. NLRB, 814 F.2d at 712). The Supreme Court has also counseled against using "ingenuity to create ambiguity" that does not otherwise exist in the statute. Rothschild & Bro. v. United States , 179 U.S. 463, 465 (1900).

Finally, although the 1984 Act removed the specific language in section 815(d)(2)(A)(ii) referring to a life insurance company's failure to qualify as a life insurance company for two years, section 815(f) of the 1984 revision carried forward and made applicable to PSAs any provisions of the 1959 Act that were not inconsistent with the 1984 Act. Section 815(f) of the 1984 Act states:

(f) Other rules applicable to policyholders surplus account continued.

 

Except to the extent inconsistent with the provisions of this part, the provisions of subsections (d), (e), (f), and (g) of section 815 (and of sections 6501(c)(6), 6501(k), 6511(d)(6), 6601(d)(3), and 6611(f)(4)) as in effect before the enactment of the Tax Reform Act of 1984 are hereby made applicable in respect of any policyholders surplus account for which there was a balance as of December 31, 1983.

26 U.S.C. §815(f) (1984). Thus, section 815(f) of the 1984 revision recognizes that, while the 1984 Act ended PSAs, the PSA accounts that existed must still be managed and taxed appropriately.

Furthermore, legislative history lacking in "meaningful explanation" on the PSA taxation issue should not be used to displace the literal meaning of the statute. The Senate Report on the 1959 Act specifically stated that when certain "triggering events" occur "it becomes clear that the company itself has made the determination that additional amounts constitute income which was not required to be retained to fulfill the policyholder's contracts." GE Life and Annuity Co. v. United States [ 2001-1 USTC ¶50,192], 127 F.Supp.2d at 799 (quoting Sen. Rep. No. 291, 86th Cong., 1st Sess. 20-21, reprinted in 1959-2 C.B. 778). A far more tenable conclusion dictates that the legislative history itself is ambiguous. Moreover, this court finds no clearer explanation in the general discussion of the legislative intent behind the 1959 Act.

The Monat court found that, in general, Congress designed the 1959 Act to "prevent shareholders from taking advantage of the tax deferral system by closing the company's doors but continuing to avoid tax liability on PSA amounts not needed for policyholder claims." Monat Capital Corp. v. United States [ 94-2 USTC ¶50,626], 869 F.Supp. at 1520. This court finds no clear indication from any of the legislative history cited by plaintiff, or identified in the Monat court's decision, that Congress intended there to be an exception to the Phase III taxation of PSA funds that would otherwise pay policyholders' claims.

Moreover, the Monat court used the legislative history language of the 1984 Act to find the 1959 Act ambiguous. In so doing, the court ignored another maxim of statutory interpretation which states that "the views of one Congress as to the meaning of an Act passed by an earlier Congress are not ordinarily of great weight... ." United States v. X-Citement Video, Inc., 513 U.S. at 77 n.6; see also Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. at 118 n.13 ("Thus, even when it would otherwise be useful, subsequent legislative history will rarely override a reasonable interpretation of a statute that can be gleaned from its language and legislative history prior to its enactment."). In passing the 1984 Act, Congress altered the 1959 Act's scheme, and thereby created a tax provision that does not tax PSA funds earmarked for policyholders. From the literal language of the 1959 statute, Congress appears to have intended that the 1959 Act rendered taxable all PSA funds of twice non-qualifying life insurance companies, even if those PSA funds were earmarked to pay policyholders' claims. Congress' alteration of the previous Act's taxation scheme in 1984 says nothing about what Congress intended in 1959.

This court disagrees with the court in Monat because this court finds no ambiguity in the language of the 1959 Act, and the result dictated by the literal meaning of the statutes is not "so bizarre that Congress 'could not have intended' it...." Weddel v. Sec'y of Dep't of Health and Human Servs., 23 F.3d at 391 (citing Demarest v. Manspeaker, 498 U.S. at 190-91).

As defendant correctly identified in a final hearing in this case, section 7806 of the 1959 and 1984 Acts requires that: "No inference, implication, or presumption of legislative construction shall be drawn or made by reason of the location or grouping of any particular section or provision or portion of this title, nor shall any table of contents, table of cross references, or similar outline, analysis, or descriptive matter relating to the contents of this title be given any legal effect." 26 U.S.C. §7806(b). Thus, the Monat court's reliance and reference to the title of section 815, "Distribution to Shareholders," is unpersuasive, because the statute requires the courts not to infer any intentions or meaning from the title of particular sections, which, in this case, would include any reference to distributions or shareholders.

With regard to the absence of any "meaningful explanation" in the legislative history, by adopting a meaning gleaned from only a general understanding of the legislative history of the 1959 Act, the Monat court and the plaintiff ignored the basic canons of statutory construction. "The starting point for interpretation of a statute 'is the language of the statute itself. Absent a clearly express legislative intention to the contrary, that language must ordinarily be regarded as conclusive.'" Kaiser Aluminum & Chemical Corp. v. Bonjorno, 494 U.S. 827, 835 (1990) (quoting Consumer Prod. Safety Comm'n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980)). Moreover, the Supreme Court has declined to contradict the literal language of a statute with the legislative history when "[t]he legislative history cited by petitioners is at best ambiguous" because such references lack a clear legislative intention or expression. Buckhannon Bd. and Care Home, Inc. v. West Va. Dep't of Health and Human Res., 532 U.S. 598, 599 (2001).

The government, in its arguments regarding the proper interpretation, makes an alternate argument, contending that "there were indirect or constructive distributions to Great Global's shareholders during the period 1983 through 1986; therefore, under section 815(d)(2)(A), the deferred tax on the 1983 PSA balance was required to be paid." Greene responds that "there have been no 'distributions,' directly or indirectly, to or for the benefit of Great Global's Shareholders." Whether or not Great Global made indirect or constructive distributions to its shareholders is an issue of fact and not subject to summary judgment. However, there is no need to address the issue at this time. A determination of whether constructive distributions were made is not material to the core issue of whether 26 U.S.C. §§802(b)(3) and 815(d)(2)(A)(ii) provide the exception relied on by the plaintiff. Moreover, because the court construes the statutes in the government's favor, there is no need to reach the government's alternate, factual argument. The PSA account taxation of twice nonqualifying life insurance companies does not offer an exception for funds earmarked for policyholder claims.



B. Supremacy of Federal Law and the Arizona Priority Statutes



1. Plaintiff's Priority Argument

Plaintiff contends that Arizona law places claims of policyholders and the Arizona Guaranty Fund ahead of unsecured claims of the United States . Plaintiff argues that the McCarran-Ferguson Act, 15 U.S.C. §1012 (2000), ¹³ which reserves to states the authority to govern the insurance industry, supplants 31 U.S.C. §3713(a)(1)(A)(iii), the federal statute granting first priority to claims of the United States against insolvent entities. According to plaintiff, the Arizona priority statute, Arizona Revised Statutes §20-629, ¹⁴ regulates the business of insurance and, therefore, under the McCarran-Ferguson Act, displaces the general federal priority statute.

To support its argument, plaintiff cites United States Department of Treasury v. Fabe, 508 U.S. 491 (1993). In Fabe, the Supreme Court examined an Ohio priority statute similar to the Arizona priority statute at issue in the instant case. The Ohio priority statute entitled claims of the federal government to fifth priority, behind (1) admin istrative expenses, (2) specified wage claims, (3) policyholders' claims and (4) claims of general creditors. See id. at 495. The Court partially upheld the order of priority dictated by the Ohio statute, holding that state priority statutes can designate admin istrative expenses and policyholders' claims to receive priority over claims of the United States . See id. at 508-509. The Fabe Court , however, held that specified wage claims and claims of general creditors may not receive priority over claims of the United States . See id.

The Supreme Court reasoned that the McCarran-Ferguson Act reserved to the states the power to regulate the "business of insurance." Id. at 493. The Court further interpreted the "business of insurance" to include state laws enacted to protect policyholders through enforcing performance of insurance contracts. Id. at 505. The Fabe Court recognized that the state priority statute at issue was "designed to carry out the enforcement of insurance contracts by ensuring the payment of policyholders' claims despite the insurance company's intervening bankruptcy." Id. at 504. Applying this rationale to the Ohio statute, the Court wrote:

[T]he Ohio priority statute, to the extent that it regulates policyholders, is a law enacted for the purpose of regulating the business of insurance. To the extent that it is designed to further the interests of other creditors, however, it is not a law enacted for the purpose of regulating the business of insurance. ... We also hold that the preference accorded by Ohio to the expenses of admin istering the insolvency proceeding is reasonably necessary to further the goal of protecting policyholders. ... The preferences conferred upon employees and other general creditors, however, do not escape pre-emption because their connection to the ultimate aim of insurance is too tenuous.

United States Dep't of Treasury v. Fabe, 508 U.S. at 508-09. The Supreme Court remanded the case to the trial court because of a clash in priorities between the respective provisions of the federal statute and Ohio Code.

The Supreme Court had previously set forth a three-part standard for defining what constitutes "the business of insurance": first, whether the practice has the effect of transferring or spreading the risk of insurer insolvency; second, whether the practice is an integral part of the policy relationship between the insurer and the insured because it is designed to maintain the reliability of the insurance contract; and third, whether the practice is limited to entities within the insurance industry. See id. at 497-98 (quoting Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982)). The Supreme Court has recognized, however, that these three requirements represent only "checking points or guideposts" and are not firm requirements for finding that a state statute regulates the business of insurance. Kentucky Ass'n of Health Plans, Inc. v. United States, 538 U.S. 329, 333, (2003) (quoting Union Labor Life Ins. Co. v. Pireno, 458 U.S. at 129); UNUM Life Ins. Co. of America v. Ward, 526 U.S. 358, 373 (1999) ("We have indicated that the McCarran-Ferguson factors are 'considerations [to be] weighed' in determining whether a state law regulates insurance."). Ultimately, the Supreme Court, in reviewing the McCarran-Ferguson Act under the Employee Retirement Income Security Program, stated that, "[t]oday we make a clean break from the McCarran-Ferguson factors and hold that for a state law to be deemed a 'law ... which regulates insurance' under §1144(b)(2)(A), it must satisfy two requirements. First, the state law must be specifically directed toward entities engaged in insurance. Second, as explained above, the state law must substantially affect the risk pooling arrangement between the insurer and the insured." Kentucky Ass'n of Health Plans, Inc. v. United States , 538 U.S. at 341-42. Thus, the Supreme Court did not intend that the three factors identified in Fabe be required or satisfied for a court to determine that a state law regulates the business of insurance.

In earlier cases in which the Supreme Court reviewed the McCarran-Ferguson Act, the Court had emphasized the necessity under the Act to protect policyholders. For example, in Pireno, the court found that the use of a peer review committee to advise an insurer as to whether chiropractic charges were reasonable was not part of the business of insurance. Rather, the court found the peer review process as an aid to decision making to be "a matter of indifference to the policyholder, whose only concern is whether his claim is paid, not why it is paid." Union Labor Life Ins. Co. v. Pireno, 458 U.S. at 120 (emphasis in original). Similarly, in Group Life and Health Insurance Company v. Royal Drug Company, the court found agreements between insurance companies and their participating pharmacies too tenuous to be considered "business of insurance." See Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 213-14 (1979), reh'g denied, 441 U.S. 917 (1979).

While Pireno and Royal Drug interpreted the second clause of 15 U.S.C. §1012(2)(b) of the McCarran-Ferguson Act, which addresses antitrust laws, the Supreme Court nevertheless noted that the purpose of the McCarran-Ferguson Act was to protect policyholders. See United States Dep't of Treasury v. Fabe, 508 U.S. at 504. In particular, when construing the phrase "for the purpose of regulating the business of insurance," the Supreme Court emphasized the importance of ensuring payment to policyholders under insurance contracts. To this end, the Fabe Court noted that:

The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement --these were the core of the 'business of insurance.' Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was --it was on the relationship between the insurance company and the policyholder.

United States Dep't of Treasury v. Fabe, 508 U.S. at 501 (quoting SEC v. Nat'l Secs. Inc., 393 U.S. 453, 460 (1969)). Therefore, in Fabe, the Supreme Court found that "[u]nder the McCarran-Ferguson Act, 15 U.S.C. §1012(b), federal law must yield to the extent the Ohio statute furthers the interests of policyholders." Id. at 502.

In the case currently before the court, the plaintiff urges the court to apply Fabe, arguing that the Arizona priority statute, Arizona Revised Statutes §60-629, places policyholders' claims ahead of claims by the United States . Plaintiff also asks this court to determine whether the Arizona Guaranty Fund is part of the "business of insurance," to the extent that guaranty fund claims are entitled to the same priority as policyholder claims under the Arizona priory statute and the McCarran-Ferguson Act. Plaintiff contends that, under the McCarran-Ferguson Act, the federal super-priority provided by 31 U.S.C. §3713(a)(1)(A)(iii) does not apply because the Arizona Guaranty Fund and the Arizona priority statute protect policyholders and regulate the "business of insurance."This issue appears not to have been previously addressed in this Circuit.

