Inherited Property Page1

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Advantage Title Agency, Inc., Plaintiff v. Terry Karl, as Temporary Guardian of the Property of Leonard Rosen, United States of America, Mats Group, Inc., as assignee of Reliance Security, Inc., Sheriff of Suffolk County, and Gary Rosen, Defendants.

U.S. District Court, East. Dist. N.Y. ; 03-CV-1795 (SLT)(MLO), February 2, 2005 .

[ Code Sec. 6223]

Validity and priority of liens: Priority of creditors: Inherited property: Renounced interest. --

IRS liens had priority over a state judgment creditor with respect to the proceeds from the sale of real property that a taxpayer would have been entitled to if he had not renounced his interest in his mother's estate. The IRS liens had priority regardless of whether or not the renunciation was valid under state law. If the renouncement was valid, it did not operate to exempt the inheritance from the definition of property to which a federal lien attaches even though the lien of the judgment creditor would not have been valid against the property. If the renouncement was invalid, the state lien, unlike a federal lien, was considered perfected for purposes of determining priority status only when the specific property subject to the lien was identifiable at the death of the mother. The federal liens were valid for priority purposes at the time filed even though they had not attached to an identifiable property until the death. Certified copies of the IRS liens were sufficient to establish the existence and validity of those liens.

Jeffrey Heller, Somer & Heller, for plaintiff. David Steiner, Department of Justice, for defendants.

MEMORANDUM AND ORDER

TOWNES, District Judge: Defendant United States moves for summary judgment on the issue of the parties' entitlement to the escrow funds currently held in the court registry and requests an order directing that the funds be turned over to the Government. Upon consideration of the written submissions of each party and oral argument on January 28, 2005 , and for the reasons set forth below, the United States ' motion is GRANTED.



BACKGROUND

This case arises out of an interpleader action brought by Advantage Title Company ("Plaintiff") on February 25, 2003, against the United States (the "Government"), Mats Group, Inc. ("Mats"), Gary Rosen, and the Sheriff of Suffolk County ("Sheriff") (collectively the "Defendants"), to determine which defendant was entitled to the funds it held in escrow, totaling $36,804.00. Plaintiff, as a disinterested stakeholder faced with competing claims by the various Defendants, asked the Court to allow it to deposit the funds in the registry of the Court while proper ownership of the funds was litigated. The Court (Spatt, J.) granted Plaintiff's request and the escrow funds were deposited into the court registry. ¹ The Government, Mats, and Gary Rosen ² each claim entitlement to the funds and this Court must decide which party has the superior claim. ³

Irene Rosen died testate on November 29, 1999 , and her will was admitted to probate at some point shortly thereafter. On or about July 6, 2000 , Leonard Rosen filed a Renunciation disclaiming his interest in any proceeds of his mother's will. Mats now claims that Leonard Rosen lacked the capacity to execute the renunciation, rendering it invalid. On August 29, 2000 , Leonard Rosen, along with co-executors Aaron Rosen and Paul Rosen, sold certain real property that had belonged to Irene Rosen, the proceeds of which were to be divided among the co-executors. Leonard Rosen's share of the proceeds was $38,804.00. After Leonard Rosen informed Plaintiff that he had renounced his right to any proceeds under the will, Plaintiff agreed to hold the $38,804.00 in escrow until December 1, 2000 , pending the release of all federal tax liens. ⁴

In August of 2002, Gary and Kim Rosen filed a petition with the Supreme Court of New York, Suffolk County , for the appointment of a guardian for the person and property of Leonard Rosen. On September 19, 2003 , the Supreme Court declared Leonard Rosen to be legally incapacitated as defined by section 81.02 of New York 's Mental Hygiene Law and appointed a guardian to manage his property and personal needs.

Mats now claims entitlement to the escrow funds as holder of a judgment entered on September 23, 1993, against Leonard Rosen and 4R Security, Inc., in the amount of $86,691.72 ⁵ , which was assigned to Mats by Reliance Security, Inc. on December 18, 2002. The Government does not dispute that Mats holds this judgment, but claims that its federal tax liens have priority. The Government asserts that it filed notice of four federal tax liens against the property of Leonard Rosen on the following dates and in the following amounts: February 14, 1995 --$108,442.31; December 30, 1998 --$533,864.12; January 5, 1999 --$425,412.81; October 8, 1999 --$13,433.09. Mats claims to have no independent knowledge to verify the existence of such liens, but, relying on Plaintiff's complaint, it admits the existence of a February 14, 1995 tax lien for $9.992,38 and an April 12, 1999 tax lien for $18.242.88.



DISCUSSION



I. Standard of Review

Summary judgment is appropriate where "there is no genuine issue as to any material fact" such that the moving party is entitled to "judgment as a matter of law." Fed. R. Civ. P. 56(c). "A fact is 'material' for these purposes if it 'might affect the outcome of the suit under the governing law.'" Holtz v. Rockefeller & Co., 258 F.3d 62, 69 (2d Cir. 2001) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). To be "genuine," an issue of fact must be supported by evidence "such that a reasonable jury could return a verdict for the nonmoving party." Holtz, 258 F.3d at 69. "In determining whether summary judgment is appropriate, a court must resolve all ambiguities and draw all reasonable inferences against the moving party." Alston v. New York City Transit Authority, 2003 U.S. Dist. LEXIS 21741, at *4 (S.D.N.Y. Dec. 3, 2003 ) (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).



II. Timing of the United States ' Motion

Mats argues that the Government's motion is premature since there has been no discovery in this case. However, documents in the record indicate that the parties have already engaged in some preliminary discovery. Moreover, nothing in Rule 56 prohibits the entry of summary judgment in the absence of full-fledged discovery. In fact, the rule permits a party to move for summary judgment "at any time after the expiration of 20 days from the commencement of the action...with or without supporting affidavits." Fed. R. Civ. P. 56(a). While the rule also permits a court to deny the motion or order a continuance to permit further discovery if it deems that further opportunity for factual development is warranted ( see Rule 56(f)), it is not required that the court do so and the lack of discovery cannot, as Mats argues, "bar" an otherwise appropriate and properly supported motion for summary judgment. Thus, this Court may decide the Government's motion for summary judgment on the current record.



III. Validity of the Federal Tax Liens

Insofar as Mats disputes the existence of the federal tax liens asserted by the Government based on an alleged inability to verify the liens, the Government has submitted certified copies of each lien, except for the December 30, 1998 lien, for which it submitted an uncertified copy, as exhibits to the sworn affidavit of David M. Steiner. ⁶ Therefore, at least as to the February 14, 1995 , January 5, 1999 , and October 8, 1999 liens, the Government has met its burden under Rule 56(e), which provides as follows:

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith.... When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial.

Fed. R. Civ. P. 56(e). Mats has failed to set forth any evidence that the federal tax liens asserted by the Government do not exist or are not valid. Instead, it relies on the Plaintiff's complaint, which, it admits, "is not evidence which would be admissible pursuant to Local Civil Rule 56.1 and Federal Rule of Civil Procedure 56(e)," for information about the federal liens that purportedly contradicts the Government's assertion. Not only does Mats selectively present only the portions of Plaintiff's complaint which disagree with the Government's assertion of its own tax liens ⁷ , the allegations made by Plaintiff (which were apparently based on the results of its own title search for tax liens encumbering the sale of the property) are not sworn to or certified and are not admissible evidence which would effectively rebut the Government's certified records. ⁸ Thus, Mats has not raised a triable issue of fact as to the existence of the tax liens asserted by the Government.



IV. Priority of the Federal Tax Liens

Mats does not appear to dispute the Government's argument that if Leonard Rosen validly renounced his interest in his mother's estate, then the Government is entitled to the funds in the court registry. The Supreme Court held in United States v. Drye [ 99-2 USTC ¶60,363], 528 U.S. 49, 59 (1999), that a taxpayer's disclaimer of rights to an inheritance under state law does not exempt the inheritance from the definition of "property" to which a federal tax lien may attach. The Court noted that "[j]ust as exempt status under state law does not bind the federal collector, so federal tax law is not struck blind by a disclaimer." Id. (internal quotation marks and citations omitted). Thus, if the renunciation is valid, Mats' state law judgment lien cannot reach the property (or the proceeds of the property) renounced by Leonard Rosen, while the federal tax lien remains in full effect.

There appears to be a genuine factual dispute as to whether the renunciation is valid. If material, this factual dispute would preclude the entry of summary judgment in favor of the Government. However, summary judgment is still appropriate because the issue is immaterial --the federal tax liens retain priority over the competing state judgment liens even if the renunciation is invalid. ⁹ In United States v. McDermott [ 93-1 USTC ¶50,164], 507 U.S. 447, 448-53 (1993), the Supreme Court held that a federal tax lien is rendered extant for first-in-time priority purposes at the time of filing, regardless of whether it has yet attached to identifiable property, while a competing state lien comes into existence for priority purposes only after it has been "perfected." A state lien is considered perfected when "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." Id. at 449-50 (quoting United States v. New Britain [ 54-1 USTC ¶9191], 347 U.S. 81, 84 (1954)). The Court held that "the property subject to a lien is not 'established' until one knows what specific property it is, and that a lien cannot be anything other than 'inchoate' with respect to property that is not yet subject to the lien." Id. at 452 n.5. Thus, the Court held, a federal tax lien has priority over a previously executed state lien with respect to property acquired by the debtor after the federal lien was filed. Id. at 455. See also Don King Prods., Inc. v. Thomas [ 91-2 USTC ¶50,474], 945 F.2d 529, 533 (2d Cir. 1991) ("Not only does a lienor's interest have to be first chronologically, but the interest must be choate to defeat the federal tax lien.") As the property whose sale yielded the proceeds currently in dispute was not "established" for the purposes of Leonard Rosen's interest in it until the November 28, 1999 death of Irene Rosen, at the earliest, and as all of the federal tax liens at issue had been filed prior to that point, the federal liens have priority and the Government is entitled to the funds. Thus, Mats has not raised a triable issue of fact as to which party is entitled to the $38,804 in the court registry.



