Minnesota

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Matthew Luxton, et al., Plaintiffs-Appellants v. United States of America , Third-Party Defendant-Appellee.

U.S. Court of Appeals, 8th Circuit.; 02-2464, 340 F3d 659, August 22, 2003 .

Affirming an unreported DC Minn. decision.

[ Code Secs. 6321 and 6323]

Validity and priority against third parties: Tax liens under state law: Minnesota : Insurance. --

The Eighth Circuit upheld a federal district court's decision assigning priority over a deceased individual's life insurance policy proceeds to the IRS. Pursuant to collateral assignments signed by the taxpayer, the IRS was named as the assignee of the insurance proceeds upon her death. As such, the taxpayer's subsequent assignment of the proceeds to her three children was not binding. The court rejected the beneficiaries' argument that state ( Minnesota ) law protected the insurance proceeds from creditors. Moreover, the beneficiaries unsuccessfully argued that the collateral assignments represented invalid compromise agreements. The collateral assignments were not compromise agreements as evidenced by the IRS's filing of a notice of tax lien for the full amount of the tax due and owing after the assignments were executed.

Before: Hansen, Chief Judge, ^* and Gibson and Loken, Circuit Judges.

LOKEN, Chief Judge: Following Beverly Luxton's death, her three children as named beneficiaries commenced this action against State Farm Life Insurance Company to recover the proceeds of three life insurance policies. State Farm interpleaded the United States because, some years before her death, Luxton had executed Collateral Assignments providing that the Internal Revenue Service as assignee may claim the policy proceeds to pay Luxton's outstanding tax liabilities. State Farm paid the proceeds into court and was dismissed from the case. After a trial, the district court ¹ upheld the Collateral Assignments and awarded the policy proceeds to the IRS. The named beneficiaries appeal. We affirm.

I. Background

In February and March 1994, the IRS assessed Luxton $793,301.39 for unpaid federal employment and unemployment taxes, penalties, and interest. At that time, Luxton's assets included three life insurance policies in which State Farm agreed to pay a total of $327,000 upon Luxton's death. Each policy granted Luxton the right to change beneficiaries, to demand the policy's cash surrender value, and to assign the policy by a writing filed with State Farm. The policies' Assignment clause provided that "[a]n assignment may limit the interest of any beneficiary."

When the substantial unpaid taxes were assessed, Luxton was undergoing extensive cancer treatments and was having difficulty meeting her medical and living expenses. In September 1994, after discussions with IRS agent Lloyd Fritsvold, Luxton submitted to the IRS a written offer of compromise in which she offered to pay "327,000 upon my death" in return for reducing her tax liability to that amount. The IRS rejected the offer because, although Luxton was not expected to live more than three years, the offer did not include a fixed date for payment.

After further discussions with Agent Fritsvold and Luxton's State Farm agent, Luxton executed the Collateral Assignments here at issue. The Collateral Assignments are standard-form State Farm documents with handwritten entries identifying the IRS as assignee, the policy number, and Luxton as the person whose life was insured. State Farm recorded the Collateral Assignments in its policy files and forwarded them to the IRS where Agent Fritsvold noted them on an IRS Form 2276 Collateral Deposit Record.

When it received the Collateral Assignments, the IRS did not compromise or otherwise reduce Luxton's outstanding tax liability. Indeed, five months after the Collateral Assignments were executed, the IRS filed notices of its tax liens against Luxton's property for the entire amount of her tax liabilities. However, consistent with an informal understanding between Agent Fritsvold and Luxton, the IRS made no further collection efforts prior to Luxton's death. In addition, in 1995 the IRS allowed $17,000 of proceeds from the sale of Luxton's residence to be used to prepay premiums on the life policies; in late 1997 the IRS allowed Luxton to borrow $5,000 of accumulated policy dividends to pay medical expenses; and in 1999 the IRS authorized the use of policy dividends to pay premiums.

Though Luxton survived her cancer longer than initially expected, she died in September 1999. Shortly before her death, she named her son Matthew beneficiary on two of the policies. The other two plaintiffs, Luxton's daughters, became the named beneficiaries of the third policy in 1994.

II. Discussion

In United States v. Bess [ 58-2 USTC ¶9595], 357 U.S. 51, 55-57 (1958), the Supreme Court held that a federal tax lien entitles the IRS to recover only the cash surrender value of a life insurance policy, not the policy proceeds, because a federal tax lien is limited to the taxpayer's "property and rights to property," 26 U.S.C. (IRC) §6321, and under state law a policyholder has no interest in life insurance proceeds before her death. Consistent with Bess, IRC §6332(b) now permits the IRS to levy on a life insurance policy only to the extent of its cash surrender value. Therefore, the beneficiaries argue, it would "frustrate the intent of Congress" to permit the government to recover more than the cash surrender value of the policies in this case. We disagree.

The government's claim to the policy proceeds is based on its rights under the Collateral Assignments, not on its tax liens. Nothing in Bess or §6332(b) suggests that those authorities limit the IRS to enforcing its tax liens. Therefore, the primary issue in this case is whether the Collateral Assignments entitle the government to recover the policy proceeds under Minnesota law. ² In addition, the beneficiaries argue that the Internal Revenue Code did not authorize the IRS to accept the Collateral Assignments and to collect the policy proceeds (in effect, that Agent Fritsvold's arrangement with Luxton was ultra vires).

A. The Effect of the Assignments under Minnesota Law

The district court held that Luxton made a valid assignment of the policy proceeds to the IRS which "limit[ed] the interest of the beneficiaries to the amount remaining after payment of the existing liabilities to the IRS." We review the court's interpretation of state law de novo. See Jeanes v. Allied Life Ins. Co., 300 F.3d 938, 940 (8th Cir. 2002) (standard of review).

Assignments of insurance policies as collateral securing the policyholder's debts to the assignee are not uncommon. See Meyer [ 64-1 USTC ¶9111], 375 U.S. at 235; All Am. Life Ins. Co. v. Billingsley, 122 F.3d 643, 650 (8th Cir. 1997); Graves & Christensen, McGill's Legal Aspects of Life Insurance 210-12 (2d ed. 1997). Unlike an absolute assignment, which permanently transfers all rights in the policy to the assignee, a collateral assignment transfers only those rights necessary to secure the assignor's debt and extinguishes the named beneficiary's interest only to the extent of the assignor's debt to the assignee. See Westchester Enters., Inc. v. Swartout (In re Swartout), 123 B.R. 794, 799-800 (Bankr. S.D. Ohio 1991); Succession of Goudeau, 480 So.2d 806, 808 ( La. 1985).