The dispute in this case arises from the inherent conflicts between the relevant state and federal statutes. See Boozell v United States, 979 F.Supp. 670, 676 (N.D. Ill. 1997). Therefore, this court must review the purpose of the Arizona insurance statute, as well as the relevant case law on guaranty fund priority claims. In general, federal case law addressing whether guaranty funds have priority over claims by the federal government is sparse. However, of the few cases that have addressed the issue, each one has held that guaranty funds are entitled to protection under the McCarran-Ferguson Act. See Ruthardt v. United States, 303 F.3d 375 (1st Cir. 2002), cert. denied sub nom. Bowler v. United States, 538 U.S. 1031 (2003), and cert. denied sub nom. Alabama Ins. Guar. Ass'n v. United States, 538 U.S. 1031 (2003); Boozell v. United States, 979 F.Supp. at 670. None of these cases, however, are precedential in this court.

In Ruthardt, the First Circuit reviewed a Massachusetts priority statute under the McCarran-Ferguson Act to determine whether guaranty fund claims had priority over claims by the United States . See Ruthardt v. United States , 303 F.3d at 379. Like the plaintiff in the case currently before the court, the Massachusetts Commissioner of Insurance argued that the McCarran-Ferguson Act protected the state priority statute, which preferred claims by guaranty funds arising out of their payments to policyholders ahead of claims by the United States . Id. at 380. The Ruthardt court upheld the Massachusetts statute, stating that "[t]he priority that Massachusetts affords to guaranty funds is part and parcel of an integrated regime aimed at the protection of policyholders." Id. at 382.

In granting guaranty funds higher priority than federal claims, the Ruthardt court examined Fabe and rejected the argument that the Supreme Court intended to limit priority only to actual policyholders. Id. at 381-82. Instead, the First Circuit held that since guaranty funds are intended to protect policyholders, they accordingly deserve a higher priority than claims by the federal government, in part because the "obligations of the guaranty funds to pay covered policy claims exists whether or not the guaranty funds are then reimbursed."Ruthardt v. United States , 303 F.3d at 381. The court stated that "priorities that indirectly assure that policyholders get what they were promised can also trigger McCarran-Ferguson protection; the question is one of degree, not of kind. " Id. at 382. Thus, the First Circuit found that "the guaranty funds are little more than a mechanism for advancing the money to pay policyholders promptly... ." Id.

In reaching its decision, the First Circuit focused on the importance of reimbursements made to the Massachusetts guaranty funds. The court stated that "[r]eimbursements to the funds are a significant source of revenue for making covered payments to policyholders." Id. at 382. In essence, the First Circuit equated making reimbursement payments to guaranty funds with making payments directly to policyholders because "[w]ithout the priority for such reimbursements, payments to policyholders could in practice be less secure and would at the very least be delayed in some instances. Prompt payment is one of the main benefits of guaranty funds." Id. The Ruthardt court also wrote: "Yet the guaranty funds are little more than a mechanism for advancing the money to pay policyholders promptly and then recovering those advances out of the estate assets, ahead of the United States , just as the policyholders could have done directly." Id. at 382. Accordingly, the Ruthardt court held that because the purpose of the guaranty fund was to protect policyholders and ensure payments on insurance contracts, guaranty funds are appropriately accorded higher priority than federal claims.

Similarly, in Boozell v. United States, the United States District Court for the Northern District of Illinois reviewed an Illinois priority statute to determine whether guaranty funds should be accorded higher priority than federal claims. See Boozell v. United States , 979 F.Supp. 670 (N.D. Ill. 1997). Like Ruthardt, the Boozell court also equated making payments to guaranty funds with making payments to policyholders. In Boozell, however, the court applied a state statute that assigned to the guaranty fund any amounts paid to policyholders. See id. at 678 ("Policyholders who receive payments on other benefits from a guaranty association are deemed to have assigned their rights under the covered policies to the association to the extent of the benefits provided. Thereafter, the guaranty association is entitled to the same priority as the policyholders would have had with respect to the assigned claims in distributions from the insolvent insurer's estate") (citing 215 ILL. COMP. STA. 5/545(a), (b), 5/531.08(12)). The Boozell court found that the Illinois priority statute was enacted for the purpose of regulating the business of insurance and, therefore, under McCarran-Ferguson, was not preeempted [ sic] by the federal priority statute.

To reach its decision, the Boozell court also expanded the narrow protection afforded to policyholders in Fabe by relying upon the United States Court of Appeals for the Second Circuit's decision in Stephens v. American International Insurance Company, 66 F.3d 41 (2nd Cir. 1995). The Boozell court found that the Fabe holding attempted to give meaning to the plain wording of the McCarran-Ferguson Act by exempting any state law which directly or indirectly protects policyholders from federal preemption. See Boozell v. United States , 979 F.Supp. at 678. In Stephens, the Second Circuit found that an anti-arbitration provision of the Kentucky Liquidation Act was enacted "for the purpose of regulating the insurance business" and, therefore, was not preempted by the federal priority statute. Stephens v. Am. Int'l Ins. Co., 66 F.3d at 46. The Stephens court reasoned that "[i]t is crucial to the 'relationship between [an] insurance company and [a] policyholder' that both parties know that in the case of insolvency, the insurance company will be liquidated in an organized fashion." Id. at 44-45.

On the other hand, the Stephens court, like the court in Boozell rejected the First Circuit's reasoning in Garcia v. Island Program Designer, Inc., 4 F.3d 57 (1st Cir. 1993). In Garcia, the court held that the federal superpriority statute preempted a Commonwealth of Puerto Rico filing deadline-related priority provision. See id. at 62. The Commonwealth provision provided that creditors making claims could file claims past the deadline for filing claims specified by the Insurance Commissioner, but that no claims filed after the deadline would be allowed until all timely filed claims had been fully paid. See id. at 60-61 (citing P.R. Laws Ann., tit. 26, §4019(2)).

In Garcia, the court rejected the Insurance Commissioner's argument that the McCarran-Ferguson Act upheld the filing-deadline statute on two grounds. First, the court found that the filing provision, with its priority deadlines, did not "regulate policyholders" because it was neither "directed at, nor necessary for, the protection of policy holders as [the Fabe] Court required." Garcia v. Island Program Designer, Inc., 4 F.3d at 62. Second, the Garcia court found that the Commonwealth's filing deadline provision was not "necessary for the protection of policyholders." Id. In short, the Garcia court found the deadline priority provision too tenuous for the McCarran-Ferguson Act to apply in that it did not have sufficient nexus to the goal of protecting policyholders.

As the Ruthardt court stated in its opinion, the Supreme Court has read the McCarran-Ferguson Act "more narrowly than literally," making this an extremely close case. Ruthardt v. United States , 303 F.3d at 382. In the case currently before the court, after reviewing the relevant statutes and case law, this court agrees with the holdings in Ruthardt and Boozell, and holds that the Arizona Insurance Statute "regulates the business of insurance," and properly grants the Arizona Guaranty Fund priority over claims by the United States .

Although the Supreme Court did not address plaintiff's guaranty fund issue directly, the Fabe court, and the subsequent cases interpreting Fabe, focused on protecting the policyholder. Id. at 511. Certainly, a policyholder is best protected if his or her claim can be paid, even when an insurance company is insolvent. The cases that have rejected application of the McCarran-Ferguson Act to state statutes, such as Garcia and Pireno, have done so because those courts found that the state statutes under review were not enacted to protect policyholders. See Garcia v. Island Program Designer, Inc., 4 F.3d at 59.

The purpose of the Arizona Guaranty Fund is to ensure insurance contract completion and to protect the interests and rights of the policyholders. If a creditor were to collect on a claim directly from the assets of an insurance company, the government in this case concedes that the policyholder is entitled to priority ahead of the United States . If, however, the same policyholder were to recover from the Arizona guaranty fund, the United States attempts to lay claim to the remaining assets of the insurance company not used directly for the policyholder's claim, rather than providing for repayment to the guaranty fund for use to pay other policyholders' claims. This action results in actually increasing the United States ' priority to assets which would have been used to pay claims but for the guaranty fund. As the Ruthardt court described, this would be a "perverse result." Ruthardt v. United States , 303 F.3d at 382. This court, therefore, holds that the Guaranty Funds are entitled to priority ahead of claims by the United States .

Likening this case to Pireno, the defendant argues that, "the source of the [guaranty] fund's reimbursement is of no interest to an individual policyholder." See Union Labor Life Ins. Co. v. Pireno, 458 U.S. at 132 (finding the peer review process to be "a matter of indifference to the policyholder, whose only concern is whether his claim is paid, not why it is paid."). This argument is not dispositive in the instant case. Unlike in Pireno, in which the peer review committee was ascertaining how much a policyholder should be paid, and the nexus to the interests of the policyholder is more attenuated, a state guaranty fund actually pays the policyholder when an insurance company is insolvent. The Arizona guaranty fund is designed protect the policyholder, and, logically, merits McCarran-Ferguson protection. See SEC v. Nat'l Secs., Inc., 393 U.S. at 460 ("Statutes aimed at protecting or regulating this relationship [between the insurance company and the policyholder] directly or indirectly are laws regulating the 'business of insurance.'").

In 1977, the Arizona Legislature adopted the 1975 Life and Health Guaranty Association Model Act of the National Association of Insurance Commissioners. In addressing the purpose of the 1975 Model Act, and finding the purpose applicable to Arizona 's Life and Disability Insurance Guaranty Fund Act, the Arizona Supreme Court wrote:

[T]he purpose of this Act is to protect policy owners, insureds, beneficiaries, annuitants, payees, and assignees of life insurance policies, health insurance policies, annuity contracts, and supplemental contracts, subject to certain limitations, against failure in the performance of contractual obligations due to the impairment or insolvency of the insurer issuing such policies or contracts.

Arizona Life & Disability Ins. Guar. Fund v. Honeywell, Inc., 945 P.2d 805, 808 ( Ariz. 1997); see also Bills v. Arizona Prop. & Cas. Ins. Guar. Fund, 984 P.2d 574, 577 (Ariz. Ct. App. 1999), review dismissed, 195 Ariz. 574 (1999) (stating that the purpose of the guaranty fund is "to provide for the payment of claims under certain insurance policies to avoid excess delay in payment and financial loss to claimants or policyholders because of the insolvency of an insurer.") (quoting Wells Fargo Credit Corp. v. Arizona Prop. & Cas. Ins. Guaranty Fund, 799 P.2d 908, 909 (Ariz. Ct. App. 1990) (citing A.R.S. §20-661 et seq.).

The government also contends that the Arizona priority statute is invalid because the United States Supreme Court did not address directly the validity of granting priority to claims of state guarantee funds and that extending the Fabe decision to include creditors such as guaranty funds is exactly what the Supreme Court hoped to avoid. ¹⁵ From this, defendant contends that the Fabe decision must have foreclosed the possibility that claims of state guarantee funds receive priority over claims of the United States . In Fabe however, the Supreme Court was not asked to address guaranty funds, and the arguments and logic set forth in Fabe do not support defendant's argument. The Fabe Court held that the focus of applying the McCarran-Ferguson Act is to protect the policyholder. See Fabe v. United States , 508 U.S. at 511. ¹⁶

In the instant case, plaintiff correctly argues that the Arizona Guaranty Fund should have priority over government claims because it is part of a state statute that protects and regulates the relationship between the policyholder and the insurer. The Arizona statute is designed to carry out the completion of insurance contracts by ensuring payment of policyholder's claims despite an insurance company's intervening bankruptcy, as required under Fabe. See Fabe v. United States , 508 U.S. at 504.



2. Plaintiff's Retroactivity Argument

Although this court holds that the Arizona Guaranty Fund is entitled to priority ahead of claims by the federal government, the issue of how Arizona prioritizes creditors in its distribution statute was raised by the plaintiff in this case. In the present case, the plaintiff seeks a refund for a tax return filed and paid in 1990. However, the plaintiff asks this court to apply the 1997 version of Arizona 's priority statute, Arizona Revised Statutes §60-629 (1997). In the 1997 version, the Arizona legislature ranked creditor priorities in an insurance bankruptcy situation in the following order: 1) admin istrative expenses, 2) claims of the guaranty funds, 3) claims of policyholders, and 4) claims of the United States . See id.

Plaintiff basis its retroactivity argument on a Historical and Statutory Note following section 60-629 (1997). That note reads:

This act applies to all delinquency proceedings begun after the effective date of this act and to all delinquency proceedings pending on the effective date of this act in which a final distribution in payment of claims has not been made, other than a distribution to claimants under §20-629, subsection A, paragraph 1, Arizona Revised Statutes, or an early access distribution to insurance guaranty funds.

ARIZ. REV. STAT. §60-629 (1997) (citing 1997 Ariz. Sess. Laws Ch. 272, §§2 and 3).

Plaintiff argues that the 1997 statute applies because "[i]t is undisputed that the Great Global delinquency proceedings were pending as of the effective date of this statute and that no final distribution has yet been made in the matter." Plaintiff also points out that the clear language of the 1997 statute states that it applies to all proceedings in which a final distribution in payment of claims has not been made. See ARIZ. REV. STAT. §60-629 (1997). The defendant challenges plaintiff's argument and contends that the 1977 statutory version should apply. Defendant argues that, when the tax was paid in 1990, the statutory version was the same as the 1977 version, and that there was no conflict with the Federal Insolvency Priority Statute.