CONCLUSION

Because there is no genuine issue of material fact requiring a trial in this case, summary judgment is hereby entered in favor of the United States. The Clerk of the Court is directed to turn over to the United States escrow funds in the amount of $38,804.00, currently being held in the court registry.

SO ORDERED.

¹ By stipulation dated June 8, 2004, Plaintiff withdrew from this action and waived any claim to attorneys' fees, costs, or expenses arising out of this litigation.

² Defendant Gary Rosen affirms that he is the President of Co-Defendant Mats Group, Inc. The two parties are represented by the same counsel and both claim entitlement to the disputed funds based on a judgment, to be discussed shortly, that is held by Mats as assignee. Therefore, the Mats/Gary Rosen defendants are referred to as "Mats" for purposes of this opinion.

³ The Sheriff is named as a defendant in this case based on a Notice of Levy served on Plaintiff for $168,225.12, apparently on behalf of Mats. The Sheriff is not represented by counsel, has submitted no papers with respect to this motion, and is not mentioned by any other defendant in its moving papers. The Sheriff appears to have no independent claim to the disputed funds.

⁴ As such a release was never forthcoming, Plaintiff held the funds in escrow until depositing them in the court registry pursuant to an order of this Court, as noted above.

⁵ The parties seem to agree that the judgment in question was for $86,298.72, but the certified documents of assignment in the file list the amount of the judgment as $86.691.72. In any event, the discrepancy is immaterial, as the sum of the judgment far exceeds the sum held in the court registry.

⁶ The Government also submitted a certified copy of the February 14, 1995 lien as re-filed on January 29, 2004 . Such timely re-filing preserves the lien's priority. See 26 U.S.C. §6323(g).

⁷ Plaintiff's allegations regarding a January 5, 1999 lien in the amount of $425,412.81 and an October 8, 1999 lien in the amount of $13,433.09 support the Government's assertions.

⁸ As to the one federal lien for which the Government submitted only an uncertified copy --the December 30, 1998 lien for $533,864.12 --the existence or non-existence of this lien is immaterial to the determination of this motion, as the remaining liens would more than cover the $38,804 in dispute should the Government prevail.

⁹ This discussion assumes without deciding that Mats' predecessors-in-interest attained judgment lien creditor status with regard to the 1993 judgment prior to February 14, 1995 , as would have been required to achieve priority over the federal tax lien filed on that date. Mats argues that it needs further discovery to ascertain whether judgment lien creditor status was ever obtained, but this factual dispute is immaterial because a federal tax lien trumps even a duly executed state lien with regard to property acquired subsequent to the imposition of the liens, as discussed in this section.

 

[2002-1 USTC ¶50,102] Bernice C. Williams, Executor, etc., Plaintiff v. U.S. Department of Treasury, Defendant

U.S. District Court, No. Dist. Ohio , West. Div., 3:01 CV 7077, 6/14/2001

[Code Secs. 6321 and 6323 ]

Tax liens, validity of: Motion to dismiss: Interpleader actions: State law: Equitable interest: Attachment of liens.--Tax liens attached to a legatee's interest in the property of a decedent's estate because, under state (Ohio) law, he had a current equitable interest in any property of the estate to which he was entitled. Accordingly, the legatee was not entitled to dismissal of an interpleader action filed by the estate's executor to determine the proper distribution of the property in the estate.

MEMORANDUM OPINION

KATZ, District Judge:

This matter is before the Court on the motion for dismissal of interpleader filed by Defendant Douglas Smith in the Probate Court of Auglaize County, Ohio, on January 31, 2001 . The case was removed to this Court pursuant to 28 U.S.C. §§1441, 1442, 1444, and 1446. For the following reasons, the motion to dismiss will be denied.

BACKGROUND

On January 26, 2001 , Bernice Williams, executor for the Estate of Wayne H. Williams, filed an action for interpleader in the Probate Court of Auglaize County, Ohio. In her complaint, the executor averred knowledge that one of the legatees of the estate, Douglas Smith ("Smith"), was the subject of two liens filed by the Department of Treasury, Internal Revenue Service ("IRS"). ¹ The executor then stated her desire not to make a final estate distribution to Smith until her concerns regarding the liens were resolved.

On January 31, 2001, Smith filed a motion to dismiss the interpleader for failure to state a claim upon which relief can be granted, pursuant to Ohio Civ. R. 12(b)(6). Smith argued that the action should be dismissed because the IRS had not claimed any right or interest in the estate, and because the executor lacked the authority to file an action in interpleader. On February 21, 2001 , the action was removed to this Court by the IRS. Finally, on March 22, 2001 , the IRS filed a memorandum in opposition to Smith's motion to dismiss. Smith did not reply, and the matter is ripe for consideration. The parties' contentions are discussed below.

DISCUSSION

I. Motion to Dismiss Standard

In deciding a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the function of the Court is to test the legal sufficiency of the complaint. In scrutinizing the complaint, the Court is required to accept the allegations stated in the complaint as true, Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 2232, 81 L.Ed.2d 59 (1984), while viewing the complaint in a light most favorable to the plaintiffs, Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Westlake v. Lucas, 537 F.2d 857, 858 (6th Cir. 1976). The Court is without authority to dismiss the claims unless it can be demonstrated beyond a doubt that the plaintiff can prove no set of facts that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Westlake , supra, at 858. See generally 2 JAMES W. MOORE, MOORE 'S FEDERAL PRACTICE, §12.34[1] (3d ed. 1997).

II. Potential Applicability of Tax Liens

For the purposes of this motion to dismiss, this Court must assume that tax liens were assessed against Smith on September 14, 1992, and December 28, 1992, pursuant to Sections 6321 ² and 6322 ³ of the Internal Revenue Code, 26 U.S.C. §6321-22. Further, the Court must assume that those liens have neither been satisfied nor rendered unenforceable. With those assumptions having been made, it is clear that Smith's motion to dismiss must be denied.

By operation of Sections 6321 and 6322, a tax lien in favor of the United States arose against Smith on all of Smith's real and personal property and rights to such property. Under Ohio law, Smith has a current equitable interest in any property of the estate to which he is entitled. See Braun v. Central Trust Co., 109 N.E.2d 476, 479-80, 92 Ohio App. 110, 115-16 (1st Dist. 1952); 31 Ohio Jurisprudence 3d, Decedents' Estates, §1277 (1997). The Supreme Court has made clear that there is no lien exception for an inheritance. See Drye v. United States [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 528 U.S. 49, 56, 120 S.Ct. 474, 480, 145 L.Ed.2d 466 (1999); see also United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 453, 113 S.Ct. 1526, 1530, 123 L.Ed.2d 128 (1993) (holding that interest in property of the estate attaches at the death of the testator). Therefore, the liens against Smith would attach to his interest in the property of the estate.

Smith's motion to dismiss is utterly without merit. Although Smith's claim that the IRS has not placed any lien against the assets of the estate may be true, the existence of such liens against the estate is irrelevant to the motion to dismiss when the action for interpleader alleges liens against Smith himself. ⁴ When the allegations of the action for interpleader are taken as true and viewed in the light most favorable to the non-movant, there clearly exists a claim upon which relief may be granted. Accordingly, Smith's motion to dismiss will be denied.

CONCLUSION

For the foregoing reasons, Douglas Smith's motion to dismiss (filed on January 31, 2001 , and contained in Doc. No. 10) will be denied.

IT IS SO ORDERED.

¹ The interpleader action also requests an order allowing distribution to two other legatees. Those legatees are not material to the resolution of the pending motion to dismiss. The matter in the state court was Williams v. Department of Treasury, Case No. 201-99.

² Section 6321 provides:

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

26 U.S.C. §6321 (West 2001).

³ Section 6322 provides:

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

26 U.S.C. §6322 (West 2001).

⁴ Similarly unavailing are Smith's unsupported arguments that the action must fail because the Will does not give the executor power to withhold or place other contingencies on Smith's funds.

 

 

[2000-1 USTC ¶50,329] United States of America , Plaintiff v. Helen Stolle, Stolle Revocable Living Trust, Krisler Management Company, Adler Holding Company, and Arrow Investment Company, Defendants

U.S. District Court, Cent. Dist. Calif. , CV 99-00823-GAF (CWx), 2/14/2000

[Code Sec. 6321 ]

Tax liens: Creation: Validity of assessment: Evidence.--Tax liens against married taxpayers were issued pursuant to a valid assessment of deficiencies that resulted from the deceased husband's scheme to evade taxes by claiming false deductions. The government presented a certified transcript indicating that the IRS sent the taxpayers timely notice and demand for payment, and the widow presented no evidence to challenge the validity of the assessments. Accordingly, the liens were enforceable.

[Code Secs. 6321 and 6323 ]

Tax liens: Property subject to: Trusts: Control of assets: Community property: Character as: Joint and several liability.--Married taxpayers' community property was subject to federal tax liens that arose after the couple transferred the property to a revocable trust. Since the taxpayers retained total control of the trust assets, they effectively owned the property under state ( California ) and federal law. They were the settlors, trustees and beneficial owners of the trust with the right to withdraw its assets or dissolve the trust at any time. Moreover, the husband was jointly and severally liable for the entire amount of the deficiencies that arose from the couple's joint returns, and state law permitted a creditor to reach the entire community property in order to satisfy a debt owed by one spouse.

