Conveyance by Taxpayer Page2

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[80-2 USTC ¶9807]United States of America v. Louis Kiefer, Administrator of the Estate of Payne Dean; Elizabeth Dean; Richard E. Caserta; John W. Bahre; William Woods, Jr., Trustee; Town of Barkhamsted Tax Collector; Town of Barkhamsted Fire District; Oscar J. Riiska; Gerald J. Heffernan, Commissioner, Connecticut Tax Department

U. S. District Court, Dist. Conn. , Civil No. H-76-256, 8/24/79

[Code Sec. 6323]

Tax liens: Unpaid income and withholding taxes: Attachment of lien to real property: Right of priority.--The District Court granted the government's motion for summary judgment and ordered a foreclosure of the taxpayer's real property upon which federal tax liens had attached. Although the property had passed to the taxpayer's widow at his death, and other parties claimed an interest in the real estate, the court held that the tax liens had arisen because of unpaid taxes due from the taxpayer before he died, and thus the recording of the federal liens served to protect the government's right of priority against all others. In so holding, the court ordered the sale of the residence with the proceeds to be distributed to the parties as their interests appeared.

Cheryl Wattley, Assistant United States Attorney, P. O. Box 1824, New Haven, Conn. for plaintiff. Donald R. Holtman, Kleinman, Steinberg & Lapuk, 99 Pratt St., Hartford, Ct. 06103, for Louis Kiefer, Maurice R. Gersten, Gersten, Butler & Gersten, 234 Pearl St., Hartford, Ct. 06103, for E. Dean, Edward F. Scully, Canton Village, Canton, Ct. 06019, for R. Caserta and J. Bahre, Austin Carey, Jr., Hoppin, Carey & Powell, 266 Pearl St., Hartford, Conn. 06103, for W. Woods, Jr., Patrick E. Power, 65 Elm St., Winsted, Conn. 06098, for Town of Barkhamsted, Thomas C. White, 101 Whiting St., Winstead, Ct. 06098, for Town of Barkhamsted Tax Collector.

RECOMMENDED RULING ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

EAGAN , Magistrate:

Plaintiff, the United States of America , has filed a Motion for Summary Judgment in its favor under Rule 56 of the Federal Rules of Civil Procedure. Plaintiff's complaint is that Payne Dean, deceased as of March 8, 1972, owes income and withholding tax from certain years between 1961 and 1971. Plaintiff demands judgment from the admin istrator of the estate and from all named parties with an interest in the former residence of Payne Dean, as this property is encumbered by federal tax liens for the taxes owed.

Defendants to this action are: Louis Kiefer, present admin istrator of the estate of Payne Dean; Elizabeth Dean, widow of Payne Dean, former joint owner with right of survivorship of the residential real estate in question at the time the delinquent taxes were due, and the former executrix of the estate of Payne Dean; Richard E. Caserta and John Bahre, present owners of the real estate by a quitclaim deed executed by Elizabeth Dean on March 1, 1973; William Woods, Jr., assignee of a mortgage placed on the real estate on October 19, 1962; Town of Barkhamsted tax collector, for any interest claimed in the real estate; Town of Barkhamsted Fire District, for any interest claimed in the real estate; Oscar J. Riiska, for any interest claimed in the real estate; Gerald J. Heffernan, Commissioner, Connecticut Tax Department, for any interest claimed in the real estate.

The question before the court is whether the Motion for Summary Judgment shall be granted. Rule 56(c) provides that the judgment sought shall be rendered 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. ". . . [F]ormal denials or general allegations which do not show the facts in detail and with precision are insufficient to prevent the award of summary judgment." Engl v. Aetna Life Ins. Co., 139 F. 2d 469, 473 (2d Cir. 1943). See also, Dressler v. MV Sandpiper, 331 F. 2d 130, 133 (2d Cir. 1964); and Applegate v. Top Associates, Inc., 425 F. 2d 92, 96 (2d Cir. 1970). In addition, assessments for federal taxes are prima facie evidence of the fact that taxes are due; the assessments are presumptively correct, and the burden is upon the taxpayer or his representative to prove that the assessments are incorrect. United States v. Rindskopf, 105 U. S. 418 (1881); Helvering v. Taylor [35-1 USTC ¶9044], 293 U. S. 507, 515 (1935); United States v. Janis [76-2 USTC ¶16,229], 428 U. S. 433 (1976); United States v. Lease [65-2 USTC ¶9478], 346 F. 2d 696 (2d Cir. 1965); Bernuth v. Commissioner of Internal Revenue [73-1 USTC ¶9132], 470 F. 2d 710, 714 (2d Cir. 1972). Mere general denials and allegations do not suffice to meet the taxpayer's burden of proof.

In this instance, the plaintiff's complaint was answered by Louis Kiefer stating that the estate is insolvent, that the estate has not yet been probated, and generally denying that the tax liabilities are due and owing from him either personally or in his capacity as admin istrator. The Town of Barkhamsted Fire District answered claiming an interest in the proceeding and alleging a prior claim in right in the real estate. William H. Woods, Jr. answered claiming an interest in the proceeding and alleging a prior claim in right in the real estate in the amount of the unpaid balance and interest on the note and mortgage. Richard E. Caserta and John Bahre answered generally claiming prior interest to all other parties.

The estate is liable for taxes due, Conn. Gen. Stat. §45-228, 229, but the admin istrator is not personally liable. Eno v. Cornish, Kirby 296 (1787). In addition to the estate liability, §7043 of the Internal Revenue Code of 1954 permits enforcement of tax liens by sale of the taxpayer's property and distributions of the proceeds of the sale depending on the interests of the United States and other parties. The property interests of the taxpayer subject to such enforcement are determined by state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513 (1960); Slodov v. United States [78-1 USTC ¶9447], 436 U. S. 238, 257 (1978). Under Connecticut law, joint tenancy in real property, even with the right of survivorship is subject to levy and execution. New Haven Trolley and Bus Employees Credit Union v. Hill, 145 Conn. 332, 336 (1958); Conn. Gen. Stat. §52-495. "The transfer of property subsequent to the attachment of the lien does not affect the lien, for 'it is of the very nature and essence of a lien, that no matter into whose hands the property goes, it passes cum onere . . ..'" United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 57 (1958), quoting, Burton v. Smith, 13 Pet. 464, 483. See also, Michigan v. United States [43-1 USTC ¶9225], 317 U. S. 338, 340 (1943).

In 1970 United States tax assessments were made for the period between 1961 and 1967, and tax liens recorded with the Town Clerk of Barkhamsted, Connecticut , against Payne Dean. At that time, Payne Dean and Elizabeth Dean were joint owners with the right of survivorship of their residence in Barkhamsted. On March 8, 1972 , Payne Dean died, and Elizabeth Dean received full ownership along with the lien which was attached to the undivided half interest of Payne Dean. March 1, 1973 , Elizabeth Dean quitclaimed the property to Richard E. Caserta and John Bahre. The lien, being attached to the property, passed also. Further assessments against Payne Dean were made in 1974 and 1975 for taxes due in 1970 and 1971, and notice of this tax lien was filed with the Town Clerk of Barkhamsted, Connecticut , in 1975. The 1970 notice was refiled in January and March of 1976. The liens arose upon assessment of taxes due, and the recording of the liens served to protect the government's right of priority as against subsequent mortgages, pledges, purchase or judgment liens. I. R. C. §6323(a). Enforcement of a tax lien by levy or by proceeding in court may take place for a period of six years from the date the assessment was made. I. R. C. §6502. The original assessment having been made on July 31, 1970 , and this action having begun on June 28, 1976 , the statute of limitations has not expired.

In all of the documents submitted to the court, no genuine issue as to any material fact has emerged. The answering parties only made formal denials and general allegations. Since there is no genuine issue as to any material fact, and the moving party is entitled to a judgment as a matter of law, this court grants the motion for summary judgment and orders foreclosure by public sale of the former residence of Payne Dean in Barkhamsted, Connecticut, with the proceeds of the sale being paid to the Clerk of the Court pending a determination of the proper distribution of such proceeds to the various parties as their interest may appear.

 

 

[40-2 USTC ¶9493]United States of America, Plaintiff, v. John T. Woodside and Mrs. Lou Woodside, his wife; City of Greenville, S.C., a corporation, and B.F. Dillard, as its Clerk and Treasurer; Greenville County, S.C., a corporation, and Rob ert N. Smith, as its Treasurer; Citizens Bank of Taylors, S.C., a corporation, and W.A. Hopkins, as Receiver thereof; Peoples State Bank of South Carolina, a corporation, and Wm. Elliott and Rob ert Gage, as Receivers thereof; Biltright Building Company, a corporation; Easley Cotton Mills, a corporation, and F.W. Halsey, Defendants.

District Court of the United States of America , Western District of South Carolina . Decree of Foreclosure and Sale., Eq. 538., Filed May 10, 1940 .

Lien for taxes: Priority.--In a suit to enforce and foreclose a lien in favor of the United States on account of taxes and interest for 1920, 1921, 1925, and 1926, the Court holds that the Government has a valid and subsisting lien against the property described herein, that the same be sold in the manner described, and that the proceeds be applied to the payment of liens in the priority to be subsequently determined.

O.H. Doyle, U.S. Attorney, and E.P. Riley and T.A. Wofford, Assistant U.S. Attorneys, all of Greenville, S.C., for plaintiff. Wilton H. Earle and A.C. Mann, both of Greenville S.C. , for certain of the defendants.

LUMPKIN, District Judge:

This is a suit in equity, commenced on the 6th day of December, 1937, by the filing of a bill to enforce and foreclose a lien in favor of the United States of America, on account of an assessment of income taxes and interest against the defendant, John T. Woodside, for the years 1920, 1921, 1925, and 1926, in the aggregate amount of $52,182.63, with interest thereon at one per centum per month from May 20, 1930, to August 30, 1935, and thereafter at six per centum per annum, to date of judgment. An amended bill was filed on July 22, 1939 , but the allegations are the same as those contained in the original bill, with the exception that additional real estate is included in the description of the property which the government seeks to sell and have the proceeds of sale applied to its lien debt.

From affidavit of E.P. Riley, Assistant United States Attorney, it appears that all parties defendant are properly before this court, and that the main parties in interest, John T. Woodside and Lou C. Woodside, failed to file an answer and are therefore in default. It appears from the bill of complaint that on June 25, 1932, while the lien of the United States was in force and effect, and after filing notice thereof, the defendant, John T. Woodside, by deed, conveyed the real estate described in the bill of complaint to his wife, Mrs. Lou C. Woodside; that the real estate described in the amended bill of complaint was the subject of litigation, which was concluded subsequent to the date upon which the original bill was filed, and the purpose of the amended bill was to include this lot in the description of real estate to be sold; now, therefore, on motion of O.H. Doyle, United States Attorney for the Western District of South Carolina,

IT IS ORDERED, ADJUDGED AND DECREED:

(1) That the United States of America has a valid and subsisting lien against all of the real and personal property of the defendant John T. Woodside, and has a right to foreclose said lien and have all of the property hereinafter more particularly described sold and the proceeds of sale applied to the payment of liens against the same in the order of their priority.

(2) That Honorable Reuben Gosnell, United States Marshal for the Western District of South Carolina, do sell, at public outcry, to the highest bidder, for cash, in front of the Greenville County Court House, at Greenville, South Carolina, on Monday, June 3, 1940, being salesday in June, 1940, during the usual hours of public sales, commencing at 11 o'clock, a.m., on said date, the lots or tracts of land hereinafter described, in separate parcels, and that the said United States Marshal do advertise the said sale and the terms thereof by publication in the Greenville News, a daily newspaper published at Greenville, South Carolina, once a week for three weeks next preceding the date of said sale, a description of the said lands to be so advertised and sold being as follows, to wit:

1. All that certain tract of land in State of South Carolina, County of Greenville, Oaklawn Township, on the west side of Augusta Road, containing 57 acres, more or less, being all of the following described tract of land (less, however, a five acre tract of land heretofore conveyed to the Board of Trustees for Ellen Woodside High School, viz.: Beginning at an iron pin on the west side of Augusta Road, said pin being at the southern corner of the Ellen B.C Woodside tract, and running north along Augusta Road, 15 chains to a point on the west side of Augusta Road; thence almost due west 17 chains to a point near a spring, thence after a slight off-set to the southeast N 851/2 W 16.84 chains, thence northeast .95 chains; thence S 52 W 5 chains, thence S 541/2 W 10 chains; thence S 88 E 7.8 chains, thence S 60 E 34 chains, thence N 69 E 12 chains to the beginning corner;

2. All that certain lot of land in the state of South Carolina, Greenville County, in the city of Greenville, known and designated on a plat of land of Poinsett Realty Co., as lot No. 79, said lot being described by courses and distances as follows: Beginning at a point on Capers Street, 285.5 feet from Crescent Avenue, at corner of lot No. 78, thence S 84 19 W 175 feet to iron pin, thence S 5 41 E 70 feet to corner of lot No. 80; thence along line of lot No. 80 N 84 19 E 175 feet to Capers Street, thence N 5 41 W 70 feet to the beginning corner. This being the same lot conveyed to John T. Woodside by Poinsett Realty Company, by deed dated March 3, 1920, recorded in R.M.C. Office for Greenville County in book 64, page 323;

3. All those certain tracts of land in State of South Carolina, Greenville County, on the Anderson Road, about four miles from the city of Greenville, known and designated on plat of property of Mabel McB. Charles, made by C.H. Millard, November, 1922, as Tracts Nos. 6, 7, 8, 9. 10, 11, 12, and 13, which tracts have such metes and bounds as are sawn on the said plat; also, Tracts Nos. 4 and 5 on the above mentioned plat; and also, a tract of 1.73 acres conveyed to John T. Woodside by Harry Bates by deed dated April 21, 1923, recorded in book 83, page 10, said tract having courses and distances as follows: Beginning at a stake in the Anderson Road, at intersection of new cut road leading from New Anderson Road to Old Anderson Road; thence with center of New Anderson Road N 38 34 E 282.5 feet to stake in center of road; thence N 33 53 W 168 feet to railroad spike in center of Old Anderson Road; thence with center of Old Anderson Road S 44 50 W 433.2 feet to intersection of new cut road and Old Anderson Road; thence with center of new cut road S 50 46 E 207.8 feet to the beginning corner. All of the above tracts taken together from one tract of 55.49 acres, more or less;

4. That certain lot of land in Greenville County, South Carolina, just inside the city limits of Greenville, on Judges Alley, having the following courses and distances: Beginning at an iron pin on east side of Judges Alley, at corner of Griffin property, thence along line of Griffin property S 47 10 E 335.6 feet to iron pin on line of Poinsett Realty Company property; thence along said line N 5 14 W 100 feet to iron pin, comer of Nesbitt property; thence along Nesbitt line N 47 16 W 271 feet to iron pin on east side of Judges Alley; thence along said alley S 34 30 W 67.3 feet to beginning. This is the same lot conveyed to John T. Woodside by C.Q. West, executor, by deed dated July, 1922, recorded in R.M.C. Office for Greenville County, in book 74, page 552;

5. That certain lot of land in Greenville County, South Carolina, in the city of Greenville, on Palmetto Avenue, known and designated as lot No. 49 on pint recorded in R.M.C. Office for Greenville County, South Carolina; said lot having a frontage of 50 feet on southwest side of Palmetto Avenue, and being 246 feet from intersection of McKay Street and Palmetto Avenue. This is one of the lots conveyed to John T. Woodside by West End Land and Improvement Co., by deed dated December 29, 1919, and recorded in R.M.C. Office for Greenville County, in book 15, page 393;

6. That certain lot of land in Oaklawn Township, Greenville County, South Carolina, containing 6.75 acres, more or less, and known as the "Hillory Shorter" tract, being triangular in shape, and bounded by lands heretofore conveyed by John T. Woodside to Woodville Investment Company.