Since its inception in 1939, the Arizona priority statute has been amended five times: in 1977, 1991, 1993, 1997 and 2001. The significant dates for this case are: December 31, 1985, when Great Global failed to qualify as a life insurance company pursuant to 26 U.S.C. §815(d)(2)(A)(ii); February 7, 1986, when the Arizona Supreme Court declared Great Global insolvent; June 8, 1988, when the court ordered an liquidation order; and July 9, 1990 when Great Global's Receiver filed an amended 1983 tax return and paid $699,849.00.

Plaintiff's argument that the 1997 statute should apply fails, however, because the Arizona legislature also changed the statute in 2001, and plaintiff asks this court to arbitrarily pick a statute that falls in between the year the payment occurred, 1990, and a recodification of the Arizona statute, 2001. Outside of the retroactivity language, the plaintiff presents no reason why the 1997 statute applies and not the 2001 or 1977 statutes.

When the Arizona legislature changed section 20-629 in 1993, they restructured the statute significantly to give clear rankings to the priority of creditors during an insolvency. See ARIZ. REV. STAT. §20-629 (1993). The 1993 statute, established after Fabe, more clearly placed guaranty funds and policyholder claims above claims by the federal government. ¹⁷ See id. Before 1993, the priority statute's language was not as clear and did not mention specifically guaranty funds directly in the statute. The 1977 statute stated only that "[u]npaid claims ... which arise out of and are within the coverage of insurance policies issued by the insolvent insurer shall have preference over and shall be paid prior to payments of claims of general creditors." ARIZ. REV. STAT. §20-629(E) (1977).

Whether the revised statute mentioned guaranty funds directly or not, the Arizona statute has continuously required that "[a]ny person recovering pursuant to this article shall be deemed to have assigned his or her rights under the policy to the fund to the extent of his or her recovery from the fund." ARIZ. REV. STAT. §20-672(A) (1977 and 2001). Thus, in 1993, when Arizona began mentioning guaranty funds in section 20-629, the Arizona legislature recognized what it had been practicing since the statute's inception, that guaranty funds protect and pay policyholder claims. Furthermore, the guaranty fund could bring a claim against a policyholder only if the policyholder first collects from the guaranty fund and in some manner assigns or surrogates his or her claim to the fund. Section 20-672 bypasses any independent assignment by the policyholder, and deems any amount received by policyholders statutorily assigned to the guaranty fund.

While the placement of claims of the guaranty fund ahead of those of policyholder claims in the 1997 version seems at odds with the Model Act and the federal cases discussed above, either way, this ranking has no affect on the government's lower priority to both policyholders and the guaranty fund as discussed and found by this court above. It appears that resolution of priority rankings under the state statute is a question for the Arizona courts to resolve. Moreover, whether the statute itself places guaranty funds ahead of federal claims, or guaranty funds are assigned by statute, the result is the same - guaranty funds serve to directly protect the policyholder and, therefore, enjoy a higher priority than the claims pursued by the IRS.

CONCLUSION

On December 31, 1985, when Great Global failed to qualify as a life insurance company for two years, it triggered Phase III tax liability under 26 U.S.C. §815(d)(2)(A)(ii). Accordingly, all amounts remaining in its Policyholder Savings Account became taxable. On February 7, 1986 , the Superior Court of Arizona declared Great Global insolvent, making the Arizona Guaranty Fund responsible for paying its policyholders claims. Great Global's receiver filed an amended 1983 tax return in 1990, paying $699,849.00 based on the amounts remaining in the Policyholders Savings Account on December 31, 1985 . After reviewing the arguments presented and the relevant case law, this court holds that the Arizona Guaranty Fund was entitled to priority claims ahead of the federal government's tax claim and that, therefore, Great Global is entitled to a complete refund of $699,849.00, plus interest. This court, therefore, DENIES defendant's motion for summary judgment and GRANTS plaintiff's motion for summary judgment. The Clerk of the Court shall enter JUDGMENT in accordance with this opinion. Each party shall bear it's own costs.

¹ Originally, the Receiver for Great Global was Chris Herstam. The position of Receiver is allocated to the Director of the Arizona Department of Insurance. Accordingly, because the person in this position has changed, so has the party acting as Receiver for Great Global. As of this date, the case is captioned in the name of Receiver, John A. Greene.

² The Deficit Reduction Act of 1984, Pub. L. No. 98-369, 98 Stat. 494, further changed the way life insurance companies were taxed. Division A of the Deficit Reduction Act is known as the Tax Reform Act of 1984, which, at section 211, 98 Stat. 720, addressed the taxation of life insurance companies (codified at 26 U.S.C. §801 et seq.). However, 26 U.S.C. §815(f) (1982 & Supp. III 1985) directs that the previous version of the code be applied to policyholders surplus accounts for which there was a balance as of December 31, 1983.

³ For further descriptions of Phases I, II, and III, see S. Rep. No. 291, 86 ^th Cong., 1st Sess., reprinted in 1959 U.S.C.C.A.N. 1575-1615.

⁴ The court incorporates the findings of fact included in its earlier opinion, which are summarized in this opinion and expanded upon based on more recent filings by the parties following the remand.

⁵ Great Global reported income from operations of $2,770,918.00 and deductions attributable to operations of $2,828,834.00. This net loss caused the calculation of a zero tax liability.

⁶ Although neither party has indicated the reasons for the failure to qualify, both parties agree that Great Global did not qualify as an insurance company during the tax years 1984 and 1985. The requirements for qualifying as an insurance company for tax purposes are set forth at 26 U.S.C. §801(a) (1982).

⁷ The terms of 26 U.S.C. §815(d)(2)(A) (1982) provide:

(2) Termination as life insurance company

(A) Effect of termination

Except as provided in section 381(c)(22)(relating to carryovers in certain corporate readjustments), if --

(i) for any taxable year the taxpayer is not an insurance company, or

(ii) for any two successive taxable years the taxpayer is not a life insurance company, then the amount taken into account under section 802(b)(3) for the last preceding taxable year for which it was a life insurance company shall be increased (after the application of subparagraph (B)) by the amount remaining in its policyholders surplus accountant the close of such last preceding taxable year.

⁸ 26 U.S.C. §6501(c)(6) was in effect prior to 1984 and is made applicable to the time period at issue by 26 U.S.C. §815(f). Section (c)(6) stated:

(6) Tax resulting from certain distributions or from termination as a life insurance company. In the case of any tax imposed under section 802(b)(3) on account of termination of the taxpayer as an insurance company or as a life insurance company to which section 815(d)(2)(A) applies, or on account of a distribution by the taxpayer to which section 815(d)(2)(B) applies, such tax may be assessed within three years after the return was filed (whether or not such return was filed on or after the date prescribed) for the taxable year for which the taxpayer ceases to be an insurance company, the second taxable year for which the taxpayer is not a life insurance company, or the taxable year in which the distribution is actually made as the case may be.

⁹ 26 U.S.C. §6402(a) reads:

(a) General Rule --In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit the amount of such overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment and shall, subject to subsections (c) and (d), refund any balance to such person.

¹⁰ The provisions of 26 U.S.C. §6511(b)(2)(B) state: "[i]f the claim was not filed within such 3-year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the 2 years immediately preceding the filing of the claim."

¹¹ Section 815(d)(2)(A) of the Act is also referred to in the case law discussion as the 1959 Act.

¹² A policyholders surplus account is defined in the immediately preceding subsection, 26 U.S.C. §815(c). In relevant part, section 815(c) provides that life insurance companies shall "establish and maintain" a PSA, and defines what additions and subtractions should be made from a PSA.

¹³ 15 U.S.C. §1012(b) reads in relevant part: "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance... ."

¹⁴ As discussed below, there is an issue raised by the parties as to the version of this Arizona statute to be applied.

¹⁵ Responding to the dissent's criticism that the majority's decision was so broad that "any law which redounds to the benefit of policyholders is, ipso facto, a law enacted to regulate the business of insurance...," the Fabe Court stated how that was "precisely the argument we reject in the text, as evidenced by the narrowness of our actual holding." Fabe v. United States, 508 U.S. at 509 n.8.

¹⁶ The Fabe court also upheld a priority for admin istrative expenses, stating that: "We also hold that the preference accorded by Ohio to the expenses of admin istering the insolvency proceeding is reasonably necessary to further the goal of protecting policyholders." Fabe v. United States , 508 U.S. at 509. Included in the Ohio Code's admin istrative expenses were costs payable to the Guaranty Fund. While this court does not directly rely on this aspect of the Fabe decision, a strong argument and analogy can be made that reimbursements to the Arizona guaranty fund are within the parameters of the kind of admin istrative expenses anticipated by the Fabe court.

¹⁷ The 1993 version was later changed in 1997. Among the significant changes in 1997 was the removal of employee claims from a priority above that of the federal government as directed by Fabe. See Fabe v. United States, 508 U.S. at 508 ( "We hold that the Ohio priority statute, to the extent that it regulates policyholders, is a law enacted for the purpose of regulating the business of insurance. To the extent that it is designed to further the interests of other creditors, however, it is not a law enacted for the purpose of regulating the business of insurance."). However, the guaranty fund's priority did not change relative to the federal government and remained ahead of "Claims of the federal government, except ... claims that are treated as secured claims." ARIZ REV STAT. §20-629(A)(4) (1997).

 

 

In the Matter of the Estate of James Lee Williamson.

Iowa District Court, Polk County ; ES 49250, April 24, 2003 .

[ Code Sec. 6323]

Validity and priority against third parties: Conflicts of law. --

The IRS's claim against an estate was valid despite a state ( Iowa ) statute of limitations that would have rendered the claim untimely. State statutes of limitations do not bind the United States as sovereign.

ORDER

KLOTZ, Associate Probate Judge: This matter came on for hearing on April 10, 2003 on the Claim in Probate of Department of the Treasury/Internal Revenue Service. The estate appeared by its attorney, Christine M. Shriver. The claimant appeared by Michael S. Raum, Trial Attorney, Tax Division, U. S. Department of Justice.

FACTS

James Lee Williamson died intestate on March 25, 2002 . Julie Demeter, daughter of the decedent, was appointed as Administrator on April 24, 2002 . The second publication of Notice of Appointment and Notice to Creditors was on May 16, 2002 . The Court file does not reflect actual notice to creditors. The claimant, however, acknowledged receiving actual notice dated May 9, 2002 . The claim was filed on December 20, 2002 . On January 3, 2003 the estate mailed Notice of Disallowance of Claim to the claimant. Request for Hearing was filed on January 21, 2003 .

On February 4, 2003 the Estate filed an answer to the claim and as affirmative defense that the claim was barred by the statute of limitations set forth in Iowa Code 633.410. On February 28, 2003 the claimant filed Motion for Summary Judgment and Memorandum of Law in Support of its Motion for Summary Judgment.

The sole question before this Court is as to whether the claim of Internal Revenue Service may be disallowed by the estate on the basis that the claim was filed beyond the time periods set forth in Iowa Code Section 633.410. In its original Answer no issue was raised by the estate as to the merits of the claim. In its Resistance to Motion for Summary Judgment, it does state it disputes the facts on which the claim is based but stated no specific facts in dispute.

CONCLUSIONS

Section 633.410, Iowa Code, provides:

"1. All claims against a decedent's estate, other than charges, whether due or to become due, absolute or contingent, liquidated or unliquidated, founded on contract or otherwise, are forever barred against the estate, the personal representative, and the distributes of the estate, unless filed with the clerk within the later to occur of four months after the date of the second publication of the notice to creditors or, as to each claimant whose identity is reasonably ascertainable, one month after service of notice by ordinary mail to the claimant's last known address.

"* * * * *

 

"3. Notice is not required to be given by mail to any creditor whose claim will be paid or otherwise satisfied during admin istration and the personal representative may waive the limitation on filing provided under this section. This section does not bar claims for which there is insurance coverage, to the extent of the coverage, or claimants entitled to equitable relief due to peculiar circumstances."

It is the position of the estate that the claim of Internal Revenue Service filed on December 20, 2002 is forever barred for the reason it was not filed within the later to occur of four months from publication of notice to creditors or one month from actual notice. The estate further states that no peculiar circumstances have been shown by the claimant to entitle it to equitable relief.

It is clear from all of the facts established that the claimant did not make a timely filing of its claim within the statutory provisions set forth above and has not alleged peculiar circumstances for such late filing. The question before this Court is as to whether non-compliance with Iowa Section 633.410 bars the claim of this claimant --the United States of America , through the Internal Revenue Service. The claimant takes the position is does not bar their claim and that case law clearly establishes that state statutes of limitation do not bind the United States as sovereign.

