Property Subject to Lien Page2

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The government relies on the alter ego theory and asserts it is applicable. Plaintiff counters that a fraudulent transfer is nothing more than a "transfer" made for the alter ego purpose. Thus, plaintiff's alter ego theory is extinguished under the extinguishment provision of the California Fraudulent Transfer Act. Plaintiff's contention is answered by the cases that hold alter ego and nominee theories distinguishable and separate causes of action.

Here, the facts presented are insufficient to support the government's motion for summary judgment. The government's motion is based primarily on the unanswered Requests for Admissions, which were deemed admitted, however, the Court later relieved plaintiff from said admissions. The remaining evidence to support the motion for summary judgment, includes: (1) the Certificates of Assessment and Payments from 1988 and 1989, which indicate an assessment occurred in 1995; (2) Certificate of Limited Partnership which indicates the Crisps are the sole general partners of the plaintiff Sequoia; (3) a grant deed which records the transfer of the property from the Crisps to the plaintiff in 1992; (4) a Refusal to Accept Form Letter 2050 for Cause without Dishonor; and (5) a gas bill for the subject property in the name of Gilbert Mark Crisp as of November 11, 1996.

Plaintiff provides the declaration of Gilbert Mark Crisp in opposition. Mr. Crisp declares: (1) Sequoia is not the alter ego of Gilbert or Rhonda Crisp; (2) all general and limited partners of the partnership reside at the residence; (3) Limited partners in Sequoia help pay the rent; and (4) the partnership was created and sanctioned by the state of California and is in good standing. On these remaining facts the government proffers genuine issues of material fact exist and summary judgment is inappropriate. The government is entitled to have responses to its discovery to resolve the alter ego issue. Defendant's motion for summary judgment based on the alter ego theory is DENIED.

2. Nominee theory

In addition to asserting that Sequoia is the alter ego of the Crisps, the government asserts that Sequoia is also the nominee of the Crisps. The nominee theory focuses on the relationship between the taxpayer and the property. With respect to the nominee theory, state law governs the determination of whether there exists a nominee from whom the government may satisfy the obligation of a taxpayer. See Towe Antique Ford Foundation [93-2 USTC ¶50,430], 791 F.Supp. at 1454. There are no California decisions which directly address the issue of which factors are relevant in determining whether a business entity is the nominee of an individual. However, other Courts have considered the following factors to be relevant in determining whether a business entity is the nominee of an individual:

(a) No consideration or inadequate consideration paid by the nominee;

(b) Property placed in the name of the nominee in anticipation of a suit or occurrence of liabilities while the transferor continues to exercise control over the property;

(c) Close relationship between transferor and the nominee;

(d) Failure to record conveyance;

(e) Retention of possession by the transferor; and

(f) Continued enjoyment by the transferor of benefits of the transferred property.

See Towe Antique Ford Foundation [93-2 USTC ¶50,430], 791 F.Supp. at 1454; United States v. Miller Bros. Constr. Co., 505 F.2d 1031 (10th Cir. 1974) (legal title holder was merely the nominee of the taxpayer); United States v. Code Prod. Corp. [63-1 USTC ¶9367], 216 F.Supp. 281 (E.D. Pa. 1963) (title holder was nominee of corporate taxpayer); Tato Int'l Corp. v. United States [89-2 USTC ¶9485], 64 A.F.T.R.2d (P-H) para. 89-5124 (S.D. Fla. 1989) ( United States ' levy against assets of corporation was proper since corporation was taxpayer's nominee).

The government alleges the nominee theory is applicable and is discrete from the issue of fraudulent conveyance. Plaintiff counters that a fraudulent transfer is nothing more than a "transfer" made for the nominee purpose and the government's alter ego theory is extinguished under the extinguishment provision of the California Fraudulent Transfer Act.

Here, for the same reasons stated above the facts presented are insufficient to support the government's motion for summary judgment. The government's motion is based primarily on the absence of responses to Requests for Admissions, which were deemed admitted, however, the Court later relieved plaintiff from said admissions, upon the condition that plaintiff complete responses to such discovery. The remaining evidence to support the motion for summary judgment, includes: (1) the Certificates of Assessment and Payments from 1988 and 1989, which indicate an assessment occurred in 1995; (2) Certificate of Limited Partnership which indicates the Crisps are the sole general partners of the plaintiff Sequoia; (3) a grant deed which records the transfer of the property from the Crisps to the plaintiff in 1992; (4) a Refusal to Accept Form Letter 2050 for Cause without Dishonor; and (5) a gas bill for the subject property was in the name of Gilbert Mark Crisp as of November 11, 1996.

Plaintiff provides the declaration of Gilbert Mark Crisp in opposition. Mr. Crisp declares: (1) Sequoia is not the nominee of Gilbert or Rhonda Crisp; (2) all general and limited partners of the partnership reside at the residence; (3) limited partners in Sequoia help pay the rent; (4) the partnership was created and sanctioned by the state of California and is in good standing; (5) the property was transferred to the partnership in 1992 for the purpose of estate planning; (6) Sequoia was created by the law firm of Chuck Tanko & Associates for the purpose of estate planning; and (7) no audit occurred on Mark or Rhonda Crisp personally, (Crisp Construction Company was audited)

The facts before the Court are insufficient to determine whether genuine issues of material fact exist and summary judgment is inappropriate. The government is entitled to have responses to its discovery. Defendant's motion for summary judgment based on the nominee theory is DENIED.

C. GOVERNMENT REQUEST FOR RULE 56(f) RELIEF

The issue before the Court is whether the government is entitled to relief under Rule 56(f). Fed. R. Civ. P. 56(f) ⁴ permits the court to grant a continuance to allow further discovery or to deny summary judgment if it appears from the affidavits of the party opposing the motion for summary judgment that the party cannot present by affidavit facts essential to justify the party's opposition. Where a party believes that additional discovery is required to oppose a motion for summary judgment, that party must submit an affidavit pursuant to Rule 56(f) stating what information will be obtained and how that information will preclude summary judgment. Barona Group of the Capitan Grande Band of Mission Indians v. American Mgmt & Amusemet, Inc., 840 F.2d 1394, 1400 (9th Cir. 1987).

Rule 56(f) permits a court, in the interests of justice, to deny or continue a summary judgment motion when additional discovery is needed to counter the motion. District courts have much discretion when applying Rule 56(f). Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1416-17 (9th Cir. 1987). To gain a continuance, the party opposing the motion must show the evidence allegedly to be uncovered through further discovery is reasonably likely to exist and show adequate cause for not conducting discovery earlier. Volk, 816 F.2d at 1416. A district court does not abuse its discretion by denying a party's motion to reopen discovery where the party has failed to comply with the requirements of Rule 56(f). See Ahston-Tate Corp. v. Ross, 916 F.2d 516, 619 (9th Cir. 1990).

Here, the summary judgment motion before the Court was filed by the government. As the moving party it is precluded from bringing a motion for relief under Rule 56(f). Rule 56(f) relief is limited to the party opposing the motion for summary judgment. See Adickes v. Kress, 398 U.S. 144, 161, 90 S.Ct. 1598, 1610 (1970). The government as the moving party is not entitled to relief under Rule 56(f) of the Federal Rules of Civil Procedure. The government's motion for Rule 56(f) relief is DENIED. To the extent the government is a responding party to the Crisps' motion for summary judgment, it is entitled to have the Crisps' discovery responses.

C. THE GOVERNMENT'S REQUEST TO RE-OPEN DISCOVERY

The government requests re-opening of discovery. The issue is whether there is any basis to re-open discovery. Pursuant to Rule 16(b), the government may file a motion with the Court for modification of the joint scheduling order. Modification of the joint scheduling order will be granted by leave of the district court upon a showing of good cause. Fed.R.Civ.P. 16(b); Johnson Mammoth Recreations, Inc., 975 F.2d 604, (9th Cir. 1992). Rule 16(b)'s "good cause" standard primarily considers the diligency of the party seeking the amendment. The district court may modify the pretrial schedule "if it cannot reasonably be met despite the diligence of the party seeking the extension." Moreover, carelessness is not compatible with a finding of diligence and offers no reason for a grant of relief. Although the existence or degree of prejudice to the party opposing the modification might supply additional reasons to deny a motion, the focus of the inquiry is upon the moving party's reasons for seeking modification. If that party was not diligent, the inquiry should end. Johnson, 975 F.2d at 609 (citations omitted) (quoting Fed.R.Civ.P. 16 advisory committee's notes (1983 amendment)).

Here, the record supports a re-opening of discovery. The government contends that it was unfairly burdened when the Court relieved plaintiff from the deemed admissions without ordering the plaintiff to respond to the governments request for admissions. Plaintiff counters that the government disregarded the Court's order to file discovery motions on or before February 15, 1998 , and have any such motions heard on March 23, 1998 . Further, plaintiff alleges the governments failure to comply with Local Rule 37-251(d) and make a good faith effort to confer and resolve the discovery dispute before filing the instant motion to amend the scheduling order to reopen discovery is an independent basis to deny the governments motion to reopen discovery. Plaintiff further alleges the government violated Local Rule 37-251(d) by failing to make any attempt to prepare and present a "Joint Stipulation re Discovery Dispute" and on this independent basis the governments motion to reopen discovery should be denied.

Here, the Court's inquiry focuses on whether the government was diligent. These factors warrant a modification of the joint scheduling conference. The government proffered good cause to modify the joint scheduling order. First, the plaintiff refused to comply with discovery. Second, the government diligently attempted to seek compliance with the discovery requests from plaintiff. Lastly, the Court apparently relieved plaintiff from admissions without compelling completion of discovery, although the Court intended to require plaintiff to comply with the government's discovery requests. The government acted diligently and is entitled to relief under Rule 16(b). Defendant's request to reopen discovery is GRANTED.

VI. CONCLUSION

For the foregoing reasons,

1. Plaintiff's motion for clarification of the order granting summary judgment is GRANTED. Pursuant to clarification Defendant is not foreclosed from bringing alter ego or nominee theories.

2. Defendant's motion for Rule 56(f) relief is DENIED, except as to completion of pending discovery to Plaintiff, as to Plaintiff's motion for summary judgment.

3. Defendant's motion to amend scheduling order to reopen discovery is GRANTED. The pending discovery is to be completed within 15 (fifteen) days, on or before May 28, 1998 . All Discovery is to be completed in 45 (forty-five) days, on or before June 9, 1998 .

4. Defendant's motion for summary judgment under the alter ego and nominee theories is DENIED.

5. Counsel for plaintiff Sequoia Properties shall prepare an order in conformity with the memorandum opinion and lodge it with the Court within five (5) days following date of service of this opinion.

SO ORDERED.

¹ The fraudulent conveyance theory is moot as it was decided in favor of the plaintiff in a memorandum opinion dated March 27, 1998 . The opinion was issued prior to the governments filing of their motion for summary judgment. Thus, the theory of fraudulent conveyance, nominee and alter ego are intertwined in the governments motion for summary judgment.

² The issue of whether Crisps are the alter ego or nominee of Sequoia Properties was not before the Court in plaintiff's motion for summary judgment.

³ During oral argument Mr. Jennings, plaintiff for the government conceded that the government's motion for summary judgment should have been filed as a cross motion for summary judgment.

⁴ Rule 56(f) of the Federal Rules of Civil Procedure provides in pertinent part:

When Affidavits Are Unavailable. Should it appear from the affidavits of a party opposing the motion that he cannot for reasons stated present by affidavit facts essential to justify his opposition, the court may refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or may make such other order as is just.

Fed. R. Civ. P. 56(f).

 

[98-2 USTC ¶50,631] Gregory F. Floyd and Denise D. Floyd, doing business as Medical Information Services, Harold Deakins and Lynne Deakins, doing business as K and L Computers, Rhonda Sippel, doing business as Statbilling, Jerry Nevonen, doing business as Network Facilities, William Muth, doing business as Electronic Billing Services, Jackie Ray, doing business as Medical Billing Service, Thomas Perry, doing business as TurboClaim, Plaintiffs-Appellants v. Internal Revenue Service of the United States of America, State of Kansas ex rel. Carla Stovall, Attorney General, 12424 Aberdeen, Johnson County, Kansas, a certain piece of real estate, Defendants-Appellees Gregory F. Floyd, Denise D. Floyd, doing business as Medical Information Services, Harold Deakins, Lynne Deakins, doing business as K and L Computers, Rhonda Sippel, doing business as Statbilling, Jerry Nevonen, doing business as Network Facilities, William Muth, doing business as Electronic Billing Services, Jackie Ray, doing business as Medical Billing Service, Thomas Perry, doing business as TurboClaim, Plaintiffs-Appellees, and Internal Revenue Service of the United States of America, Defendant-Appellee v. State of Kansas ex rel. Carla Stovall, Attorney General, Defendant-Appellant, and 12424 Aberdeen, Johnson County, Kansas, a certain piece of real estate, Defendant

(CA-10), U.S. Court of Appeals, 10th Circuit, 96-3166, 96-3215, 8/10/98 , 151 F3d 1295, 151 F3d 1295. Reversing and remanding a District Court decision, 96-1 USTC ¶50,228

[Code Sec. 6323 ]

Federal tax liens: Validity of: Priority v. state, private creditor claims: Corporate assets: Outside reverse veil-piercing theory: State law governs: Equitable theory: Adequate remedy at law.--A federal district court erred in granting IRS tax liens priority over state (Kansas) and private creditor claims against corporate assets based on the IRS's argument that the corporation was the alter ego of its sole shareholder. The IRS's attempt to secure corporate assets in satisfaction of the shareholder's tax debts was made pursuant to an "outside reverse veil-piercing theory" that was not proven to be applicable under Kansas law. That theory bypasses normal judgment collection procedures and could unfairly prejudice creditors who believed that their claims were secured by corporate assets. Finally, disregard of the corporate form is an equitable remedy, which should not have been available to the IRS, because it had adequate legal remedies available by pursuing agency, aiding and abetting and constructive dividend theories.

Edward A. McConwell, Laura L. McConwell, 6701 W. Sixty-Fourth St., Overland Park, Kan. 66202, for plaintiffs-appellants. Theodore M. Doolittle, Kenneth L. Greene, Department of Justice, Washington, D.C. 20530, for I.R.S. Martin J. Peck, Special Assistant Attorney General, Wellington, Kan., for State of Kansas.

Before: HENRY and LUCERO, Circuit Judges, and MILES-LAGRANGE, District Judge. ^*

LUCERO, Circuit Judge:

Thomas Bridges and his associated companies are in debt to three parties: the Internal Revenue Service ("IRS"), the State of Kansas , and a group of private judgment-creditors, the "Floyd plaintiffs." These three parties sought judicial resolution of the priority of their claims to the assets of Bridges and his companies. Following a bench trial, the District Court for the District of Kansas held that the IRS claims primed those of the other two parties, and that, as to the remaining assets, Kansas took priority over the Floyd plaintiffs. The district court's holding was premised in part on the IRS's position that one of Bridges's companies was his alter ego. Because we find that the district court erred in accepting the IRS's alter ego argument, we reverse and remand.

I

In 1991, Thomas Bridges founded two corporations, Network Billing Centers, Inc. ("NBC") and Med-Net Technologies, Inc. ("Med-Net"), both in the business of licensing and developing computer software. Bridges, who was the sole shareholder and director of these companies, had complete control over them. Bridges's salary from NBC was paid into the account of Thomas Marketing, Inc. ("TMI"), another corporation founded and controlled by him and of which he was the sole shareholder and director.