7. All that certain piece, parcel or lot of land, lying and being situate on the west side of Capers Street, in the City of Greenville, S.C., County and State aforesaid, and being known and designated upon a pint of Crescent Terrace as Lot No, 78, said plat being recorded in the office of R.M.C. for Greenville County, in Plat Book E, page 137, being one of the lots conveyed to me by Poinsett Realty Co,, by deed bearing date of September 20, 1919, said lot beginning at a point upon Capers Street, 210 feet from Crescent Avenue, and runs back along the rear lines of lots Nos. 29, 28, 27, and 26, S 84.40 W 270.6 feet to a strip of land belonging to the Poinsett Realty Co,; thence along said strip of land S 5.16 E 76.8 feet to corner; thence N 85 E 96 feet to stone on corner of lot No. 79; thence continuing N 84.19 E 175 feet to Capers Street; thence along Capers Street N 5.41 W 75.5 feet to beginning corner.

(3) That the United States Marshal, conducting the sale, require the highest bidder on each of said parcels or lots of land to immediately make a cash deposit of five per cent of the bid, as earnest money or evidence of good faith, such deposit to be applied on the bid should there be a compliance of same, and in the event of noncompliance, to be forfeited and paid over to the plaintiff and retained by it as liquidated damages; and the premises as to which there is a failure of compliance with the bid, within ten days from the date of sale, shall be re-advertised and re-sold, upon the same terms, at such bidder's risk, on the next ensuing salesday, or some convenient salesday thereafter, to be designated by the plaintiff's attorney. If the person making the last highest bid on any lot or parcel of said land fails to make the required deposit immediately at the time of the acceptance of his bid, then the said premises shall be immediately re-sold, at such bidder's risk, on the same salesday or some subsequent salesday, at the option of plaintiff's attorney. The provision for making deposit as evidence of good faith shall not apply to the plaintiff or its agents. The purchaser will pay for documentary stamps.

(4) That upon the terms of the sale being fully complied with, the said United States Marshall do execute and deliver to the purchasers deeds, fee simple in form, to the lots or parcels so purchased, and that he thereupon pay over the entire proceeds of said sale to W. D. White, Clerk of the United States District for the Western District of South Carolina, to be held in the Registry of this Court until the further order of the court establishing the rank of the claims as between the City of Greenville, the County of Greenville, the State of South Carolina, and the United States of America.

(5) That said action be and remain open on the calendar of the court for such other and further orders as may be proper for the final disposition of all issues involved in the suit, it being particularly understood that all answering defendants will be heard with reference to their claims before the proceeds are finally disbursed.

 

 

[61-2 USTC ¶9526]Hochschwender, Plaintiff v. Dorlo Corp'n, Defendant

N. Y. Supreme Court, Nassau County , Part II. 144 N. Y. L. J., No. 8, 7/15/60

[1954 Code Sec. 6323]

Tax lien: Validity against third party: Mortgage of corporation controlled by delinquent taxpayer.--The court refused to ignore the corporate entity of a corporation controlled by the delinquent taxpayer and to enforce the Government's tax lien against a mortgage executed by the corporation on property formerly owned by the delinquent taxpayer and deeded to the corporation. The mortgagees were held to have a valid lien which had priority over the government's tax lien. There was no showing of fraud, misrepresentation, or illegality which is necessary to pierce the corporate veil and subject its property to the Government's tax lien which is against the delinquent taxpayer.

Davies, Hardy & Schenck, 2 Broadway, New York 4, N. Y. (John W. Burke, 2 Broadway, New York 4, N. Y., of counsel), for plaintiffs. Patrick J. Mahoney, 600 Old Country Road, Garden City, N. Y., for Dorlo Corp., Lawrence A. Hochschwender, and Dorothy Hochschwender. Cornelius W. Wickersham, Jr., United States Attorney, 271 Washington St., Brooklyn, N. Y. (William A. Dubrowski, Assistant United States Attorney, Brooklyn, N. Y., of counsel), for United States. Zalkin & Cohen, 19 Rector St., New York, N. Y. (Leonard Zalkin, 19 Rector St., New York, N. Y., of counsel), for New York Trust Co. Cleary, Gottlieb, Steen & Hamilton, 52 Wall St., New York 5, N. Y. (Arthur Elfenbien, 52 Wall St., New York 5, N. Y., of counsel), for Colonial Trust Co.

BRENNAN, Judge:

In this action to foreclose a mortgage made on March 31, 1958 , the plaintiffs and the defendant Lawrence A. Hochschwender (hereinafter referred to as " Lawrence ") are brothers and sisters. On January 2, 1952 , the plaintiffs, the defendant Lawrence and his mother, Helen Hochschwender, owned interests in Flatbush Chevrolet Sales Corporation (Flatbush) and four other corporations. On that day the said parties entered into an agreement whereby the defendant acquired his mother's and the plaintiffs' interests in Flatbush for $150,000, of which $120,000 was to be paid in deferred installments. The remaining corporations were to be dissolved and the properties held by them conveyed to the individual parties to the agreement in accordance with their respective interests.

Thereafter, on the 18th of March, 1954, the plaintiffs and the defendant Lawrence, now vested with title to three parcels of real estate in Brooklyn , contracted to sell said parcels to the defendant Dorlo Corporation (Dorlo), a domestic corporation organized in 1944 and whose sole stockholder was and is the defendant Lawrence. The price was $300,225 payable as follows: $160,000 to the plaintiffs in cash, $60,000 by waiver by Lawrence of his personal share of the purchase price, $50,000 by the purchaser (Dorlo) giving a second purchase money mortgage in that amount to the plaintiffs and $30,225 by the said purchaser satisfying a then existing mortgage held by Flatbush Saving Bank.

On March 25, 1954 , the said individuals, by deed recorded on the following day, conveyed the said parcels to Dorlo. On the same day Dorlo gave back to the plaintiffs a mortgage covering said parcels, among others, which mortgage was recorded on March 30, 1954 , and which recited an indebtedness of $50,000. Installment payments were provided for and the unpaid mortgage balance was stated to be due on March 25, 1964 . The good faith of the plaintiffs in this transaction is not subject to question.

Dorlo ran into difficulties in 1957 and Lawrence advised his brothers and sisters (the plaintiffs) that his corporation could obtain a mortgage loan on the Brooklyn properties then in Dorlo's name, provided the 1954 mortgage which they held were satisfied. He offered a Dorlo mortgage on property at No. 185 Tanglewood Crossing in the village of Lawrence , Long Island , in exchange for the satisfaction of the 1954 mortgage. The Tanglewood Crossing property had been acquired by Dorlo and December 4, 1953 , for a price of $100,000 in a transaction to which reference will be made below. At the time of the proposal there was still due to the plaintiffs on the 1954 mortgage the sum of $41,554.35.

The mortgagees delivered a certificate of satisfaction of the 1954 mortgage covering the properties in Brooklyn (which certificate bore the date March 22, 1958 , and was recorded April 1, 1958 ) and received the mortgage note of Dorlo secured by its mortgage on the Tanglewood Crossing property for $41,554.35. The original (1954) mortgage called for quarterly installments of $937.50 applicable to interest at 41/2 per cent, and reduction of principal; the new mortgage called for like installments and like interest. The unpaid balance of the original mortgage was due March 25, 1964 ; the unpaid balance of the new mortgage was to become due on March 31, 1964 . There can be no question as to the adequacy of the consideration for the mortgage; nor was it made with intent, actual or presumed, to hinder, delay or defraud creditors of either Dorlo or Lawrence; nor, was it a gratuitous conveyance in any sense.

While these transactions were taking place within the family circle, other events were taking place without it to which reference will now be made.

The internal revenue service on December 31, 1956, made assessments of taxes against the defendant Lawrence as transferee of Flatbush Chevrolet for the years 1949, 1950, 1951 and 1953, the unpaid amounts of which, including interest, aggregated $40,149.11 as of March 3, 1960. A federal tax lien against him was duly filed on August 9, 1957 (this was in a greater amount at the time of filing, but has been reduced by payments and a partial abatement).

The contention of the United States is that its lien attached to the Tanglewood Crossing property of Lawrence A. Hochschwender when Dorlo deeded it to him on April 1, 1958 , at which time the plaintiffs' substituted mortgage had not yet been recorded. It also argues that if this is not true, its lien attached to the property on August 9, 1957 , in any event because Dorlo was in fact the alter ego of Lawrence and that the corporate entity should be accordingly disregarded.

These contentions must be evaluated by a close scrutiny of the time factors involved. The United States filed its lien against Lawrence Hochschwender on August 9, 1957 . On and before this date the plaintiffs had a valid mortgage lien on the Brooklyn properties of Dorlo, which would have had priority over any government lien filed against Dorlo even if the corporate veil were pierced at that time and Dorlo were held to be an alter ego of Lawrence Hochschwender. On March 31, 1958 , plaintiffs accepted, as an accommodation to their brother Lawrence, a substituted mortgage on the Tanglewood property in place of the mortgage on the Brooklyn properties. Dorlo was then the record owner of both the Tanglewood and the Brooklyn properties, and the record revealed no liens by the government on any of the Dorlo properties. Consequently, at that moment, plaintiffs held a wholly valid mortgage lien against the Tanglewood property of Dorlo. Their mortgage was not recorded until April 7, 1958 , one week after execution, a normal interval for recording. It was not until May 29, 1958, two months after this mortgage, that there was recorded a deed purporting to transfer the Long Island property from Dorlo to Lawrence Hochschwender individually, which deed was dated April 1, 1958, a convenient date indeed, one day following the mortgage, and some six days before it was recorded. This late recording of the purported deed would suggest the possibility that the deed was not executed and delivered on April 1, but in fact back dated as an afterthought of Lawrence Hochschwender. No factual determination of this possibility need be made, however. Recording of the deed raises a presumption of delivery, but the presumption is effective only as of the date of recording, not the date of execution (Maryland Casualty Co. v. Stern, 5 Misc. 2d 423). Moreover, the deed itself was ineffective to convey an unqualified fee simple. It was a full covenant and warranty deed which purported to transfer the property free and clear of mortgage liens. Dorlo had notice of the plaintiffs' mortgage. Lawrence Hochscwender had similar notice. Dorlo had no power to transfer the property other than subject to that mortgage (People v. Douglass, 217 App. Div. 328). Therefore, even if the deed were executed and delivered on April 1, it was nevertheless fraudulent as to the plaintiffs and could not transfer title to Lawrence in any manner other than subject to plaintiffs' mortgage. The most that Lawrence received by this deed was the equity of redemption ("A greater estate of interest does not pass by any grant or conveyance than the grantor possessed or could lawfully convey at the time of the delivery of the deed * * *"; Real Property Law, sec. 245).

The federal tax lien was not then valid against the plaintiff mortgagees (Title 26, U. S. C., 6323). It could only attach to the equity of redemption held by Lawrence Hochschwender. The United States contends, however, that the corporate entity of Dorlo should be disregarded as a mere alter ego of Lawrence Hochschwender, and that the Tanglewood property should be considered as being in Lawrence Hochschwender even before August 9, 1957 . While the evidence adduced at the trial indicates that Lawrence dominated the Dorlo corporation, this in itself does not require that its separate status be disregarded. It can safely be assumed that the plaintiffs would never have consented to the substitution of the Tanglewood property for their valid mortgage on the Brooklyn properties, if at that time Lawrence Hochschwender were the record owner of Tanglewood. The government lien was already filed against Lawrence , and the substitution would have constituted an outright gift to the tax gatherer, a somewhat unlikely eventuality. Plaintiff relied on the record title, and they had every right to do so. They relied on the distinction between the corporate and individual entities, a perfectly proper course of conduct.

The corporate entity may be disregarded where it is used "as a cloak or cover for fraud or illegality" (Jenkins v. Moyse, 254 N. Y. 319, 324). But there is not even a whisper of fraud or illegality in this case. In Bartle v. Home Owners Cooperative (309 N. Y. 103, 106), the court said: "Generally speaking, the doctrine of 'piercing the corporate veil' is invoked 'to prevent fraud or to achieve equity' (International Aircraft Trading Co., Inc. v. Manufacturers Trust Co., 297 N. Y. 285, 292; see Halsted v. Globe Ind. Co., 258 N. Y. 176, 179; Jenkins v. Moyse, 254 N. Y. 319, 324; Quaid v. Ratkowsky, 183 App. Div. 428, aff'd 224 N. Y. 624). But in the instant case there has been neither fraud, misrepresentation nor illegality."

In that case specific findings were made that the defendant owned all the shares of the corporation, controlled it; that the outward indicia of the two separate corporations was maintained during the period when the creditors extended credit; that the creditors were in no way misled: and that there was no fraud. The identical findings are made here.

Thus, the plaintiffs' mortgage is a valid lien which takes priority over the lien of the United States .

Defendant New York Trust Company is in the unenviable position of having given to Lawrence Hochschwender and his wife an unsecured loan in the amount of $150,000 on March 21, 1958 , ten days prior to the mortgage transaction it now challenges. It too seeks to pierce the corporate veil, treat the Tanglewood property as Lawrence Hochschwender's rather than Dorlo's and thereafter attack it as a fraudulent conveyance. For reasons already noted, the corporate entity will not be disregarded, but even if it were, the conveyance could not be set aside as fraudulent, since, as has been noted, it was given for a good and fair consideration (cf. County Federal Savings & Loan Ass'n v. Walsh Rights Corp'n, 187 N. Y. S. 2d 722 n. o. r.).

The plaintiffs are hereby awarded judgment foreclosing the mortgage. All motions upon which decision was reserved at the trial are hereby resolved accordingly. This constitutes the decision of the court required by section 440 of the Civil Practice Act. Settle judgment on notice to all parties who have appeared in the action.

 

 

[64-1 USTC ¶9384]United States of America, Plaintiff v. Stanley Crews; Callie Crews; Vergennes State Bank of Vergennes, Illinois; Du Quoin State Bank; William Cochran, also known as William A. Cochran; Dorothy Cochran, also known as Dorothy Kathleen Cochran, also known as Kathleen Cochran; State of Illinois, Defendants

U. S. District Court, East. Dist. Ill., Civil No. 4430, 230 FSupp 268, 3/13/64

[1954 Code Secs. 6321-6323]

Tax liens: Priority of creditors and liens: Illinois tax lien: Conveyance to third party: Foreclosure action.--Where the taxpayers received notice of 100% penalty assessments against them as responsible officers of a corporation, and notice of lien for the assessment was thereafter filed, the lien of the United States attached to property owned by the taxpayers which they subsequently conveyed. The United States had priority over the defendants, who purchased the property after the lien of the United States was perfected, over a bank which obtained its interest subsequent to perfection of the lien of the United States, and over the lien of the State of Illinois which was not perfected until long after lien of the United States was perfected.

Carl W. Feickert, United States Attorney, Room 327 Post Office Bldg., East St. Louis, Ill., for plaintiff. Gordon Franklin, Aikaman Bldg., Marion, Ill., for S. Crews; F. Mark Miller, Brookings Bldg., Du Quoin, Ill., for Du Quoin State Bank; W. Troy Barrett, Assistant Attorney General, 518 South Illinois Ave., Carbondale, Ill., for State of Illinois, defendants.