In support of its position the claimant cites United States v. Summerlin [ 40-2 USTC ¶9633], 310 U.S. 414,416 (1940). This was a case in which the United States had filed suit against the admin istrator of an estate who denied a claim based on a state statute of limitations. In that case the Court stated: "It is well settled that the United States is not bound by state statutes of limitation or subject to the defense of laches in enforcing its rights. The same rule applied whether the United States brings its suit in its own courts or in a state court." This basic finding in Summerlin has been applied in numerous cases since that ruling, included an Eighth Circuit case in ruling on an Iowa law. See United States v. Brown, 835 F.2d 176, 180 (1987). The Supreme Court has explained that the United States maintains its sovereign status even when it acts as a creditor as follows: "When the United States becomes entitled to a claim, acting in its governmental capacity and asserts its claim in that right, it cannot be deemed to have abdicated its governmental authority so as to become subject to a state statute putting a time limit upon enforcement." Id.

Since Summerlin state courts confronted with the same question before this Court have held in favor of the United States . See Estate of McBride, 249 N.E.2d 266, 267-68 ( Ill. App. 1969); In re Estate of Feinberg, 250 N.Y.S.2d 609 (Surrogate Court, New York 1964); Baker v. Charles, 202 N.E.2d 646 (Oh. Prob. Ct. 1963).

It is concluded that the claim of the United States , through Internal Revenue Service, is not barred by the provisions of Section 633.410. This conclusion is based on the existing case law that the United States as sovereign is not bound by state statutes of limitation.

IT IS, THEREFORE, ORDERED that the Claimant's Motion for Summary Judgment is granted and the Claim of United States of America, through the Internal Revenue Service, is allowed.

 

[2002-2 USTC ¶50,703] Leland Gail Ridenbaugh, Plaintiff v. Bryan Long, et al., Defendants

U.S. District Court, So. Dist. Ohio , East. Div., 02-CV-98, 9/3/2002

[Code Sec. 6323 ]

Notice of federal tax lien: State law: Certification of lien.--In the absence of a genuine issue of material fact, the IRS was entitled to summary judgment with respect to its determination to proceed with collection of an individual's tax liabilities. Regardless of whether the IRS met state ( Ohio ) certification requirements, the form and content of the Notice of Federal Tax Lien sent to the taxpayer was controlled by federal law and was valid pursuant to Code Sec. 6323 .

OPINION AND ORDER

SARGUS, JR., District Judge:

This matter comes before the Court for consideration of the Motion to Dismiss of Defendants John Gallagher, United States of America, and Department of the Treasury ("Federal Defendants"), (Doc. # 6), and the Motion for Summary Judgment of the Licking County Recorder, Bryan Long (Doc. # 9). The Court exercises jurisdiction pursuant to 28 U.S.C. §1331. For the reasons set forth below, the Federal Defendants' Motion is GRANTED and Defendant Long's Motion is GRANTED.

I. BACKGROUND

Pro se Plaintiff, Leland Gail Ridenbaugh, filed this case in state court seeking a declaratory judgment that a federal tax lien filed against him is invalid and seeking an injunction preventing enforcement of the lien. Amended Complaint, p. 2. The lien was filed on November 14, 2000 , in Licking County , Ohio , for unpaid federal taxes. Id. Ex. C.

The essence of Plaintiff's complaint appears to be that the lien was not entitled to be filed because it violated the Uniform Federal Lien Registration Act and the Internal Revenue Code. Id. Ex. B. Plaintiff claims that the lien violated federal law because it was not "certified." Id. Ex. B §3.

Defendants removed the case to this Court pursuant to 28 U.S.C. §§1441(a), (b), 1442 and 1444. The Federal Defendants then moved to dismiss this action and Defendant Long moved for summary judgment. Memorandum in Support of United States Defendants' Motion to Dismiss ("Federal Defendant's Memorandum in Support"); Memorandum in Support of Defendant Long's Motion for Summary Judgment ("Defendant Long's Memorandum in Support").

Plaintiff failed to properly file his either of his Memorandums in Opposition with the Court, faxing them to this Court's chambers. The Federal Defendants, however, replied to Plaintiff's Memorandum Contra. United States ' Reply to Plaintiff's Response to Motion to Dismiss. Thus, there is clearly no prejudice to the Federal Defendants if the Court deems this document filed. Defendant Long, although not replying to Plaintiff's response to his motion for summary judgement [sic], is nonetheless not prejudiced by Plaintiff's improper filing based on the Court's granting of Long's motion. Thus, the Court will deem Plaintiff's Memorandum Contra Defendant Long's Motion for Summary Judgment as filed.

II. STANDARDS

The Federal Defendants move to dismiss pursuant to Rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Defendant Long moves for summary judgment pursuant to Rule 56(c) of the Federal Rules of Civil [Procedure].

A. The Federal Defendants' Motion to Dismiss

A motion to dismiss based on Rule 12(b)(1) for lack of subject matter jurisdiction must be considered before a motion brought under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Moir v. Greater Cleveland Regional Transit Authority, 895 F.2d 266, 269 (6th Cir. 1990). A Rule 12(b)(6) motion may be decided only after establishing subject matter jurisdiction since the Rule 12(b)(6) challenge becomes moot if this Court lacks subject matter jurisdiction. Id. (citing Bell v. Hood, 327 U.S. 678, 682 (1946) which asserts that a motion to dismiss for failure to state a cause of action may be decided only after establishing subject matter jurisdiction, since determination of the validity of the claim is, in itself, an exercise of jurisdiction).

The Sixth Circuit has distinguished between facial and factual attacks among motions to dismiss for lack of subject matter jurisdiction pursuant to Rule 12(b)(1). A facial challenge is an attack on the court's subject matter jurisdiction that takes the material allegations of the complaint as true and construes them in a light most favorable to the nonmoving party. Singleton v. United States , 277 F.3d 864, 870 n.4 (6th Cir. 2002) (citing Ohio Nat'l Life Ins. Co. v. United States [91-1 USTC ¶50,009 ], 922 F.2d 320, 325 (6th Cir. 1990)). In contrast, a factual attack is "not a challenge to the sufficiency of the pleading's allegations, but a challenge to the factual existence of subject matter jurisdiction." United States v. Ritchie [94-1 USTC ¶50,076 ], 15 F.3d 592, 598 (6th Cir. 1994). Because Defendants do not dispute the sufficiency of the allegations in the pleadings, they present a factual challenge, as opposed to a facial challenge, to federal subject matter jurisdiction. See generally RMI Titanium Co. v. Westinghouse Elec. Corp., 78 F.3d 1125, 1134-35 (6th Cir. 1996).

B. Defendant Long's Motion for Summary Judgment

The procedure for considering whether summary judgment is appropriate is set forth in Federal Rule of Civil Procedure 56(c), which provides:

The judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.

The evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. Kress & Co., 398 U.S. 144, 158-59 (1970). Summary judgment will not lie if the dispute about a material fact is genuine; "that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Summary judgment is appropriate however, if the opposing party fails to make a showing sufficient to establish the existence of an element essential to that part's case and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); see also Matsushita Electronic Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986).

The Sixth Circuit Court of Appeals has recognized that Liberty Lobby, Celotex, and Matsushita have effected "a decided change in summary judgment practice," ushering in a "new era" in summary judgments. Street v. J.C. Bradford & Co. 886 F.2d 1472, 1476 (6th Cir. 1989). The court in Street identifies a number of important principles in new era summary judgment practice. For example, complex cases and cases involving state of mind issues are not necessarily inappropriate for summary judgment. Id. at 1479.

In addition, in responding to a summary judgment motion, the nonmoving party "cannot rely on the hope that the trier of fact will disbelieve the movant's denial of a disputed fact, but must 'present affirmative evidence in order to defeat a properly supported motion for summary judgment.' " Id. (quoting Liberty Lobby, 477 U.S. at 257). The nonmoving party must adduce more than a mere scintilla of evidence in order to overcome the summary judgment motion. Id. It is not sufficient for the nonmoving party to merely " 'show that there is some metaphysical doubt as to the material facts.' " Id. (quoting Matsushita, 475 U.S. at 586). Moreover, "[t]he trial court no longer has the duty to search the entire record to establish that it is bereft of a genuine issue of material fact." Id. That is, the nonmoving party has an affirmative duty to direct the court's attention to those specific portions of the record upon which it seeks to rely to create a genuine issue of material fact.

III. ANALYSIS

Initially, the Court notes that Plaintiff is proceeding pro se. The pleadings of a pro se litigant are held to "less stringent standards than formal pleadings drafted by lawyers." Haines v. Kerner, 404 U.S. 519, 520 (1972); Williams v. Browman, 981 F.2d 901, 903 (6th Cir. 1992). The Court has, therefore, viewed Plaintiff's claims pursuant to this less stringent standard.

The Court will address each of the defendants' motions in turn.

A. The Federal Defendants' Motion to Dismiss

The Federal Defendants move to dismiss this action on the basis of sovereign immunity. Plaintiff does not challenge the dismissal of the Federal Defendants from this case. Instead, Plaintiff wishes to dismiss the Federal Defendants. Plaintiff states that:

The plaintiff seeks no relief against the United States as he is not a U.S. Citizen, and for this cause no claim for relief need be stated as the United States lacks jurisdiction to grant the relief requested from the state of Ohio .. . .

Plaintiff's Memorandum Contra the Federal Defendants' Motion to Dismiss, at 2. Plaintiff claims that when the Federal Defendants are voluntarily dismissed, the Court should remand the case to state court. In addition, Plaintiff expressed in the Rule 26(f) Report of the Parties that he "desires to dismiss the United States with prejudice and remand the action back to state court." (Doc. #7).

Based on Plaintiff's request, the Federal Defendants are hereby dismissed from this case. ¹ The Court, however, denies Plaintiff's request that this case be remanded.

The Court would have the discretion to remand this case if the federal claim that formed the basis of this Court's federal question jurisdiction were to be dismissed. More specifically, the Court has discretion to determine whether or not to retain, remand, ² or dismiss without prejudice the supplemental state law claims. Long v. Bando Mfg. of Am., Inc., 201 F.3d 754, 761 (6th Cir. 2000) (citing Carnegie-Melon Univ. v. Cohill, 484 U.S. 343, 357 (1988) and 28 U.S.C. §1367(c)). But in this case, the federal claim that forms the basis of the Court's jurisdiction has not been dismissed. Plaintiff alleges violations of the Uniform Federal Lien Registration Act of 1978 and the Internal Revenue Code, 26 U.S.C. §6065. Complaint, Exs. C and D. The Internal Revenue Code is a federal statute. Consequently, this Court retains federal question jurisdiction in this case under 42 U.S.C. §1331. ³ Further, the effect of a tax lien in relation to provisions of federal law for collection of debts owing to the United States is always a federal question. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 n.7 (1963).

B. Defendant Long's Motion for Summary Judgment

Defendant Long moves for summary judgment arguing that the Uniform Federal Lien Registration Act ("UFLRA") does not apply to this action and that the controlling statute does not require certification of a notice of federal tax lien. Plaintiff argues that the tax lien filed against his property is a fraud and unenforceable because it is uncertified, as required by Section 3 of the UFLRA. Complaint, Ex. B.

Initially, the Court notes that Defendant is correct in his assertion that the UFLRA does not apply to this action. The UFLRA is a proposed uniform act and is not binding upon the states. The National Conference of Commissioners on Uniform State Laws prepared this 1978 proposed uniform act, which the various states are free to reject or adopt by action of the state legislature. The UFLRA itself shows that only thirty-eight states have adopted it, Ohio not being one of them. 7A Uniform Laws Annotated, at 449.

The controlling federal law, rather than being the UFLRA, is 26 U.S.C. §6323 which in pertinent part provides:

(f) Place for filing notice; form.

(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;

...

(3) Form. The form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien.

26 U.S.C. §6323 (emphasis added).

As evidenced by this statute, the tax lien filed against Plaintiff is valid, even if Ohio had adopted the UFLRA, and its requirement of certification, because 26 U.S.C. §6323 supercedes state law. See Larrew v. United States, 2001 U.S. Dist. LEXIS 8905, *4, 2001-2 U.S. Tax Cas. (CCH) P50,514 (N.D. Tex. 2001) (finding the tax lien properly filed 26 U.S.C. §6323 even though it did not contain the requisite certification required by state law); Bertelt v. United States, 206 B.R. 579, 583 (Bankr. M.D. Fla. 1996) (same). As the Larrew and Bartlet courts acknowledged, Revenue Ruling 71-466, interpreting 26 U.S.C. §6323, accurately states the federal law:

Acknowledgments are of statutory origin and are not essential to the validity of an instrument in the absence of specific statutory provisions. Acknowledgment of notices of tax liens, certificate of discharge, and other instruments mentioned above, would, therefore, not appear to be essential, inasmuch as there are no Federal statutory provisions specifically requiring acknowledgment of such instruments.

Section 6323(a) of the Code, which provides that a notice of lien shall not be valid unless filed in the office in which its filing is authorized by State law, does not purport to give a State authority to do more than designate a place for filing the notice. Section 6323(f)(3) of the Code, relating to the form and content of the notice, provides that the notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien. Accordingly, general provisions of State laws requiring the recording of documents, or otherwise requiring the acknowledgment of instruments relating to title to real property are not applicable. Section 6323(f) of the Code should be construed as setting up a specific filing procedure which is complete in and of itself and which is not affected by general provisions of State laws relating to recording, filing, or title to property.