The IRS's claims against Bridges and his associated companies date from Bridges's failure to pay personal income tax in 1984. The IRS first filed a Notice of Federal Tax lien against Bridges in 1990. In 1993, the IRS filed additional tax liens against Bridges as a result of his failure to pay personal income tax between 1988 and 1991. The following year, the IRS filed two tax liens against Med-Net for failing to pay employment taxes for the second and third quarters of 1993. Kansas's claims are based on a pre-judgment attachment of Med-Net, NBC, and TMI accounts following the filing of an action by the State against Bridges, Med-Net, and NBC under the Kansas Consumer Protection Act ("KCPA"). Kansas won this action in late March 1994, obtaining judgment for just under $1 million. The Floyd plaintiffs' claim is based on their successful suit against Bridges, NBC, and Med-Net for fraud and breach of contract. They secured judgment in early March 1994.

These three creditors dispute their priority to two groups of assets: first, some $179,000, which constitutes proceeds from the sale of a house in Lenexa, Kansas, held in the registry of the United States District Court for the District of Kansas pursuant to a settlement between the three creditors; second, some $84,000 from the Med-Net, NBC, and TMI accounts attached by Kansas, which is held in the registry of the District Court of Johnson County. ¹

The Lenexa house was purchased using primarily Med-Net funds in 1992. Bridges's daughter, Brooke Bridges McBride, filed an affidavit of equitable interest in the property with the register of deeds in Johnson County ; legal title was apparently to pass from the construction company to McBride pursuant upon full payment under a contract for deed. ² Both Bridges and McBride lived in the house.

In April 1994, after obtaining judgment against Bridges, Med-Net, and NBC under the KCPA, Kansas filed another state court action, which was subsequently joined by the Floyd plaintiffs, alleging that McBride had received the house through a fraudulent conveyance from Med-Net and NBC. Shortly thereafter, the Floyd plaintiffs unsuccessfully attempted to collect on their judgment against Bridges, Med-Net, and NBC by garnishing McBride, arguing that Med-Net held its interest in her name. To resolve their claims to the house, Kansas , McBride, and the Floyd plaintiffs entered into a settlement whereby the house was to be sold, with the bulk of the proceeds to be contested among the competing creditors. After filing a lien against the house naming McBride as Bridges's nominee, the IRS subsequently joined this settlement, and the house was sold.

II

The district court accepted the IRS's arguments that Med-Net was Bridges's alter ego and that McBride held the house as Bridges's nominee. With one exception, therefore, the federal tax liens had been filed against Bridges and Med-Net before either of the other creditors had secured their judgments against Bridges and his associated companies. ³ Consequently, acting on the principle that "priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right,' " United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993) (quoting United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954)), the district court held that the IRS's claims to the house proceeds primed the claims of both Kansas and the Floyd plaintiffs. Because the IRS's claims, which amounted to some $186,000, exhausted the sale proceeds entirely, the district court did not determine the relative priority of the other two creditors' claims to the house.

The district court further held that the remaining $7,000 still owing to the IRS should be satisfied from the seized bank accounts, of which it concluded some $136,000 was traceable to Bridges and his alter ego Med-Net. As to the remaining bank account funds, the district court found that the State perfected its attachment lien when it won a favorable judgment in its KCPA suit. Because the State perfected its interest in the funds before the Floyd plaintiffs executed their judgment liens against those same funds, the district court concluded that Kansas had priority over the Floyd plaintiffs to whatever funds remained. Kansas and the Floyd plaintiffs both appeal.

III

Federal tax liens only arise in property as to which the defaulting taxpayer has rights of ownership. See United States v. Wingfield [88-1 USTC ¶9367], 822 F.2d 1466, 1472 (10th Cir. 1987). State law determines such rights. See United States v. Central Bank of Denver [88-1 USTC ¶9256], 843 F.2d 1300, 1303-04 (10th Cir. 1988). Federal law then determines the priority of competing liens against a taxpayer's property. See Aquilino v. United States [60-2 USTC ¶9538], 363 U.S. 509, 514 (1960).

Both Kansas and the Floyd plaintiffs argue that Bridges had no rights to the Lenexa house, thus placing that property beyond the reach of the tax liens filed by the IRS against Bridges. More specifically, the Floyd plaintiffs argue that the house was properly owned by Med-Net, and because Med-Net was not Bridges's alter ego, the house is properly claimable only by Med-Net creditors. Kansas , for its part, argues that Bridges fraudulently conveyed the house to McBride, leaving him without a valid claim to the property under state law.

The district court determined that Med-Net was the alter ego of Bridges based on Pemco, Inc. v. Kansas Dep't of Revenue, 907 P.2d 863 ( Kan. 1995). If we accepted Pemco as the controlling authority in this case, we would review that determination deferentially. See G.M. Leasing Corp. v. United States [75-1 USTC ¶9435], 514 F.2d 935, 939 (10th Cir. 1975) (district court's finding of alter ego status "presumptively correct and must be left undisturbed on appeal unless . . . clearly erroneous"), rev'd in part on other grounds [77-1 USTC ¶9140], 429 U.S. 338 (1977). And were we to do so, we would conclude that the evidence before the district court manifestly supported its conclusion that the "relationship" between Bridges and Med-Net was "so intimate," Bridges's "control" over Med-Net "so dominating," and "the business and assets of the two are so mingled that recognition of [Med-Net] as a distinct entity would result in an injustice to third parties." Pemco, 907 P.2d at 867 (quoting Doughty v. CSX Transp., Inc., 905 P.2d 106, 111 ( Kan. 1995)). We also would not find error in the district court's conclusion that crediting Med-Net with a separate corporate identity would sanction Bridges's unjust evasion of his federal tax liability.

But Pemco does not appropriately govern this case. The Pemco court considered a parent company's request to be treated as a single unit with its corporate subsidiary for sales tax purposes. Ultimately, the court refused that request because "a corporation, having chosen the legal form in which to exist and do business, should not be permitted to pierce its own corporate veil to gain a tax advantage." Id. at 866. That rule does not speak to the case of an outside entity--here, the IRS--seeking to pierce the corporate veil.

True, Pemco does recite Kansas 's "substantial case law authorizing the piercing of a corporate veil if to do otherwise would work an injustice on third parties." Id. at 867. Those precedents, however, are inapplicable here because they consider the "standard" veil-piercing situation, in which corporate creditors seek to disregard the corporate form in order to hold stockholder assets liable for the corporation's debts. In this case, we are presented with the reverse phenomenon because the IRS seeks to pierce Med-Net's veil and use corporate assets to satisfy the obligations of an individual stockholder. Cf. Towe Antique Ford Found. v. IRS [93-2 USTC ¶50,430], 999 F.2d 1387, 1390 (9th Cir. 1993) ("Ordinarily, courts are called upon to apply the alter ego doctrine in cases where a party seeks to hold an individual liable for a business entity's debts."); Cascade Energy & Metals Corp. v. Banks, 896 F.2d 1557, 1575 (10th Cir. 1990) (stating that reverse-piercing theory employed by district court "led to the peculiar result of holding the corporation liable for the debts or torts of its controlling shareholder rather than the other way around") (emphasis added). The IRS's claims, in which an outside party seeks to meld the stockholder and the corporation into one, represent a "variant" on the usual "reverse-piercing" claim, in which an insider asserts that theory. See Cascade, 896 F.2d at 1575 n.17; see also Gregory S. Crespi, The Reverse Pierce Doctrine: Applying Appropriate Standards, 16 J. Corp. L. 33, 37-38 (1991) ("Crespi") (distinguishing between inside and outside reverse-piercing claims).

The Floyd plaintiffs urge us to reject this outside reverse veil-piercing theory, at least where third-party corporate creditors would thereby be harmed. The government counters that numerous cases recognize such a practice in the federal taxation context. See No. 96-3166, IRS's Br. at 30 (citing, e.g., Towe [93-2 USTC ¶50,430], 999 F.2d at 1390-91). But the question of whether Med-Net can be found to be Bridges's alter ego for purposes of reverse veil-piercing must be answered by state law, see Towe [93-2 USTC ¶50,430], 999 F.2d at 1391; Terrapin Leasing, Ltd. v. United States [81-1 USTC ¶9372], No. 79-1086, 1981 WL 15490, at *2 (10th Cir. Apr. 6, 1981), and none of the authorities cited by the government are drawn from that body of jurisprudence. Nor does the taxation context of the government's claim dictate the outcome here. "The IRS should be viewed as any other creditor seeking to pierce a corporate veil that is allegedly defrauding it of its legitimate claim." Terrapin [81-1 USTC ¶9372], 1981 WL 15490, at *2.

In fact, there are significant reasons to resist application of the alter ego doctrine in this case. The IRS has presented no authority suggesting that Kansas does or would recognize an outside reverse-piercing claim, and our own review of Kansas law provides no authoritative support for that proposition. See Cascade, 896 F.2d at 1577 (holding that, "[a]bsent a clear statement" by state supreme court adopting outside reverse-piercing theory, federal court will not reverse pierce). ⁴

In addition, "[t]he reverse-pierce theory presents many problems." Id. In Cascade, we noted two. First, the theory "bypasses normal judgment-collection procedures whereby judgment creditors attach the judgment debtor's shares in the corporation and not the corporation's assets." Id. Second, third parties may be unfairly prejudiced if the corporation's assets can be attached directly. Although in Cascade our particular concern was with non-culpable third-party shareholders of the corporation being unfairly prejudiced, no greater culpability should attach to the third-party corporate creditors harmed by reverse-piercing in this case. See id. (" '[A] necessary element of the [alter ego] theory is that the fraud or inequity sought to be eliminated must be that of the party against whom the doctrine is invoked, and such party must have been an actor in the course of conduct constituting the abuse of corporate privilege--the doctrine cannot be applied to prejudice the rights of an innocent third party.' ") (quoting 1 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations §41.20, at 413 (1988 Supp.)) (emphasis added); see also Hamilton v. Hamilton Properties Corp., 186 B.R. 991, 1000 (Bankr. D. Col. 1995) ("The reverse piercing theory is an aberration which, if invoked, would prejudice . . . the rightful creditors of the corporation whose assets are subsumed for the benefit of the creditors of the individual. What of the creditors of [the corporation] who relied on its separate corporate existence in doing business with it?"); Cargill, Inc. v. Hedge, 375 N.W.2d 477, 479 (Minn. 1985) (holding that in considering propriety of reverse pierce, "[a]lso important is whether others, such as a creditor or other shareholders, would be harmed by a pierce").

There are reasons beyond those identified in Cascade to deny an alter ego claim of this kind. For one thing, the prospect of losing out to an individual shareholder's creditors will unsettle the expectations of corporate creditors who understand their loans to be secured--expressly or otherwise--by corporate assets. Corporate creditors are likely to insist on being compensated for the increased risk of default posed by outside reverse-piercing claims, which will reduce the effectiveness of the corporate form as a means of raising credit. Furthermore, as Judge Learned Hand suggested in what may be the earliest case to consider such a claim, outside reverse piercing is only appropriate in the rare case of a subsidiary dominating its parent. See Kingston Dry Dock Co. v. Lake Champlain Transp. Co., 31 F.2d 265, 267 (2d Cir. 1929); see also Crespi at 67 ("Kingston stands for the proposition that the highly unusual circumstance of a subsidiary dominating its parent is a virtual prerequisite for finding the kind of unity that would allow an outside[] reverse pierce. . .,"); id. at 57, 65-66. Here, the premise of the IRS's position is that the effective subsidiary--Med-Net--was the dominated party, which makes it hard, if not impossible, to argue for forfeiture of its assets through a reverse pierce. Additionally, disregard of the corporate form is an equitable remedy. See McKinney v. Gannett Co., 817 F.2d 659, 666 (10th Cir. 1987). As a consequence, it is appropriately granted only in the absence of adequate remedies at law. See 1 William Meade Fletcher et al., Fletcher Cyclopedia of the Law of Private Corporations §41.25, at 653 (perm. ed. rev. vol. 1990). In cases where a corporation has been dominated by a controlling stockholder, an agency or aiding and abetting theory may suffice to hold the corporation liable for the actions of that stockholder. See Crespi at 65. Standard judgment collection procedures may also suffice to cover shareholder liability without expanding equitable theories of corporate liability. See Cascade, 896 F.2d at 1577. And, in taxation cases, the transfer of an economic benefit to a shareholder may be reachable for tax purposes as a constructive dividend, again obviating the need for the more drastic remedy of corporate disregard. See generally 10 Jacob Mertens, Jr. et al., The Law of Federal Income Taxation §38B.33 (1991).

We recognize that the problems associated with reverse-piercing may be viewed as less serious in cases where a corporation is controlled by a single shareholder--there are, for instance, no third-party shareholders to be unfairly prejudiced by disregarding the corporate form. Should the Kansas courts consider adopting the doctrine of reverse-piercing, that factor may well influence the terms of any rule they ultimately adopt. Consequently, we stress that in reciting the litany of problems associated with the doctrine, we should not be understood as seeking to dictate or influence the law of corporations in Kansas . Rather, we seek only to lend additional weight to Cascade's federal law conclusion that, in the absence of a clear statement of Kansas law by the Kansas courts, we will not assume that such a potentially problematic doctrine already has application in that state. See Cascade, 896 F.2d at 1577.

IV

The lion's share of the district court's analysis of this complex litigation is premised on its finding that Med-Net was Bridges's alter ego. The district court's conclusion that McBride held title to the house as Bridges's nominee depends on its underlying finding that Bridges purchased the house through his alter ego Med-Net. Similarly, the determination of priority to the bank account proceeds assumes that the IRS satisfies the bulk of its claims by means of the proceeds from the sale of the house. If that latter determination is undone, then the IRS's claims to the bank account funds, or the resolution of the other parties' claims to the house proceeds, may impact the district court's determination that Kansas would receive the bulk of the bank account funds.

However, the district court's opinion need not inexorably unravel with our holding here because the IRS also brought a constructive dividend claim. That claim, if adjudged successful, might lead to the same conclusion as to the ownership of the house and the court's subsequent determinations flowing therefrom. The district court did not rule as to whether Med-Net's purchase of the house was a constructive dividend to Bridges. As the record on appeal contains no indication that the facts relevant to a constructive dividend determination are undisputed, we cannot decide this question as a matter of law, and it must instead be resolved in the first instance by the trial court below. Cf. Dolese v. United States [79-2 USTC ¶9540], 605 F.2d 1146, 1153 (10th Cir. 1979). We are therefore obliged to remand for further proceedings.

REVERSED and REMANDED for further proceedings consonant with the views herein expressed.

^* The Honorable Vicki Miles-LaGrange, United States District Judge for the Western District of Oklahoma, sitting by designation.

¹ The total amount seized was approximately $155,000. This sum was reduced pursuant to an agreement in August 1994 between the Floyd plaintiffs and the State to around $84,000.

² The handwritten version of this contract listed Bridges and McBride as purchasers. A typed version prepared the same day lists only McBride. The district court determined Bridges had his name removed because he did not want the IRS to put a lien on the house.

³ The exception is the federal tax lien filed against Med-Net for its failure to pay employment taxes for the third quarter of 1993. The IRS does not appeal the district court's holding that both Kansas and the Floyd plaintiffs' claims have priority over this claim.