[Code Sec. 6015 ]

Tax liens: Property subject to: Community property: Innocent spouse relief: Joint and several liability: Personal liability.--A widow was not entitled to innocent spouse relief from tax liens that attached to community property that had belonged to her and her late husband. Their deficiencies arose from joint returns on which the husband claimed false deductions. Thus, he was jointly and severally liable for the entire amount of the deficiencies, and state ( California ) law permitted a creditor to reach the entire community property in order to satisfy a debt owed by one spouse. Moreover, the government was not attempting to collect against the widow personally; it was merely pursuing liens that arose against her husband. Innocent spouse relief did not prevent the government from collecting against community property in accordance with state law.

[Code Sec. 6323 ]

Tax liens: Property subject to: Community property: Death of spouse: Extinguished liens: Amount of lien: Interest: Inherited property.--A husband's death did not extinguish tax liens against community property that he had owned with his wife. The property presumably passed to the widow's sole ownership, but it did so subject to the liens, which functioned like a mortgage that reduced the value of the property. The court reserved the question of whether the amount of the liens continued to increase to account for interest that accrued on the deficiencies after the husband's death.

[Code Sec. 1 ]

Double jeopardy: Criminal conviction: Collection actions.--The collection of tax liens against an individual who was convicted of filing false tax returns did not violate his protection against double jeopardy. His conviction represented punishment for committing a crime, while the liens were intended to collect the taxes that the couple should have paid.

ORDER GRANTING PLAINTIFF UNITED STATES MOTION FOR PARTIAL SUMMARY JUDGMENT

I. INTRODUCTION

FEESS, District Court Judge:

The present motion concerns the relationship between federal tax liens and property held in a revocable trust. ¹ The Court must determine the extent to which a federal tax lien against an individual attaches to community property held by a revocable trust on behalf of the individual and his wife. The Court finds first that, in California , a tax lien can attach to property held within a revocable trust, notwithstanding the fact that the trust nominally holds title to the property. The Court next finds that a tax lien may attach to community property for the tax debts of an individual. Thus, in California , the tax lien may attach to community property that is held on behalf of the individual and his wife by a revocable trust, and the property may be used to satisfy the tax debts of the individual.

As discussed in greater detail below, Emile Stolle II ("Stolle") fraudulently overstated certain expenses on his family's tax returns for 1985, 1986, 1987, 1989, 1990, and 1991, and then significantly underpaid his taxes for those years. In 1992, Stolle was convicted of criminal charges relating to the false tax returns for 1985, 1986, and 1987. In 1992 and 1993, the government calculated the amount of tax that Stolle ought to have paid for the years 1985, 1986, 1987, 1989, 1990, and 1991; the government then served Stolle with a demand that the Stolles pay the difference between what was already paid and what he should have paid (plus interest and penalties). Stolle's debt to the government for his underpayments in 1985, 1986, and 1987 exceeded $400,000, while his debts for the underpayments in 1989, 1990, and 1991 exceeded $10,000. ²

In the current case, the government seeks to validate tax liens filed on four pieces of real property. Stolle and his wife originally owned the four pieces of property as community property in California . In 1989, Stolle and his wife transferred the property to a revocable trust. In 1992 and 1993, the government served Stolle with assessments for amounts owed as a result of Stolle's underpayment of taxes, and Stolle failed to either contest or pay those assessments.

The government contends that Stolle's failure to contest or pay the assessments resulted in a lien against all of Stolle's property. The government further contends that, as viewed by federal tax law, Stolle continued to have an interest in the four pieces of real property. As such, the government contends that Stolle's interest in those four pieces of government property became subject to lien. The government seeks validation of those liens.

As noted above, the Court agrees that under federal tax law Stolle continued to have an interest in the four pieces of property. As such, the government's tax liens attached in 1992 and 1993 to Stolle's interest in the four pieces of property. Finally, because Stolle and his wife held the property in 1992 and 1993 as community property, all of the property became subject to the liens and the liens attached to the entire property. As a result, the liens have continued to exist on the property since 1992 and 1993 and Stolle's subsequent death did not remove the liens.

II. BACKGROUND

On a motion for summary judgment, the Court must resolve all disputed facts in favor of the non-moving party, and draw all reasonable inferences in favor of the non-moving party. In this motion, Stolle's widow Helen Stolle ("Helen Stolle") and the Stolle Revocable Family Trust ("Revocable Trust") are the non-moving parties. As a result, the Court resolves all disputed facts in favor of Helen Stolle and the Revocable Trust, and draws all reasonable inferences in their favor. ³

Under that standard, the relevant facts are as follows:

A. Stolle Establishes a Scheme to Inflate Expenses Reported on His Family's Tax Returns and Thereby Underpay Tax

In a nutshell, it appears that Stolle created various off-shore trusts and then purported to execute mortgages on various parcels of real property in favor of those trusts. ⁴ Stolle then made payments to the trusts, and treated those payments as deductions in his family's income tax filings as though the payments were business (or residential interest) expenses. In fact, the payments to the trusts were not expenses, but were no more than the transfer of Stolle's own money from one Stolle account to another Stolle account. As such, Stolle's treatment of the payments as deductions was improper, and he claimed higher deductions than he should have.

Because Stolle claimed higher deductions than he should have, Stolle claimed that his income tax was lower than it should have been. Stolle filed inappropriate deductions on his joint tax returns for 1985, 1986, 1987, 1989, 1990, and 1991, and he significantly underpaid taxes for those years.

B. Stolle and His Wife Establish a Revocable Living Trust and Transfer Four Parcels of Community Property Into the Revocable Living Trust

On August 23, 1989 , Stolle and his wife established the Stolle Revocable Living Trust ("Revocable Trust").

1. Stolle and His Wife Retain Total Control of the Assets in the Trust

Pursuant to the terms of the Revocable Trust, Stolle and his wife retained the "express and total power to control and direct payments, add or remove trust property, and amend or revoke this trust."

2. Stolle and His Wife Transfer Four Parcels of Community Property Into The Trust

Schedule A to the Revocable Trust lists property that Stolle and Helen Stolle transferred into the trust at the inception of the trust. Schedule A indicates that "all of the following described property is the community property of the Settlors, unless otherwise specified."

The first four items listed in Schedule A are: "Real property located at 4900 Briggs Avenue, La Crescenta, California 91214," "Real property located at 3651 Foothill Blvd., La Crecenta, California 91214," "Real property located at 3852 Vista Court, La Crescenta, California, 91214," and "Real property located at 2910 Sycamore, La Crescenta, California 91214."

There is no indication that any of this property was separate property of either spouse, and consequently it appears undisputed that the property was community property at the time of the transfer to the trust.

At the same time that the Stolles executed the Revocable Trust, they signed and subsequently filed quitclaim deeds for the four properties, transferring their interest in the properties to the Revocable Trust. ⁵ The fact that both Stolles signed the quitclaim deeds reinforces the conclusion that the properties were held by the Stolles as community property.

3. The Trust Maintains Community Property As Community Property Unless Otherwise Indicated

Pursuant to the terms of the Revocable Trust, "[a]ny community property, including the proceeds from such property, which is or becomes trust property, shall remain community property during the lives of both of us." Moreover, any "conveyance or transfer of community property to our trust, whether directly transferred or transferred to a nominee or agent on behalf of our trust, shall not be construed as a partition of community property unless there is an express written agreement to that effect between us."

C. Stolle Is Criminally Convicted For Filing False Returns In Three of the Years During Which He Engaged In This Scheme

In August of 1992, Stolle was convicted of criminal charges relating to the false tax returns for 1985, 1986, and 1987. The criminal case did not involve Stolle's underpayment for 1989, 1990, and 1991. ⁶

D. The Government Sends Stolle and His Wife Notices of Jeopardy Assessment and Deficiency

1. Notices Related to Tax Years 1985, 1986, and 1987

On July 15, 1992 , the government sent Stolle and his wife a notice of jeopardy assessment amounting to $428,130. These assessments included underpayments, interest, and penalties for underpayment.

On September 11, 1992 , the government sent Stolle and his wife a notice of deficiency, allowing them to challenge the July 15, 1992 assessment in front of the tax court. The Stolles did not challenge or contest the jeopardy assessment.

On September 11, 1992 , the government seized approximately $397,884 from bank accounts controlled by Stolle and his wife. These funds were applied to the July 15, 1992 jeopardy assessments, leaving a balance of $30,245.

2. Notices Related to Tax Years 1989, 1990, and 1991

On April 9, 1993 , the government sent the Stolles a notice of deficiency arising out of Stolle's underpayment of his family's taxes for the years 1989, 1990, and 1991. This notice assessed taxes and penalties totaling $12,226 for the tax years 1989, 1990 and 1991. ⁷ The Stolles did not challenge or contest this notice of deficiency.

On September 7, 1993 and September 27, 1993, following the Stolles' default on the April 9, 1993 notice of deficiency, the government assessed additional taxes and penalties against the Stolles such that the total amounted to $12,371 for the tax years 1989, 1990, and 1991.

E. The Government Files Notices of Federal Tax Lien

On July 16, 1992 and April 6, 1994 , the government filed Notices of Federal Tax Lien in connection with the assessments noted above. These Notices indicated the existence of a lien against all property and all rights to property belonging to the taxpayers and were filed in the County Recorder 's office for Los Angeles County , California .

F. Emile Stolle II Passes Away

On December 16, 1994 , Stolle passed away. Stolle's interest in community property presumably passed to his wife, Helen Stolle, subject to any appropriate claims on the property that existed at the time of Stolle's death on December 16, 1994 . ⁸

G. The Government Brings This Action to Seek to Validate Liens on the Four Parcels Pursuant to 26 U.S.C. §6321

On January 27, 1999 , the government filed this action to validate the tax liens on the four parcels.

