, Plaintiff v. Allen E. Kroblin and Pamela
A. Kroblin, Defendants.
District Court, No.
June 24, 2004
Liens and levies: Priority of IRS lien: Conveyance to third party:
Transfer to spouse without consideration. --
An IRS tax
lien related to taxes assessed solely against a husband was enforceable
against a house owned solely by the wife because the wife obtained the
property subject to the IRS lien. The wife was not a purchaser exempt
from the lien within the meaning of Code
Sec. 6323(a) because she did not pay any money for the conveyance.
Liens and levies: Enforcement of lien: Conveyance to third party:
Equitable considerations. --
The IRS was
able to force the sale of a couple's home to satisfy a tax debt for
which the husband was solely liable. The wife's homestead interest in
the property under state (
) law could be adequately discharged by paying compensation to her
following the sale. The sale was not judged to impose a substantial
financial and emotional hardship on her because she was not infirm and
because she would receive her share of the proceeds from the home sale.
ELLISON, Senior District Judge: Now before the Court is the Motion for
Summary Judgment (dkt # 11) of the Plaintiff,
United States of America
, and the Cross Motion for Summary Judgment (dkt # 14) of the Defendants
Allen E. Kroblin and Pamela A. Kroblin.
seeks a ruling that it has a valid tax lien on certain property
described as follows:
Lot One (1),
Block One (1), Stonebridge Addition, a subdivision in the Southwest
Quarter of the Northwest Quarter and the South Half of the Northwest
Quarter of the Northwest Quarter (SW/4 NW/4 s/2 NW/4 NW/4) of Section
Thirty-Four (34), Township Eighteen (18) North, Range Thirteen (13)
East, City of Tulsa, Tulsa County, State of Oklahoma, according to the
recorded plat thereof.
additionally seeks a ruling that the lien is prior to any interest
conveyed to Pamela Kroblin on
February 27, 1990
, and further seeks to foreclose its lien on the property.
On December 1, 1983, Roy Lee Farley and Janie Farley conveyed the
subject property to Allen E. Kroblin. One September 1, 1987, Allen
Kroblin transferred to subject property to himself and Pamela Kroblin as
husband and wife. On February 19, 1990, the Internal Revenue Service
assessed a penalty in the amount of $573,661.35 under 26 U.S.C. §6672
against Allen Kroblin for the tax periods ending March 31, 1987. on
February 27, 1990 Allen and Pamela conveyed their interest in the
subject property to Pamela Kroblin solely. On May 7, 1990, the IRS filed
a notice of federal tax lien against Allen Kroblin in connection with
the assessment. On March 1, 1993, the IRS filed a notice of federal tax
lien against Pamela Kroblin as nominee of Allen Kroblin in connection
with the assessment.
The parties raise two issues in the cross motions for summary judgment.
The first issue is whether the conveyance to Pamela Kroblin on February
27, 1990 was made subject to the Internal Revenue Service's existing tax
lien, and the second is whether the United States should be allowed to
compel a sale of the entire property to satisfy the tax lien even though
the property is homestead, and a non-liable spouse claims an interest in
the property. The
argues that the conveyance was subject to the IRS's valid existing lien
and that a sale of the property is appropriate at this time. Defendants
argue that Pamela Kroblin was a purchaser for value, and the conveyance
was not subject to the lien. In addition, they argue that a sale
affecting Pamela Krolin's nonliable interest would impose a hardship on
her and should not be allowed.
26 U.S.C. §6321
imposes a lien on property belonging to a liable taxpayer. Section §6321
If any person
liable to pay any tax neglects or refuses to pay the same after demand,
the amount (including any interest, additional amount, addition to tax,
or assessable penalty, together with any cost 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
26 U.S.C. §6322
provides that the lien arises at the time the assessment is made. 26
imposed by section
6321 shall not be valid as against any purchaser, holder of a
security interest, mechanic's lienor, or judgment lien creditor until
notice thereof which meets the requirements of subsection (f) has been
filed by the Secretary.
Pursuant to Section
6322, the lien on Allen Kroblin's property arose on February 19,
1990, at the time the assessment was made. The question is whether the
lien was valid against Pamela Kroblin on February 27, 1990 because it
had not yet been filed by the Secretary. The
argues that §6323(a)
does not help Pamela Kroblin because she was not a purchaser of the half
interest that was conveyed to her on February 27, 1990. The
argues that she was not a purchaser because she did not pay any money
for the conveyance and therefore did not acquire an interest in property
for adequate and full consideration. Pamela Kroblin does not deny that
she did not pay money at the time of the conveyance on February 27,
1990. Rather, she argues that because she paid $105,000.00 of her own
funds for her interest in the property, a question a fact exists
preventing summary judgment.
Pamela Kroblin paid $100,000.00 toward the property in December, 1980.
Additionally, she later paid $5,000.00 to assist in the payoff of a
$70,000.00 mortgage. There is no allegation that the $5,000.00 was paid
in conjunction with the February 27, 1990 conveyance. Given the timing
of the payments made by Pamela Kroblin, the Court concludes that they
were not made to acquire the interest acquired on February 27, 1990. As
a matter of undisputed fact, Pamela Kroblin is therefore not entitled to
the protection afforded by §6323(a).
has a valid tax lien on the subject property, and the conveyance of
February 27, 1990 was made subject to that lien.
of the Property
argues that the subject property should be sold, with the proceeds
attributable to Allen Kroblin's interest going to satisfy his tax
indebtedness. The Kroblins argue that such a sale is not appropriate
under these circumstances, because it would impose a hardship on Pam
Kroblin who is not liable for the taxes owed by Allen Kroblin. 26 U.S.C.
allows the sale of a taxpayers property to satisfy tax indebtedness of a
delinquent taxpayer. In United States v. Rogers [ 83-1
USTC ¶9374], 103 S.Ct. 2132, 2142 (1983), the Supreme Court held
authorizes the sale of an entire property (not just the sale of the
delinquent taxpayer's own interest) with a recognition of the
third-party interest through judicial valuation and distribution. The
held that the power to order a forced sale which would convert a
nondelinquent spouse's homestead estate into its fair cash value is
subject to the exercise of reasoned discretion.
at 2149. The factors to be considered in exercising discretion to decide
whether to authorize a sale when the interests of nondelinquent third
parties are involved are 1) the extent to which the Government's
financial interest would be prejudiced if it were relegated to a forced
sale of the partial interest actually liable for the delinquent taxes;
2) whether the third party would normally have a legally recognized
expectation that such separate property would not be subject to forced
sale; 3) the likely prejudice to the third party, both in personal
dislocation costs and compensation; and 4) the relative character and
value of the nonliable and liable interests in the property.
With respect to the first factor, the court agrees with the Plaintiff
that its financial interest would be prejudiced if it were relegated to
a forced sale of Allen Kroblin's interest only. The property is a single
residential home, and it would simply not be feasible to sell only a
limited interest in that home. See United States v. Pottorf
USTC ¶50,502], 898 F.Supp. 792, 796 (D.
1995). The Court is not convinced that this factor weighs in Defendants'
favor by their assertions that quite a bit of time has already passed,
and that any delay will likely result in a higher sales price.
With respect to the second factor,
law does provide Pamela Kroblin with a legally recognized expectation
that her homestead interest would not be subject to a forced sale for
the payment of debt. However, the Court in Rodgers held that the
homestead interest could be adequately discharged with the payment of
compensation to the nonliable spouse. Rodgers, at 2147.
The third factor deals with the likely prejudice to the third party,
both in personal dislocation costs and in compensation. In support of
her argument that this factor weighs heavily against a forced sale,
Pamela Kroblin submits an affidavit that she is 62, that she lives on
social security and income from a part time job, that she has no ability
to pay for a different place to live, and that a forced sale would
impose a "substantial economic, physical and emotional
hardship" on her. The Court is not persuaded by the conclusory
statements in Pamela Kroblin's affidavit. She is not infirm, she is
obviously able to hold down a job, and she owns an approximate 62%
unencumbered interest in the house. Further, there is no evidence that
she will be under-compensated for the property. The Court concludes that
she will not be unduly prejudiced by a forced sale.