⁴ The Kansas courts did once apply a variant of reverse piercing--but only in a jurisdictional context. In Farha v. Signal Cos., 532 P.2d 1330, modified, 535 P.2d 463 (Kan. 1975), the Supreme Court of Kansas upheld a finding of personal jurisdiction against a corporation, which was not otherwise reachable under the Kansas long-arm statute, on the grounds that its co-defendant parent corporation transacted business within the state. While that decision contains alter ego and veil-piercing language, it does not contain any indication whatsoever that the subsidiary's assets were reachable as a result of the parent's substantive liability. As in personam jurisdiction can be asserted whenever a defendant has those "minimum contacts" with the forum state that will satisfy `traditional notions of fair play and substantial justice,'" International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) (quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940)), the Farha decision is best understood as limited to the jurisdictional context; these jurisdictional standards should not be presumed to translate into substantive corporate law.

 

 

[94-1 USTC ¶50,007] Ameritrust Company, N.A., Plaintiff v. Iraj Derakhshan, et al., Defendants

U.S. District Court, No. Dist. Ohio , East. Div., 1:92CVO931, 7/16/93, 830 FSupp 406, 830 FSupp 406

[Code Secs. 401 , 6321 and 6323 ]

Tax liens: Validity of lien against third party: Alienation of pension benefits.--The government was entitled to levy on a debtor's IRA and Keogh accounts in satisfaction of delinquent taxes even though the accounts were qualified retirement plans. ERISA's bar against assignment or alienation of an individual's interest in a qualified retirement plan did not preclude a tax levy for unpaid taxes against that interest. ERISA was not intended to alter other federal laws, and a prohibition against the alienation of ERISA funds to satisfy a federal levy would limit the scope of Code Sec. 6321 . Further, the federal levies were filed before the issuance of a qualified domestic relations order that irrevocably assigned the retirement plans to the debtor's ex-wife, and, therefore, the IRS's levies had priority.

MEMORANDUM AND ORDER

 

ALDRICH, District Judge:

On May 12, 1992, the Ameritrust Company filed this impleader action under 28 U.S.C. §1335 against Iraj Derakhshan, the Iraj Derakhshan Retirement Plan ("Retirement Plan"), the United States of America and the Internal Revenue Service (collectively "United States"), alleging that there was a dispute between the United States and Derakhshan as to the legal effectiveness of a federal tax levy entered against certain Retirement Plan funds. Ameritrust, as custodian of the Retirement Plan, requested this Court to allow it to deposit the funds with the Clerk of Court, and to release Ameritrust from any further liability to the parties.

On June 1, 1992 , this Court granted Ameritrust's request. Specifically, this Court ordered Ameritrust to deposit the funds with the Clerk of Court; enjoined the parties from filing other actions against Ameritrust concerning the Retirement Plan; and ordered all defendants and other interested parties to interplead their claims to the funds. Subsequently, Linda Jaenson, Derakhshan's former wife, was joined as a defendant, and Ameritrust was dismissed as a party to the motion.

Jaenson and the United States have filed cross-motions for summary judgment. For the reasons set forth below, this Court denies Jaenson's motion for summary judgment, and grants the United States ' motion for summary judgment.

I

 

The following facts are undisputed. Derakhshan failed to pay various federal taxes for a number of years. On January 2, 1987 , the United States placed a levy upon Ameritrust, the custodian of certain funds in a "Keogh" account created by Derakhshan. The Keogh plan provided:

The value of each Member's interest in the Fund as represented by such Member's Account shall be 100% vested in such Member at all times. However, no member shall have any right to assign, transfer, borrow, pledge, alienate, appropriate, encumber, commute or anticipate such member's interest in the Fund, or any payment to be made thereunder, and no benefits, or payments, rights or interest of a Member shall be in any way subject to any legal process or levy upon, garnish or attach the same for payment or any claim against a Member. . . .

(Retirement Plan, Art. V, ¶7). The Retirement Plan also provided that Derakhshan, the sole beneficiary of the Keogh account, could terminate the plan upon sixty days notice, and receive the funds held by Ameritrust. (Retirement Plan, Art. X, ¶3).

Ameritrust responded to the tax levy by filing a quiet title action against Derakhshan and the United States to determine who owned the funds in Derakhshan's IRA and Keogh accounts. Ameritrust's claim to the assets was based on the fact that Derakhshan owed $10,873.49 on an Ameritrust VISA credit card account, and $50,050.99 on an Ameritrust "Goldline" credit account as of November 6, 1986 . In granting the United States ' motion for summary judgment, this Court held that because Ameritrust had failed to perfect its interest in Derakhshan's accounts, the United States ' lien took priority over Ameritrust's interest in the accounts. (See Ameritrust Co. v. Derakhshan et al., No. C87-2902 (N.D. Ohio Sept. 18, 1989) (hereinafter "1989 Order")).

The United States placed other levies upon Derakhshan's Keogh account in March of 1989 and November of 1991. Ameritrust then filed this interpleader action. On July 27, 1992 , the Ohio Court of Common Pleas issued a Qualified Domestic Relations Order ("QDRO"), which irrevocably assigned Derakhshan's Retirement Plan to Jaenson. In their cross-motions for summary judgment, the United States and Jaenson both claim that they are entitled to the assets in the Retirement Plan.

II

 

Federal Rule of Civil Procedure 56(c) governs summary judgment motions and provides:

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

The nature of materials properly presented in a summary judgment pleading is set forth in Federal Rule of Civil Procedure 56(e):

Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. . . . The court may permit affidavits to be supplemented or opposed by depositions, answers to interrogatories, or further affidavits. When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denial of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party.

However, the movant is not required to file affidavits or other similar materials negating a claim on which its opponent bears the burden of proof, so long as the movant relies upon the absence of the essential element in the pleadings, depositions, answers to interrogatories, and admissions on file. Celotex Corp. v. Catrett, 477 U.S. 317 (1986).

In reviewing summary judgment motions, this Court must view the evidence in the light most favorable to the non-moving party to determine whether a genuine issue of material fact exists. Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970); White v. Turfway Park Racing Assn., Inc., 909 F.2d 941, 943-44 (6th Cir. 1990). A fact is "material" only if its resolution will affect the outcome of the lawsuit. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Determination of whether a factual issue is "genuine" requires consideration of the applicable evidentiary standards. Thus, in most civil cases the Court must decide "whether reasonable jurors could find by a preponderance of the evidence that the [non-moving party] is entitled to a verdict." Id. at 252. Although cross-motions for summary judgment do not necessarily demonstrate that no genuine issues of material fact exist, United States v. Byrum [72-2 USTC ¶12,859 ], 408 U.S. 125 (1972), the resolution of this case depends entirely upon the resolution of questions of law.

The Employee Retirement Income Security Act of 1974 (ERISA), as amended, 29 U.S.C. §§1001 et seq., contains a statutory prohibition against the assignment or alienation of pension benefits. Section 206(d) of ERISA states, in relevant part:

(1) Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.

. . .

 

(3)(A) Paragraph (1) shall apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a participant pursuant to a domestic relations order, except that paragraph (1) shall not apply if that order is determined to be a qualified domestic relations order. Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.

29 U.S.C. §1056(d)(1) , (3)(A) . See General Motors Corp. v. Buha, 623 F.2d 455, 460 (6th Cir. 1980) (§206(d)(1) bar against assignment or alienation applies to all voluntary and involuntary encroachments on qualifying plans). The QDRO exception to the anti-alienation provision of ERISA is the only exception recognized in the statute.

The United States Supreme Court has interpreted §206(d) narrowly. In Guidry v. Sheet Metal Workers Pension Fund, 493 U.S. 365, 110 S.Ct. 680, 687, 107 L.Ed.2d 782 (1990), a union sought a constructive trust against an official's pension benefits after he pleaded guilty to embezzling funds from the union. The district court imposed a constructive trust on the funds, and the Tenth Circuit Court of Appeals affirmed. In reversing these decisions, the Supreme Court wrote:

Section 206(d) reflects a considered congressional policy choice, a decision to safeguard a stream of income for pensioners (and their dependents, who may be, and perhaps usually are, blameless), even if that decision prevents others from securing relief for the wrongs done them. If exceptions to this policy are to be made, it is for Congress to undertake that task.

As a general matter, courts should be loath to announce equitable exceptions to legislative requirements or prohibitions that are unqualified by the statutory text. The creation of such exceptions, in our view, would be especially problematic in the context of an antigarnishment provision. Such a provision acts, by definition, to hinder the collection of a lawful debt. The restriction on garnishment therefore can be defended only on the view that the effectuation of certain broad social policies sometimes takes precedence over the desire to do equity between particular parties. It makes little sense to adopt such a policy and then to refuse enforcement whenever enforcement appears inequitable. A court attempting to carve out an exception that would not swallow the fuel would be forced to determine whether application of the rule in particular circumstances would be "especially" inequitable. The impracticability of defining such a standard reinforces our conclusion that the identification of any exception should be left to Congress.

110 S.Ct. at 687.

Two years later, in Patterson v. Shumate, -- U.S. --, 112 S.Ct. 2242 (1992), a chapter 7 bankruptcy trustee sought to recover the debtor's interest in an ERISA plan for inclusion in the bankruptcy estate. The Supreme Court wrote:

We previously have declined to recognize any exceptions to ERISA's anti-alienation provision outside the bankruptcy context. . . . Declining to recognize any exceptions to that provision within the bankruptcy context minimizes the possibility that creditors will engage in strategic manipulation of the bankruptcy laws in order to gain access to otherwise inaccessible funds.

Id. at 2250 (citation omitted) (emphasis in original).

III

 

In its motion for summary judgment, the United States argues that this Court's 1989 Order controls the outcome of this action, and that the various claimants to the Retirement Plan are barred by res judicata and collateral estoppel from denying that:

the funds in the "Keogh" and "IRA" accounts belong to the taxpayer, Iraj Derakhshan, that the federal tax liens for Iraj Derakhshan's tax liabilities attach to such funds, and that the liens of the United States are superior to the claims of any other party.

( United States ' Motion for Summary Judgment, at 10).

In her disposivite motion, Jaenson asserts that the 1989 Order focused on Ameritrust's failure to perfect its security interest, and the respective priority to be accorded the liens asserted by Ameritrust and the United States . However, Jaenson claims that the 1989 Order did not address the issue of the United States ' ability to levy the Retirement Plan funds. Jaenson then argues that the Retirement Plan, which is a qualified retirement plan under ERISA, is not subject to tax levies because Congress did not carve out an exception for federal tax levies in §206(d) of ERISA. See 29 U.S.C. §1056(d) . Jaenson concludes that she is entitled to the Retirement Plan funds because she was assigned the funds pursuant to a QDRO, the only recognized exception to the anti-alienation provision of ERISA.

As an initial matter, this Court agrees with Jaenson that the 1989 Order did not address whether the United States was entitled to remove funds from the Retirement Plan. Although this Court decided that the United States ' interest in the Retirement Plan had priority over Ameritrust's interest, this Court did not consider the effect of the ERISA anti-alienation provision on the United States ' ability to levy property, the issue which is squarely presented by the present action. Therefore, the United States ' arguments based on res judicata and collateral estoppel must fail as a matter of law.

However, this finding is not fatal to the United States ' motion for summary judgment. ¹ Based on a consideration of the law governing the United States ' authority to levy property and ERISA, this Court finds that the United States ' levies against the Retirement Plan are valid, enforceable, and take precedence over Jaenson's claim.

26 U.S.C. §6321 provides:

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

Sections 6321 and 6323 (which discuss the validity and priority of liens against various persons) do not bar the United States from asserting a federal lien against an ERISA retirement account. Moreover, in the present case, because the federal levies were filed before the issuance of the QDRO, the United States has priority over Jaenson's claim to the Retirement Fund.

Although §206(d) of ERISA does not contain an exception for federal tax liens, the United States notes that ERISA does provide that "[n]othing in this subchapter shall be construed to alter, amend, modify, invalidate, impair, or supersede any law of the United States . . . or any rule or regulation issued under any such law." (Material not readable) U.S.C. §1144(d). Thus, in order to adopt Jaenson's reading of §206(d), it would be necessary to alter or amend 26 U.S.C. §§6321 , 6323 , an act prohibited by 29 U.S.C. §1144(d).

Furthermore, this Court finds that Guidry and Patterson are distinguishable from the present case. In Guidry, the Supreme Court rejected an argument that §206(d) should be read to permit equitable exceptions to the prohibition against assignment or alienation of ERISA funds. However, unlike this action, there was no conflict of federal law presented in Guidry. In Patterson, the Supreme Court ruled that the §206(d) prohibition against alienation was applicable in the bankruptcy, as well as non-bankruptcy, context. Specifically, the Supreme Court considered §541(a)(1) of the Bankruptcy Code, which provides:

A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.

The Court held that the ERISA plan's anti-alienation provision constituted an enforceable transfer restriction for purposes of the bankruptcy code's exclusion of property from the estate. Thus, although the Court considered the bankruptcy code and ERISA, the Court found no conflict between the two bodies of law.

Finally, 26 C.F.R. §1.401(a)-13(b) provides:

(b) No assignment or alienation--(1) General Rule. Under section 401(a)(13) , a trust will not be qualified unless the plan of which the trust is a part provides that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or any other legal or equitable process.

(2) Federal tax levies and judgments. A plan provision satisfying the requirements of subparagraph (1) of this paragraph shall not preclude the following:

(i) The enforcement of a Federal tax levy made pursuant to section 6331 .

(ii) The collection by the United States on a judgment resulting from an unpaid tax assessment.

(Emphasis added). Jaenson argues that this Treasury regulation is invalid because Congress failed to put an analogous federal levy exception in §206(d) of ERISA. This Court disagrees with this assessment. See General Motors Corp. v. Buha, 623 F.2d at 461-62 (finding Treasury regulations authoritative); Retirement Fund Trust of the Plumbing, et al. v. Franchise Tax Board, 909 F.2d 1266, 1284-85 (9th Cir. 1990) (in absence of congressional intent to the contrary, definition in Treasury regulations was permissible construction of statute). Although strong policy considerations justify a narrow reading of the §206(d) anti-alienation provision, see Guidry, 110 S.Ct. at 687, the United States also has a strong interest in enforcing its tax laws, and collecting unpaid tax assessments. Given the fact that ERISA was not intended to alter or amend other federal laws, and the fact that a prohibition against the alienation of ERISA funds to satisfy a federal levy would limit the scope of 26 U.S.C. §6321 , this Court finds that the omission of a federal levy exception in §206(d) of ERISA was an oversight rather than a considered decision by Congress.

IV

 

In sum, this Court finds that the United States is entitled to the Retirement Plan funds, which are the subject of this dispute. This Court denies Jaenson's motion for summary judgment, grants the United States ' motion for summary judgment, and enters final judgment in favor or the United States and the Internal Revenue Service.

IT IS SO ORDERED.

¹ This Court construes the arguments raised in the United States ' response to Jaenson's motion for summary judgment as part of the United States ' dispositive motion.