The Supreme Court of Minnesota has long acknowledged that a life insurance policy may be assigned as collateral without the consent of the beneficiary, if the policy reserves that right to the insured. See Janesville State Bank v. Aetna Life Ins. Co., 274 N.W. 232, 233 ( Minn. 1937); Hale v. Life Indem. & Inv. Co., 68 N.W. 182, 185-86 ( Minn. 1896). Here, the policies issued to Luxton contained a provision allowing assignments, and she signed Collateral Assignments that assigned specific policyholder rights to the IRS, including "[t]he sole right to collect from the insurer the net proceeds of the policy," and "[t]he sole right to surrender the Policy and receive the surrendered value thereof at any time." The beneficiaries argue that the Collateral Assignments are nonetheless defeated by the policy provision that, upon Luxton's death, the proceeds will be paid "to the primary beneficiaries living when payment is made." We disagree. The policies expressly authorized assignments that "limit the interest of any beneficiary." Though the Collateral Assignments reserved Luxton's "right to designate and change the beneficiary," they provided that "any designation or change of beneficiary ... shall be made subject to this assignment and to the rights of the Assignee hereunder."

The beneficiaries further argue that payment of the policy proceeds to the IRS would violate MINN. STAT. §61A.12, which provides that, "[w]hen any insurance is effected in favor of another, the beneficiary shall be entitled to its proceeds against the creditors and representatives of the [policyholder]." Again, we disagree. The purpose of this statute is to exempt a debtor's life insurance policies from the reach of her creditors. See Murphy v. Casey, 184 N.W. 783, 784 ( Minn. 1921). The beneficiaries cite no case in which §61A.12 or a similar statute has been held to preclude an assignee's claim, as opposed to an ordinary creditor's claim. The few courts that considered the question have held that identical laws in other States did not bar the insured from limiting or defeating the beneficiary's interest by assignment. See Kash's Ex'r v. Kash, 86 S.W.2d 273, 276 ( Ky. 1935); Ferris v. Phoenix Mut. Life Ins. Co., 272 N.Y.S. 781, 783-84 (App. Div. 1934), aff'd, 195 N.E. 184 (N.Y. 1935). We conclude that the Supreme Court of Minnesota would follow this consistent authority. That Court decided Janesville over forty years after the enactment of §61A.12 and did not even mention the statute.

B. The IRS's Authority to Accept the Assignments

The Internal Revenue Code provides that the IRS may compromise a federal tax liability. The statute and implementing Treasury Regulations specify in detail the documentary record that must be compiled and the agency approval that must be obtained for a compromise agreement to be valid. See 26 U.S.C. §7122 (1994); 26 C.F.R. §301.7122-1(d)(3) (1995). This statutory procedure is "the exclusive method by which tax cases could be compromised." Botany Worsted Mills v. United States [1 USTC ¶348], 278 U.S. 282, 288-89 (1929). In this case, the IRS rejected Luxton's formal offer-in-compromise, and Agent Fritsvold then proceeded to fashion an informal understanding with her. The beneficiaries argue that, even if collateral assignments of policy proceeds are valid under Minnesota law, the IRS is only authorized to accept collateral for a tax liability as part of a formal offer-in-compromise.

In this case, the IRS did not compromise Luxton's tax liability, that is, agree to reduce her tax liability in exchange for partial payment or other consideration. See BLACK'S LAW DICTIONARY 281 (7th ed. 1999). Indeed, after receiving the Collateral Assignments, the IRS filed notices of tax liens for the full amount, confirming that Luxton's tax liability had not been compromised. Rather than formally compromise, Agent Fritsvold did what many prudent creditors would have done under the circumstances, accepting an assignment of the right to insurance policy proceeds that exceeded Luxton's available assets, paying premiums to keep the policies in force, and deferring more aggressive collection actions. Luxton benefitted from the arrangement, at least to the extent she was permitted to borrow against the policies to pay medical expenses. The beneficiaries were not harmed because the IRS could have effectively cancelled the policies by foreclosing on their cash surrender values before Luxton's death.

Thus, the beneficiaries' contention boils down to the unsupported assertion that the IRS has no authority to take informal actions of this kind to enhance its prospect of collecting unpaid taxes, interest, and penalties. It is counterintuitive to posit that Congress would arm the IRS with a powerful tax lien and other formidable collection tools, but would deny the agency the authority to employ other devices commonly used by creditors to improve their position, such as securing interests in collateral by means other than a lien. And in fact, the Internal Revenue Code refutes the beneficiaries' contention, expressly authorizing the agency to employ "such other reasonable devices or methods as may be necessary or helpful in securing a complete and proper collection of the tax." IRC §6302(b). Likewise, Part 5.6.1 of the Internal Revenue Manual confirms that revenue agents are authorized to accept collateral security from taxpayers when that is in the best interests of the government, and to record the receipt of such collateral on IRS Form 2276, as Agent Fritsvold did in this case.

For the foregoing reasons, we conclude that under Minnesota law the Collateral Assignments granted the IRS an interest in the policy proceeds superior to that of the named beneficiaries. Accordingly, the judgment of the district court is affirmed.

^* The Honorable David R. Hansen stepped down as Chief Judge at the close of business on March 31, 2003 . The Honorable James B. Loken became Chief Judge on April 1, 2003.

¹ The HONORABLE DAVID S. DOTY, United States District Judge for the District of Minnesota.

² The parties agree that state law defines the extent of the government's rights under those instruments. Cf. Meyer v. United States [ 64-1 USTC ¶9111], 375 U.S. 233, 236 (1963).

 

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

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

[Code Secs. 6323 and 7426 ]

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

Before: MCMILLIAN, LAY and MURPHY, Circuit Judges.

MCMILLIAN, Circuit Judge:

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

JURISDICTION

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

BACKGROUND

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Id. , 712 F.2d at 1329.