Lastly, the Court considers the relative character and value of the
nonliable and liable interests held in the property. Obviously if the
liable interest is minimal, there is no reason to allow a forced sale.
Here, the liable interest is approximately 38% of the value of the
property. While there is some disparity in the interests, the Court
concludes that the liable interest is significant enough to be a factor
in favor of a forced sale of the property.
In setting forth these four factors, the
makes it clear that they are not an "exhaustive list," and
should not exclude consideration of common sense and special
At 2152. In this instance however, neither party has brought to light
any additional factors to consider. The Court concludes that, in
consideration of the equities of this case, and the prejudice to either
side, a forced sale is warranted.
The Motion for Summary Judgment (dkt #11) of the Plaintiff,
United States of America
is GRANTED and the Cross Motion for Summary Judgment (dkt # 14) of the
Defndants Allen E. Kroblin and Pamela A. Kroblin is DENIED. The
is Directed to Submit a Proposed Order of Sale within 20 days of the
date of this Order. Prior to submitting this Proposed Order to the
Court, Defendants are to have an opportunity to review it for their
approval as to form.
IT IS SO ORDERED.
re Ragip Sinan Mungan, a/k/a R.S. Mungan, a/k/a Sinan Mungan, a/k/a R.
Sinan Mungan, Debtor. Mary Cathryn Jedlicka, a/k/a Mary C. Jedlicka,
a/k/a Cathy Jedlicka, Debtor. Kenneth Hundley and wife, Peggy Hunley,
Plaintiffs v. Ragip Sinan Mungan, a/k/a R.S. Mungan, a/k/a Sinan Mungan,
a/k/a R. Sinan Mungan, Mortgage Masters, Inc., Mortgage Masters
Financial Services Corporation, G. Wayne Walls, Trustee, First Tennessee
Bank National Association, Mary Cathryn Jedlicka, a/k/a Mary C.
Jedlicka, a/k/a Cathy Jedlicka, William T. Hendon, Trustee,
ert Long and wife, Melissa Long, Fidelity National Insurance Company of
New York, State of Tennessee, by and through both Department of Labor
and Workforce Development and through the Department of Revenue, the
United States of America, by and through the Internal Revenue Service,
IMC Mortgage Company, Joe M. Kirsch, Trustee, Tennessee Water Service,
Inc., New Century Mortgage Corporation, Firstar Bank Milwaukee N.A., as
trustee under Salomon Brother Mortgage Securities VII Mortgage
Pass-Through Certificates Series 1999-NCS, Michael Hunley and wife,
in Hunley, Steven J. Lusk, Trustee, Defendants.
Bankruptcy Court, East.
; 01-31472, 01-31712, 292 BR 613,
November 18, 2002
Tax liens: Offer in compromise: Satisfaction of tax debt: Evidence.
payment made by married taxpayers to the IRS did not constitute a
compromise for the entire amount of their delinquent tax liabilities
that would entitle them to the release of federal tax liens on real
property. The parties had no written offer of compromise, and there was
no written acceptance by the IRS of such an offer. The record
established that the payment related to a tax year for which no liens
had been recorded or asserted. Moreover, the IRS did not file a
certificate of release relating to the existing tax liens. Finally, the
taxpayers failed to prove that the IRS agent who allegedly entered into
a compromise with them was authorized to bind the IRS to such an
Tax liens: Attachment of lien to real property: Release by IRS. --
liens that attached to delinquent taxpayers' real property prior to any
alleged conveyances of transfers of the property continued to attach
regardless of who currently owned the realty. Once the liens attached,
any subsequent purchasers took the property subject to the IRS liens.
Despite the taxpayers' contention that certain recorded deeds
transferring their property had been fraudulently obtained by third
parties, the IRS maintained a security interest in the property pursuant
to the liens filed prior to any sort of transfer.
Morton, Morton & Morton, PLLC, for plaintiffs. Harry S. Mattice,
Jr., United States Attorney, Pamela G. Steele, Assistant
Attorney, Jason S. Zarin, Department of Justice, for I.R.S. F. Chris
ert and Melissa Long.
ON UNITED STATES' MOTION FOR SUMMARY JUDGMENT
STAIR, JR., Bankruptcy Judge: On October 19, 2001, the Plaintiffs,
Kenneth and Peggy Hurley, filed the Complaint initiating this adversary
proceeding in which they seek equitable relief from this court setting
aside certain recorded deeds transferring the Plaintiffs' real property,
which the Plaintiffs claim were fraudulendy [fraudulently] obtained by
the Debtor, Ragip Sinan Mungan d/b/a Mortgage Masters, Inc. The United
States of America, "by and through the Internal Revenue
Service" (IRS) is named as a defendant due to federal tax liens
levied against the real property on account of taxes assessed against
the Plaintiffs and Defendant Mortgage Masters, Inc. (Mortgage Masters).
Before the court is a Motion for Summary Judgment (Motion) filed by the
IRS on October 4, 2002, asserting that regardless of which entity
actually owns the real property real at issue, the Plaintiffs or
Mortgage Masters, the IRS has liens encumbering the real property based
on recorded federal tax liens. The Plaintiffs filed a "Plaintiffs'
' Motion for Summary Judgment" on October 15, 2002, stating that
their tax liability has been satisfied pursuant to payment and
settlement with the IRS. Neither Mortgage Masters, the Longs, nor any
other defendant filed a response to the Motion. Accordingly, no
defendant opposes the Motion. 1
This is a core proceeding. 28 U.S.C.A §157(B)(2)(A), (K), and (O).
The facts, as pertinent to the Motion, are set forth in the Plaintiffs'
Complaint and the Motion. Prior to December 1997, the Plaintiffs owned
two parcels of real property, one located at
4220 Van Dyke Drive
(collectively, the Real Property). For reasons in dispute and still to
be litigated, the Plaintiffs transferred at the Van Dyke property to the
Defendants Michael and
in Hunley and transferred the Van Dyke property was subsequently
transferred to Mortgage Masters. By this adversary proceeding, the
Plaintiffs are seeking to set aside these conveyances as fraudulent.
The IRS filed four federal tax liens against the Plaintiffs: (1) on
August 15, 1994, in the aggregate amount of $12,920.98; (2) on September
29, 1994, in the amount of $1,617.00; (3) on February 10, 1998, in the
aggregate amount of $2,285.64; and (4) on March 23, 2001, in the amount
of $1,083.34 (the Federal Tax Liens). 2
The IRS claims that these tax liens are secured by the Real Property,
regardless of whether it is owned by tho Plaintiffs, the Longs, or
Mortgage Masters. The IRS argues that if the Plaintiffs still own the
Real Property, the 1994 tax liens attached to it prior to any alleged
fraudulent conveyances or other encumbrances. Additionally, if the court
later determines that the Real Property is owned by Mortgage Masters
and/or the Longs, the IRS again claims to be a secured creditor by
virtue of its tax liens. 3
Rule 56 of the Federal Rules of Civil Procedure provides for summary
judgment "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
the moving party is entitled to a judgment as a matter of law." FED
R. CIV. P. 56(c). Rule 56(c) is made applicable to this adversary
proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure.