 

 

[93-1 USTC ¶50,127] Raybro Electric Supplies, Inc., Plaintiff v. D.J. Barclay, et al., Defendants

U.S. District Court, West. Dist. Ky., Bowling Green, C89-0124-BG(M), 10/29/92, 813 FSupp 1267

[Code Sec. 6323 ]

Validity of tax lien: Marital property: Priority of lien for joint debt: Priority of contingent lien of one spouse.--The United States was entitled to a priority interest in the proceeds of the sale of marital land. The tax lien attached to the present land interests of the married couple for joint tax debts and so was perfected when it was filed. The tax lien had priority over the judgment lien of a creditor that arose from the unilateral debts of the husband and that was filed prior to the tax lien. Although the judgment lien was filed first, under state ( Kentucky ) law its perfection was contingent upon the wife's death, when the husband would succeed to a fee simple interest in the land against which his unilateral debts could be enforced. Kentucky law intended to give non-debtor spouses the full enjoyment of marital land by preventing foreclosure of judgments for the unilateral debt of one spouse until that spouse had a present fee simple interest in the land.

Kurt W. Maier, English, Lucas, Priest & Owsley, 1101 College St., Bowling Green, Ky. 42102-0770, for plaintiff. John L. Caudill, Assistant United States Attorney, 510 W. Broadway, Bank of Louisville Bldg., Louisville, Ky. 40202, for defendant.

MEMORANDUM OPINION

HEYBURN II, District Judge:

The parties dispute the priority of certain liens attached to a parcel of land in Warren County, Kentucky. The realty had been owned by D.J. Barclay and his wife, Marjorie, as tenants by the entirety. The land has since been sold, and its entire proceeds will pass to the litigant who prevails in this suit.

D.J. and Marjorie Barclay became owners of seventy acres of land in June, 1972, as tenants by the entirety. The plaintiff, Raybro, sued D.J. Barclay in Florida some years later and recovered a judgment of nearly $150,000.00. In January, 1986, Raybro obtained a judgment lien against D.J. Barclay's interest in the Warren County property described above. D.J. Barclay's debt to Raybro now stands at nearly $237,000.00.

The Barclay family had encountered tax difficulties during this period, as well. The Internal Revenue Service identified shortfalls in three of the Barclays' joint tax returns. The I.R.S. secured this debt in January and September, 1988, by filing tax liens against all property owned by D.J. and Marjorie Barclay. The United States is currently owed nearly $328,000.00.

Marjorie died in November, 1988. Raybro and the United States asked this Court to sell the Warren County property, by then held solely by D.J. Barclay as the surviving spouse, and to determine the priority of their liens. The sale of the land yielded net proceeds of $1,717.00. This modest amount remains to be distributed to the party this Court identifies as the senior lienholder.

ANALYSIS

Federal law grants a lien to the United States against all property held by citizens who fail to pay taxes. 26 U.S.C. §6321 . This lien is subordinate, however, to security interests perfected by other creditors before the United States provides public notice of its tax lien. 26 U.S.C. §6323 . Competing security interests qualify for priority only when they have been "perfected", which occurs at the moment that "the identity of the lienor, the property subject to the lien, and the amount of the lien are established." United States v. Pioneer Am. Ins. [63-2 USTC ¶9532 ], 374 U.S. 84, 89 (1963). No controversy attends the effective date of the United States ' lien: it was perfected by the notice filing of September, 1988, because it attached to the joint interests of D.J. and Marjorie Barclay in the Warren County land. It is equally clear that Raybro's lien, which encumbered the sole interest of D.J. Barclay, became perfected at least upon the date of Marjorie's November, 1988 death. The central question governing the priority of the liens in this case is whether Raybro's security interest was capable of perfection at some moment before D.J. Barclay became full owner of the land. The answer turns on whether D.J. Barclay's property rights before his wife's death were equivalent to the absolute ownership he later gained by right of survivorship; in other words, whether the "property subject" to Raybro's lien in 1986 was identical to the joint interests subject to the United States' lien of September, 1988.

State law defines the nature of D.J. Barclay's interest in the property during the time prior to his wife's death. United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240 (1960).

Ancient property law had permitted the husband, but not the wife, to sell or encumber unilaterally land that the spouses held as tenants by the entirety. Hoffmann v. Newell, 60 S.W.2d 607, 610 ( Ky. 1932). The disparity resulted from the now-abandoned premise that the two spouses constituted one single legal person, which person was the husband. Id. A creditor in antiquity therefore could gain full immediate possession of marital land to recover a debt owed solely by the husband; in other words, the rights of the husband were virtually the same as those held jointly by husband and wife.

As early as 1846 Kentucky law addressed this inequity by insulating marital land from the husband's individual debts. Id. These statutes assured that a judgment against one spouse alone did not become a lien on the land during the joint lives of the spouses, but became enforceable only when the debtor-spouse became full owner by right of survivorship. Id. at 611. Under ordinary circumstances, then, the property interests of the individual spouses are inferior to their joint rights as tenants by the entirety; a creditor of one spouse cannot perfect a lien against the land itself until the land passes entirely into the hands of the debtor-spouse.

Though neither spouse can deliver full present possession or ownership of marital land by unilateral act, each spouse independently holds a severable, contingent interest in the estate: the right to succeed to the entirety of title upon the death of the other spouse. Hoffmann at 613. Kentucky statute further permits creditors to encumber land "in which the defendant has a contingent interest. . . ." Ky. Rev. Stat. 426.190. Thus a judgment creditor may obtain a lien against an individual spouse's "expectant interest in survivorship" in marital land, even though the lien arises from a unilateral debt. Hoffmann at 613. The creditor indeed may foreclose upon this contingent interest immediately, during the spouses' joint lives, to satisfy the obligation owed by the debtor-spouse. Id. Raybro insists that this characteristic of Kentucky law assures priority to its 1986 lien. It contends that its right to seize and sell D.J. Barclay's contingent interest, which existed at the moment Raybro affixed its lien in 1986, granted Raybro a security interest in the whole property identical to that obtained by the United States ' lien of September, 1988.

But this argument confuses D.J. Barclay's contingent interest of 1986 with his present fee simple interest, which came into existence only in November, 1988. A creditor who forecloses upon a debtor's contingent interest "takes the interest acquired upon its sale": that is, acquires the debtor's right of survivorship, not full title to the property. Hoffmann at 613. The interest acquired by the creditor is subject further "to the defeasance its very contingent nature demands" in the event the non-debtor spouse survives and acquires full ownership of the land. Id. Raybro indeed could have sold D.J. Barclay's right of survivorship as early as 1986, and perhaps might have realized some discounted portion of the land's full market value. But at issue before this Court is the distribution of proceeds resulting from the sale of D.J. Barclay's fee simple interest, not Barclay's contingent survivorship interest. Raybro's lien did not extend to a fee simple interest in the land until D.J. Barclay's contingent interest ripened into full ownership in November, 1988.

Raybro presents an impressive argument in its effort to assure itself a first lien against the property. But adoption of Raybro's position would require this Court to approve an anomalous and ultimately unsupportable configuration of security interests and rights. Let us assume, for purpose of argument, that Raybro could have obtained a first lien against the entire property by virtue of D.J. Barclay's individual debt. It is clear that Kentucky law would prohibit foreclosure of that lien until D.J. Barclay became sole owner by survivorship. The later tax lien attached to the Barclays' joint interests, and granted to the United States --the junior lienholder, in Raybro's analysis--the right of immediate foreclosure. As of that moment, then, Raybro would have held first right to the proceeds of the property's sale, but no right to foreclose; the United States possessed the right to foreclose, but effectively held no claim to the proceeds. The law cannot have intended to adopt such a self-defeating posture. Therefore, the Court must find that the United States holds the first lien.

To hold otherwise would also frustrate Kentucky 's policy of protecting non-debtor spouses who hold land as a tenant by the entirety. Kentucky law allows creditors to attach a debtor-spouse's contingent interest in marital land to secure unilateral debt, but prevents creditors from foreclosing on the land itself until the debtor-spouse becomes full owner by survivorship. Creditors of both spouses are therefore assured priority for their liens against marital land, even though such liens arise later than those securing unilateral debt, since these joint-debt liens attach to present rather than contingent interests in the property. Under the scheme Raybro urges, a single spouse could effectively encumber marital land unilaterally: a later creditor would not take such land as security, even for joint debt, if that creditor would be entitled only to such proceeds that remain after the unilateral debt has been satisfied. Such a policy would deprive the non-debtor spouse of the full enjoyment of marital land, contrary to the intent of Kentucky law.

The United States ' tax lien arose from a joint marital debt, and attached to the Barclays' present fee simple interest in September, 1988. Raybro's lien, though authorized by a 1986 judgment, arose from a unilateral debt and attached initially only to the debtor-spouse's contingent right of survivorship. Raybro thus did not become perfected as to land itself until D.J. Barclay became full owner in November, 1988. The United States will be adjudged to hold the first lien, and adjudged to be entitled to the proceeds deposited with this Court, in an accompanying order.

 

 

[93-1 USTC ¶50,195] Horton Dairy, Inc., and First National Bank of Conway , Appellees/Cross-Appellants v. United States of America , Appellant/Cross-Appellee

(CA-8), U.S. Court of Appeals, 8th Circuit, 91-3730, 91-3829, 2/25/93, 986 F2d 286, Affirming, reversing and vacating an unreported District Court decision

[Code Secs. 6321 , 6323 and 7426 ]

Lien for taxes: Priority: Property subject to: Security interest.--Federal tax liens filed against a dairy company's property to satisfy the tax debt of the majority shareholders were valid and properly enforced. The district court's finding that the dairy company was the alter ego of the shareholders was not clearly erroneous. The shareholders failed to keep appropriate records to distinguish between corporate and personal expenses, and the corporation failed to maintain corporate formalities regarding franchise taxes required by state ( Arkansas ) law and to timely file tax returns. Further, the IRS's rights to a corporate checking account levied upon were superior to the rights of a bank which held a security interest in the account. The bank did not properly perfect its interest in the property; it failed to establish that it had exercised its right of setoff. Finally, the district court's order that the IRS pay a percentage of the proceeds of any levies executed against the property to the shareholder's daughter, a nonparty, was vacated because the district court lacked jurisdiction over the daughter. The daughter, who claimed an arguable interest in the property, was required to bring a civil suit in order to adjudicate her rights in the property or she could have intervened in the present lawsuit.

Curtis L. Bowman, Eugene G. Sayre, Jack, Lyon & Jones, 425 W. Capitol Ave., Little Rock, Ark. 72201, for appellees/cross-appellants. James A. Bruton III, Gary R. Allen, William Estabrook, Janet Kay Jones, Department of Justice, Washington, D.C. 20530, for appellant/cross-appellee.

Before HANSEN, Circuit Judge, HEANEY and ROSS, Senior Circuit Judges.

HANSEN, Circuit Judge:

This action originated as a wrongful levy suit initiated by Horton Dairy, Inc. (HDI) and the First National Bank of Conway (the Bank). The Internal Revenue Service (IRS) levied upon property held by HDI and in which the Bank claimed a secured interest in order to satisfy the tax liabilities of HDI's majority shareholders, Jack and Arlene Horton (the Hortons). At trial the district court found the levies to be valid, holding that HDI was merely the Hortons' alter ego and that the Bank had not properly perfected its interest in HDI's property. The district court further held that a non-party, Shelly Carter, ¹ the Hortons' daughter, had given value for a 49% interest in HDI. To protect Carter's interest, the district court judicially created a partnership between the Hortons and Carter and ordered the United States to pay Carter 49% of the proceeds of any past and future levies executed against HDI's property. (Amended Judgment, October 8, 1991.)

The United States appeals the district court's order with respect to the rights of Shelly Carter. HDI and the Bank cross-appeal, asserting that the district court erroneously validated the levies when it decided the alter ego and lien priority issues. We affirm in part and reverse in part.

I. BACKGROUND

A.

Jack and Arlene Horton incorporated Horton Dairy, Inc., an Arkansas corporation, in October 1987. At the time of incorporation, Jack and Arlene each owned 150 shares of stock. One month later, the Hortons transferred their personal home and 100 acres of a dairy farm to HDI. Milking operations began on the farm in March 1989, approximately one and a half years after incorporation. On January 4, 1989 , the Hortons transferred a 49% interest in HDI stock to their daughter, Shelly Carter. Ms. Carter and her husband Leon eventually moved into a home on the farm, and each worked at least part time at the dairy. In March 1990, the State of Arkansas revoked HDI's corporate charter due to the corporation's failure to file its Corporate Franchise Tax Reports and to pay the accompanying taxes as required by state law.

In the course of its operations, HDI obtained two loans from the Bank. On March 23, 1989 , the Bank loaned the corporation $123,150, and on October 20, 1990 , HDI obtained a second loan in the amount of $60,000. In order to repay the loan, HDI directed American Milk Producers, Inc. (AMPI), buyer of HDI's raw milk, to divert $1,983.26 of the amount it would have otherwise paid HDI for its milk (which would be an account receivable of HDI) each month directly to the Bank. HDI also pledged cattle, land, and the cash it held on deposit with the Bank as security for the loans, and both the Hortons and the Carters personally guaranteed the loans.

The Hortons' debts to the IRS that form the basis for the disputed levy arose not out of the dairy business, but out of their association with a Texas corporation known as the Federal Dry Wall Company, Inc. (FDWI). In 1985, Jack Horton had obtained a controlling interest in FDWI, and by December of that year the company had fallen behind in its payment of federal employment taxes. Jack was the president of FDWI and Arlene was its secretary. The IRS assessed the unpaid taxes against the Hortons on April 18, 1988 , and on January 13, 1989 , the IRS filed notices of tax liens against them seeking some $89,386.52.

In June 1990, the IRS served its notices of levy to collect on the assessment. Because HDI's corporate charter recently had been revoked, the IRS named "Jack and Arlene Horton DBA Horton Dairy, Inc." in the levies in order to recover the taxes owing. On June 4, the IRS served a levy on AMPI for the accounts receivable, and on June 5, it served the Bank for the corporate checking account. Pursuant to these levies, the IRS successfully collected roughly $12,000.

On June 13, 1990 , approximately one week after the IRS served the tax levies, the Hortons reestablished HDI's corporate viability by paying the delinquent franchise taxes and filing the necessary reports. In this same month, HDI also filed federal and state corporate tax returns for the first time. In October 1990, as a result of these developments, the IRS filed additional notices of tax liens in its continuing effort to collect on the FDWI assessment. In these additional notices, the IRS specifically named HDI as the alter ego of Jack and Arlene Horton.

B.

On November 5, 1990 , HDI and the Bank initiated this lawsuit. The complaint alleged that the IRS had wrongfully levied upon their property in order to satisfy the delinquent tax obligations of Jack and Arlene Horton as individuals. HDI and the Bank requested a preliminary injunction to stop the IRS from executing any future levies on property in which they held a secured interest. After a hearing, the district court enjoined the IRS from executing any future levies but did not order a return of any property seized pursuant to the previously executed levies. The district court also found that, although the Bank may have had a secured interest in HDI's assets, the Bank failed to perfect that interest in accordance with the requirements of Article 9 of the Uniform Commercial Code. According to the district court, the IRS's right to the property was superior to the rights of the Bank.

At the trial approximately ten months after the issuance of the preliminary injunction, the district court determined that HDI was the alter ego of the Hortons and that the levy against HDI's property to satisfy the Hortons' debts was not wrongful. At the preliminary injunction hearing, the district court previously had expressed concern about protecting Shelly Carter's purported 49% interest in HDI. As noted before, Shelly Carter is a nonparty and did not seek to intervene in this litigation. The district court found at trial that Carter had given valuable consideration for her interest in HDI. Thus, while the district court dissolved the broad injunction against the IRS, it required the IRS to pay to Shelly Carter 49% of all past and future levies it might impose upon HDI's property, finding that ". . . basically Horton Dairy is a partnership between Shelby Carter and Mr. and Mrs. Horton and I think that of the monies that have been seized, I think 49% of those belong to Miss Carter." Appellant's Record Appendix (App.) at 270.