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

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

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

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

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

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

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

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

 

 

[95-2 USTC ¶50,549] Mary Joyce Thomson, Plaintiff-Appellant v. United States of America , Defendant-Appellee

(CA-8), U.S. Court of Appeals, 8th Circuit, 94-3861, 9/19/95, 66 F3d 160, Reversing and remanding an unreported District Court decision

[Code Secs. 6321 and 7426 ]

Lien for taxes: Interest in property: Unrecorded divorce decree: Civil action by nontaxpayer.--The IRS could not levy on the home of a divorced spouse who had acquired ownership of the property from her ex-husband in their divorce decree because, despite the couple's failure to record the decree, her ex-husband did not have an interest in the property under state (Minnesota) law. The plain meaning of Code Sec. 6321 provided for a lien only on property that belonged to the ex-husband, and the decree divested the ex-husband of any interest in the property. The trial court's reliance on the state's recording statute was misplaced because the statute provided relief to subsequent creditors and purchasers. Therefore, the ex-husband did not retain an interest in the property to which the lien could attach. However, it was unclear whether the ex-husband had acquired an interest in the property under state law to which a lien could attach when the property was conveyed to the couple under a contract for deed after the divorce decree.

Jay B. Kelly, 332 Minnesota St. , St. Paul , Minn. 55101-1314 , for plaintiff-appellant. Gary R. Allen, John A. Marrella, Bridget M. Rowan, William S. Estabrook, Sara A. Ketchum, Department of Justice, Washington, D.C. 20530, for defendant-appellee.

Before MCMILLIAN, LAY, and LOKEN, Circuit Judges.

LOKEN, Circuit Judge:

In 1971, Douglas and Mary Thomson divorced. The divorce decree awarded Mary "exclusive use, ownership and possession" of their home, which they were purchasing under a contract for deed. The divorce decree was unrecorded when the Internal Revenue Service obtained a lien on all of Douglas 's property rights under 26 U.S.C. §6321 . The IRS levied on the home, and Mary commenced this wrongful levy action under 26 U.S.C. §7426 , claiming that she owns the home. After a bench trial, the district court held that the IRS prevails over Mary's unrecorded ownership interest under the Minnesota recording act. We conclude that that act gives Douglas no property right in the home to which the government's lien may attach. We therefore reverse and remand.

The 1971 divorce decree provided that Douglas would "execute all necessary documents to effectively vest ownership in [Mary] and upon failure to do so such ownership shall vest in [Mary] by this Decree." Mary continued to reside in the St. Paul home, while Douglas made payments on the contract for deed. In 1982, Douglas and Mary mortgaged the vendees' interest in the property to Douglas's brother as security for a $140,000 loan to Douglas . The following year, Douglas again mortgaged the property, this time without Mary's knowledge, as security for a bank loan. Both mortgages were recorded. In 1985, the contract-for-deed vendors executed a warranty deed conveying the property to "Douglas W. Thomson and Mary J. Thomson ... as joint tenants." That deed was not recorded. Mary resided at the home until 1988, when she moved elsewhere for two years and Douglas lived in the home with their sons. Douglas listed the property as his home on a March 1992 Collection Information Statement submitted to the IRS, stating that he had a "joint tenant" interest.

On May 20, 1991 , the IRS assessed Douglas $179,752 in unpaid 1990 income tax, thereby creating a lien on all his property under 26 U.S.C. §6321 :

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.

On October 8, 1992 , IRS levied on the home in order to seize Douglas 's apparent one-half interest. The next day, Douglas recorded the divorce decree. Mary then commenced this action to set aside the levy.

In applying §6321 , the taxpayer's "rights to property" are determined under state law. See Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-14 (1960); Herndon v. United States [74-1 USTC ¶16,127 ], 501 F.2d 1219, 1220 (8th Cir. 1974). The district court concluded that the IRS stands in the shoes of a judgment creditor without notice, and that its lien prevails over Mary's unrecorded ownership interest under Minnesota's recording statute, Minn. Stat. §507.34.

1. Our basic problem with the district court's analysis is its assumption that the IRS as lienholder stands in the shoes of the taxpayer's judgment creditors. We have little doubt that Congress could clothe a government tax lien with the rights and powers of a hypothetical bona fide purchaser or judgment creditor. But the question is whether the statute does so when it provides that a person's unpaid taxes "shall be a lien in favor of the United States upon all property and rights to property ... belonging to such person." 26 U.S.C. §6321 (emphasis added). The plain meaning of the words "belonging to" suggests that the lien attaches to property interests owned by the taxpayer, not property interests vulnerable to the taxpayer's judgment creditors. As every bankruptcy trustee knows, the latter is a potentially larger universe. See, e.g., In re Forbrook Constr., Inc., 474 F. Supp. 876 (D. Minn. 1979). ¹

The Supreme Court has adopted this plain language approach in construing §6321 : "The Federal statute relates to the taxpayer's rights to property and not to his creditors' rights." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 727 (1985); accord, United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 690-91 (1983). This court and other circuits have as well: "The IRS acquires by its lien and levy no greater right to property than the taxpayer himself has at the time the tax lien arises." St. Louis Union Trust Co. v. United States [80-1 USTC ¶9282 ], 617 F.2d 1293, 1301 (8th Cir. 1980). See also Gardner v. United States [94-2 USTC ¶50,482 ], 34 F.3d 985 (10th Cir. 1994) ("the tax collector not only steps into the taxpayer's shoes but must go barefoot if the shoes wear out," quoting 4 Boris Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5.4 (1981)); Avco Delta Corp. Canada Ltd. v. United States [72-1 USTC ¶9359 ], 459 F.2d 436, 441 (7th Cir. 1972) ("the government's lien does not exceed the rights of the taxpayer").

Mary squarely raises this issue on appeal, arguing that the divorce decree divested Douglas of all interest in the property. The government would have us ignore the statute's text, relying on lower court decisions that simply assumed that, as lienholder, IRS stands in the shoes of the taxpayer's judgment creditors. These cases paid little if any attention to the statute's plain meaning as construed by the Supreme Court, but they were factually more similar to this case than National Bank of Commerce and St. Louis Union Trust. Thus, we must consider whether it is appropriate to apply the statute's literal language to the facts of this case.