III. LEGAL ANALYSIS

A. Standard for Summary Judgment

Under the Federal Rules of Civil Procedure, summary judgment is proper only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party has the burden of demonstrating the absence of a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S. Ct. 2505, 2514 (1986). If the moving party satisfies the burden, the party opposing the motion must set forth specific facts showing that there remains a genuine issue for trial. Id. ; see Fed. R. Civ. P. 56(e). Summary judgment may be granted on part of an action, Lewis v. Anderson, 615 F.2d. 778 (9th Cir 1979), FRCP 56(a) (plaintiff may seek summary judgment upon all or any part of an action), including questions of liability. KMLA Broadcasting v. Twentieth Century Cigarette Vendors, 264 F.Supp 35 (C.D. Cal.1967).

B. The Court Must Accept the Validity of the Tax Assessments

The United States has presented this Court with a certified transcript indicating that timely notice and demand for the outstanding assessments has been made and that there remains an unpaid balance. The certified transcript is prima facie evidence that the assessments therein are valid, meaning that the transcript will constitute sufficient evidence of the validity of the assessments unless Defendants provide evidence that would show an error in the assessments. Welch v. Helvering [3 USTC ¶1164], 290 U.S. 111, 114 (1933); Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 535 (9th Cir. 1992).

As noted in the factual discussion, Defendants have not provided any evidence to challenge the validity of the assessments. As such, the Court must accept the validity of the tax assessments.

C. Emile Stolle II Was Jointly And Severally Liable For the Entire Sum Due

Pursuant to 26 U.S.C. §6013(d)(3), both husband and wife are normally jointly and severally liable for all tax liability when a joint return is filed. Although the United States may collect no more than the total amount due, joint and several liability means that the United States may normally pursue either spouse (or both) for the amount of the tax liability.

In certain instances, one spouse may be an "innocent spouse." See 26 U.S.C. §6015(b). In those circumstances, the United States may be precluded from pursuing the "innocent spouse" for the full amount of the tax liability.

However, even if one spouse is an innocent spouse, the culpable spouse remains individually liable for the full amount of the tax liability. In this case, Emile Stolle II was net an innocent spouse, and Stolle was therefore liable for the full amount of the tax liability.

D. A Lien Arose under 26 U.S.C. §6321 on Stolle's Community Property Interest in the Four Parcels, Notwithstanding the Trust's Nominal Ownership of the Parcels

26 U.S.C. §6321 provides that: [i]f any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

As the United States Supreme Court reaffirmed last December in Drye v. United States, the language of §6321 is broad and " 'reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.' " Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 120 S.Ct. 474, 480 (1999) (quoting United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985)).

In determining whether a taxpayer possesses property or rights to property, the Court begins by looking to state law to determine what rights the taxpayer has in the property. In this case, Stolle and his wife had a right under the Revocable Trust to withdraw all four parcels from the Revocable Trust, and indeed they had the absolute right to dissolve the Revocable Trust at any time. Stolle and his wife were not only the settlors of the trust, but also the trustees and beneficial owners with the right to dispossess any other beneficial interest. As California law recognizes, Stolle and his wife effectively owned the property. See, e.g., Gagan v. Gouyd, 73 Cal.App.4th 835, 842 (1999) (noting that creditors may reach property held in revocable trust); Dawes v. Rich, 60 Cal.App.4th 24 (1997) (holding that creditors of husband may reach community property held in family trust).

Having determined whether a taxpayer could have a right to the property under state law, the Court then applies federal law to determine whether such a right constitutes property or a right to property under §6321. Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 120 S. Ct. at 481. Given the broad scope of §6321, the Court has little difficulty concluding that Emile Stolle II and his wife owned the property within the Stolle Revocable Trust within the meaning of federal tax law. Don Gastineau Equity Trust v. United States [88-1 USTC ¶9314], 687 F. Supp. 1422, 1426 (C.D. Cal. 1987) (holding that taxpayers owned property within Revocable Trust where third parties held rights in trust but taxpayers could unilaterally ignore and eliminate the rights of the third parties); see also Neely v. United States [85-2 USTC ¶9791], 775 F.2d 1092 (9th Cir. 1985) (holding that income of trust can be attributed to individual taxpayer); Belshe v. Hope, 33 Cal.App.4th 161, 175 (1995) (holding that decedent's revocable inter vivos trust constituted "estate" for purposes of federal Medicaid act allowing reimbursement to state from decedents "estate").

In short, because Stolle and his wife had effective dominion at all times over the property, the federal lien statute simply treats the property as though it belonged to Stolle and his wife. As such, liens arose against that property for the tax liabilities of Stolle and his wife when they were presented with the notices of deficiency and failed to pay.

Moreover, the Court notes that the Stolles clearly expressed their intention that said property be community property: it was community property at the inception of the Revocable Trust, and it was intended to be maintained as community property during the existence of the trust.

E. The Government May Reach The Entire Community Property To Satisfy a Debt Owed by the Husband

1. California Law Permits a Creditor to Satisfy a Debt of One Spouse Out of Community Property Owned by Both Spouses

Pursuant to California Family Code §910(a), "the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt."

In other words, community property is available to satisfy a debt from either spouse, even if the other spouse is not responsible for the debt.

In this case, even if Helen Stolle were to be treated as an "innocent spouse," Emile Stole II would still have been responsible for the entirety of the debt, and all of his separate and community assets would have been subject to lien to satisfy that debt. See Dawes v. Rich, 60 Cal.App.4th 24 (1997) (holding that creditors of husband may reach community property held in family trust). As noted above, the four parcels of property were held as community assets, and as assets of the community, they were available to satisfy the debts of Emile Stolle II.

2. Whether Helen Stolle Is an "Innocent Spouse" Is Irrelevant Because the Innocent Spouse Provision of 26 U.S.C. §6015(b) Does Not Protect Community Property

Helen Stolle argues that she is an innocent spouse and that her property should not be taken to satisfy the liabilities of Emile Stolle.

Unfortunately, the property could only belong to Helen Stolle to the extent that it is free of the liens of the United States . It helps to remember that a lien is like a mortgage. If Emile and Helen had mortgaged one of the properties to a bank, the bank would have a mortgage on the property to secure payment. Emile and Helen's equity in the property would exist only to the extent that the value of the property were to exceed the value of the mortgage. If Emile were to die, the property might pass to Helen as sole owner--but the mortgage would still exist on the property. Helen's interest in the property would still exist only to the extent that her equity exceeded the value of the mortgage.

In 1992 and 1993, the government served the Stolles with notices of deficiency. When the Stolles failed to pay, both of them became individually liable for that debt, and liens arose against each of their property.

Even if Helen Stolle were an innocent spouse, the liens still arose against all of Emile's property, and all of the community property available to satisfy Emile's debt. See Dawes v. Rich, 60 Cal.App.4th 24 (1997). The federal government therefore had liens on the properties in 1992 and 1993 to guarantee that Emile would pay the debts he owed. The liens acted like mortgages, in the sense that the value of the liens diminished the value of the properties left in the hands of the owners. Emile and Helen only owned equity in the properties to the extent that the value of the properties exceeded the value of the liens.

When Emile died in 1994, the properties presumably became Helen's sole property. However, she did not receive the properties free and clear. She received the properties subject to the government's lien, just as she would have received the properties subject to a mortgage. Her interest in the property amounts only to the equity that existed beyond the value of the liens on December 16, 1994 .

Nothing in the language or the case law suggests that the "innocent spouse" provisions of the Internal Revenue Code prevents the government from collecting against community property in accordance with state law. ⁹ Rather, the innocent spouse provisions of 26 U.S.C. §6015 are designed to prevent the government from pursuing an individual independently for tax liability that arose out of a joint return. At the present time, the government is not pursuing Helen Stolle individually, but is rather seeking to confirm the validity of liens that arose against the assets of Emile Stolle II while he was alive. His death no more removes those previously valid liens than his death would remove a previously valid mortgage. Emile's debts to the IRS were secured by an interest in the property, and the property passed to his heirs subject to that interest. ¹⁰

IV. CONCLUSION

For the reasons discussed above, the motion of Plaintiff United States for Partial Summary Judgment is GRANTED and the Court confirms that valid tax liens arose against the community property of Emile Stolle II.

IT IS SO ORDERED.

¹ This motion originally came before the Court on January 24, 2000 . At that time, Helen Stolle was not present and her son Emile Stolle III ("Emile III") sought to represent her pursuant to a general power of attorney. The Court explained to her son that, under Ninth Circuit precedent, a party must either retain an attorney or represent him or herself. A party may not designate a non-attorney representative, even by way of a general power of attorney. Jons v. County of San Diego , 114 F.3d 874, 876 (9th Cir. 1997). The Court therefore continued the hearing for three weeks to permit Helen Stolle to appear or retain counsel.

Because Emile III had indicated that his mother was very elderly and infirm, the logical solution would have been for Mrs. Stolle (or her children, acting on her behalf) to have retained counsel for her.

The hope that logic would prevail was dashed when the matter came again for hearing on February 14, 2000 . Having ignored the two possibilities explained at the prior hearing, Emile III announced that he had brought his mother "as the Court had asked." The Court did not in fact ask him to bring his mother, but had merely informed him of the two possibilities available under Jons: Mrs. Stolle could represent herself or Mrs. Stolle could retain counsel. Although Emile III sought to represent his mother, the Court again explained that he could not speak on her behalf.