JUERGENS, District Judge:

The United States of America brings this action to foreclose its tax lien on certain real property owned by defendants Stanley Crews and Callie Crews, husband and wife, who reside in Jackson County, Illinois. Jurisdiction is founded on Title 28 United States Code, Sections 1340 and 1345, and Section 7402(a) of the Internal Revenue Code of 1954. Vergennes State Bank maintains an office in Vergennes, Jackson County, Illinois. Du Quoin State Bank maintains an office in Du Quoin, Perry County, Illinois. William Cochran, also known as William A. Cochran, and Dorothy Cochran, also known as Dorothy Kathleen Cochran, also known as Kathleen Cochran, husband and wife (hereinafter known as Cochrans), reside in Jackson County, Illinois. All of the above defendants reside within the Eastern District of Illinois. Defendant State of Illinois is located in Springfield , Illinois .

[Facts]

During the year 1957 the Cochrans were responsible officers for the C. and M. Coal Company of Vergennes , Illinois .

On May 9, 1958, the District Director of Internal Revenue, pursuant to Section 6672 of the Internal Revenue Code of 1954, made 100 per cent penalty assessments of taxes with penalties and interest against defendant Cochrans as the responsible officers of the C. and M. Coal Company and on May 20, 1958, duly gave notice of the assessment, stating the amount and demanding payment. Notice of lien for the assessment was filed in the Office of the Recorder of Deeds in Jackson County, Illinois on July 9, 1958.

On May 9, 1958, the date of the assessment, the Cochrans were the owners of the following described property:

A plot of land commencing measurements 20 rods due West of the Northwest corner of the Southwest Quarter (S. W. 1/4) of the Northwest Quarter (N. W. 1/4) of Section 21, Township 7 South, Range 2 West of the 3rd Principal Meridian, running thence due South 8 Rods 8 feet, thence due West 17 rods 14 feet to the place of beginning, and containing 1 acre, more or less, Except 60 feet off the East side thereof as shown by deed dated November 22, 1946, and recorded in book 168 at page 165, also Except 100 feet off the West side thereof as shown by deed dated November 6, 1947, and recorded in book 175 at page 114, situated in Jackson County, Illinois.

On or about August 20, 1958, the Cochrans conveyed the above-described real estate to defendants Stanley and Callie Crews.

Defendant Du Quoin State Bank filed its answer, asserting, inter alia, that it has no interest or lien in the real estate described in the complaint. The Cochrans failed to answer or otherwise plead in the case, and default judgment was entered against them on March 15, 1963. In reply to request for admissions, defendants Stanley Crews and Callie Crews asserted that on or about July 9, 1958, the property in dispute was owned by the Cochrans and on or about August 20, 1958, they purchased the real estate from the Cochrans. The Vergennes State Bank filed its answer, denying, inter alis, that the notice given by filing of the lien was effective as to them for the reason that the withholding of tax by the Cochrans was not willful. The Vergennes State Bank has not further pleaded, nor has it answered request for admissions proffered to it concerning the existence of a mortgage allegedly held by defendant Vergennes State Bank.

The State of Illinois filed its answer and cross-complaint, asserting that there is due and owing to the Department of Revenue of the State of Illinois the sum of $202.12 for Retailers' Occupation Tax. In the answer, which is verified, the State of Illinois asserts that the Retailers' Occupation Tax due became a lien on January 13, 1959, upon the filing of notices of the tax due in the office of the Circuit Clerk and ex-officio Recorder of Deeds of Jackson County, Illinois.

The United States has filed its motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, Title 28 U. S. C., on the ground that there is no genuine issue or question of fact and that the pleadings, together with the affidavits attached, show that the plaintiff is entitled to summary judgment and the relief prayed in the amended complaint as a matter of law.

[Date Lien Arises]

Under the provisions of Section 6321 of the Internal Revenue Code of 1954, a lien inures to the United States upon all property and rights to property, whether real or personal, belonging to the person liable to pay any tax who neglects or refuses to pay the same after demand. Section 6322 provides that unless another date is specifically fixed by law, the lien imposed by Section 6321 shall arise at the time the assessment is made and continue until the liability for the amount assessed is satisfied or becomes unenforceable by reason of lapse of time. Section 6323 provides in pertinent parts as follows:

"(a) Invalidity of lien without notice.--Except as otherwise provided in subsection (c), the lien imposed by section 6321 shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed by the Secretary or his delegate--

"(1) Under state or territorial laws.--In the office designated by the law of the State or Territory in which the property subject to the lien is situated, whenever the State or Territory has by law designated an office within the State or Territory for the filing of such notice; or

* * *"

Under Illinois law recording or filing notice of lien on or conveyances of real estate with the Circuit Clerk and Recorder of Deeds for the county in which the property is located is sufficient notice. The filing of the tax lien by the United States in the Office of the Recorder of Deeds of Jackson County, Illinois, on July 9, 1958 , was sufficient to perfect the lien as against all persons, including purchasers and mortgagees for value.

The Court need not consider whether the lien was valid prior to this date or not, since on the date the notice of tax lien was recorded, the Cochrans were the parties against whom the tax had been assessed and were also the owners of the real estate involved and the answer of the Du Quoin State Bank is in effect a disclaimer and shows that the mortgage to it has been satisfied. Defendants Stanley and Callie Crews acquired the property by purchase subsequent to the date the lien was perfected. The Vergennes State Bank likewise obtained its interest (if any interest it has) subsequent to perfection of the lien. The lien of the State of Illinois for unpaid Retailers' Occupational Tax was not perfected until long after the lien of the United States was perfected. The persons against whom the tax was assessed have not appeared or presented any defense, and default judgment has been entered against them.

The Government is entitled to judgment against the taxpayers and is entitled to a priority over defendants Stanley Crews, Callie Crews, Vergennes State Bank of Vergennes, Illinois, Du Quoin State Bank and State of Illinois , since all of the claims of the purchasers and mortgagees and the State of Illinois are subordinate to the prior filed federal tax lien.

[Judgment of the Court]

The Court finds that defendants William Cochran, also known as William A. Cochran, and Dorothy Cochran, also known as Dorothy Kathleen Cochran, also known as Kathleen Cochran, are liable to the United States for unpaid taxes with penalties and interest assessed against them in the amount of $1,820.89 plus interest from May 9, 1958, and that the United States has a valid and subsisting lien, for taxes with penalties and interest in said amount plus interest, on the real property hereinabove described and further finds that the lien of the United States is prior and superior to any liens, claims and interests of the defendants herein, and each of them, on said property and that the plaintiff's lien is foreclosed and that the real property hereinabove described be sold by the proper officer of this Court and that the distribution of the proceeds of such sale be made to the United States in an amount sufficient to satisfy the lien of the United States on said property and liability of defendants William Cochran, also known as William A. Cochran, and Dorothy Cochran, also known as Dorothy Kathleen Cochran, also known as Kathleen Cochran, to the United States for unpaid taxes with penalties and assessed interest, plus interest as provided by law, and that plaintiff be granted its costs in this matter. The Court further finds that the lien of the State of Illinois is subordinate to the right of Stanley and Callie Crews and that plaintiff's motion for summary judgment be and the same is hereby allowed.

The above and foregoing shall be considered findings of fact and conclusions of law.

Parties to settle the order.

 

 

[54-2 USTC ¶9486] United States of America , Appellant v. Fidelity & Deposit Company of Maryland et al., Appellee

(CA-5), In the United States Court of Appeals for the Fifth Circuit, No. 14604, 214 F2d 565, July 6, 1954

Appeal from the United States District Court for the Southern District of Mississippi.

Lien for taxes: Property conveyed in fraud of creditors.--In a suit by a bonding company to set aside a conveyance from the taxpayer to his wife as being in fraud of creditors, the United States intervened and asserted priority for tax liens which arose and were recorded subsequent to the conveyance. After the conveyance and before the suit, the wife had mortgaged the property. The court held that the lien of the bonding company, acquired under state law when it filed suit, was superior to that of the United States , because when the tax liens were filed taxpayer had already parted with all his interest in the property and the United States was therefore an unsecured creditor when the bonding company acquired its lien. The bona fide mortgagee also took precedence over the United States , since the mortgage was executed when the wife had title and before the conveyance to her was set aside as fraudulent. Sec. 3466 of the Revised Statutes cannot be applied to give an unsecured claim of the United States priority over a claim secured by a lien.

Carolyn R. Just and Ellis N. Slack, Special Assistants to Attorney General, and H. Brian Holland, Assistant Attorney General, all of Washington, D. C., and Jesse W. Shanks, Assistant United States Attorney, Jackson, Miss., for appellant. William E. Suddath, Jr., James L. Spencer, W. H. Watkins, Sr., and Forrest B. Jackson, all of Jackson, Miss., for appellee.

Before BORAH, and RUSSELL, Circuit Judges, and DAWKINS, District Judge.

BORAH, Circuit Judge:

Fidelity & Deposit Company of Maryland, hereinafter called the bonding company, brought this action in the United States District Court for the Southern District of Mississippi against E. E. Lovell and Mrs. Lavinia B. Lovell, his wife, seeking a judgment against Lovell, a contractor whom it had bonded, and seeking to set aside a deed (for his one-half interest in the homestead) from Lovell to his wife, dated November 19, 1948. Also named as a defendant was H. V. Watkins, trustee for the Deposit Guaranty Bank & Trust Company of Jackson , Mississippi , to which on February 10, 1950 , the Lovells had mortgaged the homestead under deed of trust. By subsequent amendments to the complaint, first the Collector of Internal Revenue, and then in his stead the United States , was made a defendant. The complaint as amended broadened the original demands of plaintiff, and in a corresponding prayer for relief the court was additionally asked to set aside a transfer by Lovell to his wife of certain shares of stock in the Flowood Corporation and to grant unto plaintiff a personal judgment against Mrs. Lovell for the value of the stock if she had disposed of the same as well as for all sums of money transferred to, given to, or deposited by Lovell for the benefit of his wife. Subsequently, and upon motion of the plaintiff, the United States was dismissed as a party defendant without prejudice. Thereafter, the United States was permitted to intervene and file an answer and cross-claim, wherein it asserted that its tax liens against Lovell were prior and superior to any lien asserted by plaintiff, the trustee and the bank. It also alleged that the conveyance from Lovell to his wife of November 19, 1948 , was made without consideration, was fraudulent as to creditors and should be subjected to the payment of the claim for unpaid taxes owing to the United States . The Deposit Guaranty Bank & Trust Company thereupon intervened to protect its claim to certain shares of Flowood Corporation stock pledged on the personal note of Mrs. Lovell.

[District Court's Judgment]

Issue was joined and the cause came on for trial [52-2 USTC ¶9550]. At its end and after considering the evidence, the District Court found and held in substance the following: (1) that the conveyance by E. E. Lovell to his wife of his undivided one-half interest in the homestead was fraudulently made as to the Fidelity & Deposit Company of Maryland and the United States of America as creditors of E. E. Lovell, and that the same should be set aside and said property sold subject to the payment of his debts; (2) that the Deposit Guaranty Bank & Trust Company, as trustee for R. V. Powers Foundation, had a good and valid deed of trust on the homestead of E. E. Lovell and his wife to secure an indebtedness of $4,000 still owed to it; that, subject to such indebtedness, the bonding company, as institutor of this suit, has (exclusive of the homestead exemption) the right to priority of payment from the proceeds of E. E. Lovell's one-half interest which had been fraudulently conveyed; and that as to the homestead exemption, the first three thousand dollars which was not subject to execution to satisfy the bonding company's judgment, the United States was entitled to be first paid; (3) that the conveyance by E. E. Lovell to his wife of one hundred shares of Flowood stock was fraudulently made as to the creditors of E. E. Lovell, and should be set aside, and said property should be subjected to the payment of his debts; that there was owing to the Deposit Guaranty Bank & Trust Company the sum of $1,150, secured by a pledge of said stock, and that subject to such secured indebtedness the bonding company, as institutor of this suit, has the right of priority of payment from the proceeds of the stock; (4) that E. E. Lovell fraudulently transferred to his wife various sums of money aggregating $5,000, which transfers should be set aside in favor of the bonding company, as creditor of E. E. Lovell; and (5) that E. E. Lovell was indebted to the bonding company in the sum of $43,219.83, for which amount it entered judgment in favor of the bonding company; and that E. E. Lovell was indebted to the United States for unpaid taxes, as claimed, in the amount of $8,955.12 together with interest and the court entered judgment in favor of the United States for the full amount.

From that part of the judgment awarding priority in payment out of the property involved to the bonding company over the debts due the United States for unpaid taxes, and from that part of the judgment holding the debt of $4,000 due Deposit Guaranty Bank & Trust Company, secured by deed of trust dated February 10, 1950, is entitled to priority in payment over tax claims of the United States secured by liens which had arisen and been duly recorded prior to execution of the deed of trust, the United States has appealed.

[Tax Liens v. Lien of Bonding Co.]

The first of three questions presented on this appeal is whether the District Court erred in holding that the lien of the bonding company under the laws of the State of Mississippi is superior to tax liens of the United States which arose and were duly recorded prior to the institution of the suit on which the lien of the bonding company was based. Insisting that this question must be answered in the affirmative the Government argues that the federal tax liens here involved arose and were duly recorded before the bonding company acquired its lien under Mississippi law ¹ as institutor of this suit. That while the tax liens of the United States arose and were recorded after E. E. Lovell had fraudulently conveyed to his wife the property here involved, the Government, although it did not then have a statutory lien for its taxes, was as much a creditor of E. E. Lovell as was the bonding company at the time the conveyances were made and thus clearly is within the protection of Section 265 of the Mississippi Code. Under that section the fraudulent conveyances were "clearly and utterly void" as to creditors and there is no authority either in the Mississippi Code or in the decisions of the Mississippi Supreme Court to prevent the federal tax liens from attaching to the property thus transferred at the time the liens arose. In any event and regardless of whether the fraudulent transfers here involved be considered "clearly and utterly void" as declared by the statute, or merely voidable at the option of creditors as held by the court below, any rights of the bonding company were wholly derivative, and since the tax liens of the United States attached also to any after acquired property they attached to any property or rights to property derived through the taxpayer after the liens arose. Finally it is argued that there is no provision of federal law which would warrant recognizing the lien of the bonding company as superior to the tax liens of the United States .

The right of the United States priority of payment of debts due it does not stand on any sovereign prerogative, but is exclusively founded upon the actual provisions of its statutes. Appellant concedes that the bonding company upon the filing of its bill on September 20, 1950 , acquired a lien under Section 127 of the Mississippi Code against the property fraudulently transferred by the taxpayer to his wife. However, and by virtue of Section 3670 of the Internal Revenue Code, ² it insists that the tax liens of the United States which arose and had been duly recorded prior to the filing of the bill were superior in right to the lien of the bonding company.

Section 3670 provides in pertinent part as follows: "If any person liable to pay any tax neglects or refuses to pay the same on demand, the amount * * * shall be a lien in favor of the United States upon all property and rights of property, whether real or personal, belonging to such person." (Italics supplied.) Section 3671 of the Internal Revenue Code provides that the lien under Section 3670 "shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time."

[ Mississippi Law]

It is plain from the language of the statute that the tax liens of the United States attached to all property and rights to property of the taxpayer at the time the several assessment lists were received by the Collector of Internal Revenue. It is equally plain, and the Government readily concedes the fact, that the federal tax liens arose and were recorded long after the taxpayer had conveyed to his wife the property here involved. It thus affirmatively appears that the taxpayer had parted with all right, title and interest to the property in question before the tax liens of the United States arose. ³ Under Mississippi law, Lovell not only had no interest in the land from and after the execution of the deed to his wife but he had no reversionary ⁴ interest of any kind therein and he was estopped ⁵ to assert or acquire any such interest. Under Section 265 of the Mississippi Code it has consistently been held that a fraudulent conveyance is void "only" against creditors but valid as between the grantor and grantee. Or, as the Supreme Court of Mississippi said ⁶ in quoting approvingly from a Massachusetts case it "is good between the parties and void against creditors only, or to speak accurately, is voidable by creditors at their election."