Revenue Ruling 71-466, 2 C.B. 409, 1971 I.R.B. Lexis 309 *1-2, Rev. Rul. 71-466 (1971).

Accordingly, Plaintiff presents no genuine issue as to any material fact and Defendant Long is entitled to judgment as a matter of law.

IV. CONCLUSION

Based on the foregoing, the Federal Defendants' Motion to Dismiss is hereby GRANTED, (Doc. # 6), and Defendant Long's Motion for Summary Judgment is hereby GRANTED, (Doc. # 9). The Clerk is DIRECTED to enter judgment against Plaintiff and in favor of Defendants.

IT IS SO ORDERED.

¹ The Court further notes that the Federal Defendants would likely be dismissed from this case whether or not Plaintiff voluntarily did so. It is well settled that under its sovereign immunity, the United States is ordinarily immune from suit, and that it may define the conditions under which it will permit actions against it. United States v. Sherwood, 312 U.S. 584, 586 (1941); Clay v. United States [2000-1 USTC ¶50,115 ], 199 F.3d. 876, 879 (6th Cir. 1999). It is the burden of the party who institutes a claim against the United States , here Plaintiff, to allege an act of Congress that authorizes the Court to entertain that specific claim. Malone v. Bowdoin, 369 U.S. 643, 645 (1962). Plaintiff has not attempted to show the Court what act of Congress authorizes this suit against the United States .

² Although it is preferable to remand rather than dismiss state claims after the federal claim is eliminated, the Court may evaluate the use of manipulative tactics, such as voluntarily dismissing all federal claims, to control the forum. Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 357 (1988) ("If the plaintiff has attempted to manipulate the forum, the court should take this behavior into account in determining whether the balance of factors to be considered under the pendent jurisdiction doctrine support a remand in the case.")

³ "The district courts shall have original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States ." 42 U.S.C. §1331.

 

 

[99-2 USTC ¶50,992] United States of America , Plaintiff-Appellant v. Dishman Independent Oil, Inc., Penny Oil Corporation, Ronnie Messer, Kings Construction Company, Corbin Chemical Company, Defendants-Appellees

(CA-6), U.S. Court of Appeals, 6th Circuit, 93-6246, 1/31/95, 46 F3d 523, Reversing an unreported District Court decision

[Code Sec. 6323 ]

IRS liens: Validity and priority against third parties: Priority over attachment lien: Relation back.--A corporation's prejudgment attachment lien against a bankrupt oil company for amounts due on the sale of petroleum products did not have priority over an IRS lien filed against the same company even though the corporation's lien was filed first. Regardless of when the corporation's lien was considered perfected for purposes of state (Kentucky) law, it was considered inchoate under federal law until the corporation obtained a judgment that identified both the property subject to the attachment lien and its amount. Thus, although the taxpayer was in actual possession of the company's property before the IRS lien arose, M.P. Acri (SCt), 55-1 USTC ¶9138 , mandated that the tax lien was entitled to priority. The relation back doctrine did not prevent a federal tax lien from preempting an inchoate lien that attaches prior to judgment.

David Middleton, Assistant United States Attorney, Lexington, Ky., Stuart M. Fischbein, William S. Estabrook, Rob ert L. Baker, Gary R. Allen, Department of Justice, Washington, D.C. 20530, for plaintiff-appellant. L. Lee Tobbe, Monticello, Ky., for Dishman Independent Oil, Inc., Julius Rathner, Lexington, Ky., for Penny Oil Corp., Ronnie Messer, Kings Construction Co., Corbin Chemical Co.

Before: RYAN and BATCHELDER, Circuit Judges, and EDGAR, District Judge ^*

BATCHELDER, Circuit Judge:

Plaintiff-Appellant , United States of America , appeals the ruling by the bankruptcy court, as affirmed by the United States District Court for the Eastern District of Kentucky, granting Defendant-Appellee, Dishman Independent Oil, Inc., its motion for summary judgment. The bankruptcy court order held that appellee Dishman's prejudgment attachment lien was entitled to priority over the federal tax lien filed by the Internal Revenue Service (IRS). For the reasons stated below, we reverse the decision of the bankruptcy court, as affirmed by the district court.

I.

The facts in this case are not in dispute. Defendant-Appellee Dishman Independent Oil, Inc. (Dishman) initiated suit in Kentucky state court by suing Penny Oil Corporation, Ron Messer, Edna Messer, Corbin Chemical Company, and Kings Construction Company (hereafter the "debtors") in the sum of $365,522.25 for amounts allegedly due on the sale of petroleum products from Dishman to the debtors. In pursuit of its suit against the debtors, Dishman secured a prejudgment attachment against the property of Penny Oil Corporation and Ron and Edna Messer on January 11, 1991 . On January 14, 1991 , the prejudgment attachments were served and personal property of the debtors was seized by Dishman. Since January 14, 1991 , Dishman has been in possession of the debtors' property which consists of diesel fuel, gasoline, cash, checks, semi-tractors and trailers, bulk petroleum storage tanks, and fuel blending pumps.

As a result of its own indebtedness to its creditors, Dishman subsequently filed a petition for relief under Chapter 11 of the Bankruptcy Code. Dishman's suit against the debtors was therefore moved to the bankruptcy court as an adversary hearing. A trial was held on February 27, 1992 , which resulted in an April 27, 1992 judgment in favor of Dishman for $365,522.25 with service charges.

During the time period between Dishman's attachment and seizure of the debtors' property (January 14, 1991) and the judgment in favor of Dishman (April 27, 1992), a series of events took place which gave rise to the issue in this appeal. The first significant event during that period was the postponement of the trial in Dishman's case against the debtors, which was originally scheduled to go to trial on November 22, 1991 . ¹ However, immediately prior to that date, the defendants Ron and Edna Messer assigned all of their right, title, and interest in the attached property to the IRS. As a result, the IRS was granted a continuance, over the objection of Dishman, specifically to prepare for trial in its new role as defendant and owner of the attached property.

The second significant event occurred on January 1, 1992 , nearly one year after Dishman's attachment of the debtors' property, at which time the IRS assessed the debtors for unpaid excise taxes, interest, and penalties. The IRS consequently filed a tax lien against the debtors on January 29, 1992 , approximately three months before Dishman was granted judgment by the bankruptcy court on April 27, 1992 . The IRS tax lien seeks to collect $2,851,910.09 which is owed to the United States by the debtors for unpaid taxes from the third quarter of 1987 through the third quarter of 1988.

On May 29, 1992 , the IRS was permitted to intervene in the proceeding to seek a determination by the court that its federal tax lien was valid and prior to any interest held by Dishman in the debtors' property. The IRS eventually filed a motion for summary judgment which the bankruptcy court denied.

Dishman then filed its own motion for summary judgment against the IRS. The bankruptcy court granted Dishman's motion for summary judgment, after finding that Dishman's attachment lien was perfected by the judgment entered in its favor on April 27, 1992, and was therefore prior to the federal tax lien against the debtors. In re Dishman Indep. Oil Corp., Nos. 91-00057, Adv. No. 91-0078, 1993 WL 110032 (Bankr. E.D. Ky. Jan. 8, 1993 ). The district court affirmed the bankruptcy court's order granting Dishman's motion for summary judgment.

This timely appeal followed.

II.

Under the Internal Revenue Code ("Code"), the IRS obtains a lien on the property of a taxpayer ² when that taxpayer fails or refuses to pay his taxes after assessment, notice, and demand. I.R.C. §§6321 & 6322. The lien attaches to all property and rights to a taxpayer's property, including property subsequently acquired by the taxpayer. See Glass City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267 (1945); United States v. Safeco Ins. Co. [89-1 USTC ¶9227], 870 F.2d 338, 340 (6th Cir. 1989). The broad language of the Code "reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 720 (1985). In turn, §6323(a) of the Code gives priority to these federal tax liens over most other creditors of the taxpayer-debtor. The priority allotted to IRS tax liens by §6323(a) only allows such federal tax liens to be defeated by a narrow category of creditors:

(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.

I.R.C. §6323(a) (emphasis added).

The IRS asserts that its tax lien against the debtors has priority over Dishman's attachment lien on debtors' property because Dishman does not fall within the category of creditors protected by §6323(a). According to the IRS, its tax lien was filed before Dishman obtained a final judgment, therefore, Dishman was not a judgment lien creditor until after the tax lien was filed. The IRS further argues that Dishman did not hold a perfected security interest in the attached property because a prejudgment attachment lien is merely an unperfected, inchoate interest in the property.

A.

The issue before this court is whether a state attachment lien has priority over a federal tax lien if the property subject to the liens was attached prior to the time the federal tax lien was filed, although final judgment on the attachment lien was not handed down until after the federal tax lien was filed. It is undisputed that when a federal lien is involved, the relative priority between competing liens is a question of federal law determined by the principle "the first in time is the first in right." United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954); State Bank of Fraser v. United States [88-2 USTC ¶9592], 861 F.2d 954, 963 (6th Cir. 1988). Nonetheless, the task of determining what constitutes a perfected lien is usually governed by state law. United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55-56 (1958); see also United States v. Brosnan [60-2 USTC ¶9516], 363 U.S. 237, 240 (1960); United States v. Waddil, Holland & Flinn, Inc. [45-1 USTC ¶9126], 323 U.S. 353, 356 (1945). This usual rule is altered, however, when one of the competing liens is a federal tax lien. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 727; see also In re Construction Alternatives, Inc. [93-2 USTC ¶50,569], 2 F.3d 670, 674 (6th Cir. 1993); In re Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th Cir. 1990), cert. denied sub nom., Ohio , Dep't of Taxation v. IRS, 501 U.S. 1212 (1991). According to the Supreme Court, "it is a matter of federal law when such a [state] lien has acquired sufficient substance and has become so perfected as to defeat a later-arising or later-filed federal tax lien." United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532], 374 U.S. 84, 88 (1963) (footnote omitted). "Consequently, state-law limitations upon the ability of general creditors to reach a taxpayer's property do not affect the attachment of federal tax liens because the state-law consequences flowing from a property interest properly defined under state law 'are of no concern to the operation of the federal tax law.' " Safeco Ins. Co. [89-1 USTC ¶9227], 870 F.2d at 340-41 (quoting National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. at 723).

Accordingly, the Supreme Court has determined a state lien to be "perfected" only when "'the identity of the lienor, the property subject to the lien, and the amount of the lien are established.' " United States v. McDermott [93-1 USTC ¶50,164], 113 S. Ct. 1526, 1528 (1993) (quoting City of New Britain [54-1 USTC ¶9191], 347 U.S. at 84); see also Treas. Reg. §301.6323(h)-1(g) (1976). The IRS contends, therefore, that Dishman's lien was not perfected until April 27, 1992 , when the bankruptcy court judgment determined the amount of the lien and the property subject to the lien--nearly three months after the federal tax lien was filed. Consequently, the IRS argues that regardless of whether Dishman's attachment lien is considered to be perfected under Kentucky law, ³ Dishman's lien was inchoate for purposes of federal law and the federal tax lien therefore retains its priority.

We believe this issue is controlled by the holding of United States v. Acri [55-1 USTC ¶9138], 348 U.S. 211 (1955), which supports the IRS's position. In Acri, the Supreme Court unequivocally held that a federal tax lien filed after an attachment lien was executed had priority over the attachment lien because judgment on the attachment lien did not occur until after the filing of the tax lien. Id. at 214. In Acri, the Court was not persuaded by the recognition of the attachment lien as perfected under Ohio law. Id. at 213. Rather, for "federal tax purposes" the lien was "inchoate . . . because, at the time the attachment issued, the fact and the amount of the lien were contingent upon the outcome of the suit for damages." Id. at 214.

In this case, Dishman had not yet been granted judgment at the time the federal tax lien was filed. According to federal law, therefore, at the time the federal tax lien was filed, both the property subject to Dishman's attachment lien and its amount remained uncertain. Thus, despite the fact that Dishman was in actual possession of the debtors' property before the tax lien was filed, the tax lien has a higher priority based on the holding in Acri.

Based in part on In re Coston, 65 B.R. 224 (Bankr. D. N.M. 1986), the bankruptcy court found that Dishman's attachment lien had priority over the federal tax lien. It appears, however, that the bankruptcy court's reliance on In re Coston was misplaced. In that case, the bankruptcy court held that a judgment obtained by a creditor after a bankruptcy filing avoided the preference period of §547 because it related back to the date of prejudgment attachment. However, neither of the competing liens in In re Coston was a federal tax lien, and that decision is, therefore, inapposite to the case at hand.

In light of United States v. Acri, the concept of relation back, "which by process of judicial reasoning merges the attachment lien in the judgment and relates the judgment lien back to the date of attachment . . . ," United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U.S. 47, 50 (1950), would not change the outcome of this case. Pursuant to the holding in Acri, a state lien that is dependent upon the outcome of a suit for damages, is inchoate until final judgment. Consequently, the doctrine of relation back cannot save such an inchoate lien from being preempted by a federal tax lien which attaches before judgment is final.

B.

Dishman makes an additional argument, on equitable grounds, that allowing a federal tax lien to obtain priority over the claim of a Chapter 11 debtor defeats the goal of Congress to help "struggling businesses to reorganize." In support of this contention, Dishman cites United States v. Whiting Pools, Inc. [83-1 USTC ¶9394], 462 U.S. 198 (1983), establishing that Congress intended to protect the property of a bankrupt debtor from being levied upon by the IRS.