All of the parties appeal the district court's order. HDI and the Bank appeal the findings that HDI was merely the alter ego of the Hortons and that the Bank's security interest in the property levied upon was inferior to the federal tax lien. The United States urges affirmation of these two findings, but asserts that the district court erred by awarding Shelly Carter 49% of any future levies imposed by the IRS on HDI's property.

II. DISCUSSION

A.

We review the district court's finding that HDI was the alter ego of Jack and Arlene Horton under a clearly erroneous standard. See Miller v. Tony and Susan Alamo Found., 924 F.2d 143, 148 (8th Cir. 1991); Minn. Power v. Armco, Inc., 937 F.2d 1363, 1368-69 (8th Cir. 1991). Several factors should be considered when determining whether a corporation is a taxpayer's alter ego. Among these factors are the absence of corporate formalities, the commingling of corporate and personal funds and expenses, and the family relationship between corporate officers and the taxpayer. United States v. Walton [90-2 USTC ¶50,429 ], 909 F.2d 915, 928 (6th Cir. 1990); Shades Ridge Holding Co., Inc. v. United States, 888 F.2d 725, 729 (11th Cir. 1989) (citations omitted).

In this case, the district court found that upon "look[ing] at all the facts and all the history of the corporation . . . the corporation functioned as really just an appendage of the Hortons in this case and their business." Trial transcript (Tr.) at 269. The district court found that many expenditures made on the corporate account appeared instead to be personal in nature. At the very least, the Hortons failed to keep appropriate records in order to distinguish between corporate and personal expenses. ^1a See Walton [90-2 USTC ¶50,429 ], 909 F.2d at 928 ("woefully inadequate" recordkeeping supportive of alter ego finding). Arlene Horton testified that with regard to the separation of personal and corporate funds, "[i]t was just all the same money," "it was just back and forth." Tr. at 255-56. In addition, the district court observed that the named corporate treasurer, Leon Carter, the Hortons' son-in-law, "obviously never functioned in that role at all," tr. at 269, as Mr. Carter testified that he was unaware of HDI's current financial status. Tr. at 262. Finally, HDI failed to maintain corporate formalities regarding franchise taxes as required by Arkansas state law, and the corporate charter was revoked in March 1990. HDI did not file a federal or state tax return until June 1990, when the Hortons reestablished the corporate charter.

HDI and the Bank offer minimal evidence to refute the district court's finding that HDI was the Hortons' alter ego. Rather, HDI and the Bank merely assert that some of the checks that on the surface appear to cover personal expenses were in fact issued to cover dairy-related costs. The district court stated on the record, however, that it would not base an alter ego determination on "one check to Wal-Mart or one check to Kroger or one missed franchise tax payment" alone. Tr. at 268-69. Rather, the totality of the circumstances led to the finding that HDI was the alter ego of the Hortons. From our review of the evidence, we agree with the conclusion that "[t]he only thing 'corporate' about Horton Dairy was the 'Inc.' at the end of its name." Answering/Reply Brief of United States at 8. Accordingly, we hold the district court's finding that HDI was the alter ego of Jack and Arlene Horton was not clearly erroneous, and we affirm. ^1b

B.

Section 6321 of the Internal Revenue Code provides as follows:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321 . The lien arises in favor of the government at the time an assessment of the unpaid taxes is made against the delinquent taxpayer. 26 U.S.C. §6322 . See also United States v. Cent. Bank of Denver [88-1 USTC ¶9256 ], 843 F.2d 1300, 1306 (8th Cir. 1988) ("In general, a federal tax lien attaches at the time the tax assessment is made."). In this case, on April 18, 1988 , the IRS assessed against the Hortons the delinquent taxes accrued during their association with FDWI. On January 13, 1989 , the IRS filed a notice of federal tax lien against the Hortons. We review de novo the district court's legal conclusion that the IRS had a valid, superior lien on the assets of HDI. See Liberty Mut. Ins. Co. v. States, 940 F.2d 1179, 1181 (8th Cir. 1991) (de novo review of "legal conclusions regarding both federal and state law") (citations omitted), cert. denied, 112 S.Ct. 874 (1992).

1.

HDI and the Bank assert that because the tax liens were filed against the Hortons the IRS never established a valid tax lien against the property of HDI. Indeed, the IRS did not name HDI until it served its notices of levy in June 1990, in which it referred to "Jack and Arlene Horton DBA Horton Dairy, Inc." Then, in October 1990, the IRS filed additional notices of tax liens and specifically named HDI as the alter ego of Jack and Arlene Horton. According to HDI and the Bank, the sequence of these events resulted in the IRS being in a "nonlien" situation. They argue that because no tax assessment had been made specifically against HDI by the time of the levy, there logically could have been no federal tax lien against the assets of HDI. In other words, HDI and the Bank claim the IRS levied on property against which it had filed no lien.

When the lien arose in favor of the United States , it was "a lien . . . upon all property and rights to property, whether real or personal, belonging to [the taxpayer]." 26 U.S.C. §6321 . Given that the district court properly found HDI to be the alter ego of the Hortons, with the corporate structure having no substantive effect, the IRS was authorized to levy against the property held in the name of HDI. ² See F.P.P. Enters. v. United States [87-2 USTC ¶9536 ], 830 F.2d 114, 118 (8th Cir. 1987) ("Property held in the name of an entity which is the alter ego of a taxpayer may be levied on to satisfy the tax liabilities of the taxpayer."). See also Shades Ridge Holding Co., Inc. v. United States, 888 F.2d 725, 728-29 (11th Cir. 1989) ("Property of the . . . alter ego of a taxpayer is subject to the collection of the taxpayer's tax liability.") (citing G.M. Leasing Corp. v. United States [77-1 USTC ¶9140 ], 429 U.S. 338, 350-51 (1977)). By naming the Hortons in the tax liens, the IRS was entitled to levy upon property that functionally belonged to the Hortons yet nominally was held by the alter ego HDI. The IRS properly levied upon assets held in the name of HDI, the Hortons' alter ego. See Loving Saviour Church [84-1 USTC ¶9261 ], 728 F.2d 1085 (8th Cir. 1984). ³

2.

HDI and the Bank's second argument regarding the legitimacy of the levy focuses on the idea that a levy by itself does not determine the rights to and priorities in the property at issue. Specifically, they assert that "[t]he fact that the IRS obtained possession of the property in questions [sic] does not create a lien in favor of the government or otherwise enhance the government's rights, if any, to this property." Brief of HDI and the Bank at 46. This argument is dependent upon a finding that the liens themselves were faulty due to the fact that they were filed against the wrong entity. Because HDI is the alter ego of the Hortons and the IRS properly enforced the liens, this argument lacks merit.

3.

The final argument concerning the IRS's lien and subsequent levy applies only to the HDI corporate checking account. The Bank contends that, in accordance with Arkansas law, its interest in the account had priority over the federal tax lien. ⁴ For this contention it relies on 26 U.S.C. §6323(h)(1)(A) , which provides in part that "[a] security interest exists at anytime . . . if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation." Specifically, the Bank contends that because a bank is entitled to a right of setoff under Arkansas law it had a protected, superior lien on the HDI account.

"Choate state created liens take priority over later filed federal liens [] while inchoate liens do not." United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 (1963) (citations omitted). Federal law determines choateness, and "[t]he 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.' " Id. at 89 (quoting United States v. New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 84 (1954)). Until the Bank exercised its claimed right to a setoff, its right of setoff remained inchoate. Cent. Bank of Denver [88-1 USTC ¶9256 ], 843 at 1310. An unexercised right of setoff cannot defeat a government tax lien. See Peoples Nat. Bank of Washington v. United States [85-2 USTC ¶9849 ], 777 F.2d 459, 462 (9th Cir. 1985) (bank's common-law right of setoff against depositor's account when unexercised does not defeat a tax lien). "Generally, three steps are necessary to exercise the setoff right: 1) The decision to exercise the right; 2) some action that accomplishes the setoff; and 3) some record which evidences that the right of setoff has been exercised." Cent. Bank of Denver [88-1 USTC ¶9256 ], 843 F.2d at 1310 (citations omitted). The Bank fails to assert a set of facts to support a finding that it took affirmative steps to exercise any such right it may have had. We affirm the district court's order finding that the IRS had the superior interest in the bank account assets of HDI.

C.

The final issue before this court concerns the district court's order that the United States pay 49% of the proceeds of any levies executed against the property of HDI to Shelly Carter. Because we find the district court had no jurisdiction over Shelly Carter, we vacate this aspect of the district court's decision.

The tax code provides that third persons other than the taxpayer may bring a civil action to assert an interest in property levied upon by the United States . Section 7426(a)(1) specifically provides:

(1) Wrongful levy.--If a levy has been made on property or property has been sold pursuant to a levy, any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in or lien on such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States. Such action may be brought without regard to whether such property has been surrendered to or sold by the Secretary.

26 U.S.C. §7426(a)(1) . In this case, the IRS executed a levy against property held by HDI. As a third party who arguably "claims an interest in" this property, Shelly Carter had the statutory authority to bring a civil lawsuit in order to adjudicate her rights with respect to that property, or she could have intervened in the present lawsuit. She did neither.

Currently before the court, however, is the lawsuit that was brought by HDI and the Bank. Shelly Carter is not a party to this suit and was thus not in a position to assert her interests as an alleged victim of a wrongful levy. This is not a situation in which an individual simply failed to follow the procedural formalities of intervention. See Gatz v. Southwest Bank of Omaha , 836 F.2d 1089 (8th Cir. 1988). Rather, Carter failed to make an appearance in any fashion other than as a witness. Without an affirmative act on the part of Carter to enter the lawsuit, the district court lacked jurisdiction to determine her rights. ⁵ Having determined the court had no jurisdiction, we need not address whether the court could judicially create the partnership it did. Accordingly, the district court's order granting her a percentage of the levies is vacated.

III. CONCLUSION

We affirm the order of the district court finding HDI to be the alter ego of Jack and Arlene Horton and finding that the IRS had a valid, superior lien on the accounts receivable and the corporate bank account. We vacate, however, that portion of the order determining the rights of Shelly Carter.

¹ The parties refer to Ms. Carter as Shelly Carter, while the district court transcript indicates Ms. Carter's first name is " Shelby ."

^1a The record shows checks written on the corporate account to, among others, Wal-Mart, Kroger, Conway Ob-Gyn Clinic, Lake Liquor , Readers Digest, and Anna's Beauty Shop.

^1b With respect to the alter ego finding, HDI and the Bank also dispute the contention that the Hortons and the Carters should have reported as income the rent-free lodging they received while working on the farm. The district court, however, did not name this as a basis for its alter ego determination. Because we do not find this factor dispositive in the alter ego analysis, we do not address the issue.

² HDI and the Bank contend that traditional alter ego law does not apply when an innocent shareholder or a good faith creditor deals with a sham corporation. Because the parties offer no support for this bald assertion, we decline to address the issue.

³ We note that HDI and the Bank assert in another portion of their brief that "[b]ecause the lien arising under Section 6321 attaches to all real and personal property of the taxpayer, such lien extends to the assets of a taxpayer's nominee, instrumentality or alter ego." Brief of HDI and the Bank at 23 (citations omitted).

⁴ First National does not argue that it perfected its lien in accordance with the requirements of Article 9 of the Uniform Commercial Code.

⁵ While Ms. Carter is not a party to the instant wrongful levy action, she is free to contest any future levy executed by the IRS provided she meets the statutory requirements, including the applicable statute of limitations. See 26 U.S.C. §7426(h) ; 26 U.S.C. §6532(c) .

 

 

[92-1 USTC ¶50,043] United States of America , Appellee v. Frederick S. Solheim, Rob ert A. Solheim, John S. Solheim, National Bank of Commerce Trust and Savings Association of Lincoln , Trustee of the Selmer A. Solheim Trust, State of Colorado , Department of Revenue, Appellants

(CA-8), U.S. Court of Appeals, 8th Circuit, 91-1667, 1/7/92 , 953 F2d 379, 953 F2d 379. Affirming a District Court decision, 91-1 USTC ¶50,108

[Code Secs. 6321 and 6323 ]

Lien for taxes: Property subject to: Renunciation.--A taxpayer's renunciation, under state ( Nebraska ) law, of his interest in a trust did not extinguish the federal tax lien attached to the interest. The state court's acceptance of the taxpayer's renunciation of the trust specifically left open the question of existing tax liens. Even if the state court had not made the exception for tax liens, the transfer of property after the attachment of a tax lien does not affect the lien, which attaches to the property itself.

Ronald D. Lahners, United States Attorney, Omaha, Neb. 68101, Rob ert L. Baker, Gary R. Allen and David I. Pincus, Department of Justice, Washington, D.C. 20530, for appellee. J.L. Spray, Mattson, Ricketts, Davies, Stewart & Calkins, 1401 First Tier Bk. Bldg., Lincoln , Neb. 68508 , for appellants.

Before LAY, Chief Judge, ARNOLD, Circuit Judge and STUART ^*, Senior District Judge.

STUART, Senior District Judge:

We are called upon to determine whether the taxpayer's renunciation, under state law, of his interest in a trust extinguished a federal tax lien attached to the interest under 26 U.S.C. §6321 (1988). The district court ¹ held that the taxpayer's renunciation did not extinguish the lien. Upon the taxpayer's appeal, we affirm.

I.

The taxpayer, Frederick S. Solheim, was the beneficiary of a trust created by his father, Selmer A. Solheim. The trust was funded in 1980 when taxpayer's mother, Ruth M. Solheim, renounced her interest in a prior trust, causing the assets of the prior trust to be divided and paid over into three separate but identical trusts created for the benefit of taxpayer and his two brothers. The trust agreement, as amended, provided as follows:

1. The income from each separate Trust shall be accumulated by the Trustees for each of the Trust beneficiaries until such beneficiary reaches the age of 35 years at which time such accumulated Trust income shall be paid over to such beneficiary. . . .

2. When each such beneficiary reaches the age of thirty-five years, one-third of the principal of said beneficiary's trust shall be paid over to him or to her in cash on December 24th of the year in which such child reaches the age of thirty-five.

3. Thereafter, the income from the residue of each such separate trust shall be paid over to such beneficiary, if living, on January 1st each year, until such beneficiary reaches the age of forty-five years, at which time one-third of the principal of the trust shall be paid over to such beneficiary in cash on December 24th of the year in which such child reaches the age of forty-five.

4. Thereafter, the income from the residue of such separate trust shall be paid over to such beneficiary, if living, on January 1st of each year until such beneficiary reaches the age of fifty-five years, at which time all the balance of the principal of the trust shall be paid over to said beneficiary on December 24th of the year in which such child reaches the age of fifty-five.

5. When each beneficiary of each trust shall attain the age of fifty-five years, such trust as to such beneficiary shall cease and terminate; and all of the balance remaining in such beneficiary's trust shall be by the TRUSTEE paid over and distributed to such beneficiary on December 24th of the year in which such beneficiary attains the age of fifty-five years. In the event any beneficiary of any trust herein established shall die prior to the date herein stipulated for the distribution of principal to such beneficiary, then and in that event the remaining principal in such beneficiary's trust shall vest in his or her then surviving issue by right of representation; but in the event any beneficiary shall die without leaving issue surviving, then such beneficiary's trust shall be divided equally among, and added to, the trusts hereinbefore provided for the SETTLOR'S other children, including by right of representation, the then surviving children of any then deceased child of the SETTLOR; and said addition shall then be disposed of in all respects the same as is provided in the case of the trust or trusts to which so added.