When the tax liens were filed Lovell had parted with all interest in the property which he had conveyed to his wife and he never thereafter acquired any interest therein. Indeed the statute prohibited him from doing so. Consequently appellant did not then acquire a lien on property in which the taxpayer had no interest but only acquired a right to set aside the conveyance from Lovell to his wife as a fraudulent conveyance. Its position was that of an ordinary creditor seeking to recover an unsecured claim. It was an unsecured creditor just as appellee was when it filed its original bill of complaint on September 20, 1950 .

Appellee filed its bill to subject the property involved to the payment of its debt more than a year before the court permitted appellant to intervene in that proceeding and assert a lien upon the property and also the rights of a creditor. And by virtue of Section 1327 of the Mississippi Code ⁷ appellee obtained a lien upon the property as of the date of the filing of the bill which would antedate and take preference over the counterclaim filed by the appellant. In Kline v. Sims, 149 Miss. 154, 114 So. 871, 873, the Supreme Court of Mississippi in construing Section 1327, supra, said:

"We think the creditor who proceeds under this statute is entitled to the benefit of his diligence, and that, under the language of the statute, he has a lien upon the property sold on this sequestration. He is not required to bring suit on behalf of all the creditors, but may sue for his own demand and get the benefit of his diligence. Creditors who will not act, or who are not diligent in asserting their demands, are not entitled to participate equally with the man who is diligent, and who has incurred the risk and expense of proceeding to attack a fraudulent conveyance. If other creditors intervene in the suit, they may, by so doing, take their places in line with creditors according to the date of their proceedings, but they are not entitled to share in the proceeds of the first creditor's diligence and activities, and such creditor is entitled to have his claim first paid. If other creditors desire, they may attack, or sue out writs of sequestration, or take any other appropriate action; but they must do so at their own risk, and they are not entitled to participate in the activities and diligence of the creditor who first takes action."

[Priority of Mortgage]

Appellant's second point relates to the claimed error on the part of the District Court in holding that the debt due the Deposit Guaranty Bank & Trust Company, secured by a deed of trust on the real property here involved, is entitled to a priority of payment out of proceeds from the sale of the property over those taxes due the United States secured by tax liens which arose and had been recorded prior to execution of the deed of trust to the bank. ⁸

During the year 1947 E. E. Lovell and his wife acquired the property in question at a cost of $14,525, of which $6,525 was paid in cash and the unpaid balance of $8,000 was secured by a deed of trust on the property in favor of the First (Capital) National Bank of Jackson , Mississippi . After Lovell had encountered financial difficulties and after he had conveyed his one-half interest in the property to his wife it became necessary because of a threatened foreclosure of the deed of trust to refinance this obligation which by that time had been reduced to approximately $6,000. Accordingly, on February 10, 1950 , Lovell and his wife executed a new deed of trust on the property in favor of the Deposit Guaranty Bank & Trust Company in the amount of $6,000 and this instrument was recorded on February 13, 1950 . The proceeds of the new loan, at least in material part, were used to pay off the previous deed of trust to First National Bank.

In the meantime, and prior to the execution of the deed of trust to Deposit Guaranty Bank & Trust Company, the Collector had on March 28, 1949, filed notice of lien convering assessments of withholding tax and Federal Insurance Contributions Act taxes, together with penalties and interest thereon, for the second, third, and fourth quarters of 1948 in the aggregate amount of $5,823.67; and had, on April 28, 1949, filed notice of lien covering the original assessment of Federal Employment Tax Act, penalty and interest for 1948 in the amount of $235.95. At the time this action was brought the Lovells were indebted to the Deposit Guaranty Bank & Trust Company in the amount of $4,000 together with interest thereon at the rate of 51/% per annum from the tenth day of February 1952 until paid.

The record standing thus, the district judge, without passing upon or deciding the relative rights of the Deposit Guaranty Bank & Trust Company under its deed of trust and of the United States under its prior recorded tax liens, held that "the Deposit Guaranty Bank, so far as the lien on this property is concerned * * * was subrogated to the First National, and succeeded to its rights; and the Deposit Guaranty Bank and Trust Company (as Trustee for R. V. Powers Foundation) has against said property a good and valid lien, which comes ahead of the claims of all of the other parties litigant."

We think the court erred in applying the doctrine of subrogation but nevertheless reached the right conclusion in holding that the mortgage of Deposit Guaranty Bank & Trust Company was superior to the liens for taxes. The Deposit Guaranty Bank did not acquire nor did it in any manner succeed to the rights of First National Bank under the 1947 deed of trust to it. On the contrary, the Deposit Guaranty Bank entered into a new and separate loan agreement with Lovell and his wife and it took a new trust deed in its favor as security for repayment of its loan. The lien of First National was paid off and discharged, it was not transferred, and the Deposit Guaranty Bank did not thereby succeed to the lien rights of First National. However, there is and can be no doubt that the bank did acquire a good and valid mortgage lien of its own upon property the title to which was vested in Mrs. Lovell at the time she executed the deed of trust. Prior to the time of the institution of suit by the Fidelity & Deposit Company of Maryland there was no record or actual suggestion to the Deposit Guaranty Bank and Trust Company that the conveyance from Lovell to his wife was fraudulent. The Deposit Guaranty Bank was a bona fide mortgagee of Mr. Lovell because it was without notice, either actual or constructive, of the fraudulent nature of the conveyance by which she secured her title. We conceive the Mississippi law ⁹ to be that a bona fide purchaser or mortgagee from a grantee who secures title by a conveyance which is afterwards set aside because in fraud of creditors is not charged with the fraud of an antecedent grantor in the chain of title. Until the fraud is established and the instrument set aside a lien recorded against such antecedent grantor in title is not notice to the subsequent bona fide purchaser. Consequently, the mortgage of the bank was superior to the liens for taxes.

[Unsecured Claims of U. S.]

Appellant's third and final point that the District Court erred in holding that the United States is not entitled under Section 3466 of the Revised Statutes ¹⁰ to priority in payment of its taxes out of the proceeds of the property her involved is not well taken and hardly merits discussion. Our recent opinion in U. S. v. Atlantic Municipal Corporation, 212 Fed. (2d) 709, (decided May 11, 1954 [54-1 USTC ¶9392]) is dispositive of this issue. There, in speaking of Section 3466 we said: "This statute applies only as against unsecured debts, that is, debts not secured by a specific and perfected lien. It has never been, we think it will never be, applied as it is sought to be applied here, to accord payment to a debt due the United States in preference to a claim secured by a lien which is prior in time and superior in law to the lien of the United States securing the debt for which preferential payment is sought."

For the reasons stated the judgment ¹¹ of the District Court is

AFFIRMED.

¹ Mississippi Code, Annotated (1942 ed.) Volume 1, Sec. 1327.

² 26 U. S. C. 1946 ed., Sec. 3670.

³ Martin v. Tillman, 70 Miss. 614.

⁴ Lewis Williamson, Sheriff v. Wilkerson, 81 Miss. 503.

⁵ Meyers v. American Oil Company, 192 Miss. 180, 186, 187, 5 So. 2d 218.

⁶ Barwick v. Mayse & Sons, 74 Miss. 415, 21 So. 238.

⁷ Mississippi Code, Annotated (1942 ed.) Vol. 2, Sec. 1327 provides in part: "Creditors may attack fraudulent conveyances, etc.--The said court shall have jurisdiction of bills exhibited by creditors * * * to set aside fraudulent conveyances of property, * * *. Upon such a bill a writ of sequestration or injunction, or both, may be issued * * *. The creditor in such case shall have a lien upon the property described therein from the filing of his bill, except as against bona fide purchasers before the service of process upon the defendant in such bill."

⁸ The lien of Fidelity & Deposit Company of Maryland arose on September 20, 1950 , with the filing of its complaint in the state court action, which was subsequent to the execution of the deed of trust to Deposit Guaranty Bank & Trust Company on February 10, 1950 .

⁹ See footnote 7.

¹⁰ 31 U. S. C. 1946 ed. Sec. 191.

¹¹ The District Court's opinion is reported asFidelity & Deposit Company of Maryland v. Lovell, 108 Fed. Supp. 360 [52-2 USTC ¶9550].

 

 

[55-1 USTC ¶9209] United States of America , Plaintiff v. Milton W. and Myrtle K. Baumann, and Anton F. and Mary S. Spraitz, Defendants

In the United States District Court for the District of Minnesota, Third Division, Civil No. 2399, December 28, 1954

[1939 Code Sec. 3672--similar to 1954 Code Sec. 6323]

Lien for taxes: Validity against third parties: Transferees of taxpayer.--The United States had a lien on the real property transferred by the taxpayer to another individual and later by that individual to a third party, both transfers being made after the notice of the tax lien had been filed.

George E. MacKinnon, United States Attorney, 221 Federal Courts Building, St. Paul, Minn., Alex Dim, Assistant United States Attorney, for plaintiff. Beaudoin, Thuet & Todd, 210 Schult Building, South St. Paul , Minn. , for defendants Anton F and Mary S. Spraitz. No appearance as to Milton W. and Myrtle K. Baumann.

Findings of Fact, Conclusions of Law and Order for Judgment

NORDBYE, District Judge:

The above entitled matter came duly on for trial before the Honorable Gunnar H. Nordbye, one of the Judges of the United States District Court, in the Federal Courts Building , St. Paul , Minnesota , on Tuesday, December 28, 1954 . George E. MacKinnon, United States Attorney, and Alex Dim, Assistant United States Attorney, appeared for and on behalf of the plaintiff, and there were no appearances on behalf of the defendants or any of them.

The Court having heard the testimony of the witnesses produced by the plaintiff, and upon all the files, records, proceedings and admissions herein, and being duly advised in the premises, hereby makes his Findings of Fact, Conclusions of Law and Order for Judgment.

Findings of Fact

I. The plaintiff is a corporation sovereign and body politic.

II. This action arises under the Internal Revenue Laws of the United States , is authorized by the Commissioner of Internal Revenue of the United States Treasury Department, and is brought at the direction of the Attorney General of the United States .

III. On March 15, 1950 , Milton W. Baumann filed his income tax return for the calendar year 1949. The return acknowledged income tax due in the amount of $2,966.52.

IV. On April 14, 1950 , the Commissioner of Internal Revenue assessed the aforesaid 1949 income tax against Milton W. Baumann in the amount of $2,966.52. The assessment list containing this assessment was received by the Collector of Internal Revenue, who on April 15, 1950 , issued notice of the assessment to Milton W. Baumann and demanded that he pay the tax in full.

V. Of the aforementioned assessment of $2,966.52, $1,000 has been paid and the balance of $1,966.52 has not been paid.

VI. Milton W. Baumann owes plaintiff $1,966.52 plus interest according to law.

VII. On August 29, 1950 , and again on March 22, 1951 , the Collector of Internal Revenue caused a notice of tax lien to be filed with the Register of Deeds of Dakota County, Minnesota. Such notice recited the above mentioned assessment and stated that the United States had a tax lien on all of the property of the defendant Milton W. Baumann.

VIII. Prior to April 14, 1950, and on and subsequent to August 29, 1950, and at all times between those two dates, Milton W. Baumann and his wife, Myrtle K. Baumann, were the owners of record of a parcel of real property described as follows:

Lots 6 and 7, Block 9 of M. D. Miller's Addition to South Park , Dakota County , Minnesota . Such premises are also known as 1322 North 4th Street , South St. Paul , Minnesota .

[Lien Attached Before Transfers]

IX. On April 15, 1950 , a lien of the United States for taxes attached to the above described property by reason of the assessment of income taxes set out previously.

X. On or about November 15, 1950 , Milton W. and Myrtle K. Baumann transferred their title to the parcel of realty described above to one Joseph A. Godbout, and on or about May 1, 1951 , the same parcel of realty was transferred to Anton F. and Mary S. Spraitz, who now hold record title thereto.

XI. The title to the parcel of realty, now held of record by Anton F. and Mary S. Spraitz, is subordinate to the lien of the United States for taxes.

XII. Pursuant to Title 28 U. S. C., Sec. 1655, service was duly obtained and made in accordance with this Court's Order of December 9, 1953 , upon defendants Milton W. Baumann and Myrtle K. Baumann.

XIII. That pursuant to the Court's Order of December 9, 1953, the Order of said Court was duly published in the St. Paul Legal Ledger in accordance with the requirements of 28 U. S. C., Sec. 1655, as is more fully set forth in the Printer's Affidavit, dated January 19, 1954, on file and of record herein.

XIV. That the petition and order concerning 28 U. S. C., Sec. 1655, heretofore referred to was mailed by registered mail to the last known address of Milton W. Baumann and Myrtle K. Baumann, 3507 North Penn Ave., Indianapolis, Indiana, on December 29, 1953, as is more fully set forth in the Affidavit of Dreda M. Harper, on file and of record herein; and personal service as well was made on each of them by the U. S. Marshal on January 4, 1954.

XV. That defendants Anton F. Spraitz and Mary S. Spraitz were duly served and appeared by separate Answer through their attorneys, Paul A. Thuet, Jr., of the firm of Beaudoin, Thuet and Todd, which Answer was by stipulation dated December 8, 1954, withdrawn and consent given to proceed to judgment against said defendants Anton F. Spraitz and Mary S. Spraitz.

XVI. Defendants Milton W. Baumann and Myrtle K. Baumann have not answered or otherwise appeared.

Conclusions of Law

1. This Court has jurisdiction herein by virtue of 26 U. S. C., Sec. 3678 of the 1939 Internal Revenue Code and 28 U. S. C., Sec. 1655.

2. Plaintiff , United States of America , is entitled to judgment adjudging it to have a tax lien upon the following described real estate, to wit:

Lots 6 and 7, Block 9, of M. D. Miller's Addition to South Park , Dakota County , Minnesota . Such premises are also known as 1322 North 4th Street , South St. Paul , Minnesota .

superior to any right, title, or interest held or claimed by William W. Baumann, Myrtle K. Baumann, Anton F. Spraitz, Mary S. Spraitz, and Joseph A. Godbout.

3. That the plaintiff, United States of America, is entitled to enforce said tax lien against the above described real estate in accordance with law and the provisions of Section 3678 of the 1939 Internal Revenue Code to satisfy the balance due on said tax lien in the amount of $1,966.52, plus interest in the sum of $564.50, plus court costs in the sum of $86.90. If the above described real estate is sold for the purpose of enforcing the tax lien, the proceeds of the sale shall be distributed according to the respective interests of all parties.

LET JUDGMENT BE ENTERED ACCORDINGLY.

 

 

[88-2 USTC ¶9606] John S. Braxton III, Plaintiff v. United States of America , Defendant

U.S. District Court, Dist. Md., Civ. R-88-1879, 9/23/88

[Code Secs. 6323 and 7426 --Result unchanged by the Tax Reform Act of 1986]

Property: Lien for taxes: Conveyance by taxpayer: Suits by nontaxpayers.--Taxpayers' son was not entitled to an injunction prohibiting enforcement of a tax levy on real property which his parents had transferred to him, since the assessment of taxes against his parents had become a valid lien in favor of the United States before the property was transferred. Thus, the son never held a position or legal claim in the property superior to the right of the United States . In addition, the District Court did not have jurisdiction under Code Sec. 7426 to inquire into the validity of the underlying assessment. As a result, proceeds from the son's sale of the property, which had been held in escrow, were ordered to be paid over to the United States .