The two cases on which the government most heavily relies are United States v. Creamer Indus., Inc. [65-2 USTC ¶9527 ], 349 F.2d 625 (5th Cir.), cert. denied, 382 U.S. 957 (1965), and Prewitt v. United States [86-2 USTC ¶9513 ], 792 F.2d 1353 (5th Cir. 1986). In those cases, divided Fifth Circuit panels, applying Texas law, held that the §6321 tax lien attached to properties that the taxpayers had previously conveyed by unrecorded instruments. "As to the taxes owed to it," the court explained in Creamer, "the United States was a 'creditor' within the Texas recording statute." [65-2 USTC ¶9527 ], 349 F.2d at 628. In dissent, Judge Brown construed §6321 more narrowly, much like the later National Bank of Commerce decision: "Unless there is property belonging to the taxpayer, the Government's lien is nonexistent. ... [T]he one thing clear is that Taxpayer here had no right in or to the property." Id. at 629. In Prewitt, the Fifth Circuit followed Creamer without discussing National Bank of Commerce, permitting the §6321 lien to defeat an unrecorded divorce decree. Judge Jolly concurred but stated that he agreed with Judge Brown's dissent in Creamer [86-2 USTC ¶9513 ], 792 F.2d at 1353.

Applying the law of Puerto Rico, the First Circuit rejected the reasoning of Creamer and Prewitt in United States v. V & E Eng'g & Constr. Co. [87-1 USTC ¶9355 ], 819 F.2d 331 (1st Cir. 1987). The court held that the §6321 lien did not attach to property the taxpayer had previously conveyed by an unrecorded deed of sale, concluding that "a taxpayer, once having sold his property, no longer has a 'right' to that property within the meaning of section 6321 ." Id. at 333. Similarly, applying the law of Connecticut , the court in Hamilton v. United States [92-2 USTC ¶50,552 ], 806 F. Supp. 326 (D. Conn. 1992), followed V & E and rejected Creamer and Prewitt. The court explained that the taxpayer's prior unrecorded conveyance sold the taxpayer's entire interest. Therefore, the IRS "would have this Court effectively sanction the knowing sale by a vendor of the same piece of property to two purchasers. ... The Court is hard pressed to believe Congress would countenance this result." Id. at 333.

We conclude that V & E and Hamilton are more consistent with the language of §6321 and the rule of National Bank of Commerce than are Creamer and Prewitt. The IRS has many collection remedies in the Internal Revenue Code; proceeding by lien and admin istrative levy is the most summary and severe of those remedies. See Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 695-96. Congress had good reason to limit this remedy to property rights "belonging to" the taxpayer. ²

2. We must next examine the district court's reliance on Minnesota 's recording statute in light of our conclusion that the §6321 lien may only attach to property rights "belonging to" Douglas . Some recording statutes, like the one at issue in United States v. Hole, No. 75-1770-MA, 1980 WL 1555 (D. Mass. Mar. 31, 1980), provide that a conveyance has no effect "in passing title" until recorded. Under that type of statute, the transferor seemingly retains an interest to which the §6321 lien may attach. On the other hand, if a State's recording act only makes an unrecorded transfer void or voidable as against subsequent judgment creditors or bona fide purchasers, the transferor retains no post-transfer interest.

Minnesota 's statute is clearly of the latter variety. It provides that an unrecorded conveyance

shall be void as against any subsequent purchaser ... whose conveyance is first duly recorded, and as against ... any judgment lawfully obtained ... against the person in whose name the title to such land appears of record prior to the recording of such conveyance.

Minn. Stat. §507.34. This statute protects only subsequent bona fide purchasers and judgment creditors, essentially those "who buy real estate in reliance upon the record." Miller v. Hennen, 438 N.W.2d 366, 369 ( Minn. 1989). It does not vest any property interest in Douglas, the transferor. Moreover, we note that Douglas was not "the person in whose name the title to such land appears of record" because his contract-for-deed interest was never recorded. Thus, the recording act does not give Douglas any property right to which the §6321 lien may attach.

3. Douglas transferred his unrecorded equitable interest in the property to Mary by the 1971 divorce decree. See Minn. R. Civ. P. 70. With the recording act out of the picture, the question becomes whether Douglas has any other interest to which the §6321 lien may attach under Minnesota law. If not, the divorce decree effectively leaves the IRS unshod and Mary is entitled to set aside its levy. See Farmers' & Merchants' State Bank v. Stageberg, 201 N.W. 612 ( Minn. 1925).

In 1985, when the contract for deed was finally paid, the record owners conveyed the property to Douglas and Mary by a warranty deed purporting to give Douglas a joint tenant's interest. Thereafter, the Thomsons took many actions consistent with this deed, including Douglas 's representation on his 1992 IRS Collection Information Statement that he owns a joint tenant's interest. These actions raise at least two pertinent questions: (1) whether, in light of the 1971 divorce decree reflecting Douglas's conveyance to Mary, the 1985 warranty deed established an interest in the property "belonging to" Douglas to which the §6321 lien may attach under Minnesota law; and (2) if Douglas does own such an interest, whether the nature and extent of Mary's interest in the property nonetheless renders the IRS levy wrongful. See Hill v. United States [94-1 USTC ¶50,037 ], 844 F. Supp. 263, 274-75 (W.D.N.C. 1993). These are fact intensive questions that the district court should determine in the first instance. We note in this regard that the parties' respective burdens of proof may raise important and unresolved issues on remand. Compare Valley France, Inc. v. United States [80-2 USTC ¶9554 ], 629 F.2d 162, 171 n.19 (D.C. Cir. 1980), with Flores v. United States [77-1 USTC ¶9380 ], 551 F.2d 1169, 1176 n.8 (9th Cir. 1977).

For the foregoing reasons, the judgment of the district court is reversed and the case is remanded for further proceedings consistent with this opinion.

¹ We are concerned in this case with whether the §6321 lien attached to particular property. Once the lien attaches, its validity and priority are questions of federal law that Congress has addressed in great detail. See 26 U.S.C. §6323 .