The IRS, as the moving party, bears the initial burden of proving both
that there is no issue of material and that it is entitled to judgment
as a matter of law. Owens Corning v. Nat'l Union Fire Ftre Ins. Co.,
257 F.3d 484, 491 (6th Cir. 2001), The burden then shifts to the
nonmoving party, in this case, the Plaintiffs, to produce specific facts
showing that there is, in fact, a genuine issue for trial. Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 106 S.Ct. 1348, 1356
(1986) (citing FED. R. CIV. P. 56(e)). In doing so, the nonmoving party
must cite specific evidence and may not merely rely upon allegations
contained in the pleadings. Harris v. Gen. Motors Corp, 201 F.3d
800, 802 (6th Cir. 2000). The facts, and all resulting inferences must
be viewed in the light most favorable to the nonmovant. Matsushita,
106 S.Ct. at 1356. The court must then decide whether "the evidence
presents a sufficient disagreement to require submission to a jury or
whether it is so one-sided that one party must prevail as a matter of
law." Anderson v. Liberty Lobby, Inc., 106 S.Ct. 2505, 2512
In support of its Motion for Summary Judgment, the IRS attached copies
of the Federal Tax Liens recorded against both the Plaintiffs and
Mortgage Masters. The Federal Tax Liens concerning the Plaintiffs are
itemized as follows:
(1) Lien filed
August 15, 1994
, which includes taxes in the amount of $12,920.98 for the periods
December 31, 1989
December 31, 1992
. These taxes were assessed on
May 28, 1990
October 4, 1993
(2) Lien filed
September 29, 1994
, which includes taxes in the amount of $1,617.00 for the period ending
December 31, 1993
, which were assessed on
September 5, 1994
(3) Lien filed
February 10, 1998
, which includes taxes in the amount of $2,285.64 for the periods ending
December 31, 1994
December 31, 1995
December 31, 1996
. These taxes were assessed on
October 2, 1995
September 9, 1996
September 29, 1997
(4) Lien filed
March 23, 2001
, which includes taxes in the amount of $1,083.34 for the period ending
December 31, 1997
, and assessed on
November 16, 1998
In response, the Plaintiffs rely upon the Affidavit of the Plaintiff,
Kenneth Hunley, together with a payment receipt showing payment to the
IRS in the amount of $359.84 on
October 9, 2001
, and a second copy of the payment receipt with a handwritten "Paid
in full. D. Sester ID 62-11031" and marked "Received
October 10, 2001
Internal Revenue Service, W & I Area 3, Territory 4,
." In his Affidavit, the Plaintiff states that Ms. Sester, an
employee of the IRS in Knoxville, Tennessee, told him that payment of
the $359.84 would clear the Plaintiffs' debt with the IRS because
"the rest of the debt was in a `non-collectable [sic]
status."' The Plaintiff also avers that Ms. Sester told the
Plaintiffs that "the uncollectable [sic] debt liens would be gone
or expire by the end of 2003." The Plaintiffs therefore contend
that their debt to the IRS has been "fully satisfied and paid in
Federal Tax Liens are governed by the Internal Revenue Code (I.R.C.),
located at title 26 of the United States Code. The statutes pertinent to
this action are, 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
I.R.C. §6321 (West 2002).
date is specifically fixed by law, the lien imposed by section 6321
shall arise at the time the assessment is made and shall continue until
the liability for the amount so assessed (or a judgment against the
taxpayer arising out of such liability) is satisfied or becomes
unenforceable by reason of lapse of time.
I.R.C. §6322 (West 2002).
Release of lien or discharge of property.
(a) Release of
lien. --Subject to such regulations as the Secretary may prescribe, the
Secretary shall issue a certificate of release of any lien imposed with
respect to any internal revenue tax not later than 30 days after the day
on which --
satisfied or unenforceable. --The Secretary finds that the liability for
the amount assessed, together with all interest in respect thereof, has
been fully satisfied or has become legally unenforceable; ...
(f) Effect of
Conclusiveness. --... [I]f a certificate is issued pursuant to this
section by the Secretary and is filed in the same office as the notice
of lien to which it relates (if such notice of lien has been filed) such
certificate shall have the following effect:
(A) in the
case of a certificate of release, such certificate shall be conclusive
that the lien referred to in such certificate is extinguished;
(B) in the
case of a certificate of discharge, such certificate shall be conclusive
that the property covered by such certificate is discharged from the
I.R.C. §6325(a)(1) (West 2002).
Authorization. --The Secretary may compromise any civil or criminal case
arising under the internal revenue laws prior to reference to the
Department of Justice for prosecution or defense; ...
--Whenever a compromise is made by the Secretary in any case, there
shall be placed on file in the office of the Secretary the opinion of
the General Counsel for the Department of the Treasury or his delegate,
with his reasons therefor, with a statement of --
(1) The amount
of tax assessed,
(2) The amount
of interest, additional amount, addition to the tax, or assessable
penalty, imposed by law on the person against whom the tax is assessed,
(3) The amount
actually paid in accordance with the terms of the compromise.
the foregoing provisions of this subsection, no such opinion shall be
required with respect to the compromise of any civil case in which the
unpaid amount of tax assessed (including any interest, additional
amount, addition to the tax, or assessable penalty) is less than
$50,000. However, such compromise shall be subject to continuing quality
review by the Secretary.
I.R.C. §7122 (West 2002).
In summary, a valid tax lien, once recorded, remains as long as the
underlying tax liability is enforceable. I.R.C. §6322; United States
v. Hodes [ 66-1
USTC ¶9232], 355 F.2d 746, 748 (2d Cir. 1966). There are only three
methods for releasing an IRS tax lien: "1) the tax lien becomes
unenforceable by operation of time, (2) the debt which is the basis of
the lien is paid in full or (3) an Offer in Compromise is accepted by
the IRS which would settle the debt and any tax lien associated with the
debt would be no longer enforceable and have to be released." United
States v. Alfano [ 99-1
USTC ¶50,303], 34 F.Supp.2d 827, 840 (
1999) (quoting In re
ert Turner Optical, Inc. [ 94-2
USTC ¶50,555], Bankr. No. 93-01004, 1994 WL 779352, at *4 (Bankr.
Sept. 8, 1994)). To be unenforceable under I.R.C. §6322, "all of
the [IRS's] remedies ... must be extinguished."
at 839 (quoting Dillard v.
(In re Dillard), 118 B.R. 89, 93 (Bankr. N.D.
In the present case, there is no question that the Federal Tax Liens
have not become unenforceable by operation of time. As noted on the
Federal Tax Liens, with the exception of the 1989 assessments, the
re-file deadlines have not yet expired. As such, the Liens would still
be enforceable. 4
Additionally, there is no question that the Plaintiffs have not paid in
full the total amounts assessed and covered by the Federal Tax Liens.
The first issue is whether the Plaintiffs' $359.84 payment to the IRS
constituted a compromise for the entire amount of tax liability owed by
the Plaintiffs, such that it would release the Federal Tax Liens on the
"An offer to compromise a tax liability must be made in writing,
must be signed by the taxpayer under penalty of perjury, and must
contain all of the information prescribed or requested by the
Secretary." 26 C.F.R. §301.7122-1(d)(1). The offer must also be
accepted by an IRS delegate authorized to accept such compromises. See
Foulds v. Comm'r [ CCH
Dec. 45,433(M)], 56 T.C.M. (CCH) 1112 (1989). "An offer to
compromise has not been accepted until the IRS issues a written
notification of acceptance to the taxpayer or the taxpayer's
representative." 26 C.F.R. §301.7122-1(e)(1). These regulations
are strictly construed and compliance therewith is mandatory. Delohery
v. Internal Revenue Serv. [ 94-1
USTC ¶50,144], 843 F.Supp. 666, 669 (D. Colo. 1994) (citing Boulez
v. Comm'r [ 87-1
USTC ¶9177], 810 F.2d 209, 215 (D.C. Cir. 1987)). These regulations
provide the only means by which a compromise with the IRS may be
(citing Klein v. Comm'r [ 90-1
USTC ¶50,251], 899 F.2d 1149, 1152 (11th Cir. 1990); Laurins v.
Comm'r [ 89-2
USTC ¶9636], 889 F.2d 910, 912 (9th Cir. 1989); Brooks v. United
States [ 87-2
USTC ¶9626], 833 F.2d 1136, 1145 (4th Cir. 1987)).
An informal "agreement" does not constitute a compromise under
the I.R.C. and does not bind the government. See Botany Worsted Mills
v. United States [1 USTC ¶348], 49 S.Ct. 129, 132 (1929).
Therefore, "even if subordinate revenue officials at a conference
informally [agree] to accept the taxpayer's payment of a lien in full
satisfaction of [his] liability, that agreement would not bind [the
IRS]." Foulds [ CCH
Dec. 45,433(M)], 56 T.C.M. 1112 (citing Parks v. Comm'r [ CCH
Dec. 23,848], 33 T.C. 298, 301 (1959)).