MEMORANDUM AND ORDER

Procedural Background

RAMSEY, District Judge:

This action originated as a complaint for temporary restraining order and permanent injunction filed on June 28, 1988 by the plaintiff, John S. Braxton, III, a resident of Upper Darby , Pennsylvania against the Commissioner of the Internal Revenue Service. On that date the complaint was presented to the Honorable Herbert F. Maletz, serving as Chambers Judge in this Court and Judge Maletz issued an Order directing that ". . . the Internal Revenue Service refrain from collecting any of the proceeds of sale owed to John S. Braxton, III by virtue of his sale of 3600 Park Heights Avenue , Baltimore , Maryland , 21215 . . . ." Judge Maletz further ordered the settlement officer to close the sale and to place the proceeds of sale in escrow in an interest bearing account until further order of the Court and set a hearing for the matter on July 28, 1988 . A motion to continue the hearing was filed by counsel for the plaintiff and, without opposition from the Commissioner of the Internal Revenue Service, an extension was granted until August 31, 1988 .

An answer was filed by the United States of America through its attorneys on August 29, 1988 . ¹

On August 31, 1988 , this matter came on for hearing before the Court. Plaintiff was permitted to present evidence as was the defendant and it was agreed that the hearing would constitute a hearing on the injunction request as well as a hearing on the temporary restraining order.

The hearing concluded late on the 31st and the Court permitted additional time within which either party might note objections to documentary material submitted to the Court or to request the opportunity for further proceedings.

Pursuant to the authority granted the Court under Rule 65(a)(2) this Memorandum will constitute the findings of fact and conclusions of law resulting from the consolidation of the application for preliminary injunction and the final hearing on the request for permanent injunction contained in the original complaint.

Findings of Fact

The Court makes the following findings of fact:

(1) This action was brought by the plaintiff, John S. Braxton, III alleging jurisdiction based on Section 7426 of Title 26 of the United States Code Annotated.

(2) The plaintiff is the son of John S. Braxton and Joselyn L. Braxton and Mr. and Mrs. Braxton have been assessed taxes in the amount of $134,154.27 by the Internal Revenue Service.

(3) Plaintiff was designated by the Internal Revenue Service as "nominee" of Mr. and Mrs. Braxton as to the taxes allegedly owed.

(4) The underlying tax assessment arises out of the tax years 1979, 1981, 1982, 1983, and 1984. The assessments made by the United States were filed on March 2, 1984, October 28, 1985, April 27, 1987, May 18, 1987 and June 15, 1987.

(5) The earliest of these assessments, March 2, 1984, was in the amount of $62,111.24.

(6) On June 21, 1984 Mr. and Mrs. Braxton purportedly transferred to John S. Braxton, III three pieces of real estate in the City of Baltimore . This transfer was allegedly accomplished by a deed recorded in Liber 0242 at Folio 817 and bearing the date of March 16, 1984, but acknowledged on April 1, 1984 and recorded on June 21, 1984.

(7) The date hereinbefore referred to transferred the three pieces of property "* * * as a gift to our son and for no further consideration."

(8) On or about June 9, 1988 , the Internal Revenue Service filed a notice of lien under the Internal Revenue Service laws naming John S. Braxton, III as a "nominee" of John S. and Joselyn L. Braxton.

(9) That lien was filed in the Circuit Court for Baltimore City and covered the claimed taxes in the amount of $130,154.27.

(10) John S. Braxton, III, the plaintiff, had entered into a contract to sell one of the properties deeded to him by his mother and father located at 3600 Park Heights Avenue , Baltimore , Maryland , with settlement scheduled for June 28, 1988 . The levy and lien was served on the real estate agent.

(11) The sale resulted in an escrowed sum of $29,708.11 being placed in an interest bearing account by the settlement officer as a result of the settlement on June 28, 1988 .

(12) The plaintiff's mother, Joselyn Braxton, testified that she did not sign the deed conveying the properties to her son although it appears to have been signed with her name by some individual and the notarization attests to her appearing before Patricia M. Cullison. She later ratified the signature and expressly adopted the signature and the deed as her act.

(13) Plaintiff's mother also denied execution of the various tax returns filed on behalf of the Braxtons during the operative tax years. Although the testimony was somewhat inconclusive, and in some instances she did not deny her signature, for the purposes of this Memorandum the Court finds that she in fact did execute some returns, but did not execute others.

Conclusions of Law

A. The assessment by the United States through the Internal Revenue Service on the 4th day of March, 1984, in the amount of $62,111.24 became a lien in favor of the United States upon the real property known as 3600 Park Heights Avenue, Baltimore, Maryland, which was at that time the property of John S. Braxton and Joselyn Braxton, his wife.

B. The lien of the United States was perfected as to all persons except purchasers for value, the holders of security interest, mechanical lien or judgment lien creditors as of March 4, 1984, pursuant to the provisions of 26 U.S.C.A. §6323 .

C. Any attempt to transfer the property from and after the effective date of the lien was ineffective to defeat the interest of the United States in the property.

D. The purported transfer by the taxpayer, John S. Braxton, Jr. and Joselyn Braxton to John S. Braxton, III as a gift and for no consideration did not constitute John S. Braxton, III a purchaser of the property or one whose interests were superior to the lien rights of the United States, whether that transfer was effective on March 16, 1984 (the date of the deed), April 1, 1984 (the date of the notarization), or June 21, 1984 (the date of recording).

E. That the filing by the government of its lien in the Circuit Court for Baltimore City on June 9, 1988 , fully perfected the lien as against all real property and was properly lodged with the settlement officer who was handling the real estate transaction.

F. Title 26, Section 7426 permitted one who claims an interest on a property levied upon other than the person against whom the assessed tax is levied to sue the United States in this Court as to property located within the District of Maryland.

G. A United States District Court is authorized by Title 26, U.S.C.A. §7426(b)(1) to issue an injunction if a levy or sale would irreparably injure rights and property which the Court determines to be superior to the rights of the United States in such property.

H. For the purpose of an adjudication under Title 26, §7426 the assessment of the tax upon which the interest of the United States is based is conclusively presumably to be valid.

Based upon the foregoing findings of fact and conclusions of law the Court finds that there was a valid lien in favor of the United States on the property 3600 Park Heights Avenue, Baltimore City, Maryland, from and after March 4, 1984, and that lien became perfected against all the world except those specifically covered by Title 26 §6322 on June 9, 1988, on notice by filing of the same in the Circuit Court for Baltimore City.

The plaintiff herein has never at any time held a position or legal claim superior to the right of the United States in the property 3600 Park Heights Avenue , Baltimore , Maryland . The course of events and the chronology of happenings might well justify a finding of a deliberate fraud on creditors by the Braxtons, and particularly upon the Internal Revenue Service, but the Court finds that such a finding is not necessary for decision of this case.

The statute upon which plaintiff here proceeds does not authorize an inquiry by the Court into the validity of the underlying assessment and all the proof offered by the plaintiff is solely intended to attack the validity of the underlying assessment. Essentially, what is claimed, is that the wife of the taxpayer did not sign the returns which covered the years out of which the assessments arise. This is not the proper forum to litigate that aspect of the case. All testimony having to do with Mrs. Braxton's participation, non-participation, or knowledge as to the tax returns is irrelevant to appropriate disposition of the present case.

There has been no demonstration that the plaintiff John S. Braxton, III, is in any way a person with a right superior to the United States properly levied upon and the requested injunction will not issue since there is no basis for such action by the Court. Accordingly, the Court will, by separate Order, DENY the requested injunction; dismiss this proceeding; dissolve the temporary restraining order heretofore issued by the Honorable Herbert N. Maletz and direct the settlement officer to pay over to the United States the full sum in escrow from the sale of 3600 Park Heights Avenue , Baltimore , Maryland , together with all interest accrued thereon.

ORDER

Upon consideration of the plaintiff's request for a permanent injunction, it is this 23rd day of September, 1988, by the United States District Court for the District of Maryland,

ORDERED:

1. That plaintiff John S. Braxton, III's request for an injunction is DENIED;

2. That this proceeding is DISMISSED;

3. That the temporary restraining order heretofore issued by the Honorable Herbert N. Maletz is DISSOLVED;

4. That the settlement officer pay over to the United States the full sum in escrow from the sale of 3600 Park Hieghts Avenue, Baltimore, Maryland, together with all interest accrued thereon; and,

5. That the Clerk of the Court shall mail copies of this Order to all counsel of record.

¹ By agreement of the parties, the appropriate defendant was the United States of America and the Court, by its Order of September 1, 1988 , changed the caption of the case and all internal references to the United States of America .

 

 

[89-1 USTC ¶9127] United States of America , Plaintiff v. David W. Freeman and Barbara M. Freeman, Defendants

U.S. District Court, No. Dist. W.Va., Civ. 81-357-E, 8/12/88

[Code Secs. 6321 , 6322 , 6323 and 7403 ]

Tax liens: Validity of lien: Conveyances by taxpayer: Fraudulent conveyance: Real property: Period of lien: Limitations.--The taxpayer's conveyance of his interest in real property to his common-law wife was set aside and the IRS's tax liens were enforced. The conveyance at issue in the instant case had previously been set aside by a court of competent jurisdiction and that action was not open to collateral attack by the taxpayer and his wife. Moreover, even had there not been a previous judgment on the issue, the conveyance to the wife could not be permitted to stand because it was fraudulent. The conveyance was made at a time when the taxpayer was facing litigation, it was made without any consideration, and the taxpayer retained possession and control of the property. Further, under state ( West Virginia ) law, a transfer of property without valuable consideration is void with respect to creditors whose debts existed at the time of the transfer. Thus, since the IRS's tax liens predated the transfer, the transfer was void with respect to those claims. The IRS's claim was not time-barred even though it was made after the expiration of the state statute of limitations because that statute did not apply to the United States . Accordingly, the property was ordered sold to satisfy the tax liens, with the common-law wife to receive one-half of the proceeds.

FINDINGS OF FACT

MAXWELL, District Judge:

1. The United States instituted this action seeking to set aside as fraudulent and voluntary a conveyance of real property made by David W. Freeman to Barbara M. Freeman. The United States also seeks to foreclose its tax liens against the property. Defendant Barbara M. Freeman answered on or about October 14, 1982 . Defendant David W. Freeman did not answer, but appeared at the reopened trial in this matter on January 15, 1986 . Defendant Pendleton County Bank, joined earlier as a defendant, was dismissed as it no longer had an interest in the property.

2. The Internal Revenue Service made jeopardy assessments against David Freeman as shown in the following table:

                                          Total

Tax                                   (as of Date of

Year Date of Assessment Assessment     Assessment)

1971 October 17, 1978   Income Tax    $   1,996.00

                        Fraud Penalty       998.00

                        Interest            853.97

                                                     $ 3,847.97

1972 October 17, 1978   Income Tax       21,202.80

                        Fraud Penalty    10,601.40

                        Interest          7,799.29

                                                     $39,603.49

1973 October 17, 1978   Income Tax        8,628.04

                        Fraud Penalty     4,314.02

                        Interest          2,656.08

                                                     $15,598.14

1974 October 17, 1978   Income Tax        3,793.52

                        Fraud Penalty     1,816.76

                        Interest            940.20

                                                     $ 6,550.48

1975 October 17, 1978   Income Tax    $     634.76

                        Fraud Penalty       317.38

                        Interest            106.77

                        Fees & Costs           .25

                                                     $ 1,059.16

1976 
August 7, 1978
     Income Tax

                        Estimated Tax

                         Penalty             37.55

                        Delinquency

                         Penalty            251.50

                        Failure to

                        Pay

                         Penalty             50.30

                        Interest             80.98

                        Fees & Costs           .25

                                                     $   420.58

1977 October 16, 1978   Income Tax          318.00

                        Delinquency

                         Penalty             15.90

                        Failure to

                        Pay

                         Penalty              9.54

                        Interest              9.59

                        Fees & Costs           .25

                                                     $   353.28

 

As of February 15, 1986 , David Freeman's liability on these assessments amounted to $138,691.07. Interest has accrued since that date at a rate of ten percent, compounded daily. Internal Revenue Code Sections 6601 , 6621 .

3. David Freeman met defendant Barbara Freeman in 1969, in San Diego , California . During that year David and Barbara Freeman began living together and formed a common law marriage. Defendants David Freeman and Barbara Freeman moved to Brandywine , West Virginia , in 1970. For part of 1970 and 1971 they rented a house in Brandywine and paid rent of $75 per month.

4. Barbara Freeman has not had any paid employment, except for a few months while in college. Barbara Freeman has never received income as would require her to pay federal income taxes, has never paid such taxes or filed a federal income tax return. Since Barbara Freeman and David Freeman began living together, and continuing until at least September, 1978, David Freeman handled the financial transactions of both persons and has supported Barbara Freeman.

5. Mrs. Rolf Mueller is Barbara Freeman's mother. Other than claimed gifts of $42,000 in currency from Mrs. Rolf Mueller, Barbara Freeman has not received any gift or inheritance of more than $100, or gifts or inheritance of more than $1000 in the aggregate. Since the mid-1970s, Mrs. Mueller has suffered from a disease similar to Altzheimer's disease and is not mentally competent. (June 7, 1985 trial transcript at 18.)

6. Defendants financed the purchase of the first parcel by paying $12,963 at the time of purchase and by making a note for $37,737 to the sellers, T.J. Bowman, III and John Harman. The note was to be paid by three equal annual payments of $10,579. Shortly after the purchase, Mr. Bowman and Mr. Harman discounted the note to Pendleton County Bank.

The payment made at the time of purchase was made by five separate checks. One check, for $268, was drawn on Barbara Freeman's checking account and was signed by Barbara Freeman. The other four checks, for $9,237.50, were cashier's checks payable to David Freeman. The 1973 loan payment on the property was made by four separate checks, one on the Barbara Freeman account, for $5,300.59, and three cashier's or official checks payable to David Freeman, each for $2,500. The 1974 payment was made by a $10,000 cashier's check, on which David Freeman is named as payer, and $2,060.66 in cash.

7. In 1975 the defendants paid off this note by making a new note for the balance, payable to the bank. On October 15, 1975 , David Freeman made a payment of $1,400 on the new note by a cashier's check. The second parcel of 18.5 acres was paid by a check for $2,127 on the Barbara Freeman account.

8. In 1971 the Barbara Freeman account was opened at the Pendleton County Bank. During that year $1,200 in cash, and a cashier's check payable to Barbara Freeman and drawn on the Colfax National Bank in Denver , Colorado , were deposited in the checking account. In 1972 a total of $16,583.80 was deposited in that account, of which $200 was in cash and $5,600 was a cashier's check payable to David Freeman and drawn on a California bank. Eighty-three dollars and eighty cents in deposits were accounted for by two checks from Rolf Mueller or R. Mueller. The name of Barbara Freeman's father is Rolf Mueller. The other $10,000 represents four cashier checks payable to Barbara Freeman, drawn on banks in Colorado , Ohio , California and Parkersburg , West Virginia .

In 1973 a total of $23,623.45 was deposited into the Barbara Freeman account, of which $11,088 was cash. A further $6,435.45 was from checks payable to or endorsed to David Freeman, of which $2,312.50 was derived from cashier's checks from California banks. Checks payable to Barbara Freeman were the source of the remaining $6,100.00. All but one hundred dollars of this amount is accounted for by two cashier's checks drawn on California banks.

In 1974, $4,493.72 was deposited into the account, of which $4,219.00 was currency. Two hundred dollars arose from a money order on a Colorado bank payable to David Freeman. A further $74.72 arose from checks to Barbara Freeman.