² There is an apparent exception to the general rule of National Bank of Commerce--taxpayer fraudulent conveyances. Under state law, such conveyances are typically void "as against" subsequent bona fide purchasers or creditors, without regard to whether the defrauding transferor has a residual interest in the property. See, e.g., Minn. Stat. §§513.08, 513.44-.45. Yet a number of cases have held that the §6321 lien attached to property conveyed by the taxpayer with the intent to defraud creditors, treating the IRS as a defrauded creditor without considering whether that is the proper focus given the language of §6321 as construed in National Bank of Commerce. See United States v. Fernon [81-1 USTC ¶9287 ], 640 F.2d 609, 612 & n.5 (5th Cir. 1981); United States v. Jones [86-2 USTC ¶9832 ], 631 F. Supp. 57, 59 (W.D. Mo. 1986). The contrast between the government's uniform success in fraudulent conveyance cases and the plain language of §6321 as construed in National Bank of Commerce is somewhat troubling. Perhaps a special rule is appropriate in cases of fraud. Or perhaps the lien issue is unimportant because the IRS is in any event a creditor entitled to pursue its remedies under these fraudulent conveyance statutes. See United States v. Bierbauer [91-2 USTC ¶50,331 ], 936 F.2d 373 (8th Cir. 1991). As there is no suggestion of taxpayer fraud in this case, we need not resolve this question.

 

 

[70-2 USTC ¶9559] United States of America , Plaintiff v. Glenn A. Erlandson, d/b/a Glenn's Giant Submarine and Pizza Shop, Franklin National Bank of Minneapolis and Elizabeth Silliman, Defendants

U. S. District Court, Dist. Minn., 4th Div., No. 4-68-Civ. 230, 311 FSupp 399, 8/20/69

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

Tax liens: Priority over garnishment lien: Choateness of garnishment: Minnesota law.--A Federal tax lien that was recorded subsequent to the execution of a garnishment summons but before the garnishing creditor obtained judgment was entitled to priority. Under Minnesota law, a garnishment is an inchoate lien perfected only by judgment.

Patrick J. Foley, United States Attorney, Joseph T. Walbran, Assistant United States Attorney, Minneapolis, Minn., for plaintiff. John F. Casey, Jr., 845 NW Bank Bldg., N. E. Stewart, 1200 Second Ave., Minneapolis, Minn., for defendants.

Memorandum Decision

LARSON, District Judge:

The above entitled matter was tried to the Court on August 7, 1969 . Plaintiff was represented by Joseph T. Walbran, Assistant United States Attorney. Defendant Silliman was represented by Attorney N. E. Stewart. The following was stipulated to at trial:

1. The Summons and Complaint in the action of Mrs. Elizabeth Silliman, formerly known as Lily Elizabeth Fox, Plaintiff, versus Glenn A. Erlandson, Defendant, was filed April 19, 1966, in Municipal Court, First Division, City of Minneapolis, County of Hennepin, State of Minnesota, under File No. 508403, said action arising out of a claim based on a promissory note dated January 27, 1965, asking for a money judgment in the amount of $2,580.

2. The Summons and Complaint was served on the defendant Glenn A. Erlandson on April 23, 1966 .

3. The Garnishee Summons was served on the Franklin National Bank of Minneapolis on April 19, 1966 .

4. On April 27, 1966 , the Franklin National Bank disclosed that it held $2,054.34 for garnishment.

5. Defendant's attorney, Samuel H. Bellman, served on the attorney for the plaintiff Elizabeth Silliman an Answer in the nature of a general denial.

6. Plaintiff moved for Summary Judgment on January 20, 1967 , on the basis that there was no genuine issue on a material fact. Defendant Erlandson made no appearance and did not serve an opposing affidavit.

The Motion was granted to the plaintiff and an Order for Judgment was signed by the Court on January 24, 1967 .

It is also undisputed that on June 17, 1966 , an assessment was made against the defendant Glenn A. Erlandson by an agent of the Secretary of Treasury for Federal income taxes and interest for the taxable year 1965. It was likewise agreed that this tax lien was filed on September 15, 1966 , in the office of the Register of Deeds for Hennepin County .

[Issue]

The single question presented by this case is whether or not a Federal tax lien which was recorded subsequent to the execution of a garnishment summons but before the garnishing creditor obtained judgment is entitled to priority.

[Choateness]

Although the Supreme Court of the United States has on several occasions held that for purposes of determining the priority of liens the principle of "first in time, first in right" shall apply, Meyer v. United States [64-1 USTC ¶9111], 375 U. S. 234 (1963); United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954) this rule is operative only if the lien attached to the property and is choate. United States v. Pioneer American Insurance Co., supra. To determine the status of a lien the Supreme Court has stated the following criteria:

"The federal rule is that liens are 'perfected in the sense that there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established.'" United States v. Pioneer American Insurance Co., supra; United States v. New Britain , supra.

[Garnishment liens]

In United States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950), the Court addressed itself to the question of how an attachment or garnishment lien was to be treated. The Court held that for purposes of evaluating priorities the classification of an attachment lien by State law as inchoate is practically conclusive; a Federal tax lien will not be defeated by a contingent attachment lien prior in time. In United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211 (1954), the Court expanded this principle by ignoring State law which categorized the attachment lien as perfected and instead substituted its own determination that the lien was inchoate because the outcome of the lawsuit was still undecided. That these decisions are equally applicable to garnishment proceedings is demonstrated by United States v. Liverpool & London & Globe Insurance Co., Ltd. [55-1 USTC ¶9136], 348 U. S. 215 (1954).

In view of the holdings of the above cited cases and the Minnesota position that a garnishment is an inchoate lien perfected only by judgment, Marsh v. Wilson Bros., 124 Minn. 254, 144 N. W. 959 (1914), it is the opinion of this Court that the Federal tax lien should be granted a priority. Counsel for the garnisher contends that the nature or merits of the original action for which the garnishment was issued should have the effect of perfecting the lien at an earlier date, but the fact still remains that the Order for Judgment was not entered until after the perfection of the tax lien and no cases creating an exception based on the relative merits can be found.

Counsel for plaintiff will submit on Order for Judgment to be approved by the Court.