The fact that Emile III could not speak for his mother in this case should have been apparent from the January 24, 2000 hearing. It appears to the Court that Emile brought his mother (who is wheelchair bound and appears quite infirm) for the sole purpose of putting her on display. The Court wishes at this point to express its disappointment that neither Mrs. Stolle nor her children (as her representative) retained counsel for her to handle this tax case on her behalf.

At the February 14, 2000 hearing, the Court very briefly attempted to conduct the hearing with Helen Stolle but it was immediately apparent that Mrs. Stolle could not meaningfully participate because she could not even hear the Court. At that point, the Court asked the government to report on the status of the settlement negotiations that the Court had ordered at the last hearing. Government counsel began by stating that Emile III had made an offer to settle, but Emile III began violently shaking his head back and forth indicating that no offer had been made. By that time, it was apparent that nothing productive could be accomplished at the hearing and the Court took the matter under submission.

² In 1992, the federal government seized over $397,000 from bank accounts controlled by Stolle and his wife to satisfy the assessments for taxes underpaid for 1985, 1986, and 1987.

³ Although the Court resolves all disputed facts in favor of Helen Stolle and the Revocable Trust, the Court must accept all undisputed facts supported by competent evidence. In other words, once the government has established a fact, the fact will be accepted unless Helen Stolle and/or the Revocable Trust provide contrary evidence.

In this case, neither Helen Stolle nor the Revocable Trust have provided any contrary evidence. Quite the opposite, in fact: Helen Stolle has attested that she has "no knowledge of these matters" and that she is "unable to rebut, correct, respond or otherwise defend this matter properly." The entirety of her affidavit amounts to a declaration that she was in total ignorance of the events at issue and that she cannot provide any evidence on the subject. As a result, there is no contrary evidence that could create disputed issue of fact, and the evidence must be evaluated as presented by the government.

As a final matter, the Court notes that Helen Stolle did request the Court to delay resolution of this motion pursuant to Rule 56(f) because she has not yet received the answers to unspecified interrogatories served on the government after the government's original motion. Although Helen Stolle did not use the proper form for making a Rule 56(f) motion, she is pro se and the Court will consider her request as though it were a formal Rule 56(f) motion.

To prevail upon a Rule 56(f) motion, a party must identify specific facts that establishe that evidence may exist on an important fact, the reasons why evidence cannot be presented at the current time, and the steps that the party has taken to obtain the evidence.

In this instance, Helen Stolle has failed to identify any specific facts that suggest that the government possesses evidence that might help her. In fact, Helen Stolle attests that the government's response "may or may not enlighten" her. As such, the Court denies her request to postpone consideration pursuant to Rule 56(f). Terrell v. Brewer, 935 F.2d 1015, 1018 (9th Cir. 1991); Brae Transportation, Inc. v. Coopers & Lybrand, 790 F.2d 1439, 1443 (9th Cir. 1986).

⁴ Because Stolle executed liens in favor of the offshore trusts on the property at issue in this suit, the trusts were originally named as defendants in the current suit as parties with potential interests in the real property at issue. The offshore trusts failed to appear despite appropriate service, and the Court granted summary judgment against the offshore trusts in an earlier summary judgment motion. Any interests that the offshore trusts may have had in the real property at issue has thus been extinguished and the Court's discussion of the facts will largely omit facts related to any interests purportedly held by the offshore trusts.

⁵ In its briefing and in its proposed Statement of Uncontroverted Facts and Conclusions of Law, the United States indicates that the Stolles signed the quitclaim deeds in favor of the Revocable Trust in July, 1989. This is both nonsensical, because the Revocable Trust did not exist until August, 1989, and flatly contradicted by the deeds themselves which are dated August 23, 1989 .

This is but one of several indicia of carelessness in the government's briefing. (See also Plaintiff's Mem. of P & A at 17 (citing 26 U.S.C. §6621 rather than 26 U.S.C. §6321). The Court strongly cautions counsel against unprofessional behavior.

⁶ The criminal case also did not constitute an attempt by the government to collect on Stolle's underpayment of taxes. Helen Stolle argues in her opposition papers that the current action violates the protection of double jeopardy because she believes that the government is further attempting to punish Stolle for his underpayment. However, Stolle committed a crime when he filed false tax statements, and his criminal conviction represented the punishment for the mere fact of filing false statements. Stolle also owed the government money because he paid less than he should have. The sums assessed by the government constitute the money that Stolle should have paid, plus interest and penalties. In this respect, the government behaves no differently than a credit card company or other private entity: failure to pay the government money you owe results in a balance to be paid, plus accrued penalties and interest. Collection of delinquent taxes along with penalties and interest on those delinquent taxes is not punishment for the crime of filing a false statement and does not constitute double jeopardy after conviction of the crime. This principle was established by the Supreme Court in 1938 in Helvering v. Mitchell [38-1 USTC ¶9152], 303 U.S. 391, 404 (1938) and has been recently reaffirmed by the Supreme Court in Hudson v. United States, 522 U.S. 93 (1997). See also I & O Publishing Co. Inc. v. Commissioner of Internal Revenue [98-1 USTC ¶50,115], 131 F.3d 1314, 1416 (9th Cir. 1997); United States v. Alt [96-1 USTC ¶50,267], 83 F.3d 779, 781 (6th Cir. 1996); Thomas v. C.I.R. [95-2 USTC ¶50,439], 62 F.3d 97, 100-02 (4th Cir. 1995).

⁷ The notice also assessed $24,194 in taxes and penalties for tax year 1998, but that year is not at issue in this current motion.

⁸ The terms of the Revocable Trust may have modified the normal course of inheritance. Those modifications are not relevant to the current motion, inasmuch as the government seeks only to confirm the validity of liens that arose on the community property assets before Stolle's death. Any lien validly existing on the property at the date of Stolle's death remains on the property unless satisfied or otherwise expunged.

⁹ Section 6015(b) does indicate that community property should be ignored in determining what income should be attributed to an individual for the purpose of determining their tax. In other words, since Helen Stolle apparently had no income herself during this period, and assuming without deciding that she were an innocent spouse, the IRS could not attribute half of Emile Stolle II's income to her and request that she pay tax on that income.

¹⁰ The Court at this time concludes only that the government has valid tax liens on the properties to secure the debt owed by Emile Stolle II at the time of his death. The Court does not address the question of whether those liens continued to grow after his death. In other words, although the debt of Emile Stolle II may have continued to accrue interest, it is not clear to the Court that the liens on the properties continue to grow after Stolle's death in 1994 because the remainder of the equity became separate property upon Emile Stolle's death. It is therefore possible that any additional interest remains a debt of Emile Stolle II but not a lien against his wife's equity in the property. The Court expressly reserves this question, concluding today only that valid tax liens arose in favor of the United States for the full value of Emile Stolle's debts up to the day he died. At the very least, therefore, the government currently has valid liens on the property for the value of Stolle's tax debt as of the date of his death.

At this juncture, it appears to the Court that both parties would benefit from another attempt to settle this case. Although the government has prevailed in this motion and demonstrated that tax liens currently exist for at least the value of Stolle's tax debts at the time of his death, the government will have to continue to litigate this case to determine whether or not the tax liens continued to grow. This should provide some incentive for the government to settle.

From Helen Stolle's perspective, the benefits to resolving this situation should be evident. If the government can be satisfied with the moneys from one or two of the properties, the tax liens on the other properties can be removed. Moreover, Mrs. Stolle may not even have to surrender any of the properties if she can get a loan on one or more of the properties to settle the case. The existence of the tax liens should not be an impediment to getting a loan if the banks know that the proceeds of the loan will go to remove the tax lien as part of the loan transaction. By contrast, if Mrs. Stolle continues to litigate, all four properties will continue to be subject to the tax liens and she runs the risk that interest will keep accruing against the properties.

 

 

[98-2 USTC ¶50,861] In the Matter of Succession of Bernice Addison Brumfield. United States of America , Petitioner v. Noel A. Brumfield, William Brumfield, Vincent Brumfield, and Succession of Bernice Addison Brumfield, Respondents

U.S. District Court, Mid. Dist. La., Civ. 96-7508-B-M1, 9/30/98

[Code Secs. 6321 and 6323 ]

Tax liens: Validity: Attachment: After-acquired property: Inherited property: Renunciation of bequest, consideration for: Constructive or tacit acceptance.--A federal tax lien attached to two parcels of real estate inherited by a delinquent taxpayer despite his valid renunciation of the bequest. Under state ( Louisiana ) law, he was deemed to have actually accepted the properties. While Louisiana statutes provide that a valid renunciation will retroactively preclude a transfer of ownership from a decedent to a renouncing heir, renunciation of the heir's rights to a co-heir for a "price" can nonetheless result in an irrevocable acceptance. The taxpayer's receipt of a release from his co-heir for liabilities for inheritance taxes and monetary claims was a valuable consideration, or "price," for his renunciation. Thus, the taxpayer had an interest in the properties that dated back to the decedent's death and to which the outstanding federal tax liens attached despite his renunciation.

Lyman Edgar Thornton III, Baton Rouge , La. 70801 , for plaintiff. Greg Gouner, 5515 S. Sherwood Forest Blvd., Baton Rouge, La. 70816, John R. Rarick, Rarick & Brumfield, 9821 Royal St., St. Francisville, La. 70775, Cherie Rarick Brumfield, 435 W. Ardenwood Dr., Baton Rouge, La. 70806, David L. Guerry, Daniel D. Holliday III, 8550 United Plaza Blvd., Baton Rouge, La. 70809, for defendants.

RULING

POLOZOLA, Chief District Judge:

This case requires the Court to resolve important issues involving the rights of the Internal Revenue Service ("IRS") against a taxpayer's interest in the estate of his mother. There are now five motions pending before the Court. ¹ The Court has also questioned its subject matter jurisdiction. For reasons which follow, the Court finds it does have subject matter jurisdiction. The Court also finds that the tax lien of the IRS attached to the properties of the taxpayer at the time of his mother's death. Therefore, the United States is entitled to foreclose on the taxpayer's property interest and sell the real estate at a judicial sale.