In its order, the bankruptcy court declined to address this or Dishman's additional equitable arguments because the court had concluded that Dishman's attachment lien had priority. On remand the court should, therefore, address Dishman's equitable arguments including the assertion that delaying the prosecution of Dishman's case allowed the IRS to intervene and thereby insured that the filing of the federal tax lien predated judgment in favor of Dishman. Cf. In re Mansfield Tire & Rubber Co. [91-2 USTC ¶50,419], 942 F.2d 1055, 1062 (6th Cir. 1991) ("We continue to recognize that equitable subordination in bankruptcy may be appropriate if the claimholder is guilty of inequitable conduct or if the claim itself is of a status susceptible to subordination."), cert. denied sub nom., Krugliak v. United States, 112 S. Ct. 1165 (1992).

We note in that regard that the IRS apparently became the owner of the property in question before the IRS filed its tax lien against the property. On November 1, 1991 , the Secretary of State of Kentucky dissolved Penny Oil Corporation, rendering Ron Messer the owner and title holder of the defunct corporation's assets. On November 22, 1991 , all of the Messer rights, title, and interest in the attached property were then transferred to the IRS. In this manner, the IRS became the new owner of the property, established standing, and won the continuance on November 22, 1991 , the date on which trial was originally scheduled to begin. Finally, on January 29, 1992 , the IRS filed its tax lien. On remand, the court must, therefore, also consider whether the actions of the IRS, purporting to file a tax lien on its own property in January, 1992, constituted additional inequitable conduct.

III.

For the foregoing reasons, we REVERSE the order of the district court granting appellee Dishman's motion for summary judgment. This case is REMANDED for proceedings not inconsistent with this opinion.

^* The Honorable R. Allan Edgar, United States District Court for the Eastern District of Tennessee, sitting by designation.

¹ Plaintiff Dishman was prepared for trial on November 22, 1991 , and had five witnesses present to testify that day.

² As §6321 states: If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. I.R.C. §6321.

³ The Kentucky Revised Statute reads:

A lien shall be created on the property of the defendant by the levy of the attachment; or by service of the summons, with the object of the action indorsed thereon, on the person holding or controlling his property. Ky. Rev. Stat. Ann. §426.383 ( Baldwin 1991). The Kentucky courts have further determined that a lien on a specific piece of property acquired by attachment does not become effective merely by issuance of the writ of attachment or by placing the writ in the hands of an officer, . . . nor does a lien become effective merely upon delivery of a copy of the attachment to the debtor. . . . There must be an actual levy on the property itself. Thacker v. Commonwealth, 284 S.W.2d 325, 326 (Ky. Ct. App. 1955) (citations omitted). Upon examining the record in the case at hand, the bankruptcy court found that Dishman had executed an actual levy on the debtors' property and that Dishman had reported the proceeds of the attachment to the Wayne Circuit Court. In re Dishman Indep. Oil Corp., 1993 WL 110032, at * 2. The IRS did not dispute that the property actually had been levied upon. Consequently, the bankruptcy court found, pursuant to state law, that Dishman secured a perfected lien on the property as of the date of attachment and that Dishman was therefore a judgment lien creditor as defined by 11 U.S.C. §101(36) (defining a judicial lien as one "obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding").

 

 

[99-2 USTC ¶50,715] State of Minnesota , Department of Revenue, Appellee v. United States of America , Appellant

(CA-8), U.S. Court of Appeals, 8th Circuit, 98-1927, 7/7/99 , 184 F3d 725, 184 F3d 725. Reversing and remanding an unreported District Court decision

[Code Secs. 6323 and 7426 ]

Liens: Priority: Federal v. state: Perfection of liens: State (Minnesota) law: Filing of return: Date of assessment: Administrative actions: Additions of penalties and interest: Nonministerial actions.--State tax liens on the property of a corporation that failed to pay its federal and state employment tax liabilities were not perfected on the date the corporation filed state tax returns and, consequently, the state liens were not entitled to priority over federal tax liens. Under Minnesota law, the state had to take admin istrative action to acknowledge the taxpayer's liability before its liens could be perfected, and thus choate, under federal law. Specifically, after the taxpayer filed its state tax returns, the state tax commissioner was required to examine the returns, make a determination of the taxpayer's liability, and impose penalties and interest for the corporation's failure to pay over the withheld taxes. The state liens were not summarily enforceable because the actions left to be done could not be described as merely ministerial.

Before: MCMILLIAN, LAY and MURPHY, Circuit Judges.

MCMILLIAN, Circuit Judge:

The United States appeals from a final order entered in the District Court for the District of Minnesota granting summary judgment in favor of the State of Minnesota and denying summary judgment to the United States, holding that the state tax liens were choate, as of the time of filing of the state tax returns and not when processed. For reversal, the United States argues that the state tax liens were not established at the time the state tax returns were filed because, under state law, the state must take admin istrative action to acknowledge taxpayer liability before its liens can be perfected, and thus "choate," under federal law for purposes of determining relative priority. For the reasons discussed below, we reverse the judgment of the district court and remand the case to the district court with directions to enter summary judgment in favor of the United States .

JURISDICTION

The district court had subject matter jurisdiction over this wrongful levy suit brought pursuant to 26 U.S.C. §7426 under 28 U.S.C. §1346(e). The United States filed a timely notice of appeal. See 28 U.S.C. §2107(b) (notice of appeal in a civil case must be filed within 60 days of judgment when the United States is a party); Fed. R. App. P. 4(a)(1)(B). This court has jurisdiction over this appeal under 28 U.S.C. §1291. ¹

BACKGROUND

The relevant facts were stipulated. On June 2, 1992 , the taxpayer, Prime Factors Communications, Inc., filed federal and state employment tax returns for several quarters, including all four quarters of 1991 and the first quarter of 1992, the periods at issue in this appeal. The taxpayer did not pay the taxes that it reported as due on its federal and state returns. The IRS assessed the unpaid federal taxes for the quarters at issue on August 3 and August 10, 1992 . By law, federal tax liens upon the taxpayer's property for those liabilities arose on that date. See 26 U.S.C. §§6321, 6322. The IRS filed a notice of federal tax lien on January 14, 1993 , reflecting a total federal tax liability due from the taxpayer of $248,658.33.

The state processed the taxpayer's state employment tax returns for the period at issue by entering the taxpayer's liability into its computer records, on August 20, 1992, after the date the IRS assessed the taxpayer's federal tax liabilities at issue. The taxpayer's state tax liability for the period at issue totaled $14,378.32.

On June 21, 1996 , Charles and Lorilee Leininger purchased certain property belonging to the taxpayer. Prior to the sale, the IRS served on the closing agent for the sale a notice of levy with respect to the taxpayer's unpaid federal employment taxes, including the taxes due for the quarters at issue. Pursuant to the levy, the IRS received $14,579.22 of the sale proceeds. ²

The state filed its complaint in this action on March 3, 1997 , and an amended complaint on September 23, 1997 . The state alleged that the IRS had wrongfully levied upon $14,378.32 of the sales proceeds, because the state's tax liens were entitled to priority over the federal tax liens. The United States and the state filed cross-motions for summary judgment. The state contended that, under Minn. Stat. §270.69(1), a lien for state taxes arises on the date of the assessment of the tax, and that under Minn. Stat. §270.65, the date of the assessment is the later of the date the return is filed or the date on which the return is due. The state thus argued that its tax liens became choate, on June 2, 1992 , the date the returns were filed, and were therefore entitled to priority over the federal lax liens which arose on August 3 and 10, 1992, the dates the federal taxes were assessed. In support of its argument, the state relied on Cannon Valley Woodwork, Inc. v. Malton Construction Co., 866 F. Supp. 1248 (D. Minn. 1994) (Cannon Valley), a case in which the district court held that Minnesota tax liens had priority over those of the United States.

The United States argued that the state's tax liens did not become choate, until the returns were actually processed by the state on August 20, 1992 , a date after the federal tax liability had been assessed, and that the federal tax liens were thus entitled to priority over the state tax liens. The United States relied on In re Priest, 712 F.2d 1326, 1329 (9th Cir. 1983), modified, 725 F.2d 477 (1984), in which the Ninth Circuit, interpreting a California statute similar to Minn. Stat. §§270.65,.69(1), held that the "mere receipt" of a state tax return was insufficient "to establish a lien that is capable of taking priority over a federal lien."

Following arguments on the motions, the district court ruled from the bench and granted summary judgment in favor of the state and denied the motion of the United States . The district court found that the state's tax liens became choate upon the filing of the taxpayer's returns, adopting the rationale of Cannon Valley and rejecting the Ninth Circuit's reasoning in In re Priest. The district court ruled that the state's tax liens were "established" and "summarily enforceable" as of the date the taxpayer filed its returns and "not contingent on future events." Accordingly, the district court ruled that the state's tax liens were prior to those of the United States and that the state was entitled to recover. This appeal followed.

DISCUSSION

The district court's grant of summary judgment is reviewed de novo. See Bremen Bank & Trust Co. v. United States [98-1 USTC ¶50,116], 131 F.3d 1259, 1264 (8th Cir. 1997) (Bremen Bank); see also McDermott v. Zions First Nat'l Bank [91-2 USTC ¶50,491], 945 F.2d 1475, 1478 (10th Cir. 1991) (district court's finding that a federal tax lien has priority over a state tax lien is reviewed de novo, rev'd on other grounds sub nom. United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447 (1993) (McDermott)). Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). This case was tried on the basis of stipulated facts and the sole issue is a question of law, that is, whether the state tax liens were sufficiently choate as a matter of federal law so as to be entitled to priority over the federal tax liens.

The lien provisions of the Internal Revenue Code are intended to insure prompt and certain enforcement of the tax laws. See United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 721 (1985); United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 683 (1983). When a person liable to pay a federal tax fails to do so after a demand for payment is made, the amount of the tax, together with interest, additions, penalties, and costs, becomes a lien in favor of the United States upon all real and personal property and all rights to property belonging to the delinquent taxpayer. See 26 U.S.C. §6321; Bremen Bank [98-1 USTC ¶50,116], 131 F.3d at 1262-63. The lien arises automatically when the assessment is made and continues until the taxpayer's liability is either satisfied or becomes unenforceable due to the lapse of time. See 26 U.S.C. §6322. An assessment is "a bookkeeping notation . . . made when the Secretary [of the Treasury] or his [or her] delegate establishes an account against the taxpayer on the tax rolls." Laing v. United States [76-1 USTC ¶9164], 423 U.S. 161, 170 n.13 (1976); see 26 U.S.C. §6203.

State law determines the nature and the extent of a taxpayer's interest in "property." See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 513 (1960); United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55 (1958); Little v. United States [83-1 USTC ¶9343], 704 F.2d 1100, 1105 (9th Cir. 1983). Federal law, however, governs the relative priority accorded to the competing liens asserted against the property of the delinquent taxpayer. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. at 513-14. "Federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right.' " McDermott [93-1 USTC ¶50,164], 507 U.S. at 449 (citations omitted); see United States v. Equitable Life Assurance Soc'y [66-1 USTC ¶9444], 384 U.S. 323, 327-30 (1966); United States v. City of New Britain [54-1 USTC ¶9191], 347 U.S. 81, 87 (1954) (New Britain); cf. Bremen Bank [98-1 USTC ¶50,116], 131 F.3d at 1263 (discussing modification of common law rules by Federal Tax Lien Act of 1966). "Under federal law, the priority of a lien depends on the time the lien attached to the property in question and became choate." Cannon Valley, 866 F. Supp. at 1250, citing New Britain [54-1 USTC ¶9191], 347 U.S. at 84. A state-created lien is "choate" for "first in time" purposes only when it has been "perfected" in the sense that there is nothing more to be done, i.e., when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." New Britain [54-1 USTC ¶9191], 347 U.S. at 84; accord United States v. Vermont [64-2 USTC ¶9520], 377 U.S. 351, 354-55 (1965); see also McDermott [93-1 USTC ¶50,164], 507 U.S. at 449. The test for choateness or perfection also requires that the creditor have the right to summarily enforce its lien. See United States v. Vermont [64-2 USTC ¶9520], 377 U.S. at 359 (holding state's assessment choate where the "assessment is given the force of a judgment, and if the amount assessed is not paid when due, admin istrative officials may seize the debtor's property to satisfy the debt") (quoting Bull v. United States [35-1 USTC ¶9346], 295 U.S. 247, 260 (1935)); Monica Fuel, Inc. v. IRS [95-2 USTC ¶50,477], 56 F.3d 508, 513 (3d Cir. 1995); In re Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d 1168, 1176 (6th Cir. 1990) (holding a "state lien holder must show that he [or she] had the right to enforce the lien at some time prior to the attachment of the federal lien"), cert. denied, 501 U.S. 1212 (1991).