The trust agreement also contained a spendthrift provision.

Because taxpayer was over thirty-five years of age when his mother renounced her interest, taxpayer was entitled to receive one-third of the principal of his trust. Because the primary asset of the trust was an unmatured promissory note, however, actual distribution was postponed. Taxpayer began receiving annual income distributions from the trust in 1981.

The federal tax liens at issue arose from assessments made against taxpayer beginning in November 1986 for unpaid federal income taxes, interest, and penalties for the years 1984, 1985, and 1986. Notices of federal tax lien were filed on September 14, 1987 and January 21, 1988 .

On February 23, 1988 , taxpayer renounced his interest in the trust pursuant to Nebraska Revised Statutes section 30 -2352(c) (1989). Under section 30 -2352(b), a renunciation made within nine months of the date the interest was created relates back to that date; otherwise, the interest passes under section 30 -2352(c) as if the person renouncing had died on the date the interest was renounced. On March 12, 1988 , the Internal Revenue Service (IRS) served a Notice of Levy upon the trustee, National Bank of Commerce Trust and Savings Association of Lincoln, Nebraska, with respect to funds held for the taxpayer's benefit. On March 14, 1988 , the trustee petitioned the County Court of Lancaster County, Nebraska, for a determination of the effect of taxpayer's renunciation. The trustee further advised the IRS that, based on the renunciation, it was not holding any property of the taxpayer.

On May 27, 1988 , the county court found that the renunciation was permissible, but it expressly made no determination regarding the effect of taxpayer's renunciation upon the federal tax liens. It held that, under section 30 -2352(c), the taxpayer's interest in the trust was to be handled as if he had died on the date he renounced his interest. Because the taxpayer had no issue, his trust was divided and added to his brother's trusts. Thereafter, the IRS filed an action in federal district court to foreclose on the tax lien. Upon the IRS's motion for summary judgment the district court held that taxpayer's interest in the trust--whether vested or contingent--was "property" to which the federal tax lien attached. The court further held that the renunciation was ineffective as to the liens, citing United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190 (1971) and United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51 (1958). The court concluded that the IRS was entitled to the principal and income payable since the first assessment in November 1986 and all future income and principal payments as they come due.

II.

Section 6321 of the Internal Revenue Code imposes a lien for the income tax "upon all property and rights to property . . . belonging to" the person liable for the tax. 26 U.S.C. §6321 ; United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 204 (1971). The lien imposed by §6321 arises upon assessment and continues until it is satisfied or becomes unenforceable. 26 U.S.C. §6322 . Section 6321 "creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . . ." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958).

Taxpayer concedes that the tax lien attached to his "rights created under state law." A Nebraska statute defines "property" as "one or more interests either legal or equitable, possessory or nonpossessory, present or future, in land, or in things other than land . . . ." Neb. Rev. Stat. §76-101(a) (1990). The statute further provides that the term "future interest is applicable equally to property interests in land and in things other than land, and is limited to all varieties of remainders, reversions [&c.]." Neb. Rev. Stat. §76-101(b). Therefore, taxpayer's interest in the trust, even if contingent, is "property" within the meaning of §6321 .

Because the taxpayer concedes that the tax lien attached, we have no question before us regarding whether the lien may attach to contingent property interests. See, e.g., City of New York v. United States [60-2 USTC ¶9767 ], 283 F.2d 829 (2d Cir. 1960); Bigheart Pipeline Corp. v. United States [84-2 USTC ¶9961 ], 600 F. Supp. 50, 53 (N.D. Okla. 1984), aff'd, [88-1 USTC ¶9110 ], 835 F.2d 766 (10th Cir. 1987); Home Ins. Co. v. B.B. Rider Corp. [63-1 USTC ¶9235 ], 212 F. Supp. 457 (D.N.J. 1963); In re Rosenberg's Will, 62 Misc. 2d 12, 308 N.Y.S.2d 51, 70-1 USTC (CCH) ¶9293 (1970). Neither are we presented with the argument that the "relation-back" idea avoids attachment of the lien. See, e.g., Stickell v. United States, 78-1 USTC (CCH) ¶9328 (N.D. Ill. 1978); United States v. McCrackin [60-2 USTC ¶9800 ], 189 F. Supp. 632 (S.D. Ohio 1960). Cf. In re Detlefson, 610 F.2d 512 (8th Cir. 1979) (relation-back of disclaimer under state law prevented interest from vesting in bankruptcy trustee). As the county court order recognized, taxpayer's renunciation was effective on the date it was executed, without the benefit of the relation-back doctrine.

Once the tax lien has attached to the taxpayer's state-created interest, federal law applies. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 513-14 (1960). Whatever right of renunciation may exist under federal law, taxpayer's acceptance of some of the benefits of the trust and his failure to renounce within a reasonable time preclude renunciation here. Cf. Cottrell v. Commissioner [80-2 USTC ¶13,369 ], 628 F.2d 1127 (8th Cir. 1980) (en banc) (discussing "reasonable time" to disclaim in gift tax context); Keinath v. Commissioner [73-1 USTC ¶12,928 ], 480 F.2d 57 (8th Cir. 1973) (same). Accordingly, we hold that taxpayer's renunciation of his interest in the trust did not extinguish the lien.

We recognize that at least part of taxpayer's interest is defeasible by his death. ² To be sure, the government "steps into the taxpayer's shoes" and "must go barefoot if the shoes wear out." United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 691 n.16 (1983). However, taxpayer cannot under these circumstances take advantage of a fiction of the Nebraska law giving him the benefits of dying legally without the inconvenience of having to do so physically. As the government observed during oral argument, the taxpayer's shoes were in good condition and not worn out when he took them off and handed them to his brothers.

The judgment of the district court is affirmed.

^* The Hon. William C. Stuart, Senior District Judge for the Southern District of Iowa, sitting by designation.

¹ The Hon. Lyle E. Strom, Chief United States District Judge for the District of Nebraska.

² It appears that taxpayer's right to receive one-third of the principal of the trust is vested and not subject to defeasance.

 

 

[88-2 USTC ¶9580] Cardinal Construction Company, an Ohio corporation, Plaintiff v. BesMec, Inc., a West Virginia corporation, Fidelity and Deposit Company of Maryland, a Maryland corporation, Electronic Specialty Company, a West Virginia corporation, and the United States of America, Defendants

U.S. District Court, So. Dist. W.Va., Charleston, Civ. 2:85-0791, 8/25/88

[Code Secs. 6321 , 6323 and 31 U.S.C. §3713--Result unchanged by Tax Reform Act of 1986 ]

Lien for taxes: Priority: Property subject to tax lien: Bankruptcy and receivership.--A federal tax lien was superior to the claim of one corporation which failed to make a timely claim under the terms of a surety bond but the federal tax lien was not superior to a mechanics lien held by a second party. However, the federal tax lien had priority over the mechanics lien under the absolute priority rule of 31 U.S.C. §3713 because of an act of bankruptcy committed by the corporation subject to the mechanics lien. The mechanics lien, whether or not perfected, was not considered choate because the lienor had not reduced the property encumbered by its lien to possession or obtained title to it.

Charles L. Woody, Rob ert Scott Long, Spilman, Thomas, Battle & Klostermeyer, 500 Virginia St., East, Charleston, W.Va. 25321-0273, for plaintiff. Thomas A. Brown, Alexander J. Ross, 608 Virginia St., East, Charleston, W.Va. 25301, Charles W. Yeager, Steptoe & Johnson, 715 Charleston Natl. Plaza, Charleston, W.Va. 25326, for Fidelity & Deposit Co. of Maryland. Charles E. Pettry, Jr., Goodwin & Pettry, 209 Ruffner Ave., Charleston, W.Va. 25311, for Electronic Specialty Co. Marye Wright, Assistant United States Attorney, Charleston, W.Va. 25332, Charles A. Baer, Department of Justice, Washington, D.C. 20530, for U.S.

MEMORANDUM ORDER

COPENHAVER, Jr., District Judge:

This matter is before the court on the separate motions for summary judgment of Fidelity and Deposit Company of Maryland, Electronic Specialty Company, and the United States of America . The parties have stipulated and agreed to the pertinent facts and submit this case for decision on the basis of the record before the court inasmuch as there is no genuine issue of material fact in dispute.

I. Factual Background

The plaintiff, Cardinal Construction Company, was engaged in constructing the Boone County Health Care Center. The defendant BesMec, Inc., contracted with Cardinal to perform electrical work. Inasmuch as BesMec was not compensated as required by the subcontract, ¹ it instituted a civil action against Cardinal on or about June 21, 1983. Subsequently, on November 14, 1983 , BesMec brought an action against United States Fidelity and Guaranty Company (USF&G), Cardinal's surety on the project.

In November, 1984, Cardinal and BesMec compromised and settled BesMec's pending civil actions against Cardinal and USF&G for the sum of $20,000.00, subject to a determination of the party or parties legally entitled to the settlement amount. Because several parties claim an interest in some or all of the settlement sum, Cardinal commenced this interpleader action requesting "that this Court determine which party(s) is entitled to the Twenty Thousand Dollar ($20,000.00) settlement sum due BesMec and deposited with this Court." Complaint at 5.

The defendant Fidelity and Deposit Company of Maryland was the surety on the bonds of BesMec which guaranteed payment to those who provided labor or materials for the electrical work done by BesMec. On September 11, 1980 , BesMec agreed to indemnify Fidelity from any loss suffered by Fidelity under the terms of the surety bonds written for BesMec. ² State Electric Supply Company, Inc., sold BesMec materials and supplies to be used by BesMec in performance of its contract with Cardinal. Fidelity, acting as surety, was required to pay State Electric the sum of $9,645.88 on or about September 26, 1983 , for goods received. Contemporaneously, Fidelity was granted an assignment of the rights of State Electric. Accordingly, Fidelity argues that it is entitled to $9,645.88 of the $20,000.00 on deposit.

Meanwhile, on December 27, 1982 , the defendant Electronic Specialty Company, Inc., recorded a notice of mechanics lien in the office of the Clerk of the County Commission of Boone County , West Virginia , in the amount of $5,048.62 for labor and materials supplied to BesMec in connection with the construction of the health care facility. The parties agree that the mechanics lien was timely filed and that Electronic Specialty began furnishing materials for the job prior to the recordation of the first federal tax lien on November 23, 1982 , as noted below. Accordingly, the mechanics lien would take precedence over the federal tax lien under 26 U.S.C. §6323(a) and (b)(2) , inasmuch as suit to enforce the mechanics lien was filed by Electronic Specialty on June 7, 1983, being within the six-month period required by W.Va. Code §38 -2-34.

The suit by Electronic Specialty on its mechanics lien was filed in Boone County Circuit Court against four defendants, Boone County Building Commission, Americare of West Virginia, Inc., Cardinal and BesMec. The Boone County Building Commission, pursuant to an order agreed to by Electronic Specialty, has been dismissed from that action. Electronic Specialty also sought in that action an in personam judgment for the $5,048.62 against Cardinal and BesMec. Default judgment was entered in favor of Electronic Specialty against Cardinal in the amount of $5,048.62 on July 20, 1984 . Default judgment was similarly entered against BesMec which has sought relief under the federal bankruptcy laws. The action remains pending with respect to enforcement of the mechanics lien except as to the Boone County Building Commission which has been dismissed.

The United States has filed three notices of federal tax liens against BesMec in the Boone County Clerk's office. The initial notice, relating to a lien for four quarters ending June 30, 1982 , in the amount of $48,284.91, was filed on November 23, 1982 . ³ The second notice, reflecting a lien for the period ending September 30, 1982 , in the amount of $6,277.10, was filed on February 11, 1983 . The third and final notice was filed on October 31, 1983 , indicating a lien for the period ending December 31, 1981 , in the amount of $191.75. There are also subsequent judgment liens of record against BesMec, the earliest of which was obtained June 6, 1984 and recorded on June 14, 1984 .

On August 9, 1985 , the Circuit Court of Kanawha County, West Virginia, in an action entitled State of West Virginia v. A&E Painters, Inc., Civil Action No. 85-C-271, ordered that the charter rights of BesMec be forfeited and ordered that Vincent V. Chaney be appointed as receiver for BesMec for the purpose of liquidating the assets of BesMec and distributing those assets among BesMec's creditors and shareholders. BesMec's financial condition has not improved and BesMec is insolvent.

Fidelity maintains that it should be permitted to recover the amount of $9,645.88 which it paid to State Electric as BesMec's surety. Electronic Specialty claims the sum of $5,048.62 as set forth in its notice of mechanics lien and its suit to enforce its mechanics lien. The United States posits that it is entitled to the total deposit in the registry of the court in that it has perfected tax liens in the amount of $54,753.76. The United States claims priority under the federal tax lien statute, 26 U.S.C. §6321 , and the absolute priority rule of 31 U.S.C. §3713. The defendant BesMec allies itself with the United States and prays that the $20,000.00 on deposit be used to past-due taxes.

II. Section 6321

The Internal Revenue Code gives the United States a lien upon "all property and rights to property, whether real or personal, belonging to" any taxpayer who fails to pay any tax after demand. ⁴ The tax lien arises at the time of assessment and is perfected by filing. 26 U.S.C. §6323 . A perfected tax lien takes priority over all other security interests except for those enumerated in §6321 .

State law controls as to whether the taxpayer has a property interest subject to the federal tax lien. Commonwealth of Kentucky v. Laurel County [87-1 USTC ¶9119 ], 805 F.2d 628 (6th Cir. 1986). Once a property interest is found, federal law determines the priority of the federal tax lien. United States v. Durham Lumber Co. [60-2 USTC ¶9539 ], 363 U.S. 522 (1960); Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509 (1960).

A Labor and Material Payment Bond for this project was entered into by Cardinal as principal, USF&G as surety, and Boone County Health Care Corp., Charleston National Bank and Boone County Building Commission as obligee or owner in the amount of $1,800,000, pursuant to which Cardinal and USF&G bound themselves to make payment to all claimants for labor and material used in the performance of the contract for the project. As defined in the bond, the term "claimants" includes BesMec as the subcontractor and State Electric Supply Company, Inc., and Electronic Specialty Company, who each supplied BesMec. ⁵

As a condition to suit or action on the bond, the terms of the bond specified that claimants such as State Electric and Electronic Specialty must (1) notify any two among Cardinal, USF&G, and the owner of any such claim within ninety days after the last furnishing of labor or materials by such claimant and (2) commence suit or action on the bond within one year following the last work which was performed by Cardinal on the contract on January 7, 1983. ⁶

Neither State Electric nor its surety as the successor to its claim, Fidelity, gave notice, filed suit, or recorded a mechanics lien as prescribed by the bond. Electronic Specialty substantially complied with the notice provision by serving notice of its mechanics lien on Cardinal and filing it in the Boone County clerk's office, followed by its suit to enforce the mechanics lien and to obtain an in personam judgment against Cardinal, as well as BesMec, resulting inter alia in the default judgment against Cardinal.