I. Background

Noel A. Brumfield owed income taxes for 1983 and 1984. The IRS assessed these taxes on December 2, 1985 and February 6, 1993 , respectively. Noel A. Brumfield, his brother William Brumfield, his son Vincent Brumfield, and the succession of his mother, Bernice Addison Brumfield, were named as defendants in the federal foreclosure action filed by the United States in 1996. Later, the succession suit was removed from the Nineteenth Judicial District Court for the Parish of East Baton Rouge and consolidated with the federal suit.

The United States then filed a contempt action against Noel A. Brumfield regarding certain properties, located in the Cayman Islands , in which Noel A. Brumfield possessed an interest. Noel A. Brumfield was held in civil contempt of court on July 31, 1996 and has been in custody since that time.

There is little dispute in the underlying facts except for the validity of the renunciation allegedly made by Noel A. Brumfield of his interest in his mother's estate.

As previously stated, the IRS assessed income taxes for 1983 and 1984 against Noel A. Brumfield on December 2, 1985 and on February 6, 1993 . The United States filed a Notice of Federal Tax Lien with respect to Noel A. Brumfield's unpaid tax liabilities in East Baton Rouge Parish, Louisiana on July 19, 1993 .

Despite notice of the assessments and demand for payment, Noel A. Brumfield has refused to pay the full amount of the assessments described above. As of July 19, 1993, Noel A. Brumfield remained indebted to the United States in an amount exceeding $2.4 million, plus statutory additions according to law. Additional unassessed interest and all statutory additions thereon as provided by law continue to accrue on this liability, which exceeds $3.5 million.

Bernice Addison Brumfield died testate on November 8, 1995 . On November 14, 1995 , the state court ordered the olographic will of Bernice Addison Brumfield to be executed according to law. The will of Bernice Addison Brumfield granted to her son, William Louis Brumfield, everything which she possessed "except the following two properties; the six and one-half acres with improvements located at 11136 Julia Aubin Lane, Baton Rouge, La. and the house and lot located at 10590 Toledo Bend, Baton Rouge, La. which I leave and bequeath to my grandson Noel Vincent Brumfield II with Noel Addison Brumfield usufruct." ²

Despite this specific bequest and his right to a "forced portion" in the assets of his mother's succession under Louisiana law, Noel A. Brumfield executed a document on July 15, 1996 which purported to renounce his usufruct interest in the two subject properties. On July 28, 1996 , Noel A. Brumfield executed another document which purported to renounce both his usufruct interest in the two subject properties and his "forced portion" in the succession's assets.

The state court had previously granted a judgment of possession to the legatees for all of the succession property except for the two parcels which are the subject of the petition by the United States to foreclose, thus leaving the disposition of these two properties as the only matter pending in the succession. The United States then intervened in the state court succession case as a creditor of Noel A. Brumfield. Thereafter, the United States filed a petition in state court to foreclose the tax liens on the usufruct interest of Noel A. Brumfield in the Aubin Lane and Toledo Bend properties. The succession action was removed to federal court. Thereafter, this Court denied defendant's motion to remand. The case is now before the Court on the pending motions.

In its motion for summary judgment and motion for default judgement, the United States seeks an order "determining that the tax liens of the United States encumbered, as of November 8, 1995, Noel Brumfield's interests in the assets of the Succession and specifically in the two parcels of property bequeathed to him under his mother's will." ³ The United States also seeks an order allowing it to foreclose its tax liens on Noel A. Brumfield's interest in the succession through a judicial sale.

II. Subject Matter Jurisdiction

This Court clearly has subject matter jurisdiction under 28 U.S.C. §1331 to determine whether or not the government has a lien on Noel A. Brumfield's "forced portion" and his usufructs over the two pieces of real estate. ⁴ The Court also has subject matter jurisdiction over the underlying issues of the validity and effect of the purported renunciations executed by Noel A. Brumfield. The basis for the government's foreclosure suit is 26 U.S.C. §6321, which provides for a lien on the property of the delinquent taxpayer.

The more difficult question regarding jurisdiction is whether this Court can exercise jurisdiction over the property and whether it can subsequently order its transfer in accordance with the Court's decision finding that the government has an enforceable lien on the property. This issue implicates the "probate exception" cases cited by the Brumfields in their prior memoranda. ⁵ Noel A. Brumfield's forced portion and the proceeds from the sale of the properties, until adjudicated by the state court handling the succession, remain property of the succession. ⁶ The probate exception cases hold that a federal court has no jurisdiction to probate a will or admin ister an estate. However, a federal court may exercise its jurisdiction to adjudicate rights in estate property provided its judgment does not interfere with the state court's possession of the property or its probate proceedings, except for the state court's obligation to accord full faith and credit to the federal court's judgment regarding the lien. ⁷

While the government may obtain a judgment from this Court recognizing the validity of its lien on the property, this Court may not order the transfer of the property nor exercise control over the property because either action would constitute an exercise of control over property under probate. Therefore, this Court's jurisdiction is limited to declaring the validity or invalidity of the government's lien and leaving the United States to assert this Court's judgment as res judicata in the state court succession proceedings.

Thus, the proper course for this Court seems to be an order transferring the sales proceeds from the registry of this Court to the registry of the state court handling the succession. The prevailing party could then assert this Court's judgment regarding the validity of the government's lien in the ongoing probate proceedings in state court. Whether it is really necessary to transfer the proceeds to the state court is unclear since the government has no objections to this Court's jurisdiction over the proceeds and since the Brumfields requested, via motion, that the proceeds be deposited into the registry of this Court. To avoid a problem, the Court will schedule a separate hearing to determine which court should distribute the proceeds from the sale.

III. The Validity of the Government's Tax Lien

As noted earlier, there are five pending motions before the Court. These pending motions can be resolved by the Court's ruling on the issue of whether or not the United States has a valid tax lien on Noel A. Brumfield's property interest in the succession.

The resolution of this issue requires an analysis of both Louisiana succession law and federal law. It is the ownership of the succession property which the Court is concerned with on these motions. Ownership is transmitted at the moment of death to the heirs and legatees. ⁸ Thus, Noel A. Brumfield acquired the forced portion and the two usufructs on November 8, 1995 , the date of Bernice Brumfield's death.

The United States ' tax lien, which was filed against Noel A. Brumfield pursuant to 26 U.S.C. §6321, arose at the time of its assessments of Noel A. Brumfield's deficiencies on December 2, 1985 and February 6, 1993 . ⁹ This tax lien attached to "all property and rights to property" belonging to Noel A. Brumfield, whether owned at the time of the assessments or subsequently acquired. ¹⁰ The Court must look to state law to determine whether and when Noel owned "property" or "rights to property." ¹¹

As noted above, it is clear that Noel A. Brumfield acquired the right to his forced portion and to the usufructs at the moment Bernice Brumfield died on November 8, 1995 . Since Noel acquired "rights to property" on November 8, 1995 , the conclusion would seem to be that the United States ' tax lien attached to the property on the same date and is effective as of the date of the assessments. ¹²

However, Louisiana Civil Code article 946, which was cited by the Brumfields in their prior memoranda, complicates the Court's resolution of the issue and is at the crux of the dispute between the parties. Article 946 provides that while Noel A. Brumfield is said to acquire the right to his forced portion and to the usufructs at the time of Bernice Brumfield's death, such right is "in suspense" until he decides whether to accept or renounce the part of the succession that has fallen to him.

The article further provides that if Noel A. Brumfield accepts his part of the succession, he is deemed to have succeeded to such part from the moment of Bernice Brumfield's death. However, if he renounces such part, he is considered as never having received it. The Court cannot overlook the retroactive nature of this code article. Louisiana law provides that no one may be compelled to accept a succession and that one may accept or renounce a succession. ¹³

The Brumfields, relying on this retroactive language and on the Fifth Circuit's recent decision in Leggett v. United States, ¹⁴ argue that the July 28, 1996 renunciation by Noel A. Brumfield of his rights to the property was valid. Thus, the Brumfields argue that under article 946, it must be that Noel A. Brumfield never succeeded to the property. Accordingly, the Brumfields argue that since Noel is deemed to never have had any rights in the property, the government's tax liens could not attach to the property.

In Leggett, the Fifth Circuit was confronted with a similar fact scenario in which a delinquent taxpayer renounced her succession rights in an alleged attempt to prevent the government's tax lien from attaching to her rights. Applying Texas succession law containing a retroactivity provision similar to Louisiana 's article 946 and an immediate vesting provision similar to Louisiana articles 940 and 1626, the Fifth Circuit attempted to determine whether the taxpayer ever had a property interest in the succession property to which the government's lien could attach. The court noted the contradiction between the two provisions of Texas law which on the one hand provided that the heir was vested with a property right from the moment of death, while on the other hand provided that the renouncing heir never had a property interest at all. ¹⁵ There is a similar contradiction between article 946 and articles 940 and 1626 of the Louisiana Civil Code.