 

 

[58-2 USTC ¶9758]First State Bank of Medford , Plaintiff v. The United States of America , Defendant, and Harry L. Altman, Intervener

U. S. District Court, Dist. Minn., First Div., Civil No. 565, 166 FSupp 204, 7/11/58

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

Tax lien: Oral and unrecorded assignment of indebtedness to bank: Validity as against tax levy.--A federal tax lien, arising from an assessment for unpaid withholding taxes, is superior to a prior oral and unrecorded assignment of indebtedness to a bank as security in a loan transaction. Such a lien is inchoate and unperfected and remained dormant until after the tax lien had become perfected.

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

Tax lien: Priority as against unperfected equitable claim of lien for attorney's services.--An alleged equitable lien for attorney's services rendered was inferior to the tax lien of the Government, where such services were rendered after the Government's lien came into existence and where the claim for lien had not been perfected by recording as required by state law.

Wallace M. Tripp, of Nelson, Casey and Tripp, Owatonna , Minn. , for plaintiff.

George E. MacKinnon, United States Attorney, Kenneth G. Owens, Assistant United States Attorney, St. Paul, Minn., for defendant.

Ralph S. Schneider and Mr. Harry L. Altman, of Altman, Hennen, Malmon and Schneider, Minneapolis , Minn. , for intervener.

Memorandum Decision

NORDBYE, District Judge:

The above-entitled cause came before the Court for trial without a jury.

This suit was brought to determine the ownership of $2,500.00 on deposit with the Clerk of the District Court of Dodge County, Minnesota. The dispute arises by reason of the following facts and circumstances.

Some time prior to June, 1954, Kenneth W. Hammann and Harvey L. Hustad formed a partnership doing business as Owatonna Trenching Service (hereinafter called Owatonna or the partnership). Owatonna entered an oral agreement with Underground Constructors, Ine. (hereinafter called Underground) to perform certain operations in the installation of natural gas distribution systems in Windom and Mountain Lake , Minnesota . Under the agreement, Underground agreed to pay Owatonna eighty per cent of the amount due it as the work progressed, but Underground retained twenty per cent of the contract price as a holdback until completion and acceptance of the job.

After entering this contract, Hammann and Hustad approached an officer of the First State Bank of Medford (hereinafter called the Bank) to finance the operation. On June 30, 1954 , the Bank loaned Owatonna $2,000.00. A note evidencing the indebtedness was made due in 60 days, and the $2,000.00 borrowed was deposited in Owatonna 's checking account.

On July 29, 1954 , the partners procured another loan from the Bank. This note was for $2,800.00, payable on September 1, 1954 . This credit was extended upon the strength of a purported oral assignment by Owatonna to the Bank of moneys due Owatonna from Underground. In connection therewith, the Bank received a letter from W. C. Donaldson, president of Underground, which stated:

" August 2, 1954

"First State Bank of Medford Medford , Minnesota

Gentlemen:

We have been requested by the Owatonna Trenching Service to assign the payments due them to your bank.

We have no objections to doing this and we will from the above date make out all payments due the Owatonna Trenching Service to them and your bank and send them to you when due. These will be accompanied with a statement of the footages and amounts withheld until the work is completed.

This assignment only pertains to the Windom, Mountain Lake jobs, and will be in force until we are requested to change these conditions.

Yours very truly

UNDERGROUND CONSTRUCTORS

By

(Signed) W. C. Donaldson

W. C. Donaldson (Pres.)"

Thereafter, except in one instance, Underground made the checks payable to the Bank, and the Bank then deposited the checks in Owatonna 's checking account. After the assignment Underground also paid certain creditors of Owatonna who might possess liens against the completed job. These amounts were deducted from the amount paid over to Owatonna without the Bank's knowledge or consent. It may be noted at this point that one check was made payable to Owatonna rather than to the Bank after the purported assignment. In addition, one check issued prior to the purported assignment was made payable to the Bank rather than to Owatonna . After the notes fell due, four checks, dated September 8, 1954, for $7,298.75, September 22, 1954, for $3,069.56, October 8, 1954, for $5,940.80, and October 19, 1954, for $2,000.00, totaling $18,309.11, were made payable to the Bank, but the Bank deposited the checks in Owatonna's checking account and did not apply any part of these funds toward satisfaction of Owatonna's notes. The Bank contends that it did not satisfy Owatonna 's indebtedness because the partners assured the Bank that Underground still owed Owatonna $17,500.00. This latter amount far exceeded Owatonna 's indebtedness, and being included in the alleged assignment it would cover Owatonna 's obligation to the Bank.

On November 23, 1954 , the District Director of Internal Revenue received a $6,428.53 assessment against Owatonna for its failure to pay withholding deductions to the Government. A specific and perfected tax lien attached as of this date. On January 18, 1955 , Underground was sent a Notice of Levy against Owatonna . Underground acknowledged receipt of the notice on January 20, 1955 .

The Bank did not realize until January or February of 1955 that Owatonna was in financial difficulty. It then proceeded to reduce its notes to judgment, but the judgments were not obtained until September 15, 1955 . In the meantime, intervener Altman had entered the picture as an accountant. He conducted an audit of Owatonna 's books in December, 1954, and billed Owatonna for these services. The indebtedness thereby incurred by Owatonna has been paid or discharged in Owatonna 's subsequent bankruptcy. However, a dispute had arisen during this time between Owatonna and Underground as to the amount due Owatonna for holdbacks and extra work not covered by the contract. Owatonna claimed that $17,500.00 was due. Underground refused to pay anything, and Owatonna engaged Altman, this time as its attorney, to collect the sum. Through Altman's efforts the claim was finally settled on April 17, 1956 , for $2,500.00. This fund was paid into State Court pending a determination of its ownership. Altman received nothing for his services as Owatonna 's attorney. Both Hammann and Hustad have gone through bankruptcy. Altman apparently did not file a claim in bankruptcy for attorney's fees and did not, therefore, collect a fee from either of them.