It is observed that the land on which the nursing home was constructed is the subject of a 99-year lease dated November 19, 1979 , from Boone County Building Commission, as Lessor, to Americare of West Virginia, Inc., as Lessee. The lessee is the predecessor in title to its subsidiary, Boone County Health Care Corp. Although the lessee could use the premises only for nursing care purposes, the lessee retained the right to "remove . . . or otherwise freely deal" with the building improvements on the demised premises. The contractor's construction contract with Boone County Health Care Corp. and its bond were recorded on June 12, 1981 , in the Boone County Clerk's office. If treated as a "structure" to be used for public purposes, the public building statute directs that the laborers and materialmen must, at least as to the interest of the lessor Boone County Building Commission, look to the bond alone and cannot obtain a lien upon the building or land upon which it is situate. W. Va. Code §38 -2-39. If treated instead as a filing under the statute limiting the owner's liability for virtually all purposes to the amount paid by the owner under the contract, the laborers and materialmen could obtain a lien upon the real estate, but the contractor and surety would be bound to discharge it by payment under the bond. W. Va. Code §38 -2-22. The result in this interpleader action is the same under either statute. See infra, page 13, Fidelity & Deposit Co. of Maryland v. County Court, 123 W.Va. 409, 15 S.E.2d 302 (1941).

A similar labor and material payment bond was entered into by BesMec as principal, Fidelity as surety, and Cardinal as obligee or owner in the amount of the BesMec subcontract with Cardinal for $278,500 under date of December 10, 1981 . This bond was not recorded. The subcontract between Cardinal and BesMec of the same date included the following provision:

Before issuance of the final payment, the Sub-contractor, if required, shall submit evidence satisfactory to the Contractor that all payrolls, bills for materials and equipment, and all known indebtedness connected with the Sub-contractor's Work have been satisfied.

Subcontract, §6.2 ⁷ The subcontract, together with the subcontractor's bond and the contractor's bond, appear to give Cardinal the right, though not the duty in the absence of either a valid mechanics lien or timely notice and suit on the bond, to make payment of the subcontractor's unpaid bills for labor and materials used on the project and deduct any such payment from the balance owing to BesMec. Cardinal chose not to make payment of the State Electric/Fidelity claim and the Electronic Specialty claim, particularly in view of the outstanding federal tax lien claim of the United States and, instead, paid the $20,000 sum otherwise owing under the BesMec subcontract into court in this interpleader action.

Under these circumstances, the applicable state law of West Virginia makes it clear that BesMec has a property interest in the remaining contract proceeds of $20,000 to which the federal tax lien attached. Fidelity & Deposit Co. of Maryland v. County Court, 123 W.Va. 409, 15 S.E.2d 302 (1941). In Fidelity, it was held that moneys remaining in the hands of the owner and not yet paid over to the defaulting contractor whose surety completed the job constituted property subject to the lien of West Virginia's business and occupation tax against the contractor and was superior to the rights of laborers and materialmen to which the surety was subrogated. In Fidelity, the county court had awarded a contract for the erection of a county jail. Inasmuch as the project involved a public building, the contractor was required to furnish a bond for the faithful performance of its contract. The bond included all the requirements of W.Va. Code §38 -2-39 which prescribed, then as now, that the "bond and the sureties thereon shall be responsible to such materialmen . . . or performer of such labor, or their assigns, for the full payment of the value thereof." ⁸ The lien of the State for gross sales tax at issue in Fidelity reached and was limited to "all property used in the business or occupation upon which such tax is imposed and said lien shall have priority over all other liens and obligations except those due the United States." W.Va. Code §11 -13-12.

The West Virginia court concluded that the contract under which the contractor in Fidelity operated, including all rights accruing to the contractor thereunder, constituted property to which the lien of the State attached. ⁹ The court then distinguished its earlier holding in State v. Coda, 103 W.Va. 676, 138 S.E. 324 (1927), as being limited to cases involving the competing rights of private creditors. Fidelity, 15 S.E.2d at 305. In Coda, those furnishing material and labor in the construction of a public highway, for which the contractor had given the required bond conditioned for their payment, were held to possess an equitable lien on the money retained by the State until completion of the contract; and, upon default of the contractor, were further held to prevail over one to whom the contractor upon completion of the contract assigned part of that fund for repayment of a loan of money used by him in performing the contract. In Fidelity, the court observed:

It is true that appellee [the surety in Fidelity] paid in wages and for materials an amount in excess of any sum due the contractor from the county court on the completion of the work, and undoubtedly under the principle of subrogation would be entitled to be subrogated to the rights of laborers and materialmen for any amount so paid to them. This is held in State v. Coda, 103 W.Va. 676, 138 S.E. 324; Capon Valley Bank v. State Road Commission, 111 W.Va. 491, 163 S.E. 44. This being a public building, coming within the terms of Code §38 -2-39, the laborers or materialmen could not acquire a lien upon the public structure, but they are protected under the bond required by said statute, and under the cases above cited, and general law, the surety on the bond executed thereunder would be entitled to be subrogated to their rights. The relief which the surety could thereby obtain cannot in our opinion take a higher status than the lien which a laborer or materialman could obtain were the structure under consideration not a public building.

The court in Fidelity, treating Coda as inapplicable to defeat the competing state tax lien, held the lien of the State for gross sales taxes superior to that of laborers or materialmen. ¹⁰

Reference to the federal tax lien arising under the Internal Revenue Code discloses that it is even broader than the West Virginia statute in Fidelity in that the federal tax lien reaches in the broadest sweep "all property and rights to property . . . belonging to" the taxpayer. Inasmuch as the contractor possesses a property interest in the proceeds of the contract sufficient to permit the attachment of the West Virginia gross sales tax lien at issue in Fidelity, so too is it sufficient to be reached by the federal tax lien under §6321 . To the extent that the opinion in Logan Planing Mill Co. v. Fidelity & Casualty Co. of New York [63-1 USTC ¶9343 ], 212 F. Supp. 906 (S.D. W.Va. 1962), concludes to the contrary, it is unpersuasive. Id. at 922-23.

As already noted, Cardinal chose not to make payment to State Electric/Fidelity, who failed to make timely claim as required by the bond terms or to take any step to perfect that claim. Accordingly, the federal tax lien is deemed superior to the claim of Fidelity, the assignee-subrogee of State Electric.

Cardinal also chose not to pay Electronic Specialty, notwithstanding its mechanics lien and suit against Cardinal and others resulting in default judgment for $5,048.62 against Cardinal. It is conceded by the United States in its Memorandum In Support Of Motion For Summary Judgment that Electronic Specialty's mechanics lien is protected by and is superior to the federal tax lien under 26 U.S.C. §6323(a) and (h)(2) . The United States nevertheless claims priority under section 3713 as next discussed.

III. Section 3713

The United States in this setting is entitled to prevail by virtue of the absolute priority rule of 31 U.S.C. §3713, wherein it is prescribed in subsection (a)(1) that:

A claim of the United States Government shall be paid first when--(A) A person indebted to the Government is insolvent and-- . . . (iii) an act of bankruptcy is committed; . . . .

In order for the priority expressed in §3713 to apply in the present case, it must be shown that an act of bankruptcy has been committed by BesMec. "Acts of bankruptcy" were enumerated in §21(a) of the former Bankruptcy Act and include, inter alia, having suffered or permitted, while insolvent, either a judicial lien upon one's property without discharging that lien within thirty days or the appointment of a receiver or trustee to take charge of one's property. See, former 11 U.S.C.A. §21(a) . The priority contained in §3713 does not arise at the time a debt becomes due to the United States . Rather, the priority is created when an act of bankruptcy is committed by an insolvent debtor. Here, the initial act of bankruptcy was committed as of July 6, 1984 , when BesMec failed to discharge a judgment lien within thirty days, BesMec's insolvency is conceded.

The priority accorded under §3713 is based on the policy of securing an adequate revenue to satisfy the burdens on the federal treasury. In light of this purpose, §3713 is to be liberally interpreted. United States v. Moore, 423 U.S. 77 (1975) (discussing former 31 U.S.C.A. §191 , the predecessor to §3713). Section 3713 insures that the United States is accorded an absolute priority over the claims of general lienholders, even though its own lien is general. W.T. Jones and Co. v. Foodco Realty, Inc., 318 F.2d 881, 885 (4th Cir. 1963).

In addition, §3713 confers priority on the government over subsequently created choate liens. However, it does not confer priority upon the United States over prior choate liens. See, e.g., United States v. DuPriest, 305 F. Supp. 714 ( W.D. La. 1969); Creditors Exchange Service, Inc. v. United States [67-2 USTC ¶9745 ], 277 F. Supp. 885 (S.D. Tex. 1967); United States v. Oswald & Hess Co., 225 F. Supp. 607 (W.D. Pa. 1964). In order for a lien to be considered choate, the identity of the lienor, the amount of the lien and property subject to the lien must be established, and, with respect to an insolvent debtor under §3713, the lienor must generally have obtained either possession or title to the property. United States v. Vermont, 377 U.S. 351, 358 (1963); W.T. Jones and Co. v. Foodco Realty, Inc., 318 F.2d 881, 887 (4th Cir. 1963); United States v. DuPriest, 305 F. Supp. 714, 717 (W.D. La. 1969); Creditors Exchange Service, Inc. v. United States [67-2 USTC ¶9745 ], 277 F. Supp. 885 (S.D. Tex. 1967); cf. United States v. Atlantic Municipal Corp. [54-1 USTC ¶9392 ], 212 F.2d 709 (5th Cir. 1954). See Plumb, Federal Tax Liens, at pp. 192-93.

Electronic Specialty has not reduced the property encumbered by its lien to possession or obtained title to it. A mechanics lien, even where perfected and preserved according to state law, does not thereby achieve priority over the claim of the federal government. See W.T. Jones and Co. v. Foodco Realty, Inc., 318 F.2d 881 (4th Cir. 1963) (mechanics lien filed prior to the creation of the priority is subordinate to the claim of the United States if the subject property is not reduced to possession of the lienor). The claim of Fidelity is likewise inchoate when measured against the federal tax lien.

IV.

Accordingly, for the reasons given, it is ORDERED and ADJUDGED that:

1. The motion for summary judgment of the defendant, the United States of America , be, and the same hereby is, granted;

2. The motion for summary judgment of the defendant, Fidelity and Deposit Company of Maryland , be, and the same hereby is, denied;

3. The motion for summary judgment of the defendant, Electronic Specialty Company, be, and the same hereby is denied;

4. The sum of $20,000.00, plus interest, held by the Clerk of this court be remitted to the defendant, the United States of America ; and

5. The defendants BesMec, Inc., Fidelity and Deposit Company of Maryland, Electronic Specialty Company, and the United States of America, their agents, attorneys, representatives, assigns, and all other persons claiming by, through or under them, be, and the same hereby are, enjoined from instituting or prosecuting any suit or proceeding in any court based on a right to the $20,000.00 in proceeds representing the settlement between Cardinal Construction Company and BesMec, Inc.; without prejudice, nevertheless, to all such further proceedings as Electronic Specialty Company may take to seek payment of its claim in the principal sum of $5,048.62 as evidenced by its judgment against Cardinal Construction Company in that amount in the Boone County Circuit Court, as well as its pursuit in that same suit of the enforcement of its mechanics lien and any in personam action therein, but Electronic Specialty Company shall realize only one recovery; and without prejudice to such timely suit, if any, as may be made on the bond of Cardinal Construction Company, as principal, United States Fidelity & Guaranty Company, as surety, and Boone County Health Care Corp., Charleston National Bank, and Boone County Building Commission, as obligee or owner, under date of May 5, 1981.

There being nothing further for disposition in this civil action, it is further ORDERED that this case be dismissed and stricken from the docket of the court.

The Clerk is directed to forward certified copies of this order to all counsel of record.

JUDGMENT ORDER

Pursuant to the memorandum order this day entered in the above-styled civil action, it is ORDERED and ADJUDGED that:

1. The motion for summary judgment of the defendant, the United States of America , be, and the same hereby is, granted;

2. The motion for summary judgment of the defendant, Fidelity and Deposit Company of Maryland , be, and the same hereby is, denied;

3. The motion for summary judgment of the defendant, Electronic Specialty Company, be, and the same hereby is, denied;

4. The sum of $20,000.00, plus interest, held by the Clerk of this court be remitted to the defendant, the United States of America ; and

5. The defendants BesMec, Inc., Fidelity and Deposit Company of Maryland, Electronic Specialty Company, and the United States of America, their agents, attorneys, representatives, assigns, and all other persons claiming by, through or under them, be, and the same hereby are, enjoined from instituting or prosecuting any suit or proceeding in any court based on a right to the $20,000.00 in proceeds representing the settlement between Cardinal Construction Company and BesMec, Inc.; without prejudice, nevertheless, to all such further proceedings as Electronic Specialty Company may take to seek payment of its claim in the principal sum of $5,048.62 as evidenced by its judgment against Cardinal Construction Company in that amount in the Boone County Circuit Court, as well as its pursuit in that same suit of the enforcement of its mechanics lien and any in personam action therein, but Electronic Specialty Company shall realize only one recovery; and without prejudice to such timely suit, if any, as may be made on the bond of Cardinal Construction Company, as principal, United States Fidelity & Guaranty Company, as surety, and Boone County Health Care Corp., Charleston National Bank, and Boone County Building Commission, as obligee or owner, under date of May 5, 1981.

There being nothing further for disposition in this civil action, it is further ORDERED that this case be dismissed and stricken from the docket of the court.

The Clerk is directed to forward certified copies of this order to all counsel of record.

Kind of  Tax Period   Date of    Identifying  Unpaid Balance

  Tax      Ended     Assessment    Number     of Assessment

  941     
09-30-81
    
11-30-81
   55-0602374     $  5534.86

  941     
12-31-81
    
03-22-82
   55-0602374        9526.99

  941     
03-31-82
    
06-14-82
   55-0602374       16496.51

  941     
06-30-82
    
09-20-82
   55-0602374       16996.55

 

¹ The original contract price to be paid BesMec was $278,500.00 and the contract was to be substantially completed by October 30, 1982 . See Stipulation, Exhibit A at 2. BesMec's complaint in the action filed against Cardinal alleges that Cardinal was to make a total payment to BesMec of $291,751.24. Apparently, the difference between the contract price and the price claimed arose due to authorized change orders. As of November 8, 1982 , Cardinal had paid $264,807.00.

² The "Agreement of Indemnity" provided that BesMec's rights to payment on projects in which Fidelity was the surety would be assigned to Fidelity upon the breach of BesMec, effective as of the date of the bond. In the event that the underlying contract was unassignable, all payments received by BesMec were to he held in a trust fund for the benefit of Fidelity. Stipulation Exhibit N at 1-2.

³ Although the original tax lien against BesMec was filed on November 23, 1982 , it was assessed at four different times as displayed by the table at the end of this opinion.

Notably, a tax lien arises at the time of assessment and continues until the liability is extinguished. 26 U.S.C.A. §6322 .

⁴ Title 26, United States Code, Section 6321 , provides as follows:

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.

⁵ Claimant is defined in the bond as one having a direct contract with Cardinal or with a subcontractor of Cardinal for labor and material respecting the project.

⁶ It was further provided that the amount of the bond was to be reduced by all payments made under the bond, including any payment by USF&G of mechanics liens filed of record against the improvement, whether or not a claim for the amount of any such mechanics lien was presented under and against the bond.