In 1975, $5,373.08 was deposited into the account, $2,840.00 of which was cash. Checks payable to David Freeman accounted for $2,377.78. Of the remaining $755.30, $420 is from a check from R. Mueller to Barbara Freeman.

David Freeman controlled this account, making all the deposits. The Court finds that substantially all of the funds in the account were funds of David Freeman, and that this was his account.

9. In August of 1973 T.J. Bowman and John Harman sold 101 acres in Highland County , Virginia to Barbara Freeman, Rob ert Wallace and George McKerrow for $20,000. David Freeman conducted the transaction for the purchasers, and paid at least $1,956.45 of the down payment.

On September 6, 1972 Mirkwood, Inc. purchased 380 acres in Pendleton County , West Virginia from Bowman and Harman. Barbara Freeman was and is one of three shareholders in Mirkwood, Inc., and owns at least 25% of the corporation. David Freeman arranged for her to have this interest. David Freeman arranged the purchase of land, paid a down payment of $12,500 and three annual payments totaling $36,394.

10. Don Aaron Freeman is the son of defendants Barbara and David Freeman. He was born on February 25, 1971 . On January 11, 1972 , a 1971 Mercedes Benz automobile was purchased in the name of Don Aaron Freeman. The signature of Don Aaron Freemen on the registration form was executed by David Freeman.

11. David Freeman was arrested on August 29, 1974 by the West Virginia State Police and was charged with the felonious possession with intent to manufacture a controlled substance. He was found guilty of this charge on June 10, 1975 , and placed on probation.

12. On September 16, 1974 , David W. Freeman executed a deed which purported to convey his one half interest in the title to the property at issue to Barbara M. Freeman for consideration of love and affection and $1.00. The deed also claimed that Barbara Freeman and her parents had paid for the property at issue. The deed was recorded on September 18, 1974 .

13. On September 25, 1974 Carleton D. Temple filed a civil action in the Circuit Court of Pendleton County, West Virginia, alleging that David Freemen had shot him, committing the tort of battery. Temple also alleged that the September 16, 1974 conveyance, the conveyance here at issue, was fraudulent as to him.

14. On August 9, 1976 , pursuant to Temple 's action, the Circuit Court of Pendleton County adjudged and ordered that the September 16, 1974 deed be set aside and held to be void and title was reinvested in David Freeman.

15. David Freeman pled guilty to a charge of failing to file an income tax return for 1972 and was sentenced to serve one year for that offense. Freeman was a fugitive from justice on that charge from 1978 until October 25, 1985 , when he was arrested by agents of the Federal Bureau of Investigation and the United States Marshal Service in Austin , Texas . David Freeman was arrested by FBI Special Agent Tom McClenaghan. At trial in this matter, Special Agent McClenaghan was asked the charge on which David Freeman was arrested. Special Agent McClenaghan testified "I believe" Freeman was wanted for bond default and for a warrant for conspiracy to distribute narcotics. Freeman was formally charged solely on the fugitive charge.

16. Barbara Freeman was deposed by the United States on October 4, 1984 . Barbara Freeman was represented by experienced counsel, and consulted counsel prior to the deposition. Barbara Freeman, in response to a question from her attorney, testified under oath that the last time she had contact with David Freeman was the Fall of 1978.

17. Trial in this matter was held on March 26, 1985 . After the United States presented its case, Barbara Freeman's counsel moved to recess the case until he could locate his client and have her testify. Trial recommenced on June 6, 1985 . Barbara Freeman discussed the case with her attorney after the deposition and before the June 6, 1985 hearing. At the June hearing Barbara Freeman testified, in response to a question from her counsel, that she had no contact with David Freeman since the Fall of 1978.

18. Barbara Freeman testified at deposition that she received three gifts of cash from her mother, $30,000 in 1970 and two in 1972 and 1973. The deposition transcript indicated that Barbara Freeman testified that when her mother visited her, "she gave me approximately right around six thousand dollars." Barbara Freeman reviewed that transcript and did not correct that quotation. At trial Barbara Freeman indicated that she meant that her mother gave her $6,000 in 1972 and a further $6,000 in 1973. She claimed that this was Mrs. Mueller's own money. Defendant Barbara Freeman testified that Mrs. Mueller obtained these funds by selling china after World War II. Barbara Freeman also testified that the family emigrated to the United States in 1954. Barbara Freeman testified that her father did not know of the supposed gift until he read her deposition in 1984. Barbara Freeman has testified that she gave this money to David Freeman to purchase land, and that David Freeman handled the money after that. Barbara Freeman testified that this money was used to purchase the property at issue, as well as the Highland County, Virginia, property and the Mirkwood property.

19. After the arrest of David Freeman in October of 1978, the United States moved to reopen the record in this matter. At reopened trial the United States adduced testimony from Mr. Jerry Morse that David and Barbara Freeman, under the names David and Janet Canterbury, had rented a house from him in Austin, Texas, in 1981 and occupied that house together until October of 1985. Mr. Morse also testified that during the later period of defendants' occupancy the rent was usually paid in cash or by cashier's checks payable to David Canterbury from California banks. Mr. Morse identified defendants as the Canterburys. At the hearing Special Agent Tom McClenaghan of the Federal Bureau of Investigation testified that, after arresting David Freeman, he went to the house and addressed the woman living there as "Mrs. Freeman", and she responded to that name. Special Agent McClenaghan also identified defendants.

20. Defendant Barbara Freeman and defendant David Freeman also testified at the January 15, 1986 hearing. Defendant Barbara Freeman admitted that her testimony, at deposition and trial, that she had no contact with David Freeman since 1978 to the time of trial, had been false.

21. Defendant David Freeman testified that the claimed gifts from Mrs. Mueller were the source of the funds used to buy the property at issue. David Freeman admitted that he had promised to appear to begin serving his sentence in 1978 but did not appear.

22. Defendants' testimony was not credible. David Freeman was the source for the funds used to buy the property. The Court does not believe defendants' testimony that Mrs. Mueller provided these funds.

Barbara Freeman gave false testimony in response to questions from her attorney and after a full opportunity to tell her counsel not to ask those questions. The Court must infer that Barbara Freeman intentionally misled her counsel so that she could gain the Court's sympathy by her false testimony. Further, David Freeman changed his testimony after Barbara Freeman's counsel indicated to him that documentary evidence contradicted his testimony. (January 15, 1986 transcript at 22-23, 26-27.)

After observing the demeanor of the witnesses in this matter, the Court gives credence to the testimony presented by the United States and does not give credence to defendants' testimony. The Court is satisfied that defendants, both in state court and in this Court, have attempted to manipulate the judicial process. (January 15, 1986 transcript at 48-49.) The Court cannot allow this to be done. The Court finds that funds used to purchase the property were derived from the activities of David Freeman, and not from any gift from Mrs. Mueller to Barbara Freeman.

CONCLUSIONS OF LAW

1. The United States has submitted a certified copy of a judgment of the Pendleton County Circuit Court setting aside the conveyance at issue in this case. Temple v. Freeman (No. 783, ( Aug. 9, 1976 ). The judgment was based upon a complaint alleging that the September 16, 1974 conveyance was fraudulent as to Temple , a creditor of David W. Freeman.

A judgment setting aside a conveyance as fraudulent to one creditor voids that conveyance as to all creditors. Lockhard v. Beckley , 10 W. Va. 87 (1877). West Virginia courts give preclusive effect to consent judgments. State ex. rel. Prince v. Dept. of Highways, 195 S.E. 2d 160, 162 (W. Va. 1972); State v. Sawyers, 133 S.E. 2d 257, 261 (W. Va. 1963); Ohio River R. Co. v. Johnson, 50 W. Va. 499, 40 S.E. 407, 409 (1901). As the order in Temple was by a court of competent jurisdiction, it must be given effect by this Court, regardless of defendant's arguments that it was erroneous. Kremer v. Chemical Construction Corp., 456 U.S. 461, 466 (1982); University of Illinois Foundation v. Blonder-Tongue Laboratories, Inc., 465 F.2d 380, 381 (7th Cir. 1972), cert. denied, 409 U.S. 1061. See Federated Department Stores, Inc. v. Moitie, 452 U.S. 394, 398 (1981); M.J. Former Adjudications, Section 10; M.J. Judgments, Section 146 .

Defendant Barbara Freeman has raised various objections to the Pendleton County judgment. This is not the proper forum for defendant's objections. It is the law in West Virginia that an order of a court acting within its subject matter jurisdiction is not open to collateral attack, except for want of jurisdiction. State ex rel. Massey v. Boles, 140 S.E. 2d 608, 610 (W. Va. 1965); Adkins, supra; Stewart v. Senter, 106 S.E. 443, 444 (W. Va. 1921) ("The law is so firmly settled that a judgment of a court of competent jurisdiction, so long as it stands in full force and unreserved, cannot be impeached in any collateral proceeding on account of errors not going to the jurisdiction * * *"). A collateral attack is an attempt to impeach a judgment in a proceeding not instituted for the express purpose of annulling, correcting or modifying that judgment. Lough v. Taylor, 124 S.E. 585 (W. Va. 1924). An attack on a judgment is direct if it involves a review or annulment of the judgment and is collateral if it involves a mere avoidance of its effect. McKnight v. Pettigrew, 141 W. Va. 506, 91 S.E. 2d 324, 328-329 (1956). Defendant is merely attempting to evade the preclusive effect of Temple . Such a collateral attack on a state court order should not be allowed. Silvious v. Helmick, 291 F. Supp. 716, 718 (N.D. W. Va. 1968).

As defendants have not acted to set aside the Circuit Court judgment, this Court must give full faith and credit to the state court judgment, and not hear collateral attacks on that judgment. However, even if this were not the case, the United States has shown, after a full trial of this matter, that it is entitled to judgment.

2. The burden was on defendants to show that the conveyance should be allowed to stand. As the conveyance at issue was from husband to wife, West Virginia law provides that the Court must presume the conveyance to be void as to creditors and the burden of proof as to the validity of the transfer is shifted to the party attempting to uphold the transaction. Hutchinson v. Walton, 119 W. Va. 709 (1938). The "burden is upon [defendant], not only to produce the evidence [to uphold the transaction], but to prove the facts clearly and fully." Bradley v. Kenova Trading Co., 115 S.E. 866, 868 (W. Va. 1923). See also Pickers v. Wood, 50 S.E. 818, 820-821 ( W. Va. 1905). This case is very similar to Pickers, supra. Barbara Freeman's claim is essentially that her husband's interest in the land was held in secret trust for her until the purported conveyance. Defendants must carry a heavy burden to establish the bona fides of this transaction.

3. The fraud necessary to set aside a conveyance may be inferred from the facts and circumstances of the case. Patterson v. Patterson, 277 S.E. 2d 709, 719 (W. Va. 1981). When the facts and circumstances of the case are such to make a prima facie case, they are taken as conclusive evidence, unless rebutted. To rebut this case, defendants must show by well established facts that the conveyance is not fraudulent. Hutchinson v. Walton, supra.

Certain facts suggesting fraud are sometimes designated "badges of fraud." M.J. Fraudulent Conveyances, Sec. 15 . Among the more common of these badges of fraud are a close relationship between the parties, want of consideration and the retention of the property by the grantor. Patterson v. Patterson, 277 S.E. 2d 709, 718 (W. Va. 1981). The United States has established the presence of several of these badges of fraud, and defendants have not rebutted this case.

4. The evidence is clear that David Freeman not only provided payment for his half interest in the property, but most, if not all, of the funds for the property as a whole. The statement in the 1974 deed that Barbara Freeman and her family had provided all of the funds for the original purchases of the property is not credible. It is thus clear that the 1974 conveyance of David Freeman's one-half interest in the property was made without consideration, which is a badge of fraud.

5. Other badges of fraud are present in this case, the retention of possession and control of the property by David Freeman, and was facing possible litigation. In April of 1975, after the purported conveyance, David Freeman signed a Deed of Trust Note secured by the property, which rolled over the original indebtedness for the property. David Freeman also continued to live on the property after the conveyance.

Further, David Freeman was facing litigation at the time of the purported conveyance. David Freeman had shot Carleton Temple in June of 1974 and was facing a lawsuit from Temple . David Freeman had been arrested on felony charges on August 29, 1974 and was facing the possibility of criminal fines. A transfer made with the intent to avoid future criminal fines is fraudulent. State v. Burkeholder, 30 W. Va. 593, 598-599 (1888).

6. David Freeman purchased several parcels of land and a Mercedes Benz automobile, but kept this property in others' names. He operated a bank account in another's name. David Freeman failed to file income tax returns for the years 1971, 1972 and 1973 or pay tax for those years. His practice of hiding his property interests gives rise to a compelling inference that he was acting with a fraudulent motive.

7. As a general rule, the title of a purchaser is not affected by the fraudulent intent of a grantor, unless the purchaser had notice of that fraudulent intent. However, this rule only protects a purchaser for valuable consideration. W. Va. Code Ann. Sec. 40 -1-1; Laidley v. Reynolds, 58 W. Va. 418, 52 S.E. 405 (1905). The recipient of a fraudulent gift, however free from fraudulent intent, becomes a fraudulent grantee the moment he claims the benefit of the grant. His acceptance amounts in law to an adoption of the fraudulent act of the grantor. Donehoo v. King, 83 W. Va. 485, 98 S.E. 520, 522 (1919). See also Graham Grocery Co. v. Chase, 75 W. Va. 775, 84 S.E. 785, 786 (1915). Here the deed shows on its face that the transaction was voluntary and thus void irregardless of Barbara Freeman's motives.

8. A conveyance made with the intent to defraud existing creditors vitiates the conveyance as to subsequent creditors. Donehoo, supra, 98 S.E. 520, 522; Graham Grocery Co., supra 84 S.E. 785, 786.

9. The United States did not need to show that David Freeman was insolvent at the time of the transfer. "The right of a creditor to subject to the payment of his debt the property of his debtor fraudulently conveyed does not depend on the question of the insolvency of the debtor." Halfpenny v. Tate, 65 W. Va. 296, 64 S.E. 28 (1909). Insolvency is just an indicata of fraud, not a prerequisite for a finding that a conveyance was fraudulent.

10. A transfer of property made without valuable consideration is void as to creditors whose debts existed at the time of the conveyance. W. Va. Code Ann. Sec. 40 -1-3. A voluntary transaction is void pursuant to this section whether or not the parties had a fraudulent intent. Kell v. Cumby, 125 W. Va. 802, 26 S.E. 2d 233 (1943); Tetrick v. McIntire, 110 W. Va. 529, 158 S.E. 788 (1931); McCaskey v. Potts, 65 W. Va. 641, 64 S.E. 908 (1909). A voluntary transfer is void as to pre-existing creditors even if the grantor was not insolvent at the time of the transaction. Bank v. Wilson , 25 W. Va. 242, 254-255 (1884); M.J. Fraudulent and Voluntary Conveyance, Sec. 65 . A voluntary transfer is void as against existing creditors because it is voluntary, regardless of the "amount of debts, the extent of the property so conveyed, the motives which prompted the settlement, or the conditions or circumstances of the party at the time." McCaskey v. Potts, supra; M.J. Fraudulent and Voluntary Conveyance, Sec. 65 .

Here the deed on its face shows it was made without valuable consideration. Even if Barbara Freeman's claim that she and her family had paid the full price for the original purchase of the property was believed, that would not save the transfer of David Freeman's interest to her, as the delivery of the joint interest to the property to David should be presumed to be a completed gift. Horner v. Huffman, 52 W. Va. 40, 43 S.E. 132 (1903); McGinnis v. Curry, 13 W. Va. 29, 64 (1878). See Patterson v. Patterson, 277 S.E. 2d 709, 715-716 (W. Va. 1981). In any event, the circumstances of the family finances and the purchases clearly makes Barbara Freeman's story incredible, and indicates that the source of the funds for the property was David Freeman.