It seems amply evident that Owatonna intended to give some form of oral assignment to the Bank of funds coming due from Underground. There is no real dispute in the testimony as to this. As between Owatonna and the Bank, the validity of this assignment is not questioned. Determining the nature of the assignment is more difficult and is actually the key to the entire case. The Government contends that so far as creditors were concerned, the assignment was fraudulent because it was not in writing and was not recorded. Section 513.17, Minn. Stat. Ann., states:

"Every assignment of a debt, unless the same be in writing and be filed with the clerk of the town or municipality in which the assignor resides, shall be presumed to be fraudulent and void as against his creditors, unless those claiming thereunder make it appear that it was made in good faith and for a valuable consideration: Provided, that this section shall not apply to debts evidenced by writing subscribed by the debtor, and delivered to the assignee at the time of the assignment thereof. Assignments required by this section to be filed need not be acknowledged."

However, as the Bank points out, this statute merely provides a rule of evidence. Telford v. Hendrickson, 1913, 120 Minn. 427, 139 N. W. 941. The presumption of fraud has been overcome here by a showing that the assignment was given in good faith and for a valuable consideration (the procurement of credit).

[Nature of Assignment]

Having found that the assignment was not rendered invalid by Section 513.17, Minn. Stat. Ann., we can proceed to consider further the nature of the assignment. In discussing the nature and effect of the Bank's assignment, some basic factors must be borne in mind. Quite obviously the Bank did not purchase Owatonna 's right to future payments from Underground. The Bank demanded an assignment as security. There never was any intention to grant or receive more than a security interest. Primarily, then, the Bank's interest is in the nature of a lien. The difference between an assignment and a lien is set forth in Springer v. J. R. Clark Co., 8 Cir., 1943, 138 Fed. (2d) 722, 726, where it states that "A lien is distinguished from an assignment in that it is a charge upon property, while an assignment creates an interest in property." Certainly, the Bank did not treat the moneys it received from Underground as though it had an immediate interest therein. The checks were deposited to Owatonna 's account even after the notes fell due. Regardless of what Owatonna may have told the Bank concerning holdbacks and extra work, the Bank's treatment of the funds is consistent only with a lienhold interest. In this regard the Springer case states, p. 726,

"If the intention of the parties to make an equitable assignment or to create an equitable lien arises by necessary implication from the terms of the agreement, construed with reference to the situation of the parties at the time of the contract, and by the attendant circumstances, such equitable right will be enforced by a court of equity against the fund."

From this the conclusion can be drawn that the Bank had a lienhold interest by virtue of its assignment.

["Perfected Lien" Standard Applied]

The question then arises as to whether or not the Bank falls within one of the privileged classes as contemplated by 26 U. S. C. A. §6323(a), which provides,

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

If the Bank is one of those privileged by the statute, it must be either a pledgee or mortgagee. No serious argument has been advanced by the Bank that it is a pledgee, and no special consideration will be given to such a theory. It is urged, however, that the Bank is, in one sense, a mortgagee. That may be true. This does not mean, however, that the Bank is a mortgagee as contemplated in the statute. The Supreme Court has imposed a "perfected lien" standard upon lien interests that are recognized under this statute. United States v. White Bear Brewing Company, 350 U. S. 1010 [56-1 USTC ¶9440]; United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680]; United States v. City of New Britain, 347 U. S. 81 [54-1 USTC ¶9191]; United States v. Security Trust & Savings Bank of San Diego, 340 U. S. 47 [50-2 USTC ¶9492]. As counsel for the Government points out, development of the law along these lines is of recent origin. The most recent case is United States v. R. F. Ball Construction Co., Inc., 355 U. S. 587 [58-1 USTC ¶9327]. That case was initiated in the Western District of Texas as R. F. Ball Construction Co., Inc. v. Jacobs, W. D. Tex., 1956, 140 Fed. Supp. 60 [56-1 USTC ¶9514]. The case is similar to the one at bar, so a rather complete analysis and comparison will be helpful.

Ball procured a housing project contract in San Antonio and subcontracted the painting and decorating to Jacobs. On July 21, 1951 , Jacobs applied to a bonding company for a performance bond. As collateral security for protection of the bonding company, Jacobs assigned in writing to the bonding company all percentages retained by Ball under the subcontract. The assignment was made as security not only for possible losses growing out of the San Antonio job, but also for payment of any indebtedness or liability "whether heretofore or hereafter incurred." Thereafter, on April 4, 1952 , Jacobs obtained a similar bond with the same company on a different subcontract in Louisville , Kentucky .

On April 30, 1953 , the holdbacks on the San Antonio job were finally determined to be $13,228.55. In May, June and September of 1953, the Government filed tax liens against Jacobs totaling approximately $17,000.00. Sometime thereafter, the bonding company's contingent liability on the Louisville job ripened into an actual liability, and the bonding company was required to pay out $12,971.88.

Not knowing to whom the $13,288.55 owing on the San Antonio job should be paid, Ball instituted an interpleader action to determine the rights of various creditors. The suit finally resolved itself into a dispute between the bonding company and the Government. The bonding company claimed that the assignment of the amount owing on the San Antonio job created a lien upon that fund which carried forward to the liability incurred by reason of Jacobs' default on the Louisville job. The bonding company contended that this lien placed it within the privileged categories of "mortgagee, pledgee, purchaser, or judgment creditor" under Section 3672 of the Internal Revenue Code of 1939 (now 26 U. S. C. A. §6323). The District Court was well aware of the Supreme Court decisions stating that liens, to be cognizable, must be more than inchoate and unperfected interests. Nevertheless, the District Court accepted the reasoning of the bonding company that the assignment as collateral security was a perfected contractual lien rather than the unperfected statutory type of lien which had theretofore been ruled upon by the Supreme Court.

The Court of Appeals affirmed the District Court in a per curiam decision, United States v. R. F. Ball Construction Co., Inc., 5 Cir., 1957, 239 Fed. (2d) 384 [57-1 USTC ¶9269]. The Supreme Court, however, reversed the Circuit Court in a five to four decision. The majority opinion treated the case summarily when it stated (also in a per curiam decision), at p. 587,

"The judgment is reversed. The instrument involved being inchoate and unperfected, the provisions of §3672(a), Revenue Act of 1939, 53 Stat. 449, as amended, 53 Stat. 882, 56 Stat. 957, do not apply. See United States v. Security Trust & Savings Bank, 340 U. S. 47 [50-2 USTC ¶9492]; United States v. City of New Britain, 347 U. S. 81, 86-87 [54-1 USTC ¶9191]. The claim of the interpleader for its costs is controlled by United States v. Liverpool & London & Globe Ins. Co., 348 U. S. 215 [55-1 USTC ¶9136]."