The Plaintiffs have the burden of proving that their payment of $359.84
was a compromise of their entire tax liability of $17,906.96.
(citing Welch v. Helvering [3 USTC ¶1164], 290 U.S. 111 (1933)).
The Plaintiffs must likewise prove that D. Sester, as the government
official who allegedly formed a compromise with them, had the actual
authority to bind the IRS to such agreement. See Brubaker v. United
States [ 65-1
USTC ¶9274], 342 F.2d 655, 662 (7th Cir. 1965); Buesing v.
United States [ 99-1
USTC ¶50,246], 42 Fed.Cl. 679, 688 (Fed. Cl. 1999) (citing, among
others, City of El Centro v. United States, 922 F.2d 816, 820
(Fed. Cir. 1990)).
The documents provided by the Plaintiffs do not convince the court that
the Plaintiffs and the IRS entered into a compromise whereby the
Plaintiffs were released from their total $17,906.96 tax liability by
the payment of $359.84. First, there was no offer to compromise in
writing, as required by 26 C.F.R. 301.7122-1(d)(1), nor was there a
written acceptance by the IRS of an offer of compromise, as required by
26 C.F.R. §301.7122-1(e)(1). The receipt of payment evidencing the
handwritten "Paid in full. D. Sester ID 62-11031" and marked
"Received October 10, 2001 Internal Revenue Service, W&I Area
3, Territory 4, Knoxville, Tennessee" does not satisfy this
Moreover, after reviewing these documents, it is obvious to the court
that the $359.84 payment made by the Plaintiffs was in satisfaction of
their past due 1999 taxes, for which the IRS has not recorded or
asserted a lien. The taxes covered by the Federal Tax Liens are for the
years 1989, 1992, 1993, 1994, 1995, 1996, and 1997.
Second, the IRS did not file a certificate of release pertaining to the
Federal Tax Liens with the Knox County Register of Deeds, as it is
required to do in the event of a party's satisfaction. See I.R.C.
§6325. A certificate of release of the lien must be filed, otherwise,
the tax lien is not released. United States v. Waite, Inc. [ 80-1
USTC ¶9128], 480 F.Supp. 1235, 1239-40 (W.D. Pa. 1979). Clearly,
the IRS did not intend for the Plaintiffs' $359.84 payment to satisfy
the entire $17,906.96 balance owed by the Plaintiffs and secured by the
Federal Tax Liens. 5
The next issue before the court is whether the Federal Tax Liens which
attached to the Real Property prior to any alleged conveyances or
transfers would still attach regardless of the current owner of the Real
Federal tax liens attach to the property and property rights of the
delinquent taxpayer. Pronto Enters., Inc. v. United States, 188
B.R. 590 (W.D. Mo. 1995). This includes real and personal property owned
at the time of assessment and after-acquired. United States v. Gen.
Motors Corp. [ 91-2
USTC ¶50,158], 929 F.2d 249, 251 (6th Cir. 1991). Once a federal
tax lien has attached, the delinquent taxpayer "cannot avoid or
defeat liability by disclaiming or renouncing interest in the property
or transferring or conveying the interest." United States v.
Jepsen [ 2000-2
USTC ¶50,608], 131 F.Supp.2d 1076, 1085 (W.D. Ark. 2000) (citing United
States v. Rodgers [ 83-1
USTC ¶9374], 103 S.Ct. 2132, 2141 n.6 (1983)). Likewise, once the
lien has attached, any subsequent purchaser of the property takes
subject to the IRS lien. See United States v. Bess [ 58-2
USTC ¶9595], 78 S.Ct. 1054, 1058 (1958) ("The transfer of
property subsequent to the attachment of the lien...."); United
States v. Donahue [ 90-2
USTC ¶50,343], 905 F.2d 1325, 1331 (9th Cir. 1990) ("[A] lien
continues to attach to a taxpayer's property regardless of any
subsequent transfer of the property.").
It does not matter whether the Real Property is presently owned by the
Plaintiffs, by the Longs, or by Mortgage Masters. In either event, the
IRS maintains a security interest in the Real Property pursuant to its
Federal Tax Liens filed prior to any sort of transfer. Accordingly, if
the Plaintiffs still own the Real Property, it is encumbered by the
Federal Tax Lies filed in their names. However, if Mortgage Masters is
the owner of the Van Dyke property, that property is encumbered not only
by the Federal Tax Liens in Mortgage Masters' name, but also by the
Federal Tax Liens filed in the Plaintiffs' names prior to the first date
of transfer, i.e., all Federal Tax Liens filed prior to August 1,
1999. Likewise, the
property allegedly transferred to the Longs is encumbered with the
Federal Tax Liens in the Plaintiffs' names prior to and at the time of
Taking all facts and inferences in the light most favorable to the
Plaintiffs, the court finds that there is no genuine issue of material
fact. There was no compromise of the total tax liability evidenced by
the Federal Tax Liens. Additionally, pursuant to the Internal Revenue
Code, the Federal Tax Liens attaching the Real Property remain until
either released or satisfied. As such, the IRS is entitled to summary as
a matter of law.
An order consistent with this Memorandum will be entered.
Pursuant to the Memorandum on
' Motion for Summary Judgment filed this date, the court directs the
1. The United States' Motion for Summary Judgment filed
October 4, 2002
, by the Defendant United States of America, on behalf of its agency,
the Internal Revenue Service, is GRANTED.
2. The Federal Tax Liens filed against the Plaintiffs by the Internal
Revenue Service on August 15, 1994, September 29, 1994, February 10,
1998, and March 23, 2001, unless otherwise released by the Internal
Revenue Service, continue to encumber the real property known as 4220
Van Dyke Drive, Knoxville, Tennessee, and 610 Jade Road, Knoxville,
Tennessee, and the interest of the Defendant United States in these
properties is superior to all subsequently filed interests in the
3. The Federal Tax Liens filed against the Defendant Mortgage Masters,
Inc., by the Internal Revenue Service on February 23, 2001, April 10,
2001, and October 29, 2001, continue to encumber the real property known
as 4220 Van Dyke Drive, Knoxville, Tennessee, and the interest of the
United States in this property is superior to all subsequently filed
interests in this property.
Pursuant to E.D.Tenn. LBR 7007-1, a party opposing a motion for summary
judgment "shall be respond within twenty days after the date of the
filing of the motion.... A failure to respond shall be construed by the
court to mean that the respondent does not oppose the relief requested
by the motion."
Additionally, the IRS filed the following three Federal Tax Liens
against Mortgage Masters: (1) February 23, 2001, in the aggregate amount
of $65,897.03; (2) April 10, 2001, in the amount of $1,650.00; and (3)
October 29, 2001, in the amount of $7,363.61. Because Mortgage Masters
ert and Melissa Long do not oppose the Motion, summary judgment will be
granted the IRS as to them. See supra 1.
Summary judgment is being granted on this claim, so if Mortgage Masters
and the Longs are deemed to own the Real Property, the Real Property is
subject to the IRS liens.
The Federal Tax Lien notices each provide that:
With respect to each assessment below, unless notice of lien is refiled
by the date in column (e), this notice shall constitute the certificate
of release of lien as defined in IRC 6235(a).
The deadline for re-filing the Federal Tax Lien as to the 1989
June 27, 2000
. It appears that the 1989 assessment was not re-filed, and if so, the
tax liability therefor, in the amount of $11,079.25, was in fact
As noted earlier, however, if the IRS did not re-file its Federal Tax
Lien for the 1999 assessment prior to June 27, 2000, the Notice of Tax
Lien recorded on August 15, 1994, will, in fact, serve as the
Certificate of Release of Lien as to $11,079.25 in tax liability, thus
leaving the Plaintiffs' total tax liability as $6,827.71.
USTC ¶50,218] United States of America, Plaintiff v. Bartle, John W.,
Bartle, Rebecca McCowan, Bartle, Whitni, Bartle, Paige, First Health
Corporation, Inverness Corporation, Hammes, Joseph W., Trustee for the
Bankruptcy Estate of Delmar Limited Partnership, Defendants
District Court, So. Dist.