11. The burden of proving that the transfer was bona fide and for a valuable consideration rests upon Barbara Freeman, not David Freeman's creditors. Horner, supra; Herog v. Weiler, 24 W. Va. 199 (1884).

12. The United States was a preexisting creditor of David Freeman. The tax claims for the United States for 1971, 1972 and 1973 all predate the transfer. Hence the transaction is void as to these tax claims of the United States .

13. Ordinarily, a claim that a transfer was void as to creditors as it was a voluntary conveyance could not be brought as more than five years passed from the date of the conveyance to the date the complaint was filed. West Virginia law sets a five-year statute of limitations for such claims. W. Va. Code Ann. Sec. 40 -1-4. However, such state statutes of limitations do not apply to the United States when it is acting in its sovereign capacity. United States v. Summerlin [40-2 USTC ¶9633 ], 310 U.S. 414, 416 (1939); United States v. Morgan, 298 F.2d 255, 256 (4th Cir. 1962); United States v. Weintraub [80-1 USTC ¶9172 ], 613 F.2d 612 (6th Cir. 1979); United States v. Polan Industries Inc. [61-2 USTC ¶9598 ], 196 F.Supp. 333, 335-339 (S.D. W. Va. 1961); United States v. West, 299 F.Supp. 661, 664 (Del. 1969) (fraudulent conveyance case). See Block v. North Dakota , 461 U.S. 273, 288-290 (1983). As the United States made its claim that the conveyance was voluntary within six years after the date of assessment, its claim was not time barred. 26 U.S.C. Section 6502 .

14. The United States has established that the conveyance at issue was both voluntary and fraudulent. Defendants' attempt to rebut that case has failed. The September, 1974 conveyance is thus void as to the United States , a creditor.

15. Pursuant to Internal Revenue Code Section 7403 (26 U.S.C.) and United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677 (1983), the United States is entitled to a sale of the property, with half of the sale proceeds, but not more than the amount of David Freeman's tax liabilities, to be paid to the United States. The rest of the funds shall be paid to Barbara Freeman.

Counsel shall submit an appropriate order of judgment and sale.

 

 

[71-1 USTC ¶9296]Continental Oil Co., Plaintiff v. United States of America, The Bank of Bermuda, Ltd., Henry Goldon et al., Defendants

U. S. District Court, So. Dist. N. Y., 69 Civ. 827 HRT, 326 FSupp 266, 3/26/71

[Code Sec. 6323--Result unchanged by '69 Tax Reform Act]

Validity of lien: Priority against third parties: Conveyance by taxpayer.--The taxpayer's assignment to a bank of receivables was not a complete transfer of his entire interest. He maintained a contractual right to receive approximately 95% of payments exceeding $100,000. The assignment was therefore illusory and the taxpayer did not divest himself of substantial ownership. The bank was also required to give adequate and full consideration for the taxpayer's 95% interest in the payments which it acquired before a notice of the lien was filed. The government was granted leave to amend its complaint in order to advise to Court of its position in respect to the payments.

Francis R. Jones, Dewey, Ballentine, Busby, Palmer & Wood, 140 Broadway, New York , N. Y., for plaintiff. David M. Brodsky, Assistant United States Attorney, William R. Burton, Valicenti, Leighton, Reid & Pine, 70 Pine St., New York, N. Y., for defendants.

Opinion

TYLER, District Judge:

In response to a notice of levy served by the government on February 27, 1969, the Continental Oil Co. (hereinafter "Continental") instituted this interpleader action, pursuant to 28 U. S. C. §1335, in March, 1969, depositing in the Registry of the Court at that time and thereafter such sums as accrue to the interest of Mr. Edgar Fain. ¹ The United States and the Bank of Bermuda, Ltd. (the "Bank") remain the sole contenders for these funds. ² The United States ' claim stems from a jeopardy assessment against the taxpayer Fain in the amount of $1,107,207.14, plus statutory additions of $7,339.34; the Bank lays claim to these funds as assignee and/or vendee of Fain's rights to future payments from Continental.

[Facts]

In December, 1969, defendant Henry Gordon moved for summary judgment with respect to his recently settled claim. ³ In March, 1970, the motion was denied without prejudice because the United States lacked sufficient information upon which to oppose it. Counsel were instructed to commence discovery and submit thereafter memoranda of law setting forth their respective theories for lien priority, to be discussed hereinafter.

On the basis of the memoranda of law submitted by counsel, the following facts appear uncontested:

In consideration of a sale, consummated September 18, 1964 , of certain property owned jointly by the taxpayer Fain and his two brothers, Continental as purchaser promised to amortize slightly over 2/3 of the purchase price in seven (7) equal annual instalments payable each September 18 with interest at 41/2%. Fain's proportionate interest in the instalments was 16.3686396% or $498,887. The amount of the 1969 and 1970 annual instalments was subject to some fluctuation by reason of the amount of insurance proceeds received by Continental in each year. Additional consideration for the Fain property consisted of a contingent payment due March 1, 1969 , computed on the basis of the cash earnings of the purchased properties, but not to exceed $6,000,000, plus 4% interest from September 18, 1964 , which amount was to be shared in an unspecified proportion by the Fain brothers. Continental further agreed to make the payments negotiable as collateral security for borrowings by the Fains by giving its guarantee to future lenders.

[Assignment of Rights]

On May 29, 1967 , Fain made the so-called "assignment" of his rights to the contingent payment from Continental and to the contingent increases in 1969 and 1970 instalment payments to the Bank of Bermuda. In exchange for the transfer of these rights, Fain received $100,000 cash, plus 951/2% of all payments received by the Bank in excess of $100,000. Thus, the Bank was guaranteed return of the $100,000, plus 41/2% of any excess. Given the expected size of the contingent payment, it is clear that Fain retained the right to the bulk (approximately 95%) of payments due him. In addition, to secure returns of the $100,000, Fain deposited $100,000 in his Bank of Bermuda account (or, more precisely, the Bank incurred by Henry Gordon on Fain's The Bank of Bermuda issued to Continental two guarantees totalling $500,000 to cover liabilities to First National City Bank incurred by Henry Golrdon on Fain's behalf and for which Fain also promised to pay a .5% fee and to indemnify the Bank. All these transactions were executed by August, 1967.

As of November, 1970, these additional transactions had occurred: (1) upon receiving the insurance proceeds contemplated by the sales agreement in February 1968, Continental relieved the Bank of Bermuda of $400,000 of its guaranty; and (2) on February 3, 1969, the Bank apparently acquired Fain's 95% interest in the March, 1969 contingent payment by paying to Fain $1,040,000. According to the Bank, Fain's contingent interest was then valued at $1,150,000. ⁴

[Jeopardy Assessment]

On September 6, 1966 , Fain renounced his United States citizenship and became a citizen of Nicaragua with a residence in Bermuda . Because of his expatriation, the Internal Revenue Service disallowed instalment basis treatment for the Continental payments received in 1966. In December, 1968, the first jeopardy assessment for 1966, in the amount of $1,120,680.30, was made against Fain and his wife jointly. A revised assessment in the sum of $1,107,207.14 was made on January 17, 1969 . Notice of the revised assessment was served upon Fain on January 20, 1969, but not recorded in accordance with 26 U. S. C. §6323(f) until February 12, 1969, nine (9) days subsequent to the purported acquisition by the Bank of Fain's interest in the allegedly assigned payments. Apparently, notice of lien in accordance with 26 U. S. C. §6323(f) was never filed respecting the 1968 assessment, a fact which, if controverted, would significantly alter the tentative conclusions set forth below.

The purpose of this interim memorandum is dual: to dispose of certain contentions of the parties with respect to the legal effect of the so-called "assignment" by Fain to the Bank; and to set forth those aspects of this litigation which require clarification and, perhaps, further evidentiary submissions, before the opposing motions for summary judgment, either partial or total, can be decided.

[Theories for Lien Priorities]

Summary judgment turns on which contender is, in fact and in law, the prior lienor. The government presents three theories for its lien priority: (1) that the May 29, 1967 "assignment" by Fain to the Bank of his rights in the contingent payment and the contingent increases in the 1969 and 1970 instalments was illusory and void; (2) that the "assignment" created merely a security interest in the Bank, which interest remained imperfected prior to the perfection of the tax lien; and (3) that even if the government is not entitled priority over the Bank's security interest, the Bank should be required to marshall other assets of the taxpayer before recourse to the Continental deposits in this proceeding. The Bank urges its lien priority on the diametrically opposed ground that the May 29, 1967 assignment effected a full, absolute and valid transfer of Fain's interest in the Continental payments. Consideration of the government's fourth theory of recovery--that the assignment is void, being a fraudulent transfer in violation of the New York Debtor and Creditor Law §§ 276 and 278--is deferred until final disposition of those grounds amenable to summary judgment.

I. The Assignment

The government's lien for taxes, which arises at time of assessment, 26 U. S. C. §6322, attaches to "all property and rights to property, whether real or personal," belonging to the delinquent taxpayer. 26 U. S. C. §6321. To decide what constitutes such "property or rights to property," the court must look in the first instance to state law, conceded here to be the law of New York . Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 513 et seq. (1960), United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55-56 (1958). Therefore, since the assignment, executed May 29, 1967 , predated the December 1968 assessment and demand upon the taxpayer, the Bank is the prior lienor to the extent that the assignment effectuated a valid transfer of the Continental monies under New York law. See City of New York v. United States [60-2 USTC ¶9767], 283 F. 2d 829 (2d Cir. 1960), United States v. Lester, 235 F. Supp. 115 (S. D. N. Y. 1964). As previously indicated, however, the question of the vulnerability of this assignment under the New York Debtor and Creditor Law is reserved for future decision.

The Bank correctly argues that under New York law, funds to become due, either definitely or contingently, are assignable. See 3 N. Y. Jurisprudence, Assignments §9, Strathos v. Murphy, 276 N. Y. S. 2d 727, 26 A. D. 2d 500 (1st Dept. 1966 ), aff'd 281 N. Y. S. 2d 81, 19 N. Y. 2d 883 (1967). Nor does the Bank err in reading the state law to sanction enforcement of writeen assignments regardless of consideration. N. Y. Gen. Oblig. Law §5-1107 ( McKinney 1964), Davin v. Isman, 228 N. Y. 1, 126 N. E. 257 (1920). Thus, if the agreement of May 29, 1967 did indeed intend and effectuate a complete, irrevocable transfer by Fain to the Bank, then under New York law, Fain would have no interest in the Continental payments as of December, 1968. But therein lies the rub. It is apparent from the face of the assignment agreement that Fain thereby did not transfer dominion and control in respect to at least 951/2% of the future payments in excess of $100,000.

[Transfer of Entire Interest]

To be enforceable against third parties under New York law, an assignment must be "a complete transfer of the entire interest of the assignor in the particular subject of assignment, whereby the assignor is divested of all control over the thing assigned." 3 N. Y. Juris., Assignments §28. Fain's right to receive from the Bank approximately 95% of the funds purportedly assigned is as much a contractual right to future proceeds as was the original Continental promise to pay. The transfer of legal title is of no consequence where the assignor retains an absolute right to the proceeds. Awner v. Moscowitz, 176 N. Y. S. 737 (1st Dept. 1919 ), and see In re Walton's Estate, 247 N. Y. S. 2d 21, 20 A. D. 2d 386 (1st Dept. 1964 ). On remand, in Aquilino v. United States, 10 N. Y. 2d 271, 219 N. Y. S. 2d 254 (1961), the New York Court of Appeals, concerned with the property rights of an assignee, held that bare legal title unaccompanied by beneficial interest is not subject to the government's tax lien. Conversely, I am compelled to conclude that here the Bank did not acquire such interest in the bulk of the Continental monies as would divest the assignor of substantial ownership. The assignment is, therefore, illusory at least insofar as the Continental funds exceed $100,000, plus 41/2% of the balance.

The foregoing makes it unnecessary to consider the government's alternative characterization of this transaction as creating a security interest in the Bank. ⁵ Were it not for the apparent payment on February 3, 1969 by the Bank of $1.04 million to Fain in exchange for some portion of his reversionary interest in the Continental funds, the government would be entitled to immediate entry of summary judgment respecting the priority of its lien to the above-decribed extent. Curiously, however, neither the government nor the Bank accord significance to this payment, which, if a valid purchase under Sections 6323(a) and (h)(6) of the Federal Tax Lien Act of 1966, 26 U. S. C., would entitle the Bank to lien priority.

II. The February 3, 1969 Transaction

Both contenders appear to acknowledge that some or all of Fain's reserved 95% interest in the Continental payments was acquired by the Bank for the sum of $1.04 million on February 3, 1969 . This payment, which occurred after the jeopardy assessment was made but before a notice of lien was filed, may have transformed the Bank into a "purchaser" whose claim to the acquired property is protected against an unfiled tax lien. 26 U. S. C. §6323(a). ⁶

[Adequate and Full Consideration]

To be a purchaser, the Bank must have given "adequate and full consideration." 26 U. S. C. §6323(h)(6). ⁷ Prior to the 1966 Tax Lien Act, purchaser status was achieved by the giving of "valuable consideration" even if not adequate. United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218, 221 (1955). Enochs v. Smith [66-1 USTC ¶9378], 359 F. 2d 924 (5th Cir. 1966). The intended effect of the 1966 language is explained in the Report of the Senate Committee on Finance:

"A purchaser is defined as a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valued under local law as against subsequent purchasers without actual notice. By requiring 'adequate and full consideration,' the bill modifies the results reached in court decisions under present law in that the amount paid can no longer be so small as to have little relation to the property acquired. However, this requirement is not intended to preclude a bona fide bargain purchaser . . ." Senate Rep. No. 1708, 89th Cong., 2d Sess., reprinted in 1966 U. S. Code Cong. & Admin. News, Vol. 3, at 3735.

[Federal Law Controlling]

Even before the 1966 revision, the determination of purchaser status turned not upon state law concepts but upon those of federal law. Enochs v. Smith, supra. Similarly, the determination of the fullness and adequacy of consideration is a question of federal law. See Creedon, "The Federal Tax Lien Act of 1966: An Historic Breakthrough," 4 Harv. J. Legis. 163, 177 (1966-67). Although this section of the revised Act has not yet been applied in reported decisions, the courts have long interpreted the requirement of adequate consideration in relation to estate and gift tax liens. 26 U. S. C. §6324. See Commissioner v. Wemyss [45-1 USTC ¶10,179], 324 U. S. 303 (1945), Merrill v. Fahs [45-1 USTC ¶10,180], 324 U. S. 308 (1945), Smith v. United States [67-2 USTC ¶12,496], 277 F. Supp. 583 (M. D. Fla. 1967), Nourse v. Riddel [56-2 USTC ¶11,637], 143 F. Supp. 759 (S. D. Cal. 1956). Given the expressed intention of the Congress to withdraw the constructive notice privilege accorded by Section 6323(a), the requirement of adequate and full consideration must be strictly construed. Thus, revised Section 6323(h)(6) modifies the doctrine, oft-repeated in this circuit, that the government has no greater right to property than that accorded the taxpayer. City of New York v. United States , supra, Lester v. U. S. , supra, at 119. Whereas Fain may be incapable of recovering the Continental monies under state law, the government's rights are no longer so limited.

