Luxton, et al., Plaintiffs-Appellants v.
United States of America
, Third-Party Defendant-Appellee.
Court of Appeals, 8th Circuit.; 02-2464, 340 F3d 659,
August 22, 2003
Affirming an unreported DC Minn. decision.
Secs. 6321 and 6323]
Validity and priority against third parties: Tax liens under state
: Insurance. --
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 (
) 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.
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
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
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 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
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
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).
The Effect of the Assignments under
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
USTC ¶9111], 375
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
Enters., Inc. v. Swartout (In re Swartout), 123 B.R. 794,
799-800 (Bankr. S.D.
1991); Succession of Goudeau, 480 So.2d 806, 808 (
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 (
1937); Hale v. Life Indem. & Inv. Co., 68 N.W. 182, 185-86 (
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 (
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 (
1935); Ferris v.
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
over forty years after the enactment of §61A.12 and did not even
mention the statute.
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
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
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.
The HONORABLE DAVID S. DOTY, United States District Judge for the
District of Minnesota.
The parties agree that state law defines the extent of the government's
rights under those instruments. Cf. Meyer v. United States
USTC ¶9111], 375 U.S. 233, 236 (1963).
¶50,715] State of
, Department of Revenue, Appellee v.
United States of America
Court of Appeals, 8th Circuit, 98-1927,
, 184 F3d 725, 184 F3d 725. Reversing and remanding an unreported
District Court decision
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
law, the state had to take
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.
MCMILLIAN, LAY and MURPHY, Circuit Judges.
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
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
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
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
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
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
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
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.
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
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
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.
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."
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 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
and that the state was entitled to recover. This appeal followed.
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.
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
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.
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
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
[54-1 USTC ¶9191], 347
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."
[54-1 USTC ¶9191], 347
at 84; accord
[64-2 USTC ¶9520], 377 U.S. 351, 354-55 (1965); see also
McDermott [93-1 USTC ¶50,164], 507
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,
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
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
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
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
law, which provides, in relevant part:
imposed by any chapter
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.
Stat. §270.69(1). "For purposes of
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. . .
§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.
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."
[54-1 USTC ¶9191], 347
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."
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.
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."
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.
, 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."
[54-1 USTC ¶9191], 347
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
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
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
at 86. For example in In re Priest, a
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.
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
test for choateness. The Ninth Circuit disagreed and held that the
statute cannot be deemed to create liens that are sufficiently choate
. See, 712 F.2d at 1329. The court held that "a lien cannot
arise prior to the taking of any
istrative steps to establish the lien" because "[t]he mere
receipt of a delinquent State tax return [under
law] is too vague and indefinite."
, 725 F.2d at 478. The court observed that
delays might well occur before there was even any acknowledgment of the
director's receipt of the delinquent return, or any
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.
, 712 F.2d at 1329.
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.
above, the district court relied upon
, 866 F. Supp. 1248, and declined to follow In re Priest.
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
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."
at 1251. The district court found that under state law
tax liens were not contingent on future events and were summarily
enforceable and therefore choate. See id.
We believe the
improperly discounted the importance of preciseness in the amount
of tax owed in the
test for choateness. In our view, the plain language of
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
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
, the Court refers to the requirement that the amount of the lien be
"certain." See id. at 86; see also
[64-2 USTC ¶9520], 377
at 357. The Ninth Circuit was therefore correct in emphasizing this
requirement in In re Priest and the district court in
was wrong to discount it.
we disagree with the finding in Cannon Valley that the
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
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.
note that there is a critical factual distinction between
and the present case. In
, 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
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."
at 1252. Thus, for purposes of the
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."
(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
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
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
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).
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.
¶50,549] Mary Joyce Thomson, Plaintiff-Appellant v.
United States of America
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
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
Jay B. Kelly,
332 Minnesota St.
, 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.
MCMILLIAN, LAY, and LOKEN, Circuit Judges.
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
'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
recording act. We conclude that that act gives
no property right in the home to which the government's lien may attach.
We therefore reverse and remand.
divorce decree provided that
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
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
. The following year,
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
lived in the home with their sons.
listed the property as his home on a March 1992 Collection Information
Statement submitted to the IRS, stating that he had a "joint
May 20, 1991
, the IRS assessed
$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
October 8, 1992
, IRS levied on the home in order to seize
's apparent one-half interest. The next day,
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
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
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
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,
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
¶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").
raises this issue on appeal, arguing that the divorce decree divested
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
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
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
was a 'creditor' within the
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."
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.
law of Puerto Rico, the First Circuit rejected the reasoning of Creamer
and Prewitt in United States v. V & E Eng'g & Constr.
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 ."
at 333. Similarly, applying the law of
, 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."
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
istrative levy is the most summary and severe of those remedies. See
USTC ¶9374 ], 461
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
's recording statute in light of our conclusion that the §6321
lien may only attach to property rights "belonging to"
. 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
's statute is clearly of the latter variety. It provides that an
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.