Div., IP 01-0768-C-B/S,
Dist. LEXIS 918.
Notice of assessment: Last known address: Place of business.--The
IRS properly mailed to an individual's last known address a notice of
assessment of the trust fund recovery penalty in connection with his
failure to collect and pay over income and FICA taxes due from wages of
employees of his corporation. The notice was sent to his usual place of
business, which was also the address he provided on his tax returns, and
he offered no evidence that it had been sent elsewhere.
Tax liens: Priorities: Purchaser of stock.--The wife of a
taxpayer who transferred corporate stock to her was not entitled to
priority as a purchaser because she did not give full and adequate
consideration. She asserted that she received the stock in return for
cash consideration, a guarantee of company debt, and as compensation for
consulting work. However, the court could not evaluate whether her
services bore a reasonable relationship to the value of the shares she
received because she failed to assign a monetary value to those
services. As a result, summary judgment seeking foreclosure of liens
against corporate stock as assets of the husband was granted.
District court: Jurisdiction: Appointment of receiver: Sufficiency of
complaint.--A receiver was appointed to arrange for the sale of all
stock or assets of a taxpayer's companies to satisfy the tax liens
against him. Though the taxpayer stressed the extraordinary nature of
receivership as a remedy under state (
) law, the standard for appointment was made pursuant to the exigencies
of the case as well as to clear statutory authorization.
Snoeyenbos, Department of Justice,
, for plaintiff. Stephen K. Miller, Hughes & Miller,
, for John W. Bartle. Patricia McCrory, Harrison & Moberly,
Indianapolis, Ind., for Rebecca McCowan Bartle, Whitni Bartle, Paige
Bartle. David B. Hughes, Hughes & Miller, Indianapolis, Ind., for
First Health Corp., Inverness Corp. Charles R. Whybrew, Tabbert Hahn
Earnest & Weddle LLP, Indianapolis, Ind., for Joseph W. Hammes,
GRANTING MOTION FOR SUMMARY JUDGMENT
comes before the Court on the Government's Motion for Summary Judgment
seeking foreclosure of federal tax liens against stock in First Health
Corporation and Inverness Corporation as assets of John Bartle, based on
federal taxes assessed against Bartle on February 2, 1994. For the
reasons set forth below, we GRANT the Government's Motion for Summary
Judgment and order the appointment of a receiver to oversee the
disposition of the specified corporate assets.
and Rebecca McCowan Bartle are husband and wife, residing at
16535 East 114th Street
Compl. P 2. In 1992, John Bartle resided at 9724 Gulfstream Drive,
Fishers, Indiana, while maintaining his business address at 421 South
Walnut Plaza, Muncie, Indiana. Aff. of John Bartle P 1. Individual
Income Tax Returns for tax years 1992, 1993, 1994 and 1997 bore John
business address. Supp. Decl. of Douglas W. Snoeyenbos, Exs. 4-8.
On February 2,
1994, a delegate of the Secretary of the Treasury made the following
assessments against John Bartle pursuant to 26 U.S.C. §6672:
$489,154.71; $25,785.11; and $417,683.75. Pl's Statement of Material
Facts PP 1-3. These amounts were assessed for John Bartle's alleged
failure "to collect, truthfully account for, or pay over income and
FICA taxes due and owing from wages of the employees" of Elkhart
Investors, Ltd., Delmar, Ltd., and Health Care Affiliates for specified
quarters of 1990, 1991, and 1992.
On April 12, 1994, the Government filed a Notice of Federal Tax Lien
with the recorder in Muncie, Delaware County, Indiana, listing John
Bartle's address as 421 South Walnut, Muncie, Indiana, the same address
reflected on Bartle's 1992, 1993, 1994, and 1997 tax returns. Decl. of
Snoeyenbos, Exs. 4-8.
prior to April 1, 1996, John Bartle owned at least 96 of the 100 issued
and outstanding shares of stock in Inverness Corporation. Pl's Statement
of Material Facts P 7. On April 1, 1996, John Bartle assigned 48 shares
of stock in
to Rebecca Bartle, "in consideration of mutual promises and
covenants set forth herein, along with one dollar ($1.00) and other
valuable consideration." Decl. of Snoeyenbos, Ex. 2. Immediately
prior to October 1, 1998, John Bartle owned at least 95 of the 100
issued and outstanding shares of stock in First Health Corporation. Pl's
Statement of Material Facts P 6. On October 1, 1998, John Bartle
transferred to Rebecca Bartle one half of his shares in First Health
"for good and valuable consideration." Decl. of Snoeyenbos,
Ex. 1. As of March 1, 1999, shareholders of Inverness Corporation
included John Bartle, Rebecca Bartle, Whitni Bartle Jentes and Paige
Bartle. Pl's Statement of Material Facts P 8.
On November 2,
1999, this court entered judgment in favor of the Government and against
Bartle for the unpaid balance of the aforementioned federal tax
P 5. To date, certain portions of these assessments remain unpaid.
P 4. The Government alleges, and Defendants neither confirm nor deny,
that the amount due totals $1,674,655.98 plus interest and other
statutory additions accruing after April 24, 2001. D's Response to Pl's
Statement of Material Facts P 4.
On June 15,
2001, the parties entered into an agreed preliminary injunction,
restricting distribution of the corporations' assets in anticipation
that such assets may be used to satisfy the assessments against John
Bartle. On July 19, 2001, the Government filed the present Motion for
Summary Judgment, seeking foreclosure on the federal tax liens against
John Bartle and the appointment of a receiver for the disposition of
corporate assets to satisfy those liens. 2
judgment is appropriate if "the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits,
if any, show that there is no genuine issue of material fact and that
the moving party is entitled to judgment as a matter of law."
Fed.R.Civ.P. 56(c). A genuine issue of material fact exists if there is
sufficient evidence for a reasonable jury to return a verdict in favor
of the non-moving party on the particular issue.
v. Liberty Lobby, Inc., 477
242, 248, 91 L.Ed.2d 202, 106 S.Ct. 2505 (1986). The nonmovant must
establish more than mere doubt as to the material facts, but must
"adduce evidence 'setting forth specific facts showing that there
is a genuine issue for trial.' " Fed.R.Civ.P. 56(e); Packman v.
Chicago Tribune Co., 267 F.3d 628, 637 (7th Cir. 2001). The mere
existence of a factual dispute will not bar summary judgment; the facts
in dispute must be outcome-determinative.
In considering a motion for summary judgment, a court must review the
record and draw all reasonable inferences in the light most favorable to
the non-moving party. Anderson, 477
at 255; Del Raso v.
, 244 F.3d 567, 570 (7th Cir. 2001). "If the non-movant does
not come forward with evidence that would reasonably permit the finder
of fact to find in [his] favor on a material question, then the court
must enter summary judgment against [him]." Waldridge v.
American Hoechst Corp., 24 F.3d 918, 920 (7th Cir. 1994), citing Matsushita
Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585-87,
89 L.Ed.2d 538, 106 S.Ct. 1348 (1986); Celotex Corp. v. Catrett,
477 U.S. 317, 322-24, 91 L.Ed.2d 265, 106 S.Ct. 2548 (1986); Anderson,
477 U.S. at 249-52. A self-serving affidavit, unsupported by specific
concrete facts reflected in the record, cannot preclude summary
judgment. Albiero v. City of
, 246 F.3d 927, 933 (7th Cir. 2001); Slowiak v. Land O'Lakes,
Inc., 987 F.2d 1293, 1295 (7th Cir. 1993).
asserts, and Defendants dispute, that notice of the federal tax
assessments and demands for their payment were sent to John Bartle's
last known address, in compliance with the notice requirements of 26
U.S.C. §6303(a). The statute provides, in relevant part:
shall, as soon as practicable, and within 60 days, after the making of
an assessment of a tax pursuant to section 6203, give notice to each
person liable for the unpaid tax, stating the amount and demanding
payment thereof. Such notice shall be left at the dwelling or usual
place of business of such person, or shall be sent by mail to such
person's last known address.