The Fifth Circuit noted two ways to resolve this apparent contradiction: the "transfer theory" and the "acceptance-rejection theory". ¹⁶ The court then examined Texas succession law and noted that under Texas law, like Louisiana law, the heir had the right to accept or reject the succession. ¹⁷ The court then concluded that the Texas courts have followed the "acceptance-rejection theory". ¹⁸ Based on this analysis, the Fifth Circuit concluded that the taxpayer had not accepted the bequest but rather had executed a valid renunciation and, accordingly, the taxpayer never had a property right to which the tax lien could attach. ¹⁹

The United States argues, based on the language of article 946, that its tax lien against Noel A. Brumfield attached at the time of Bernice Brumfield's death and, thus, federal law controls thereafter. It further argues that since federal law controls once the lien attached to the property, state law (namely, Noel's renunciation and the retroactivity provision under article 946) could not defeat the attachment of the lien. The United States relies on United States v. Comparato, ²⁰, which cites the Supreme Court's decisions in United States v. Rodgers ²¹ and United States v. Bess. ²² The New York successions provisions noted in the Comparato opinion are also similar to Louisiana 's provisions. ²³

The Fifth Circuit in Leggett distinguished Comparato, noting that New York law was at issue and that the New York courts had held heirs to have a property interest in the right to accept or reject the inheritance to which the federal tax lien attached. ²⁴ Therefore, New York law follows the so-called "transfer theory". ²⁵ Thus, the delinquent taxpayers in Comparato could not destroy the property right by renouncing the underlying succession. ²⁶

The Court's research reveals that the Louisiana courts have not decided whether Louisiana follows the "transfer theory" or the "acceptance-rejection theory". In fact, there are very few cases applying or interpreting the above-cited code articles. Thus, the Court must rely on the language of the code articles and the Fifth Circuit's guidance in Leggett.

The situation this Court is now faced with is similar to the situation the Ninth Circuit was faced with in Mapes v. United States . ²⁷ In Mapes, the court was applying Arizona law which had not been interpreted by the Arizona courts. Thus, the Ninth Circuit assumed that Arizona's statutory scheme followed the so-called "acceptance-rejection theory." ²⁸ The Fifth Circuit in Leggett noted that the "acceptance-rejection theory" is the majority rule. ²⁹ Because (a) the "acceptance-rejection theory" is the majority rule; (b) there is a substantial similarity between the Texas statutes cited in Leggett and the Louisiana provisions; and (c) the language of Louisiana Civil Code article 946 states that the heir's right is in suspense until the heir decides whether to accept or reject the succession, it is reasonable to conclude that the Louisiana Supreme Court would follow the "acceptance-rejection theory" and that the Fifth Circuit would so hold.

Therefore, this Court finds that it is bound by the Fifth Circuit's holding in Leggett. Thus, the validity of the United States ' tax lien on Noel A. Brumfield's interest in the succession property is dependent on the Court's resolution of three issues:

A. Was Noel A. Brumfield's July 28, 1996 Renunciation a Valid Renunciation?

If Noel A. Brumfield's renunciation of July 28, 1996 was a valid renunciation, Leggett dictates that he never had an interest in the property to which the tax lien could attach. Thus, the property would pass unencumbered by the lien. In its prior memoranda, the United States contests the validity of the renunciation. On its face, the renunciation appears valid because it meets all of the codal requirements. The renunciation was, on its face, executed by notarial act before a notary and two witnesses. ³⁰ Noel A. Brumfield had the requisite capacity to make the renunciation. ³¹ Further, his right to renounce had not proscribed. ³²

The court believes that what the government is really asserting when it claims the renunciation was invalid is that the renunciation should be annulled because of its allegedly fraudulent purpose. The United States cites, in its memorandum opposing the defendants' motion for summary judgment and in its memorandum supporting its earlier-filed motion for summary judgment, several bases for annulling the renunciation: 1) a revocatory action under articles 2036-2043 of the Louisiana Civil Code; 2) an oblique action under article 2044 of the Louisiana Civil Code; 3) a finding that the renunciation is a simulation under articles 2025-2028 of the Louisiana Civil Code; 4) an action allowing the government to accept the succession, despite the renunciation, in the name of Noel A. Brumfield, under Louisiana Civil Code article 1021 on the basis of the prejudice caused the United States by the renunciation; and 5) an avoidance of the renunciation as a fraudulent transfer under the Federal Debt Collection Procedures Act. ³³

The simulation articles are not a basis for annulling the renunciation and are not applicable under the facts of this case.

The revocatory action is prescribed by the one year prescription of Louisiana Civil Code article 2041.

The oblique action must be brought via a separate action with both Noel A. Brumfield and the succession joined as defendants therein. This requirement has not been met here.

In order for the United States to exercise the right to accept the succession in Noel A. Brumfield's stead, Louisiana Civil Code article 1071 requires that a petition to obtain such authorization be presented to the judge of the place where the succession is opened with service of process made on the debtor (Noel A. Brumfield). The United States has failed to meet these requirements.

Finally, the use of the Federal Debt Collection Procedures Act to set aside the renunciation also requires a separate complaint with service of process. Therefore, this Act does not apply herein.

Thus, in the absence of a separate petition filed by the United States seeking to set aside the renunciation on one of the above grounds, Noel A. Brumfield's renunciation appears to be a valid renunciation.

B. Did Noel A. Brumfield Actually Accept the Succession?

The Court must now determine whether Noel A. Brumfield, by his actions, actually accepted the succession, thus making his right to the property, under Louisiana Civil Code article 946, effective as of the date of Bernice Brumfield's death. If Noel A. Brumfield actually accepted the succession, the United States tax lien, under Leggett, attached to the property at the same time. An acceptance of the succession by an heir is irrevocable. ³⁴ An acceptance can be either express or tacit. ³⁵ There was clearly no express acceptance by Noel A. Brumfield under the facts of this case.

However, the United States contends that Noel A. Brumfield tacitly accepted the succession by residing in and on one of the properties, in the capacity of an heir, from 1994 until the time he was incarcerated in 1996. While the United States did not cite a code article, the Court presumes it is relying on article 993 and/or article 994 of the Louisiana Civil Code. Considering that Noel resided in and on the property before Bernice Brumfield's death in 1995, the Court does not believe it would be proper to conclude that he was occupying the property after his mother's death in the capacity of an heir. Thus, the Court concludes that there was no tacit acceptance of the succession by Noel A. Brumfield on this basis.

However, the Court finds that Noel A. Brumfield, via his renunciation and the "receipt and full release" agreement of July 28, 1996 , accepted the succession under article 1003 of the Louisiana Civil Code. Article 1003 provides that a renunciation in favor of a coheir is an acceptance when the renouncing party receives a "price" for the renunciation. Noel's renunciation was in favor of his co-heir and brother William Brumfield as the civil code provides that Noel's portion of the succession, once renounced, falls to William as the instituted universal legatee. ³⁶ Although the United States contends several times in its memoranda that the renunciation was in favor of the son, Vincent Brumfield, the Court can find no support for this in the language of the renunciation or in the civil code.

The Court finds that Noel A. Brumfield did receive a "price" for his renunciation. A careful reading of the "receipt and full release" agreement reveals that Noel received valuable consideration in exchange for his renunciation, including a release from William for any and all liability for inheritance taxes pertaining to his part of the succession and a release from any and all claims that William had against Noel, including the claims pertaining to the Livingston suit debt and to Noel's alleged wrongful taking of items' from Bernice Brumfield's home after her death. While the Court could not locate any cases interpreting the meaning of the term "price" as used in the article, it is reasonable to conclude that the valuable consideration set forth above clearly satisfies this requirement.

Therefore, the Court concludes that under the clear terms of article 1003 of the Louisiana Civil Code and Leggett, Noel A. Brumfield accepted his mother's succession. Thus, the Court finds, under the facts of this case and as a matter of law, that the United States ' tax lien attached to the property at the time of Bernice Brumfield's death.

The Court also finds as a matter of law that Noel A. Brumfield accepted the succession under article 1002 of the Louisiana Civil Code. This article provides that a donation, sale, or assignment by a coheir of his/her rights of inheritance to a fellow coheir is considered to be an acceptance of the succession. Since Noel A. Brumfield executed the renunciation in exchange for the valuable consideration mentioned above, it follows that such a transaction was a sale or assignment of Noel's rights in the succession.

C. Does Louisiana 's Succession Law Follow the "Acceptance-Rejection Theory" or the "Transfer Theory" as Termed and Defined by the Fifth Circuit in Leggett?

For reasons noted above, the Court concludes that Louisiana follows the "acceptance-rejection theory" and thus the Court is bound by the Leggett holding.

IV. Summary and Conclusion

For reasons set forth above, the Court finds that the renunciation was valid in form and that Louisiana follows the "acceptance-rejection theory." However, because Noel A. Brumfield accepted the succession under articles 1002 and 1003 of the Louisiana Civil Code, the Court finds that, pursuant to article 946 of the Louisiana Civil Code, Noel had rights in the succession as of the moment of Bernice Brumfield's death at which time the United States ' tax liens attached.

Therefore, the Court concludes that the United States ' tax liens are valid and that the United States is entitled to foreclose on the property. The United States is also entitled to a lien for its share of the proceeds from the judicial sale of the property.

The parties shall have until October 16, 1998 to submit a prepared judgment which shall include a provision for the disposition of the funds in the registry of the Court.

Therefore:

IT IS ORDERED that plaintiff's motion for summary judgment be and it is GRANTED.

IT IS FURTHER ORDERED that plaintiff's motion for a default judgment against Noel A. Brumfield and Vincent Brumfield be and it is DENIED.

IT IS FURTHER ORDERED that defendants Succession of Bernice Addison Brumfield and William Brumfield's motion for summary judgment be and it is DENIED.

IT IS FURTHER ORDERED that defendants Succession of Bernice Addison Brumfield and William Brumfield's motion for hearing of pending probate rule to place legatee in possession of property be and it is DENIED.

IT IS FURTHER ORDERED that defendant Vincent Brumfield's motion for summary judgment be and it is DENIED.