⁷ The subcontract further provides in §11.2.6 as follows:

The subcontractor shall pay for all materials, equipment and labor used in, or in connection with, the performance of this Subcontract through the period covered by previous payments received from the Contractor, and shall furnish satisfactory evidence, when requested by the Contractor, to verify compliance with the above requirements.

⁸ As already noted, section 38 -2-39 further provides that "[n]othing in [the mechanics lien] article shall be construed to give a lien upon such a public building or improvement as is mentioned in this section, or upon the land upon which such public building or improvement is situated."

⁹ The gross sales taxes due the State in Fidelity had arisen in part on income respecting the jail construction contract and in part on income from other business activities of the contractor.

¹⁰ Thus, the West Virginia Supreme Court has allocated the risk of loss in such situations to the laborers and materialmen unless a surety is on hand to absorb the loss, with recourse of dubious worth against the failing contractor.

 

 

[74-2 USTC ¶9617]Nevada Rock and Sand Company, a Nevada corporation, Plaintiff v. The United States of America, Department of the Treasury Internal Revenue Service; Witco Chemical Corporation, a Delaware corporation; and Coop Oil Products, Inc., a Nevada corporation, Defendants

U. S. District Court, Dist. Nev. , Civil LV-1566, 4/30/74

[Code Secs. 6321 and 6323]

Lien for taxes: Property or rights to property: Contract rights assigned: State law: Priorities.--Even though the taxpayer had assigned a contract it retained a property interest in the contract under state law to which the federal tax lien attached. Further, the tax lien had priority over the imperfected claim of a creditor.

George L. Albright, 309 S. Third St. , Las Vegas , Nev. , for plaintiff. V. DeVoe Heaton , United States Attorney, Las Vegas , Nev. , for defendants.

Opinion

Facts

FOLEY, District Judge:

This interpleader action was brought by Nevada Rock and Sand Company (NRSC) under the provisions of 28 U. S. C. §§ 1335, 1340 and §7402 of the 1954 Internal Revenue Code. The facts, as developed by the pretrial order and stipulations of counsel at the trial, are undisputed:

On July 6, 1970 , defendant Coop Oil Products, Inc., (COOP) assigned to defendant-claimant Witco Chemical Corporation (WITCO) all monies due or to become due from NRSC to COOP by reason of a certain designated contract between NRSC and COOP. Although WITCO was not required to render any performance under the NRSC-COOP contract, the assignment was not for the purpose of collection only. COOP's assignment to WITCO constituted a transfer of a significant part of the outstanding contract rights of COOP, and under the terms of the assignment NRSC was to pay the monies directly to WITCO. NRSC received notice of this assignment and consented to its terms on July 10, 1970 . On October 1, 1970 , the NRSC-COOP contract was completed and $10,810.30 had become due COOP; under the COOP-WITCO assignment this amount was to be paid to WITCO.

On October 26, 1970 , the Internal Revenue Service (IRS) assessed taxes against COOP, and on February 4, 1971 , a further assessment of taxes against COOP was made. Federal tax liens for these assessments were filed by the IRS with appropriate Nevada officials prior to any filing by WITCO, under Nevada 's Uniform Commercial Code, of the COOP-WITCO assignment of COOP's contract rights. The Court will refer to the IRS liens as a single tax lien, inasmuch as neither the rights of the parties nor the issues presented are affected thereby, and simplicity of discussion is facilitated. Pursuant to the tax lien, the IRS sought to collect from NRSC the monies due and owing COOP under the NRSC-COOP contract.

Since both the IRS and WITCO claimed the funds due under the NRSC-COOP contract, NRSC filed an interpleader action on February 9, 1971 , naming the IRS, WITCO and COOP as defendants, and deposited the entire fund due under the contract with the Court. Defendant COOP has not made an appearance in this action. NRSC has been dismissed as a party.

Issues

1. Did COOP, on October 26, 1970 , and February 4, 1971 , possess any property interest in the contract rights assigned to WITCO sufficient to allow the attaching thereto of a federal tax lien against COOP? ¹

2. If a federal tax lien has so attached, is this lien entitled to priority over the claims of the assignee, WITCO, to such funds?

Conclusions

1. Yes.

2. Yes.

DISCUSSION

1. Is the Assignment of Contract Rights That Become Due and Owing Prior to the Assessment and Filing of a Tax Lien Against the Assignor Sufficient to Divest the Assignor of Such Property so as to Foreclose Attachment of the Tax Lien Upon it, Even Though the Assignment is Not Perfected Under the State's Uniform Commercial Code Provisions From Claims of Lien Creditors Having no Knowledge of the Assignment?

The principal issue discussed herein involves the frontiers of our society's fundamental notion of private ownership of property. The issue is presented within the framework of unsettled judicial decisions, new concepts embodied in the Uniform Commercial Code (U. C. C.), and recently amended tax statutes. The problem of resolving this issue is exacerbated by the fact that the claimants in this case do not directly clash. Arguing from the same initial premise, but from entirely different perspectives as regards the impact of the U. C. C., the role in which the IRS is to be cast, and the definition of how "property right" is to be defined, claimants provide two diverging planes of thought, each leading to its own, judicially supported conclusion. Coherent discussion of this issue, then, is in itself a formidable task.

A. The Initial Premise: Title 26, Section 6321, of the United States Code, provides that if a person liable for any tax refuses to pay that tax after demand, the amount thereof, including interest, penalty or addition to such tax "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). ² In Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-14, 80 S. Ct. 1277 (1960), the Supreme Court stated:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law . . . However, once the tax lien has attached to the taxpayer's state-created interests, we enter the province of federal law, which we have consistently held determines the priority of competing liens asserted against the taxpayer's 'property' or 'rights to property.' . . . This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for uniform admin istration of the federal revenue statutes."

In the companion case, United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522, 80 S. Ct. 1285 (1960), the Court made it clear that to the extent, under applicable state law, the taxpayer has no property interest in the funds sought to be subjected to a tax lien, there is nothing to which the lien can attach. ³

Both WITCO and the IRS accept this premise: the tax lien can attach to the NRSC fund only if Nevada law establishes COOP's interest in that fund to be "property" or "rights to property."

B. WITCO'S Argument: WITCO urges a traditional point of view. It argues that the IRS has rights that can rise no higher than those of the taxpayer whose right to property is sought to be levied upon. United States v. Winnett [48-1 USTC ¶9115], 165 F. 2d 149, 151 (9th Cir. 1947); Stuart v. Willis [57-1 USTC ¶9330], 244 F. 2d 925, 929 (9th Cir. 1957). And the rights of the IRS must be determined on the basis of the condition of the property as it exists at the time the tax lien arises. Board of Sup'rs of La. State Univ. v. Hart, 210 La. 78, 26 So. 2d 361, 364 (1946). WITCO asserts that at this crucial juncture, COOP was already bound by a prior valid assignment to WITCO of the monies due from NRSC. See Jones v. P. W., L. & F. Co., 13 Nev. 359, 373 (1878) (between the parties, the assignment is complete the moment it is made). Even though WITCO did not file the assignment as required by the U. C. C. (NRS §104.9302) to protect its interest against third party creditors (NRS §104.9301), the assignment is nevertheless binding between the parties. See NRS §104.9201; United States v. Lebanon Woolen Mills Corp [65-2 USTC ¶9571], 241 F. Supp. 393, 401 (D. N. H. 1964) (recording statute is irrelevant re: perfection of interest against party to the transaction). Therefore, WITCO concludes, COOP no longer had any property or rights to property held by NRSC and there was nothing upon which the tax lien could attach. See In re Halprin [60-2 USTC ¶9564], 280 F. 2d 407 (3rd Cir. 1960); Monroe Banking & Trust Co. v. Allen [68-2 USTC ¶9526], 286 F. Supp. 201 (N. D. Miss. 1968); United States v. Lebanon Woolen Mills Corp., supra; United States v. Lester [65-1 USTC ¶9221], 235 F. Supp. 115 (S. D. N. Y. 1964); Transmix Concrete of Rockdale v. United States [56-1 USTC ¶9349], 142 F. Supp. 306 (W. D. Tex. 1956); Central Surety & Insurance Corp. v. Martin Infante Co. [58-2 USTC ¶9942], 164 F. Supp. 923 (D. N. J. 1958), affirmed [59-2 USTC ¶9736], 272 F. 2d 231 (3rd Cir. 1959); Hartford Accident and Indemnity Co. v. State, 85 S. D. 608, 187 N. W. 2d 663 (1971); Pitcher & Co. v. Ralph Nay Constr. Co., 172 A. 2d 360 (N. H. 1961); Board of Sup'rs of La. State Univ. v. Hart, supra.

C. The IRS's Argument: The IRS develops its argument through the use of the U. C. C., adopted in Nevada in 1965. NRS Title 8, Chap. 104. First, looking to Article 9 of the U. S. C., the IRS notes that although that article does not apply to an assignment of contract rights for the purpose of collection only or to an assignment of such rights where the assignee is also to perform under the contract (NRS §104.9104(6)), it does apply to:

". . . any transaction (regardless of its form) which is intended to create a security interest in . . . accounts or contract rights; ⁴

". . . any sale of accounts, contract rights or chattel paper(;)

". . . (and) to security interests created by contract including pleade (or) assignment . . . intended as security." (NRS §104.9102(1)(a) and (b), (2).)

The IRS concludes from this language that whether the WITCO assignment is considered a sale of or security interest in the COOP accounts or contract rights, the transaction is within the scope of Article 9. ⁵ See United States v. Trigg [72-2 USTC ¶9642], 465 F. 2d 1264, 1268 (8th Cir. 1972); L. B. Smith, Inc. v. Foley [72-1 USTC ¶9230], 341 F. Supp. 810, 813 (W. D. N. Y. 1972); Centex Construction Co. v. Kennedy [72-1 USTC ¶9289], 332 F. Supp. 1213, 1214-16 (S. D. Tex. 1971); Standard Lumber Co. v. Chamber Frames, Inc. [70-2 USTC ¶9670], 317 F. Supp. 837, 839 (E. D. Ark. 1970).

Second, the IRS points to the fact that Article 9 is not concerned with traditional questions of title, but, rather, directs its provisions to questions of "rights, obligations and remedies." See NRS §104.9202; Annotation, 30 ALR 3rd 9, 31 and cases cited at n. 16. As regards the rights of third parties, NRS §104.9301(1)(b) provides in relevant part:

"(1) . . . an unperfected security interest is subordinate to the rights of:

"* * *

"(b) A person who becomes a lien creditor without knowledge of the security interest and before it is perfected."

This provision is the focal point of the IRS's argument. Under NRS §104.9302, a financing statement must be appropriately filed to perfect all security interests except in certain specified situations. Since none of the exceptions to filing are applicable to the WITCO assignment, ⁶ that "security interest" (within the meaning of the U. C. C.) must be considered "unperfected" for purposes of NRS §104.9301. Under NRS §104.9301(3), a "lien creditor" is a creditor who "has acquired a lien on the property involved by attachment, levy or the like." This definition is broad enough to include the IRS once the IRS filed its assessment against COOP in the instant case. See United States v. Trigg, supra, 465 F. 2d at 1268; L. B. Smith, Inc. v. Foley, supra, 341 F. Supp. at 813-14; In re Farr Western Asphalt Paving, Inc., 69-2 USTC ¶9646 (D. Ariz. 1969).

Third, from the above statutory interpretation and reasoning, the IRS concludes that because it is entitled to priority over WITCO under Article 9 of Nevada's U. C. C., whatever the nature of the "property interest" which remained with COOP after the assignment but prior to any filing of that assignment by WITCO, this "property interest" was sufficient to allow the attaching of a federal tax lien. See United States v. Trigg, supra, 465 F. 2d at 1269; and cf. L. B. Smith, Inc. v. Foley, supra, 341 F. Supp. at 813-14; In re Farr Western Asphalt Paving, Inc., supra.

D. Background: Resolution of this seeming impasse of position requires an understanding of the judicial and legislative developments in the last fourteen years which have affected the law regarding federal tax liens. As will be seen, the development of tax lien priority and the development of the requirement that the taxpayer have "property" to which the lien can attach are interrelated judicial developments. Crisp distinction between these concepts has not been uniformly observed, necessitating the breadth of this discussion. Consideration of the pertinent tax lien developments is perhaps best begun by the observation that:

". . . Quite by accident, at the same time that the UCC provisions on priorities were being written, the Supreme Court was forced to evolve a set of priority rules for tax liens. On hindsight, it is not surprising that both the Court and the UCC draftsmen produced some confusion in the process . . ." (Coogan, "The Effect of the Federal Tax Lien Act of 1966 Upon Security Interests Created Under the Uniform Commercial Code," 81 Harv. L. Rev. 1369, 1377 (1968).)

(i) Judicial Developments: The "Choate" Doctrine and the "No Property" Rule:

In the field of federal tax law, the Supreme Court has revived the term "choate" in developing a doctrine for establishing priority among nonfederal claimants and IRS tax liens.

"As security interests tended to become less fixed as to the property covered and the indebtedness protected, the Court began insisting that any lien in competition with a federal priority or tax lien be more fixed--more 'specific' or 'choate'--than had been generally supposed necessary. Up until United States v. Security Trust and Savings Bank (340 U. S. 47, 71 S. Ct. 111 (1950)) the choate and perfected lien doctrine defined the judicially created exception to the apparently absolute priority given by the federal insolvency priority statute, R. S. 3466. In Security Trust and Savings Bank it was applied for the first time in a case involving the tax lien priority statute. ⁷

". . .

". . . Until 1958, there had been no Supreme Court case where the choate doctrine was applied to liens created by contract . . . In United States v. R. F. Ball Construction Co. (355 U. S. 587, 78 S. Ct. 442 (1958)), an enigmatic per curiam, the Court apparently applied the doctrine to a lien created by contract of the parties, an assignment of receivables. ⁸ Ball could be construed to have held that a lien which was indefinite at any point as to the exact amount of debt protected or identity of the property covered was inchoate.

"After Ball, there was a flurry of cases in which one security interest after another was subordinated to a tax lien [as being inchoate]." (Coogan, supra, 81 Harv. L. Rev. at 1377-79 (footnotes omitted).)

Ball created great doubt as to whether any security interest in accounts receivable or contract rights could successfully compete with a federal tax lien. (Id. at p. 1379.) While advancements by creditors often enhanced the value of the taxpayer's property, the tax lien could undermine the security interest and appropriate without compensation that added value.

"the harsh effects of the choateness doctrine were somewhat mitigated (at this point) by judicial adoption of what has been termed the 'no property' rule . . . See, e.g., Aquilino v. United States [supra]; United States v. Durham Lumber Co. [supra]."

(Note, "Choateness and the 1966 Federal Tax Lien Act," 52 Minn. L. Rev. 198, 203 n. 27 (1967).)

Under this rule, as noted previously, ⁹ if the taxpayer is not deemed under local law to have "property" or "rights to property," there is nothing upon which the federal tax lien can attach. Justice Harlan felt, in his dissenting opinion in Aquilino, that the "no property" rule was inconsistent with results previously reached by the Court in applying the choate doctrine (Aquilino v. United States, supra, 363 U. S. at 516 (Harlan, J., dissenting)), and that:

". . . If the federal standard of choateness is thought to be an undesirable restriction on the States' freedom to regulate property relationships, the cases establishing that standard should be expressly overruled and not emasculated by dubious distinctions." ( Id. at 521.)