[Government's Possible Contentions]

With the legal framework thus developed, the government is requested to advise the court of its position in respect to the February 3 payment, to wit:

(1) does it dispute that the contract was executed prior to filing of notice, that payment was actually made, or that rights to some part of the Continental proceeds were irrevocably transferred; or

(2) does it challenge the exchange for inadequate consideration, e.g., what part of Fain's interest in the "assigned" Continental payments was acquired (if the contingent increases on the 1969 and 1970 instalments were not acquired, summary judgment may be entered forthwith in that amount); ⁸ what was the expected value of the proceeds; what degree of risk of nonpayment, if any, was assumed by the Bank, how does the Bank's expected profit compare with discounted purchases in the normal course of business; or

(3) does it contend that the Bank had actual notice of the tax lien so as to make the filing of notice by the government arguably irrelevant. Cf. United States v. Hodes [66-1 USTC ¶9232], 355 F. 2d 746, 751 (2d Cir. 1966), United States v. Sirico [66-1 USTC ¶9209], 247 F. Supp. 421, 422 (S. D. N. Y. 1965); or

(4) does it contest the legal characterization of the February 3 exchange as a "purchase".

[Leave to Amend Pleadings Allowed]

If the government declines to challenge the February 3 payment on any of the above-listed or other relevant grounds, then the ultimate determination of the contest between the Bank and the United States will have to abide an evidentiary hearing directed to whether this transaction constituted a fraudulent transfer, under New York law. The government is hereby granted leave to amend its complaint to include such ground for relief, cognizable pursuant to this court's pendant jurisdiction. The lateness of the request to amend is amply explained by the lengthy course of pre-trial discovery an portends no prejudice to the Bank's interests at this stage.

Counsel are hereby requested to appear for a conference in Court Room 2704 on April 8, 1971, at 4:15 p. m. to discuss the questions raised in this interim opinion and to determine the steps precedent to the conclusion of this litigation.

¹ The funds were transferred by order of the court to a time account at the Manufacturer's Hanover Bank & Trust Co. By stipulation, dated January 22, 1971 , the parties agreed to a procedure for withdrawal by the Bank of amounts in excess of the government's claim.

² A claim for $52.46 interposed by Henry Gordon has been withdrawn. Thus, this opinion will not concern itself with the Gordon-Fain transactions, although related to those detailed herein.

³ Ibid.

⁴ Attention is directed to the above finding that only the contingent payment was acquired by the February 3, 1969 lump sum payment. Since it is possible that the term "contingent payment" was intended to encompass as well the contingent increases on the 1969 and 1970 instalments, counsel are requested to advise the court if there is error in the above construction.

⁵ The treatment herein of the assignment as an outright transfer is not intended to foreclose the government from further developing its theory that the assignment was for security purposes only, if relevant to future disposition. 26 U. S. C. §§ 6323(a) and (h)(1). Cf. Warren v. Chemical Bank & Trust Co., 79 N. Y. S. 2d 776, 274 A. D. 785 (1st Dept. 1948 ), Sams v. Redevelopment Authority of City of New Kensington , 261 A. 2d 566, 436 Pa. 542 (Sup. Ct. 1970) 4 Corbin, Contracts §881, p. 543 (1951), and see Creedon, "Assignments for Security and Federal Tax Liens", 37 Fordham L. Rev. 535 (1968-69).

⁶ §6323(a). Purchase(r)s, 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 or his delegate.

⁷ §6323(h) Definitions.--For purposes of this section and section 6324--. . . .

(6) Purchaser.--The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice. In applying the preceding sentence for the purposes of subsection (a) of this section, and for purposes of section 6324--. . . .

(B) A written executory contract to purchase or lease property or any interest therein, . . ..

(D) . . . which is not a lien or security in interest shall be treated as an interest in property.

⁸ See footnote 4, supra.

 

 

[69-2 USTC ¶9524] United States of America , Plaintiff-Appellee v. Sam Mitchell and Vera L. Mitchell, Defendants-Appellants

(CA-7), U. S. Court of Appeals, 7th Circuit, No. 16727, 413 F2d 181, 7/11/69 , Aff'g District Court, 67-1 USTC ¶9468, 271 F. Supp. 858.)

[1939 Code Sec. 41--substantially similar to 1954 Code Sec. 446]

Reconstruction of income: Net worth method: Correctness.--The government correctly established that the taxpayer had unreported income by reconstructing his income through the net worth method. By including personal expenditures made by the taxpayer during the taxable years in question, the government showed that he had considerable unexplained income and adequately showed a probable source of such income as unreported sales from the taxpayer's cabaret businesses.

[1939 Code Sec. 3672--substantially similar to 1954 Code Sec. 6323]

Assessment: Validity against transferred property: Prior lien.--Even if the transfer of property to taxpayer's wife was not voidable, the subsequent transfer to the taxpayer's son was subject to the government's tax lien since the deficiency was assessed prior to such transfer. Consequently, the son took the property subject to the government's lien.

Johnnie M. Walters, Lee A. Jackson, Elmer J. Kelsey, Ann E. Belanger, Department of Justice, Washington, D. C. 20530, Thomas A. Foran, United States Attorney, Chicago, Ill., for plaintiff-appellee. Anna R. Lavin, 53 W. Jackson Blvd. , Chicago , Ill. , for defendants-appellants.

Before SWYGERT and CUMMINGS, Circuit Judges, and ESCHBACH, District Judge. ¹

SWYGERT, Circuit Judge:

The Government brought this action to reduce to judgment certain assessments of cabaret excise taxes imposed by Section 1700 of the Internal Revenue Code of 1939 that were claimed to have arisen from taxpayer Sam Mitchell's activities during the period 1947 through 1950. Additionally, federal income tax liability for 1948 and 1949 against Sam Mitchell, individually, and for 1950 against Sam and his wife, Vera Mitchell, was averred. The complaint prayed that a certain transfer of real estate by the taxpayers be set aside as fraudulent against the Government and the property ordered sold in satisfaction of tax liens.

The case was originally tried before Senior Judge Fred L. Wham, but, on account of his illness, it was reassigned to Chief Judge William J. Campbell of the Northern District of Illinois for his decision. Pursuant to a stipulation of the parties, Judge Campbell decided the case without further trial on the basis of counsel's briefs and the record. The district court's judgment directed that the United States recover $246,061.12 plus interest against Sam Mitchell; that the United States recover $34,034.41 plus interest against Sam and Vera Mitchell, jointly and severally; and that the conveyance of real property by Sam and Vera Mitchell on February 24, 1959 was void as to the United States; and that Vera Mitchell's assignment of her interest in that property was void as to the United States. It is an appeal from that judgment which is before us.

From the record and the findings of the district court, it appears the following facts occurred. Cabaret excise tax returns were filed each month during the years in question by Sam Mitchell as owner of two night clubs, the Riptide Club and the Little Club, located in Calumet City , Illinois . Cabaret tax returns for the Riptide Club extended over a 48-month period from January 1947, through December 1950. Tax returns for the Little Club were filed during a 25-month period from December 1948, through December 1950. The information and amounts of tax submitted with each monthly return conformed with the records of the two clubs. The tax due was computed by totaling the month's receipts but excluding those receipts attributed to day sales and to evening sales when entertainment was not provided. The records of the Riptide Club indicate entertainers were contracted for, worked, and received wages covering many of the evenings in which the ledgers for cabaret tax purposes indicated there was no entertainment. Local newspapers continuously advertised entertainment every night at the Riptide Club, but no cabaret taxes were paid on receipts from many nights from January 1, 1947 , through July 31, 1948 .

From August 1948, through December 1950, the Riptide Club featured taxable entertainment each evening in the form of exotic dancing. Though cabaret income was reported and excise tax paid for each evening during this period, over one-half of the Club's revenue was taken in during non-taxable day sales periods according to Riptide records. The defendant Sam Mitchell testified that the day sales period would run normally from 6:00 a.m. , when the Riptide opened, until 9:00 p.m. when entertainment started. This testimony was directly contradicted by the postman who delivered the mail to the Riptide. He claimed that during the period in question, the Riptide was often closed when he made the morning and afternoon mail deliveries.

The testimony revealed that a similar procedure was in operation at the Little Club. From December 1948, to September 1949, taxable entertainment was contracted for and appeared at the Little Club six days a week, Cabaret taxes were paid only for the weekend evenings. As in the case of the Riptide Club, during the years 1949 and 1950, the taxpayer reported that about one-half of the total receipts of the Little Club were earned during the non-taxable day sales hours. Again, the postman testified that he made morning and afternoon deliveries to the Little Club each weekday and that there were no customers in the club. Another witness stated that there were few customers in the Little Club as late as 9:00 p.m.

An Internal Revenue agent testified regarding his investigation into the clubs' operations. On the basis of his three-year inquiry, the agent concluded that the non-taxable day sales at the Riptide amounted to no more than $30 per day and at the Little Club to no more than $20 per day.

The district court found that the excise tax returns filed each month contained false information, either as to the number of evenings taxable entertainment occurred or the percentage of daily receipts attributable to day sales, that a clear case of tax fraud had been established and as a consequence the Government was entitled to fraud penalties on the excise tax liabilities. The court denied, however, the Government's claim to the extent that it included cabaret tax penalties and interest on alleged unreported sales.

The income tax deficiency asserted by the Government was based on a net worth analysis. Revenue agents testified that they conducted an investigation into Sam Mitchell's finances dating back to 1943 and that they had established December 31, 1947 as the starting point from which subsequent increases in assets could be measured. The agents' net worth computations were introduced as evidence. After the defendants' counsel stated that three items in the net worth statement were contested, two of the items were withdrawn and the alleged income tax deficiency was accordingly readjusted. The remaining disputed item concerned a $33,000 loan made to the taxpayer's brother during the year 1950.

The district court found that the Government's net worth computation established that the taxpayer and his wife had considerable taxable income in excess of that reported and that a probable source of the unreported income was his cabaret business. However, the court held that no fraud penalties would attach to the income tax deficiencies.

In 1959 while the taxpayers were admin istratively contesting the tax liabilities assessed in this case, they conveyed certain real estate to the Chicago Title and Trust Company, as Trustee, and named Vera Mitchell as the beneficial owner. Subsequently, she gratuitously transferred her beneficial interest to their son. The district court determined that the purpose of these transfers was to hinder, delay or defraud the United States in its effort to collect taxes due, held the transfers to be void and set them aside as to the United States .

The defendants' first contention is that the net worth theory was improperly applied in that there was no starting point from which to make a net worth computation and that in any case the Government failed to prove the Mitchells' unreported income. The record does not support this assertion. Harry Ansell, the Revenue agent who prepared the Government's net worth summaries, testified that on the starting point, December 31, 1943 , the taxpayer had a net worth figure of $20,977.71. The assets and liabilities that were the basis of this determination were set forth in his summary. Throughout the case the taxpayer never alleged that he had any other assets or liabilities. Further, he disputed only one item in the final computation, the $33,000 loan in 1950. The cases cited by the taxpayer to support his position are distinguishable. In Phillips' Estate v. Commissioner [57-2 USTC ¶9844], 246 F. 2d 209 (5th Cir. 1957), a net worth computation in which neither the Commissioner nor the Tax Court made any finding relating to opening cash on hand was in issue. In light of the fact that the taxpayer's business produced cash profits and required large sums of cash to be kept on hand, the Fifth Circuit found no basis for the Commissioner's inference that the taxpayer's opening and closing cash positions were substantially the same. In the instant case, a specific cash on hand figure was included in the initial net worth computation. There is nothing inconsistent with the technique employed here and the essential requirements for net worth analysis set forth in Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121 (1954).

Taxpayer's argument that the Government failed to prove unreported income is not supported by the record. He bases his argument on the net worth figures contained in the Government's original schedule before they were recomputed to reflect the withdrawal of the two disputed items. The taxpayer has completely disregarded his personal expenditures for the years in question which must be added to the increases in net worth to reconstruct his income. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 125 (1954). The Government is not required to show the precise source of unreported taxable income, but only a source likely and capable of producing the income. United States v. Mackey [65-1 USTC ¶9328], 345 F. 2d 499 (7th Cir. 1965). The Government not only demonstrated that the clubs were a probable source of unreported taxable income, but it also established that this income did not come from any non-taxable source. Either of these forms of proof is sufficient to support a net worth computed deficiency. United States v. Massei [58-1 USTC ¶9326], 355 U. S. 595 (1958). The taxpayer testified that his only source of income for the years in issue, aside from an oil interest, was his profit from the Riptide Club and Little Club operations. He also testified that he received no substantial gifts, no inheritance, and did not receive any insurance proceeds. Under these circumstances, our court has previously found a taxpayer to be liable. "However, defendant in this case did not furnish any explanation which would attribute his increased net worth to other than taxable income. Defendant had the right to remain silent but he did so 'at his peril.'" United States v. Mackey [65-1 USTC ¶9328], 345 F. 2d 499, 506 (7th Cir. 1965).

The defendants next argue that the excise tax was wrongfully and arbitrarily assessed. The record unequivocally demonstrates that prior to each club's conversion to nightly entertainment, the taxpayer's records falsely reflected that no taxable entertainment occurred on evenings when, in fact, taxable entertainment did occur. The uncontradicted testimony of a variety of performers as well as newspaper advertising evidence amply supports the conclusion that the taxpayer's records were false. Since book entries are merely evidentiary, Doyle v. Mitchell Bros. Co. [1 USTC ¶17], 247 U. S. 179, 187 (1918), having been shown to be false, the taxpayer's books are incapable of rebutting the Government's proof of fraud. Likewise, the testimony of former bartenders, the postman, and customers of the clubs clearly shows that the amount of receipts attributed to day sales was fraudulently overstated. The Government relied on more than the correctness presumption to support its allocation of total sales to day sales. The agent who investigated the clubs' operations testified to the reasonableness of the allocation. The facts disclosed by affidavits of many former employees and entertainers likewise corroborated the allocation.

The next contention raised by the taxpayers is that the presumption of correctness should not have operated here to sustain the Government's arbitrary assessment. We are of the view that the record supports the Government's determination of opening net worth and that the taxpayer has failed to show wherein the determination is arbitrary. The case cited by the taxpayer, Thomas v. Commissioner [56-1 USTC ¶9449], 232 F. 2d 520 (1st Cir. 1956), dealt with the presumption to be accorded a cash on hand figure that was without any support in the record. In light of the ample support for the asserted deficiencies in the record before us, the Thomas case has no application to this appeal.

The final argument advanced by the taxpayers is that the district court erred in finding that the transfer of real estate by the taxpayers to their son was void as being made for the purpose of defrauding and defeating the collection of taxes. Ill. Rev. Stat. ch. 59 §4 (1967). The defendants admit that there was no consideration for the transfer from Vera Mitchell to their son on November 19, 1959 . However, Sam Mitchell contends that the transfer of his interest to his wife on February 24, 1959 was not gratuitous. As consideration for this transfer of his interest, Sam Mitchell claims that his wife gave him the right of mortgaging the house and using the $8,000 proceeds to discharge existing tax liens against the property. Assuming this arrangement to be true, there was no valuable consideration to creditors. The result of the transaction was a mere substitution of creditors; the underlying $8,000 obligation was not discharged.

Even if the February 24, 1959 transfer is not voidable, the November transfer to the taxpayers' son is subject to the Government's tax lien since the federal income tax deficiency, which included a joint assessment against Sam and Vera Mitchell for the year 1950 was assessed on October 23, 1959 . Thus, at that time a federal tax lien attached to all of the taxpayers' property pursuant to 26 U. S. C. §6321. Consequently, one month later, when Vera Mitchell transferred the property to their son, he took subject to the Government's tax lien to the extent of the $58,365.29 assessment for 1950.

The judgment of the district court is affirmed.

¹ Judge Eschbach is sitting by designation from the Northern District of Indiana.