U.S.C. §6303(a). If using the taxpayer's last known address, the IRS
must exercise reasonable diligence in attempting to discover such
address. Eschweiler v. U.S. [91-2 USTC ¶50,505], 946 F.2d 45, 48
(7th Cir. 1991); McPartlin v. Commissioner [81-2 USTC ¶9569],
653 F.2d 1185, 1189 (7th Cir. 1981). The Seventh Circuit has held that,
to meet this obligation, the IRS may properly rely on the "address
found in the return being audited, unless there is 'clear and concise
notification from the taxpayer directing the Commissioner to use a
different address.' "
[91-2 USTC ¶50,505], 946 F.2d at 48, quoting Goulding v. U.S.
[91-1 USTC ¶50,185], 929 F.2d 329, 331 (7th Cir. 1991).
not contend that Bartle never received notice, 3
but that "mailing of the notice to the usual place of business,
which was the Muncie address, does not satisfy the statutory notice and
demand requirements that such notice must be left at a
business." This reading of the statute ignores the final option the
statute provides for effecting notice of an assessment and the very
method of serving notice that the Government contends it used--mailing
notice to the subject's last known address.
offer no evidence to refute the contention that the IRS sent notice to
anywhere other than to John Bartle's Muncie address, which he provided
to the IRS on his individual tax returns for tax years 1992, 1993, 1994
and 1997, as would be permitted by the terms of the statute. To the
contrary, Defendants' argument seems to rely on the assumption that the
Government did mail the notices to the
address. Even taken in the light most favorable to Defendants, the
record does not undermine the Government's assertion (supported by the
sworn statement of IRS technical support advisor Louis Leach) that it
properly gave notice by mailing the notices to John Bartle's last known
address. Therefore, we find that by mailing the notices of assessment to
address, the address Bartle had repeatedly used in his filings with the
IRS, the Government properly met the statutory notice requirements.
further argues that the transfers of shares to Rebecca Bartle must take
priority over the Government's liens because Rebecca Bartle qualifies
for protection as a purchaser under 26 U.S.C. §6323 and the Government
failed to satisfy the filing requirements of 26 U.S.C. §6323(f)(2)(B)
necessary to trump her interest. The Government counters that the filing
location is irrelevant because Rebecca Bartle was not entitled to
priority as a purchaser because she did not give full and adequate
consideration in exchange for the transferred shares.
certain parties from the encumbrances created by existing federal tax
liens, 26 U.S.C. §6323 offers protection for specified classes of
interest-holders. Specifically, purchasers take priority over federal
tax liens until such liens are filed according to the requirements of 26
U.S.C. §6323(f). Even if properly filed, such liens do not affect the
interests of purchasers who do not have actual notice or knowledge of
the existence of the lien at the time of purchase. 4
26 U.S.C. §6323(b)(1)(A). To qualify for this statutory priority, a
purchaser must give "adequate and full consideration in money or
money's worth" for the acquired interest.
§6323(h)(6). "Adequate and full consideration" requires
"consideration in money or money's worth having a reasonable
relationship to the true value of the interest in the property
acquired." 26 C.F.R. §301.6323(h)-1(f)(3). The regulations define
"money or money's worth" as "tangible or intangible
property, services and other consideration reducible to a money
value," but not "any other consideration not reducible to a
§301.6323(h)-1(a)(3). The question of adequacy of consideration
typically turns on factual issues. Schoppert v. CCTC Int'l, Inc.,
972 F.Supp. 444, 447 (N.D.
1997). The burden of proof as to adequate consideration rests on the
party seeking purchaser status. A & B Steel Shearing &
Processing, Inc. v. U.S. [96-2 USTC ¶50,506; 96-2 USTC ¶60,245],
934 F.Supp. 254, 257 (E.D. Mich. 1996); U.S. v. McCombs [96-1
USTC ¶50,194], 928 F.Supp. 261, 267 (
submit affidavits asserting that Rebecca Bartle "received her
shares of stock in Inverness Corporation both for cash consideration and
guaranteeing millions of dollars of corporate debt of Inverness
Corporation" and "received her shares of stock in First Health
Corporation because an estimated ninety percent of the income received
by the corporation is directly related to her work as a consultant and
the work of consultants under her guidance." These are relatively
vague descriptions of facts that would seem to be readily susceptible to
proof. However, despite providing lengthy descriptions of Ms. Bartle's
qualifications to serve in a health care
istration capacity, Defendants' affidavits provide no specific facts
establishing the money value of Rebecca Bartle's services or even
whether the shares received by Rebecca Bartle were compensation for
future obligations or past services. 5
Defendants' failure to reduce this amount to money value leaves the
Court unable to evaluate whether Rebecca Bartle's services bore a
reasonable relationship to the value of the shares she received, and,
therefore, whether she in fact qualified for statutory protection as a
purchaser. Because Defendants have not offered specific factual evidence
tending to prove that Rebecca Bartle qualified for protection as a
purchaser with regard to the federal tax liens that arose in this case
(other than vaguely factual, conclusory statements by John and Rebecca
Bartle), we find Defendants' arguments as to the filing requirements for
these liens to be moot. Accordingly, summary judgment is GRANTED in
favor of the United States and the federal tax liens on John Bartle's
interests in the Inverness Corporation and First Health Corporation as
of the dates of the assessments are hereby foreclosed free and clear of
any of the rights, title, claims, or interests of any other party in
Government seeks appointment of a receiver to arrange for the sale of
all the stock or assets of the Inverness Corporation and First Health
Corporation. Defendants stress the extraordinary nature of receivership
as a remedy under
law, primarily in the realm of actions for corporate mismanagement.
However, Defendants make no argument regarding the standard for the
appointment of a receiver under federal law, specifically 26 U.S.C. §7402(a),
the legal basis for the Government's request. The statute directs courts
to appoint receivers "as may be necessary or appropriate for the
enforcement of the internal revenue laws." 26 U.S.C. §7402(a).
This provision has been construed broadly, to allow courts the full
panoply of remedies necessary to effectuate the enforcement of the
federal tax laws. U.S. v. Raymond, 78 F.Supp.2d 856, 877 (E.D.
Wis. 1999), citing Brody v. U.S. [57-1 USTC ¶9606], 243 F.2d
378, 384 (1st Cir. 1957). Pursuant to the exigencies here and the clear
authorization set forth in this statutory directive, we hereby order the
appointment of a receiver, the identity and compensation of which shall
be established by a future order of this court, to oversee the
disposition of the assets of First Health Corporation and Inverness
Corporation for the satisfaction of the liens against John Bartle
foreclosed upon by the Government by the terms of this Order.
moved for summary judgment regarding foreclosure on federal tax liens
against Defendant John Bartle. Defendants argued that alleged notice and
filing deficiencies should preclude the grant of summary judgment in
favor of the Government and that receivership was an inappropriate
remedy in this case. For the foregoing reasons, we find that 1)
Defendants have not set forth specific facts suggesting any genuine
issue of material fact with regard to the notices of assessments mailed
to John Bartle's Muncie address; 2) Rebecca Bartle has not provided
facts sufficient to find that she qualified for priority as a purchaser
under 26 U.S.C. §6323; and 3) receivership is proper under 26 U.S.C. §7402.
Accordingly, we GRANT summary judgment for the Government in this
matter. In addition, we order the appointment of a receiver to oversee
the disposition of stock and assets of the Inverness Corporation and
First Health Corporation, the specifics of which appointment shall be
outlined in a future order.
Whitni Bartle Jentes and Paige Bartle, children of John Bartle, are also
named as defendants in this action based on their status as shareholders
in the corporations at the heart of this foreclosure action. Compl. P 6.