The issue to be decided in this case is whether, under federal law, the state tax liens were sufficiently choate upon the taxpayer's filing of its tax returns to prime the federal tax liens. The United States argues that, regardless of state law, the mere receipt by the state of a tax return is insufficient to meet the federal standard for choateness, because such receipt does not establish the amount of the taxpayer's liability or of the liens themselves. Under Minnesota law, the United States contends, additional steps are required to establish the amount of the state tax liens and to permit the state to enforce the liens, and federal law regarding choateness requires a state to take some action to acknowledge a liability before a lien can be perfected. As a result, the United States argues that the state tax liens were not perfected and were not entitled to priority over the federal liens.

The state tax liens at issue arose by virtue of Minnesota law, which provides, in relevant part:

The tax imposed by any chapter admin istered by the commissioner of revenue, and interest and penalties imposed with respect thereto, including any recording fees, sheriff fees, or court costs that may accrue, shall become a lien upon all the property within this state, both real and personal, of the person liable for the payment or collection of the tax . . . from and after the date of assessment of the tax.

Minn. Stat. §270.69(1). "For purposes of taxes admin istered by the commissioner [i.e., taxes due as shown on a return], the term 'date of assessment' means the date a return was filed or the date a return should have been filed, whichever is later. . . ." Id. §270.65. Thus, under state law, the state tax liens at issue arose when the taxpayer filed its returns on June 2, 1992 , two months before the federal taxes at issue were assessed.

State law, however, and a state's own characterization of its liens for purposes of determining priority do not control this issue. See William T. Plumb, Jr., Federal Tax Liens 180 (3d ed. 1972) ("Local statutory provisions that fix a tax lien date prior [to the time the lien becomes choate] must be ignored for the purpose of resolving the federal-state priority question."). "Otherwise, a State could affect the standing of federal liens, contrary to the established doctrine, simply by causing an inchoate lien to attach at some arbitrary time even before the amount of the tax, assessment, etc., is determined." New Britain [54-1 USTC ¶9191], 347 U.S. at 86 (footnote omitted). Accordingly, state tax liens are not necessarily perfected on the date a taxpayer files a return simply because state law provides that the "date of assessment" with regard to taxes shown due on a return is the date the return is filed. Rather, we must still determine if the state tax liens are sufficiently perfected as of that date under federal law.

In our view, the state tax liens at issue were not choate as of the date the taxpayer filed its returns and the state tax liens therefore are not entitled to priority. Despite the fact that state law provides that tax liens arise on the date on which the taxpayer filed its returns, state law also provides that "[t]he commissioner shall make determinations, corrections, and assessments with respect to state taxes, including interest, additions to taxes, and assessable penalties." Minn. Stat. §289A.35 (emphasis added). In addition, when a taxpayer has filed a return, "the commissioner shall examine the return and make any audit or investigation that is considered necessary." Id. Therefore, even after a return is filed, the commissioner is required to examine the return and to make a determination of the taxpayer's liability. Beyond doubt, it is this determination that formally establishes the amount of the taxpayer's liability.

Further, Minnesota law also provides that "[i]f a withholding or sales or use tax is not paid within the time specified for payment, a penalty must be added to amount required to be shown as tax." Minn. Stat. §289A.60(1). Therefore, in a case such as this where withholding taxes were not timely paid, state law required the commissioner to add a penalty to the tax liability. This penalty is not computed until a tax return is processed. Cannon Valley , 866 F. Supp. at 1252. Also upon processing, interest due on the liability is computed.

As a result of these state law provisions, we hold that the amounts of the state tax liens at issue here were not established on the date the returns were filed and that state tax liens were therefore not perfected and choate on that date. The returns filed by the taxpayer had not been examined, the taxes owed had not been determined by the commissioner, and the delinquency penalties and interest had not been computed and added to the amount of the tax, all of which is required under state law. Thus, pursuant to state law, the state has done that which is expressly prohibited, that is, it has "affect[ed] the standing of federal liens . . . simply by causing an inchoate lien to attach at some arbitrary time even before the amount of the tax is determined." New Britain [54-1 USTC ¶9191], 347 U.S. at 86.

Moreover, we also note that because of these additional statutory provisions, the state tax liens were not summarily enforceable. While a lien is considered summarily enforceable even though ministerial acts which do not affect the viability of the lien remain to be done, the acts described above as required by state law cannot be characterized as ministerial. After the taxpayer filed its returns, it remained the statutory duty of the commissioner to examine the returns and determine its liabilities, and to calculate and add to the unpaid tax the required penalty for non-payment and the interest that was due. Only then could notice and demand for payment of the amount due be sent. See Minn. Stat. §270.70(2)(a). Notice and demand for payment must be sent before a levy can be made. See id. Thus, substantial contingencies remain before the state tax liens could be enforced.

We note that, in addition to the requirements of state law, federal law regarding choateness also requires that a state take some admin istrative action to acknowledge formally a liability before the amount of the lien can be deemed "established" and the lien perfected. See New Britain [54-1 USTC ¶9191], 347 U.S. at 86. For example in In re Priest, a California statute provided that a perfected and enforceable state tax lien for an unpaid tax liability shown as due on a return arose at the time the tax return was filed. California characterized the effect of the filing of the delinquent state return as "self assessment" and argued that this admission of liability by the taxpayer satisfied the New Britain test for choateness. The Ninth Circuit disagreed and held that the statute cannot be deemed to create liens that are sufficiently choate under New Britain . See, 712 F.2d at 1329. The court held that "a lien cannot arise prior to the taking of any admin istrative steps to establish the lien" because "[t]he mere receipt of a delinquent State tax return [under California law] is too vague and indefinite." Id. , 725 F.2d at 478. The court observed that

[s]ignificant delays might well occur before there was even any acknowledgment of the director's receipt of the delinquent return, or any admin istrative act by which the State acknowledged in its own accounts that the taxpayer is liable for unpaid taxes, or the precise amount of that delinquency, and the amount of penalty, interest and fees.

Id. , 712 F.2d at 1329.

In re Priest has been followed by other courts. In Baybank Middlesex v. Electronic Fabricators, Inc., 751 F. Supp. 304, 310 (D. Mass. 1990) (citations omitted), the district court held that "in order for the amount of the state lien to be established, there must be 'some activity by the State to fix the taxpayer's liability.' " The state liens at issue had priority over the federal liens because the state had acknowledged in its own accounts that the taxpayer was liable for unpaid taxes. See id. The district court also noted approvingly that the state had calculated the interest due on the liability and included that amount in the notice of lien. See id. Because these steps had been taken before the federal lien arose, the state lien was choate since there was nothing more to be done. See id.

As noted above, the district court relied upon Cannon Valley , 866 F. Supp. 1248, and declined to follow In re Priest. Cannon Valley involved the same statutes at issue in this case, i.e., Minn. Stat. §§270.65, .69. The district court concluded that a lien arising under the statutes was choate under federal law at the time of assessment, the date a tax return was filed. See 866 F. Supp. at 1252. The district court rejected the argument of the United States that a state assessment was only choate if it was similar to the federal assessment, see id. at 1250-51, as well as its contention that, as in In re Priest, preciseness in the amount of tax owed is necessary for the lien to be choate. See id. at 1251. Instead, the district court interpreted the doctrine of choateness to require that "a lien be enforceable and not contingent on future events before it could defeat a federal tax lien." Id. at 1251. The district court found that under state law Minnesota tax liens were not contingent on future events and were summarily enforceable and therefore choate. See id.

We believe the analysis in Cannon Valley improperly discounted the importance of preciseness in the amount of tax owed in the New Britain test for choateness. In our view, the plain language of New Britain requires the amount of the lien to be established, that is, determined, before a state-created lien can be considered choate. See [54-1 USTC ¶9191], 347 U.S. at 84. Certainly, more had to be done in the present case, and if the Supreme Court had intended to require only that the lien, i.e., the taxpayer's liability in general, had to be established, it could have said so. Instead, it stated that the amount of the lien had to established. Moreover, in both New Britain and Vermont , the Court refers to the requirement that the amount of the lien be "certain." See id. at 86; see also Vermont [64-2 USTC ¶9520], 377 U.S. at 357. The Ninth Circuit was therefore correct in emphasizing this requirement in In re Priest and the district court in Cannon Valley was wrong to discount it.

In addition, we disagree with the finding in Cannon Valley that the Minnesota tax liens were free from contingencies upon the taxpayer's filing of its return and summarily enforceable. See supra at 7-8. In our view, state law requires additional admin istrative action to establish the liens. The taxpayer's liabilities could not be collected until notice of the liabilities and demand for payment had been sent out, and notice and demand could not be sent until the returns had been processed and the tax, penalties, and interest determined by the commissioner. Thus, the state tax liens are not summarily enforceable on the date of assessment, the date the return is filed or should have been filed.

Finally, we note that there is a critical factual distinction between Cannon Valley and the present case. In Cannon Valley , unlike the present case, the state had in fact "processed" the taxpayer's return before the IRS assessed the federal taxes. See 866 F. Supp. at 1249 n.1, 1252. The district court in Cannon Valley held, in the alternative, that at the very least, the state tax liens were choate at the time the returns were processed, noting that "[b]y processing the forms, Minnesota took admin istrative action that established that the taxpayer was liable to the State of Minnesota for unpaid taxes, including the amount of the unpaid taxes and the amount of any penalty and interest." Id. at 1252. Thus, for purposes of the New Britain test for choateness, "the lienor was known . . ., all of the property of the taxpayer was attached, and the amount including principal, penalties and interest was known." Id. (noting only variable that continued to change was applicable interest, which changed daily). Accordingly, while the primary rationale for the Cannon Valley analysis is at odds with that in In re Priest, the result (and the alternative holding) in Cannon Valley is in harmony with In re Priest. In the present case, on the other hand, the state did not process the taxpayer's returns until August 20, 1992 , a date after the IRS assessed the federal taxes on August 3 and August 10, 1992 .

Accordingly, the judgment of the district court is reversed and the case is remanded with instructions to the district court to enter summary judgment in favor of the United States .

¹ The district court's judgment provides that the state's motion for summary judgment is granted. In an action for money, specification of the amount of monetary award generally is an essential element of the judgment. See United States v. F. & M. Schaefer Brewing Co. [58-1 USTC ¶9410], 356 U.S. 227, 233-35 (1958). It is sufficient, however, if the judgment specifies the means of determining the amount due. See id. at 234. Here, the summary judgment is, in effect, a judgment that the state is entitled to recover the amount ($14,378) that it sought in its complaint. Cf. Goodwin v. United States, 67 F.3d 149, 151 (8th Cir. 1995) ("a judgment may be final if only ministerial tasks in determining damages remain") (citation and internal quotations omitted).

² The IRS was paid after deductions were made for settlement charges, delinquent property taxes, and payments to other creditors. The Minnesota Department of Economic Security received $16,386.40 and the Minnesota Department of Revenue received $3,723.34 for other tax liabilities. These other payments from the proceeds are not in dispute.

 

 

[94-1 USTC ¶50,169] First of America Bank--West Michigan, Plaintiff v. William J. Alt, M.D., Lind Alt, Harbor Laboratory, Inc., United States of America, and Cote La Mer, Inc., Defendant

U.S. District Court, West. Dist. Mich. , So. Div., 1:91-CV-1020, 12/22/93

[Code Secs. 6323 , 6501 and 6502 ]

Tax liens: Assessments: Statute of limitations: Standing to challenge.--A bank lacked standing to challenge the validity of an IRS tax lien against a condominium owned by delinquent taxpayer individuals who had obtained a mortgage on the property from the bank on the grounds that the two underlying assessments were not filed within three years of the date on which their return was filed. The three-year limitations period for assessing tax protects taxpayers only, not third parties. Furthermore, since the assessments were assumed valid due to the bank's lack of standing, the IRS's lien attached for ten years under the applicable limitations period for collecting tax.

[Code Sec. 6321 ]

Lien for taxes: Validity of lien: Transfer to related entity.--The transfer of a condominium by delinquent taxpayers to a related corporation did not defeat an IRS tax lien that was filed against the individuals only. Although the deed was executed before the IRS filed its lien, it was not recorded until afterward.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Conflicts of law.--An IRS tax lien had priority over a bank's unrecorded mortgage even though under state ( Michigan ) law it would not have had priority if the IRS was on notice of the bank's lien. Notice of a prior unrecorded interest is irrelevant to determining lien priority under the Code. The priority of IRS liens is determined under federal law, not state law.

[Code Sec. 6323 ]

Lien for taxes: Validity of lien: Estoppel against IRS: Equitable principles.--The IRS was not estopped from claiming an interest in mortgaged real estate even though it waited almost 10 years to begin legal proceedings or to enforce its lien. Despite the fact that the lender would not have made the loan had it known of the IRS's assessment, the IRS had committed no affirmative action that misled the bank or induced it to make the loan. Furthermore, the IRS was not required under equitable principles to apply seized assets to the earliest tax liability.

[Tax Court Rule 37 ]

Suits by nontaxpayers: Default judgment: Attorney fees: Interrogatories, failure to reply.--A lender was not entitled to a default judgment against the IRS in a case involving the priority of liens since the IRS complied with discovery orders. The lender may have been entitled to attorney fees since the IRS had not answered all interrogatories fully and correctly. This issue was referred to a magistrate judge for further consideration.