This language clearly shows that the majority of the Court regarded the assignment as an inchoate and unperfected lien. The Bank here, however, points out that the assignment in the Ball case was made to secure a contingent or future indebtedness and that the assignment under consideration by this Court was given to secure a present and ascertained indebtedness. Admittedly, this is a distinguishing characteristic, but the distinction does not perfect an unperfected lien. Nor was the assignment to the Bank so definite as it contends. This is shown by the Bank's treatment of the moneys it did receive. The fact that the checks were made payable to the Bank is not particularly enlightening because at least one check was made so payable before the assignment, and conversely, one check after the assignment was made payable to Owatonna . The Government admits that the Bank may have obtained a perfected right to the payments it received and put into Owatonna 's checking account. These funds were at least reduced to possession by the Bank, but this is not true of the unpaid fund here in suit.

[Bank's Lien Unperfected]

The fact that the purported assignment here was given to secure a specified sum, and that the notes fell due on dates certain, relieved any lien which might arise of certain imperfections, but so far as the tax law is concerned, the lien itself remained unperfected, at least until some action was taken to enforce it. Furthermore, the matter of contingency is not limited solely to indefiniteness of time or amount. A lien interest, in and of itself, is indefinite. Contingency is the very basis of liens--if an obligor fails upon a primary obligation, the lienhold interest, though already in existence, becomes the basis of an enforcible right. The exact status of lienhold interests at any particular time always has been a difficult question. It is only proper, therefore, that the courts have erected the "perfected" standard to determine when the lien interest becomes cognizable in the federal tax lien law.

The Court is not particularly concerned with the fact that there are Minnesota decisions which may have recognized that oral assignments are valid and binding upon others than the immediate parties to the assignment. The question here is whether the Bank's lien interest satisfied the standards imposed by the decisions of the federal courts where the question of priority arises as between a government tax lien and a private unperfected lien. That the federal courts have the final say in federal tax lien matters is basic. United States v. Acri, 348 U. S. 211 [55-1 USTC ¶9138]. The oral assignment given to the Bank merely gave rise to an equitable right, but such right cannot be called "perfected" as against the lien of the United States . It is admitted that the Government had no notice of the Bank's alleged lien; in fact, no notice whatsoever was given by the Bank as to its oral assignment. The Bank, although it had ample opportunity to satisfy its lien, was content to rely solely upon its undisclosed lien to secure its indebtedness. It seems clear, therefore, that so far as the Government is concerned, the secret lien of the Bank remained inchoate and unperfected and lay dormant until after the tax lien became perfected. A majority of the court in the Ball case rejected the contention that an assignment as in the case at bar constitutes a mortgage within the meaning of Section 3672(a), Revenue Act of 1939. This Court must hold likewise here.

Claim of Intervener Altman

It was in November, 1954, that the Government's assessment became perfected and the Government obtained a lien upon all of Owatonna 's property and "rights in property." It was not until February, 1955, that Altman performed any services as Owatonna 's attorney. Obviously, therefore, the Government's lien existed on all of Owatonna 's rights to any property from Underground before Altman performed any legal services in creating the fund in question. He never perfected any lien for such services as required by Section 481.13 of the Minnesota Statutes. However, he now asks the Court to declare an equitable lien on the fund prior to that of the Government's lien, which was perfected some months prior to the commencement of Altman's services. His position is that if the Government obtains the money on deposit, it will be the recipient of funds which were created by him, and in good conscience there should be paid over to him such part of such funds as represents the reasonable value of the legal services which he rendered. In passing it may be noted, though it is probably without any significance here, that when settlement was made in State Court whereby the fund was deposited with the Clerk, Altman in signing the stipulation of settlement which arranged for the deposit, made no reference to any claim for attorney's fees, nor did he indicate in the settlement stipulation that there were any other claimants to the fund except the Bank, the Government, and the Federal Mutual Insurance Company, whose claim was subsequently dismissed. Owatonna was still doing business when it proceeded to settle with Underground. That Altman was looking to Owatonna for payment for any services which he rendered seems evident. He first commenced a suit in State Court against Owatonna requesting $250.00 for the legal services which he rendered in obtaining the settlement in question. The advent of bankruptcy evidently caused him to pursue his alleged lien claim against the fund. But whatever equitable lien he may have had against the fund, it remained unperfected, and in fact it is in this proceeding that he seeks to have his lien perfected. It may be true as Judge Kalodner stated in Filipowicz v. Rothensies, 43 Fed. Supp. 619, 623, 624 [42-1 USTC ¶9300], that there is a "well recognized principle that an attorney has a lien on a fund which has been created as a result of his efforts in litigation." But the holding in the Filipowicz case cannot be followed. Until rendered specific and definite by a decree of a court, the attorney's lien remains unperfected and inchoate in so far as its status in a federal tax lien case is concerned. If laborers, mechanics and materialmen, who have rendered services in creating improvements on real estate and filed liens according to state law before the Government perfects its tax lien on such real estate, are nevertheless subordinated to the Government's tax lien, it is difficult to understand under what rationale this Court can elevate Altman's unperfected legal lien to one which is superior to the Government's perfected lien in this case. See United States v. White Bear Brewing Company, 350 U. S. 1010 [56-1 USTC ¶9440], reversing 227 Fed. (2d) 359 [55-2 USTC ¶9776]; United States v. Colotta, 350 U. S. 808 [55-2 USTC ¶9680], reversing ( Miss. ) 79 So. 2d 474; United States v. R. F. Ball Construction Co., Inc., 355 U. S. 587 [58-1 USTC ¶9327].

The above may be considered the Court's findings of fact, and as conclusions of law the Court finds that the United States has a good and valid lien on said fund prior to the rights of the plaintiff and the intervener herein, and that the United States have judgment that it is entitled to said fund free and clear of any claim of the plaintiff and the intervener herein. Let judgment be entered accordingly.

An order directing the Clerk of the District Court of Dodge County, Minnesota, to pay and deliver said fund to the United States of America in accordance with said judgment may be presented.

Exceptions are allowed.