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 (
1989). It does not vest any property interest in Douglas, the
transferor. Moreover, we note that
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
any property right to which the §6321
lien may attach.
transferred his unrecorded equitable interest in the property to Mary by
the 1971 divorce decree. See
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
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 (
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
'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
USTC ¶9380 ], 551 F.2d 1169, 1176 n.8 (9th Cir. 1977).
foregoing reasons, the judgment of the district court is reversed and
the case is remanded for further proceedings consistent with this
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
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
United States of America
, Plaintiff v. Glenn A. Erlandson, d/b/a Glenn's Giant Submarine and
Pizza Shop, Franklin National Bank of
and Elizabeth Silliman, Defendants
S. District Court, Dist. Minn., 4th Div., No. 4-68-Civ. 230, 311 FSupp
[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
law, a garnishment is an inchoate lien perfected only by judgment.
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.,
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:
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.
The Summons and Complaint was served on the defendant Glenn A. Erlandson
April 23, 1966
The Garnishee Summons was served on the Franklin National Bank of
April 19, 1966
April 27, 1966
, the Franklin National Bank disclosed that it held $2,054.34 for
Defendant's attorney, Samuel H. Bellman, served on the attorney for the
plaintiff Elizabeth Silliman an Answer in the nature of a general
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
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
September 15, 1966
, in the office of the Register of Deeds for
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
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.
[54-1 USTC ¶9191], 347
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:
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.,
States v. Security Trust & Savings Bank [50-2 USTC ¶9492], 340
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.
plaintiff will submit on Order for Judgment to be approved by the Court.
¶9758]First State Bank of
, Plaintiff v. The
United States of America
, Defendant, and Harry L. Altman, Intervener
S. District Court, Dist. Minn., First Div., Civil No. 565, 166 FSupp
[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.
Tripp, of Nelson, Casey and Tripp,
, for plaintiff.
MacKinnon, United States Attorney, Kenneth G. Owens, Assistant United
States Attorney, St. Paul, Minn., for defendant.
Schneider and Mr. Harry L. Altman, of Altman, Hennen, Malmon and
, for intervener.
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.
prior to June, 1954, Kenneth W. Hammann and Harvey L. Hustad formed a
partnership doing business as Owatonna Trenching Service (hereinafter
or the partnership).
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
. Under the agreement, Underground agreed to pay
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.
this contract, Hammann and Hustad approached an officer of the First
State Bank of
(hereinafter called the Bank) to finance the operation. On
June 30, 1954
, the Bank loaned
$2,000.00. A note evidencing the indebtedness was made due in 60 days,
and the $2,000.00 borrowed was deposited in
's checking account.
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
to the Bank of moneys due
from Underground. In connection therewith, the Bank received a letter
from W. C. Donaldson, president of Underground, which stated:
August 2, 1954
State Bank of
have been requested by the Owatonna Trenching Service to assign the
payments due them to your bank.
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
assignment only pertains to the Windom,
jobs, and will be in force until we are requested to change these
W. C. Donaldson
C. Donaldson (Pres.)"
except in one instance, Underground made the checks payable to the Bank,
and the Bank then deposited the checks in
's checking account. After the assignment Underground also paid certain
who might possess liens against the completed job. These amounts were
deducted from the amount paid over to
without the Bank's knowledge or consent. It may be noted at this point
that one check was made payable to
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
. 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
's indebtedness because the partners assured the Bank that Underground
$17,500.00. This latter amount far exceeded
's indebtedness, and being included in the alleged assignment it would
's obligation to the Bank.
November 23, 1954
, the District Director of Internal Revenue received a $6,428.53
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
. Underground acknowledged receipt of the notice on
January 20, 1955
The Bank did
not realize until January or February of 1955 that
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
's books in December, 1954, and billed
for these services. The indebtedness thereby incurred by
has been paid or discharged in
's subsequent bankruptcy. However, a dispute had arisen during this time
and Underground as to the amount due
for holdbacks and extra work not covered by the contract.
claimed that $17,500.00 was due. Underground refused to pay anything,
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
'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
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
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.
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
as the Bank points out, this statute merely provides a rule of evidence.
Telford v. Hendrickson, 1913, 120
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]
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
'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
's account even after the notes fell due. Regardless of what
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,
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
this the conclusion can be drawn that the Bank had a lienhold interest
by virtue of its assignment.
["Perfected Lien" Standard Applied]
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
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
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
a housing project contract in
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
April 30, 1953
, the holdbacks on the
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
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
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
job created a lien upon that fund which carried forward to the liability
incurred by reason of Jacobs' default on the
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
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.
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]."
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
. The Government admits that the Bank may have obtained a perfected
right to the payments it received and put into
'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.
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
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
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
. 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.
of Intervener Altman
It was in
November, 1954, that the Government's assessment became perfected and
the Government obtained a lien upon all of
's property and "rights in property." It was not until
February, 1955, that Altman performed any services as
's attorney. Obviously, therefore, the Government's lien existed on all
'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.
was still doing business when it proceeded to settle with Underground.
That Altman was looking to
for payment for any services which he rendered seems evident. He first
commenced a suit in State Court against
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
1010 [56-1 USTC ¶9440], reversing 227 Fed. (2d) 359 [55-2 USTC ¶9776];
United States v. Colotta, 350
808 [55-2 USTC ¶9680], reversing (
) 79 So. 2d 474; United States v. R. F. Ball Construction Co., Inc.,
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.
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.