Alvin D. Treado, Culver, Lague & McNally, 600 Terrace Plaza, Muskegon , Mich. 49443 , for plaintiff. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (IRS). Floyd H. Farmer, 102 S. Buchanan St. , Spring Lake , Mich. 49456, for defendant (Cote La Mer, Inc.). Cote La Mer, Inc., 4739 Poinsettia, Grand Rapids, Mich. 49508, pro se. Michael H. Dettmer, United States Attorney, Michael L. Shiparski, Assistant United States Attorney, 110 Michigan Ave., Grand Rapids, Mich. 49503, Alexandra E. Nicholaides, John A. Linquist, Department of Justice, Washington, D.C. 20530, for defendant (USA).

MEMORANDUM OPINION

MCKEAGUE, District Judge:

This is a civil action brought by plaintiff First of America Bank-- West Michigan ("FOA" or "Bank") to foreclose its mortgage on certain real property previously owned by William and Rosalinda ("Lind") Alt, and to determine the priority of its lien. The subject property is a condominium located in Cote La Mer, a subdivision in Ottawa County , Michigan . The property was recently sold by judicial sale, yielding net proceeds of $79,710.45. Those proceeds have been placed in escrow with the Court.

The United States contends that its tax lien against Lind Alt has priority over plaintiff's claimed mortgage interest in the property pursuant to the Internal Revenue Code, 26 U.S.C. §6323 . Both parties are now before the Court on contesting motions for summary judgment.

FACTS

Lind Alt purchased the disputed Cote La Mer property on December 30, 1971 . On April 16, 1982 , Lind and William Alt filed their 1981 tax return with the Internal Revenue Service ("IRS"). A few months later, on October 11, 1982 , the IRS made an assessment against the Alts for their unpaid taxes from 1981. On June 27, 1984 , the Alts borrowed $501,000 from FOA in the form of a commercial loan, securing the loan with a mortgage on the condominium and two other pieces of property located in Muskegon County . The Bank recorded the mortgages by filing in Muskegon County , but not in Ottawa County where the Cote La Mer condo is located.

On or before April 15, 1985 , the government contends that it issued a statutory notice of deficiency for the Alts' unpaid 1981 taxes. ¹ Later in April of that year, the Alts commenced a Tax Court proceeding relating to their 1981 return. On May 27, 1986 , the Tax Court entered a judgment against the Alts for taxes due in the sum of $83,655.40, plus negligence penalties. A few days later, on June 2, 1986 , Lind Alt transferred the condominium to a corporation called Harbor Laboratory, Inc. ("Harbor Lab"), by quitclaim deed. Although the facts are unclear, Harbor Lab is apparently owned by Lind Alt. The deed was recorded on August 1, 1986 , in Ottawa County . The IRS later found Harbor Lab to be a nominee or alter ego of the Alts. On June 13, 1986 , the IRS made another assessment against the Alts, this time pursuant to the Tax Court's ruling in May.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt, but not Harbor Lab, in Ottawa County . The tax lien was for $178,280.87, for the tax period ending December 31, 1981 . This lien initially referenced the assessment of October 11, 1982 . On April 28, 1987 , however, the IRS filed an amended tax lien, changing the assessment date to June 13, 1986 , the date of the assessment which followed the Tax Court's ruling.

In August of 1987, the IRS sold other property of the Alts, realizing net proceeds of $94,770.80. These proceeds were applied against the Alts' 1981 tax liability.

By letter dated December 31, 1987 , FOA requested proof of fire insurance for the Cote La Mer property from the Alts. Lind Alt responded that the loan had been paid in full. Subsequent negotiations between the Alts and the Bank ensued, whereby FOA agreed to refinance the Alts' loan on March 8, 1988 , secured by the same property, including the condominium. This time, however, the mortgage was recorded in Ottawa County on April 28, 1988 . On June 12, 1991 , the IRS filed a notice of Federal Tax Lien against Harbor Lab in Ottawa County .

Throughout early 1991, FOA requested that the Alts obtain fire insurance on the Cote La Mer property. Effective June 26, 1991 , the Bank independently obtained its own insurance coverage for the condo. A few months later, on November 1, 1991 , FOA filed the present foreclosure action in Ottawa County Circuit Court. On November 12, 1991 , the IRS filed further liens against the Alts' property for tax years subsequent to 1981.

The IRS contends that Lind Alt owes the United States $188,794.83 as of August 1, 1993 , on the 1981 tax liability. At the judicial sale of the Cote La Mer condo, the property grossed approximately $91,500. After payment of back taxes on the property, U.S. Marshal fees, dues owed to the condominium association, and utility costs incurred by the association in maintaining the property, $79,710.45 remained. This sum was escrowed with the Court, pending disposition of this matter.

In October of 1992, FOA served its first set of interrogatories and document production requests in this case on the IRS. The IRS objected to most of these requests and inquiries. On January 25, 1993 , Magistrate Judge Scoville granted the Bank's motion to compel discovery, and the IRS was ordered to furnish FOA with supplemental answers. In its subsequent answers, the IRS indicated that it was appropriate for it to file a notice of deficiency for the tax year 1981 in the spring of 1986, as the Alts misrepresented their 1981 income by over 25%, giving the IRS a six-year statute of limitations. These subsequent answers proved inadequate to FOA, however, and on March 31, 1993 , Judge Scoville issued another order compelling the IRS to comply with discovery requests. In this set of answers, the IRS no longer claimed that the Alts had misrepresented their income by over 25%. Rather, the IRS claimed that notice of deficiency had issued on or before April 15, 1985 , pulling it within the three-year statute of limitations applicable in most situations. The IRS also revealed for the first time that the Alts had filed a Tax Court petition in 1985.

DISCUSSION

Both FOA and the United States are now before this Court on cross-motions for summary judgment. The briefs in this case present a myriad of issues for resolution. First and foremost, is the question, "Who has priority in the property?" Although it appears the IRS does, FOA challenges the priority of the federal tax lien on several grounds. The second issue is whether the equitable doctrines of laches or estoppel apply in this case. The third issue concerns whether the doctrine of marshalling may be applied to the IRS. The fourth question presented by the briefs asks whether FOA is entitled to discovery sanctions due to IRS actions (or nonactions) in the course of this litigation. The final issue presented for resolution is whether FOA is entitled to reimbursement for the insurance it obtained on the Cote La Mer property. Applying the standards for summary judgment, the Court will examine each of these issues in turn.

Summary judgment is appropriate when the record reveals that there are no issues as to any material fact in dispute and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Sims v. Memphis Processors, Inc., 926 F.2d 524, 526 (6th Cir. 1991) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986), and Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). The standard for determining whether summary judgment is appropriate 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." Booker v. Brown & Williamson Tobacco Co., 879 F.2d 1304, 1310 (6th Cir. 1989) (quoting Anderson , 477 U.S. at 251-52). "By its very terms, this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact." Anderson, 477 U.S. at 247-48 (emphasis in original).

The moving party bears the burden of clearly and convincingly demonstrating the absence of any genuine issues of material facts. Sims, 926 F.2d at 526. The court must consider all pleadings, depositions, affidavits, and admissions on file and draw all justifiable inferences in favor of the party opposing the motion. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). If the moving party carries this burden, the nonmoving party must present significant probative evidence showing that genuine, material factual disputes remain to defeat summary judgment. Sims, 926 F.2d at 526. The court's function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Id. The court must make purely legal judgments that go to the nature and sufficiency of the complaint as well as the evidence put forward to support it. Val-Land Farms, Inc. v. Third Nat'l Bank, 937 F.2d 1110, 1113 (6th Cir. 1991). Applying these principles to the present case, this memorandum concludes that FOA's motion for summary judgment shall be denied. The government's motion shall be granted.

I. Priority of Lien

The first question presented for resolution in this matter is whose interest in the Cote La Mer property has priority. FOA contends that its mortgage on the condominium has priority, while the United States claims that the federal tax lien prevails. This is a question of both federal and state law.

In Michigan , interests in real property are recorded with the register of deeds in the county where the property is located. All recorded liens, rights, and interests in property take priority over subsequent owners and encumbrances. M.C.L.A. §565.25. Where an individual fails to record a lien or interest in property, that interest is void as against any subsequent interest holder who purchased the interest in good faith for valuable consideration. M.C.L.A. §565.29. A person takes in "good faith" if he or she takes without notice of the prior unrecorded interest. Michigan Nat'l Bank & Trust Co. v. Morran, 194 Mich. App. 407, 410 (1992). Thus, Michigan has adopted what is frequently known as a "race-notice" statute: the first interest holder to record takes priority, unless that individual has notice of a prior unrecorded interest.

The Internal Revenue Code alters the scheme of priorities under Michigan law. Under 26 U.S.C. §6321 , a lien on an individual's property arises when the individual is liable to pay a tax, but neglects or refuses to pay the tax after notice of the liability is given. However, "[t]he lien imposed by section 6321 shall not be valid against any . . . holder of a security interest . . . until notice thereof which meets the requirements of [26 U.S.C. §6323(f) ] has been filed." 26 U.S.C. §6323(a) . Section 6323(f) requires that notice of a lien on real property be filed according to the laws of the state where the property is located. Accordingly, the tax lien has priority if it was recorded first with the register of deeds in the county where the property is situated.

On November 3, 1986 , the IRS filed a tax lien against Lind and William Alt in Ottawa County , Michigan , the location of the Cote La Mer property. The Bank had recorded its mortgage on the property in Muskegon County in 1984, but did not file in Ottawa County until April of 1988. A cursory review of the facts thus suggests that the IRS has priority in the condominium. FOA disputes this conclusion, however, on four separate grounds. First, FOA challenges the validity of the IRS assessment against the Alts, which gave rise to the lien. Second, FOA contends that the statute of limitations on the collection of taxes has expired. Third, the Bank argues that the lien did not attach to the Cote La Mer condominium, as that property had been transferred to Harbor Lab on June 2, 1986 . Finally, FOA maintains that a genuine issue of material fact remains as to whether the IRS had notice of the Bank's prior unrecorded interest in the property. Such notice is relevant, the Bank contends, to determining the priority of the tax lien.

a. Validity of the IRS Assessment

FOA challenges the validity of the government's tax lien, claiming that the assessments pursuant to which the liens were filed were untimely and not preceded by notices of deficiency. Under 26 U.S.C. §6501(a) , taxes must be assessed within three years of the date on which the return was filed. In this case, two assessments were made for the Alts' 1981 taxes: one on October 11, 1982 , and the other on June 13, 1986 .

The first assessment clearly falls within the statutory three-year period. The second assessment, however, falls well outside this time frame. Supplemental assessments are permitted by the Internal Revenue Code, but they too must fall within the three-year period of limitations. See 26 U.S.C. §6204(a) ; Brockhurst, Inc. v. United States [91-1 USTC ¶50,217 ], 931 F.2d 554, 557 (9th Cir. 1991). FOA also contends that the government failed to provide the Alts with notice of deficiency for the June 1986 assessment. Initially, the IRS contended that notice was served sometime in the spring of 1986; later the government alleged that notice was issued before April 15, 1985 , pulling it within the three-year statute of limitations. The government has no evidence to support these assertions, however. ²

The IRS does not appear to argue that the June 13, 1986 , assessment fell inside the statutory time frame, or that it can prove that notice was sent prior to April 15, 1985 . Rather, the government contends that the Bank lacks standing to challenge the assessment. Under 28 U.S.C. §2410(a), sovereign immunity of the government is waived, permitting a party to sue the United States to foreclose a mortgage on property upon which the government has a lien. This is essentially a suit to "quiet title." However, the courts have construed §2410 to permit only challenges to the procedural regularity of the lien, not the underlying tax liability or merits of the assessment. Pollack v. United States [87-2 USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987). FOA contends that it asserts merely procedural defects in the assessment, and not the underlying tax. The IRS counters that a challenge to the notice is a challenge to the very merits of the assessment.

The case law provides little guidance on the resolution of this issue. In Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 737 (10th Cir. 1992), the Tenth Circuit held that a taxpayer could not raise a procedural defect in the issuance of a deficiency notice in a quiet title action because the purpose of the notice requirement was to allow the taxpayer to challenge the amount of the assessment in Tax Court. The challenge thus went to the underlying tax liability itself. However, the taxpayer was found to be entitled to relief under another statute, and the Court held that the failure of the IRS to send a notice of assessment could be challenged under §2410. Other cases suggest that all taxpayer challenges to notice, be it notice of deficiency or assessment, do qualify as claims of procedural irregularities. In an unpublished decision, the Sixth Circuit permitted a taxpayer to challenge notice under §2410, although it ultimately ruled against him on the merits. See Williams v. United States, No. 89-5740, 1990 W.L. 47555 (6th Cir. 1990); see also Gentry v. United States [91-2 USTC ¶50,374 ], No. CIV-1-89-337, 1991 W.L. 191246 (E.D. Tenn. 1991) (citing Williams). Thus, it would appear that in this Circuit, a taxpayer may challenge the validity of the assessment and the resulting lien by asserting that no deficiency notice was issued. A taxpayer challenge to the assessment on the grounds that it fell outside the statutory period similarly appears to constitute a procedural challenge.