Defendants Rebecca Bartle, Whitni Bartle Jentes and Paige Bartle request
in their opposition brief that the Court "sustain [the]
Cross-Motion for Summary Judgment, and grant all other just and proper
relief." However, no cross motion for summary judgment has yet been
filed or docketed with the Court. Therefore, we confine our focus to the
Government's motion for summary judgment previously filed and fully
The Government suggests that the Court should draw an adverse inference
from Mr. Bartle's failure to testify as to whether he received the
notices of assessment, presumably based on the "missing
witness" rule. However, the Seventh Circuit has repeatedly
expressed reluctance to apply this rule in such a mechanical fashion, at
least in the labor law context. Multi-Ad Servs., Inc. v. NLRB,
255 F.3d 363, 372 n.1 (7th Cir. 2001); NLRB v. Louis A. Weiss. Mem'l
Hosp., 172 F.3d 432, 445-46 (7th Cir. 1999). Therefore, instead of
drawing any dispositive inferences based on this lack of evidence, we
will simply factor the evidentiary gap into our summary judgment
analysis regarding issues of material fact.
Although we need not decide the notice issue in determining whether
Rebecca Bartle qualifies for the statutory protection, the Court notes
that given Rebecca Bartle's status as spouse and cohabitant with John
Bartle, the sequence of events underlying John Bartle's federal tax
liens and the amounts involved could not reasonably have escaped her
law, past consideration is not sufficient to support a new obligation. Comstock
v. Coon, 135 Ind. 640, 35 N.E. 909, 911 (
1893); Field v. Alexander & Alexander of Indiana, Inc., 503
N.E.2d 627, 631 (Ind. Ct. App. 1987).
United States of America
, Plaintiff v. Harold Morrell and Michael F. Morrell, Defendants
District Court, East. Dist. N.Y., 97 CV 5344
Liens and levies: Enforcement: Validity: Foreclosure: Transfer of
property subject to lien.--Federal tax liens on a residence conveyed
by married taxpayers to their son and an annuity traceable to securities
also transferred to their son, in exchange for a promise of future
support were valid and could be foreclosed. The parents conceded that
they divested themselves of their assets through the conveyance,
rendering them unable to satisfy their tax obligations and the son
admitted that the purported agreement arose after the transfer had taken
place. Further, there was no supporting documentation for the claim that
the son purchased the securities with his own money. Thus, there was no
basis for concluding that the shares had not been transferred to the son
in the same manner as other securities were transferred or that the
transfer occurred before the tax assessments were made.
Liens and levies: Enforcement: Validity: Foreclosure: Transfer of
property subject to lien: Purchaser: Oral agreement.--An individual
who promised to provide future support for his parents in exchange for
their transfer to him of their home was not a purchaser whose interests
in the transferred property were superior to federal tax liens on the
property. The purported oral agreement under which the property was
transferred was unenforceable under the statute of frauds and the son
admitted that the agreement arose after the property was transferred.
Moreover, courts have repeatedly rejected the argument that promises of
future support constitute fair consideration.
Liens and levies: Enforcement: Validity: Foreclosure: Transfer of
property subject to lien: Purchaser: Equitable subrogation.--An
individual who promised to provide future support for his parents in
exchange for their transfer to him of their home was not entitled
equitable subrogation. He did not have an equitable lien superior to the
government's lien because he did not satisfy a senior encumbrance on any
of the properties, nor did his payments to his parents confer any
benefit upon the government. Moreover, equitable principles did not
point to the type of relief requested by the taxpayer.
moves pursuant to Rule 56, Fed. R. Civ. P., for summary judgment to
declare the validity of certain tax liens and to order foreclosure on
the liens and sale of property, consisting of a residence conveyed by
taxpayers to their son and an annuity traceable to securities that had
been transferred by taxpayers to their son, that is subject to the
liens. Defendants oppose the motion, arguing that there are factual
issues for trial: (1) that the son"s interests in the real and
personal property that had been transferred to him are superior to the
tax liens; (2) that some of the funds used to purchase the annuity came
from the son's independently accumulated assets, or alternatively, from
property transferred by the taxpayers before the liens attached; and (3)
that the government is not entitled to the appreciation in the value of
assets after the transfers by the parents to the son.
which in part are set forth in a Joint Agreed Statement of Material
Facts ("Joint Statement") entered into by the parties, are
undisputed except as indicated. Defendant Harold Morrell invested in tax
shelters and claimed deductions on his joint income tax returns filed
with his wife, Dolores Morrell, for the years 1977--1980. 1
The IRS disallowed the deductions for these four years and assessed
deficiencies. Harold and Dolores Morrell contested the deficiencies in
Tax Court. On
August 13, 1990
, the Tax Court entered an agreed decision finding deficiencies for
those years, exclusive of interest, of $182, 645, which with interest
had grown to over $750,000 as of the date of the decision and
approximately $1.4 million when the parties entered into the Joint
separately assessed the deficiencies and demanded payment for each of
the years 1977--1980 between November 15 and December 10, 1990, thereby
creating liens against all property of Harold and Dolores Morrell
pursuant to 26 U.S.C. §§6321 and 6322. These statutes provide that a
lien attaches at the time of assessment to "all property and rights
to property" of the taxpayer for the amount of the assessment,
including interest that may accrue, and continues until the liability is
satisfied or becomes unenforceable by lapse of time. Tax liens were
filed against Harold and Dolores Morrell in
on September 11, 1991. Harold Morrell does not contest the deficiencies,
and agrees that judgment should be entered against him for the full
amount of the liability.
Dolores Morrell transferred real estate, stocks and other securities to
their son, defendant Michael F. Morrell. The real estate, a home in
having a fair market value of approximately $400,000 at the time, was
transferred by deed dated May 24, 1991, after the assessment and
attachment of the government's lien. 2
Harold and Dolores Morrell continued to reside there after the transfer
as they had before. There was no mortgage on the property. Harold and
Dolores Morrell also transferred to Michael Morrell in May 1991 their
holdings in municipal trusts worth over $217,000. The transfer was
effectuated by transferring the holdings from the parents' account at
Dean Witter to Michael's account at Dean Witter. Michael subsequently
transferred the municipal trusts to a joint Dean Witter account of
Michael and his spouse. In April 1992, Harold and Dolores Morrell
transferred stock holdings worth approximately $200,000 from their Dean
Witter account to the Dean Witter account of Michael and his spouse.
claimed in his deposition that all of these transfers, which admittedly
followed the assessment, were not undertaken to avoid payment of tax
deficiencies. Instead, he asserted, the assets were transferred in light
of the declining health of Dolores Morrell, so that the parents would
qualify for government medical assistance. Michael Morrell testified in
his deposition that he shared the same understanding of the reason for
the transfers of assets, and was not aware at that time of his parents'
tax difficulties. For purposes of the summary judgment motion, the
government does not contest motivation, but asserts that it is entitled
to foreclose on its liens regardless of motivation.
Morrell's assertion of an interest superior to the government liens is
based upon the defendants' claim that in exchange for the transfer of
assets, Michael orally agreed to support his parents and in fact did so.
Defendants argue that Michael Morrell therefore is a
"purchaser" protected under 26 U.S.C. §6323(a) or,
alternatively, that he is entitled to an equitable lien for the hundreds
of thousands of dollars he spent to support his parents over the years
following the transfers of assets.
testified at his deposition that he and his wife transferred their
residence, stocks and securities pursuant to a unitary plan to divest
themselves of all assets, and that no other assets were left after the
Harold Morrell testified as follows as to the timing of the alleged
support agreement in relationship to the transfer of property:
connection with the transfer of the assets, did your son later make some
promises to you as to what he would do for you?
A. Well, we
had set up for a planned estate, and he agreed after we transferred
everything over to his name he would support us. We were concerned about
our health, my wife's health, which subsequently has died, but concerned
about Medicare, so we didn't want to have anything around. So we made a
deal. We decided that we'll have Michael take everything now and then
support us so that we wouldn't be exposing the assets to Medicaid.
Q. At the time
of the transfers that you made to your son, had your son agreed to give
Q. And your
recollection is that his promise for the support was before the
transfers were made, not after?
A. I don't
remember whether it was before or after. I don't remember that part,
before or after.
Q. It could
have been one or the other?
A. Yeah, it
could have been.