¹ Motion for summary judgment, filed by plaintiff United States of America ("United States") on April 10, 1997 (Rec. Doc. No. 39); motion for default judgment against Noel A. Brumfield and Vincent Brumfield, filed by plaintiff United States on April 10, 1997 (Rec. Doc. No. 39); motion for partial summary judgment, filed by defendants Succession of Bernice A. Brumfield and William L. Brumfield on June 24, 1997 (Rec. Doc. No. 46); motion for hearing of pending probate rule to place legatee in possession of property, filed by defendants Succession of Bernice A. Brumfield and William L. Brumfield on June 24, 1997 (Rec. Doc. No. 46); and motion for summary judgment, filed by defendant Vincent Brumfield on March 3, 1998 (Rec. Doc. No. 1)

² Will of Bernice Addison Brumfield, dated October 27, 1995 , as contained in Exhibit C of the United States ' Statement of Material Facts filed April 10, 1997 (Rec. Doc. No. 40).

³ Memorandum of Law by the United States in Support of its Motion for Summary Judgment and Motion for Default Judgment, page 3, filed April 10, 1997 (Rec. Doc. No. 41).

⁴ See generally American Well Works Co. v. Layne & Bowler Co., 241 U.S. 257, 36 S.Ct. 585, 60 L.Ed. 987 (1916).

⁵ See Markham v. Allen, 326 U.S. 490, 66 S.Ct. 296, 90 L.Ed. 256 (1946) and Turton v. Turton, 644 F.2d 344 (5th Cir. 1981).

⁶ See generally La. Civ. Code art. 872.

⁷ Markham v. Allen, 326 U.S. 490, 66 S.Ct. 296, 90 L.Ed. 256 (1946); Turton v. Turton, 644 F.2d 344 (5th Cir. 1981).

⁸ Baten v. Taylor, 386 So.2d 333 ( La. 1979) and La. Civ. Code arts. 940 and 1626.

⁹ United States ' Statement of Material Facts, filed April 10, 1997 (Rec. Doc. No. 40).

¹⁰ 26 U.S.C. §6321 and J.N. Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770], 542 F.2d 270 (5th Cir. 1976).

¹¹ Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 80 S.Ct. 1277, 4 L.Ed.2d 1365 (1960); Leggett v. United States, 120 F.3d 592 (5th Cir. 1997); and Medaris v. United States [89-2 USTC ¶9565], 884 F.2d 832 (5th Cir. 1989).

¹² 26 U.S.C. §§6321 & 6322.

¹³ La. Civ. Code art. 977.

¹⁴ 120 F.3d 592 (5th Cir. 1997).

¹⁵ Leggett, 120 F.3d at 594-595.

¹⁶ Id. at 595.

¹⁷ Id. at 595-596.

¹⁸ Id.

¹⁹ Id. at 596.

²⁰ [94-2 USTC ¶50,354], 22 F.3d 455 (2d Cir.), cert denied, 513 U.S. 986, 115 S.Ct. 481, 130 L.Ed.2d 394 (1994).

²¹ [83-2 USTC ¶9572], 461 U.S. 677, 103 S.Ct. 2132, 76 L.Ed.2d 236 (1983)

²² 357 U.S. 51, 78 S.Ct. 1054, 2 L.Ed.2d 1135 (1958)

²³ Comparato [94-2 USTC ¶50,354], 22 F.3d at 457.

²⁴ Leggett, 120 F.3d at 596.

²⁵ Id.

²⁶ Id.

²⁷ 15 F.3d 138 (9th Cir. 1994).

²⁸ Mapes, 15 F.3d at 140-141.

²⁹ Leggett, 120 F.3d at 597.

³⁰ La. Civ. Code art. 1017.

³¹ La. Civ. Code art. 1018.

³² 32 La. Civ. Code art. 1030.

³³ 33 28 U.S.C. §3001 et seq.

³⁴ La. Civ. Code art. 1009.

³⁵ La. Civ. Code arts. 989 and 990.

³⁶ La. Civ. Code arts. 1703 and 1709.

 

 

[94-2 USTC ¶50,354] United States of America , Appellee v. Anthony Comparato, Individually and as the Administrator of the Estate of John Comparato, Mildred Comparato, Millicent Comparato, Diana Comparato Carlucci, Appellants

(CA-2), U.S. Court of Appeals, 2nd Circuit, 93-6237, 93-6293, 4/18/94, 22 F3d 455, Affirming a District Court decision, 93-2 USTC ¶50,424

[Code Sec. 6321 ]

Lien for taxes: Settlement proceeds: Property rights: Renunciation.--The parents of a deceased child could not defeat IRS tax liens by renouncing their interest in escrow accounts representing settlement proceeds from malpractice actions relating to their son's death. Under state ( New York ) law, the parents acquired vested interests in the accounts at the time of their son's death. Once the IRS liens attached, they could not be displaced by subsequent state law renunciation of the parents' property rights to the accounts.

[Code Sec. 6334 ]

Levy and distraint: Vested interests: State law renunciation.--State ( New York ) law permitting renunciation of parents' interests in their deceased son's estate could not defeat an existing IRS lien on estate property. Once the parents had vested interests in escrow accounts holding the proceeds from malpractice actions relating to their son's death, federal law controlled whether the parents' interests were exempt from levy.

Zachary W. Carter, United States Attorney, Brooklyn, N.Y. 11201, Loretta C. Argrett, Assistant Attorney General, Gary R. Allen, Gilbert S. Rothenberg, Sara S. Holderness, Department of Justice, Washington, D.C. 20530, for appellee. Richard F. Thurston, Denver , Colo. , for appellants.

Before: TIMBERS, CARDAMONE, and KEARSE, Circuit Judges.

TIMBERS, Circuit Judge:

Appellants appeal from a summary judgment in favor of the government entered in the Eastern District of New York, Reena Raggi, District Judge. The court held that federal tax liens had attached to Anthony and Mildred Comparato's property interests in malpractice claims arising from their son's death. The court also held that Anthony and Mildred Comparato's renunciations of their interests in their son's estate did not defeat the federal liens because the liens attached prior to the attempted renunciations. Summary judgment was entered against Anthony and Mildred Comparato for their tax liabilities for the years 1974, 1975, 1976, and 1985.

Appellants contend that Anthony and Mildred Comparato's renunciations of their interests in their son's estate defeated the federal tax liens. They claim that, pursuant to New York law, their renunciations retroactively extinguished their interests in their son's estate.

We affirm.

I.

We summarize only those facts and prior proceedings believed necessary to an understanding of the issues raised on appeal.

The United States commenced this action to collect on tax assessments against Anthony and Mildred Comparato. Between 1985 and 1989, the Internal Revenue Service (IRS) assessed Anthony Comparato a total of $676,534.99 in taxes, interest, and penalties for the tax years 1974-1976 and 1981-1985. In 1989, the IRS assessed Mildred Comparato a total of $215,515.22 in taxes, interest, and penalties for the years 1974-1976 and 1981-1984.

Anthony and Mildred Comparato's principal asset is $650,000 held in escrow accounts pending the outcome of the litigation related to their tax obligations. This money represents the proceeds of the settlement of malpractice actions arising from the death of John Comparato--Anthony and Mildred Comparato's quadriplegic son who died intestate on March 30, 1984 . While John Comparato was still alive, a malpractice action which sought damages for pain and suffering was commenced in New York State Supreme Court, New York County . After John Comparato's death, the Queens County Surrogate's Court appointed Anthony Comparato as admin istrator of John's estate. As admin istrator, Anthony Comparato pursued the pain and suffering claim and commenced another action for wrongful death. Eventually, the pain and suffering claim was settled for $350,000. The wrongful death claim was settled for $500,000.

In 1989, Anthony Comparato petitioned the Surrogate's Court to approve the settlement and to permit payment of various expenses, including legal fees. He asked that the net proceeds be distributed equally between himself and his wife as John's statutory distributees. In August 1989, before the Surrogate's Court acted on this request, the IRS served notices of levy on Baron & Vesel, attorneys for the Comparato estate, citing tax liens against Anthony and Mildred Comparato. The Surrogate's Court entered an order permitting payment of $200,000 in attorney's fees, the remainder of the money ($650,000) to be deposited in eleven separate escrow accounts pending the outcome of Anthony and Mildred Comparato's challenge to the federal tax assessments.

On April 10, 1991, Anthony and Mildred Comparato executed separate renunciations of their interests in John's estate pursuant to N.Y. Estates, Powers and Trusts Law, §2 -1.11 (McKinney 1981 & Supp. 1994). On September 23, 1991 , the Surrogate's Court permitted the renunciations to be filed, despite the fact that the renunciations had not been filed within the nine-month statutory period.

On July 21, 1992 , the Surrogate's Court permitted Diana and Millicent Comparato to intervene in the admin istration of their brother John's estate. Under New York law, they would succeed their parents as the statutory distributees of John. N.Y. Estates, Powers and Trusts Law, §4 -1.1(a)(5) ( McKinney Supp. 1994).

On July 15, 1992 , the government commenced this action which sought to reduce to judgment the tax liabilities of Anthony and Mildred Comparato. In a July 2, 1993 order, the court held that Anthony and Mildred Comparato, as the presumptive heirs and sole statutory distributees of their intestate son, acquired property interests in the proceeds of the malpractice claims as of the date of their son's death. The court also held that Anthony and Mildred Comparato could not renounce their interests in their son's estate to defeat the federal tax liens. The court granted summary judgment in favor of the government. On August 17, 1993 , the court entered a final judgment pursuant to Fed. R. Civ. P. 54(b) with respect to the assessments for the years 1974-1976 and 1985 against Anthony Comparato, and for the years 1974-1976 against Mildred Comparato. Enforcement of the judgment was stayed pending a final settlement order by the Surrogate's Court.