Q. Did your
son ever tell you what he would do for you in the way of providing you
A. He would
support us the way we were--the way we lived, you know.
Morrell admitted at his deposition that he first found out about the
transfer of property to him during a telephone call from his father
saying, "here is what I've done, and I'm really doing this because
of these Medicare issues." As far as Michael knew, the
documentation for effecting the transfer of securities consisted simply
of a name change in ownership of the Dean Witter account. Michael
Morrell testified that the circumstances surrounding the support
arrangement "was simply, We're going to give you this money, and,
you know, I agreed to support them. I mean it was no--there was no
formal arrangement." Michael reiterated that he thought "the
transfer took place and then we had the discussion," which could
have taken place one or two months after the transfer. The discussion
was: "I would just pay all their expenses." In the deposition,
Michael Morrell recollected that the transfer of securities occurred
after the real estate had been transferred; he believed the transfer of
securities took place in late 1991.
Morrell's affidavit submitted in opposition to the summary judgment
motion simply states, in reference to the purported agreement: "In
exchange for the transfer of the assets, I agreed to support my parents
for their lifetime," and that he "kept that promise" by
the substantial deposits to his parents' bank accounts and his purchase
of a townhouse in 1996 where his father lives rent free. The affidavit
identifies the transferred assets as his parents' entire portfolio of
stock and municipal bonds, and their home. The affidavit states that the
home was transferred in May 1991, and the securities in May 1991 and
1995, Michael Morrell liquidated his joint Dean Witter account and used
all of the proceeds to purchase a variable annuity for approximately
$833,000. The government claims that its lien attaches to the entire
amount of the annuity, which had increased in value to over $1 million
as of March 31, 1998. In opposition to the summary judgment motion,
Michael Morrell claims that at least $380,000 in the Dean Witter account
that was used to purchase the annuity represented separate savings
accumulated by Michael and his wife and did not come from his parents.
Michael also argues that the government should not be entitled to
payment of the portion of the proceeds from his Dean Witter account used
to purchase the annuity that represents appreciation in the Dean Witter
account; Michael attributes that appreciation in asset value to his
prudent and skillful management of the account.
agrees in principle that, to the extent that Michael could show that a
portion of the annuity was purchased with funds that were not traceable
to transfers from his parents after the lien attached, Michael would be
entitled to retain a pro rata share of the proceeds of the
annuity. However, the government contends that there is no genuine
factual dispute that all of the funds in the Dean Witter account that
were used to purchase the annuity are traceable to transfers made by
Harold and Dolores Morrell after the tax liens had attached. The
government also contends that, since the lien follows the property, it
is entitled to foreclose on the entire value of the annuity, including
any appreciation in value of the annuity or the Dean Witter fund used to
purchase the annuity, until the deficiency, including accrued interest,
is fully satisfied.
that Michael Morrell asserts had been purchased with his own funds is a
tax free fund of Dean Witter. Neither Harold Morrell nor Michael Morrell
produced most of their securities account records in discovery for the
critical period of 1990 through the first few months of 1992, which
would have shown all holdings and activity in the accounts in the
periods preceding and following the assessments. Michael Morrell's
affidavit in opposition to summary judgment attached his Dean Witter
account statement for June 1991, which reflected a holding of 33,769
shares of Dean Witter New York Tax Free Inc. Fund, then worth
approximately $378,000, as well as approximately $2,000 in a
government money market fund. Michael claimed that these investments
were acquired with his own funds and were not derived from property his
parents transferred to him. Michael explained his failure to produce
that statement and others or to discuss those holdings at his deposition
by stating that he had only recently located some of these records, and
that his memory had been impaired because of a heart condition. Michael
Morrell did not produce any records that showed that he in fact
purchased shares of this tax free fund from his own savings. The
government responded to this new information by obtaining other records
from Dean Witter, including the account statement for Harold and Dolores
Morrell as of April 30, 1990, showing that the exact same quantity,
33,769 shares of Dean Witter New York Tax Free Inc. Fund, then worth
approximately $364,000, was held in the parents' account.
account statements produced by the defendants and those obtained by the
government from Dean Witter are incomplete, there is a gap between the
April 1990 statement of the taxpayers and the June 1991 statement of
Michael Morrell. Therefore, no document shows when, after April 1990,
the 33,769 shares of Dean Witter New York Tax Free Inc. Fund were
withdrawn from the taxpayers' account or where it went, or when, before
June 1991, 33,769 shares of Dean Witter New York Tax Free Inc. Fund
first were carried in Michael's account or where it came from.
Defendants argue that there are factual issues, precluding the granting
of summary judgment to the government, as to whether this fund was
transferred from the parents to Michael Morrell, and if it was, when the
transfer took place, i.e., before or after the tax liens attached
in November and December, 1990.
the Dean Witter monthly statements for the account of Michael Morrell
and his spouse from the end of 1991 until its liquidation in October and
November 1995, when Michael used the entire proceeds to purchase the
annuity, confirms the government's assertion that no new money or other
assets were put into the account except for securities transferred by
Harold and Dolores Morrell in April 1992. Defendants were afforded an
opportunity after oral argument to identify any such assets that Michael
put into the account, but their counsel notified the court that they had
no further information to offer. The account statements show that there
were few purchases and sales of securities, except for liquidations to
withdraw funds from the account, and that all purchases of securities in
the account during this time period were made with the proceeds from
redemption of other securities held in the account and accumulated
dividends and interest from those securities. Although Michael Morrell
placed no new money in the account, he frequently made withdrawals from
it between December 1992 and September 1995, for a total of
approximately $119,000. The record contains no explanation of these
withdrawals. As a result of these withdrawals, there was in fact
negligible increase in the value of the account: it had a value of
approximately $778,000 on March 31, 1992, $807,000 on November 30, 1992,
$781,000 on February 28, 1995, and $814,000 on May 31, 1995, before
being liquidated for approximately $833,000 in October and November,
Summary judgment are granted if there is no genuine issue as to any
material fact, and the moving party is entitled to judgment as a matter
of law. See Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir.
1995). The moving party must demonstrate the absence of any material
factual issue genuinely in dispute. See id. A material fact is
one whose resolution would "affect the outcome of the suit under
governing law," and a dispute is genuine "if the evidence is
such that a reasonable jury could return a verdict for the nonmoving
party." Anderson v. Liberty Lobby, Inc., 477
242, 248 (1986). The court must view the inferences to be drawn from the
facts in the light most favorable to the party opposing the motion. See
Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S.
574, 587 (1986). However, the non-moving party may not "rely on
mere speculation or conjecture as to the true nature of the facts to
overcome a motion for summary judgment." Knight v. U.S. Fire
Ins. Co., 804 F.2d 9, 12 (2d Cir. 1986). Nor may the non-moving
party "simply show that there is some metaphysical doubt as to the
material facts." Matsushita Elec., 475
at 586. The party must produce specific facts sufficient to establish
that there is a genuine factual issue for trial. See Celotex Corp. v.
317, 322-23 (1986).
Under 26 U.S.C. §6323(a)
6323(a) of Title 26, United States Code, provides that "[t]he lien
imposed by section 6321 shall not be valid as against any
purchaser" until notice of the lien has been filed. A
"purchaser" is defined in Section 6323(h)(6) as "a person
who, for adequate and full consideration in money or money's worth,
acquires an interest . . . in property which is valid under local law
against subsequent purchasers without actual notice." The Treasury
Regulations define "adequate and full consideration" to
require "consideration in money or money's worth having a
reasonable relationship to the true value of the interest in the
property acquired." 26 C.F.R. §301.6323(h)-1 (f)(3). "Money
or money's worth" is defined in the regulation as including
"tangible or intangible property, services and other consideration
reducible to a money value," but excluding such things as
"love and affection . . . or any other consideration not reducible
to a money value."
juror could find that Michael Morrell was a "purchaser" within
the meaning of this provision. First, defendants conceded during oral
argument of the summary judgment motion that the purported oral
agreement by Michael Morrell to support the taxpayers for their lives is
unenforceable under the statute of frauds. Obviously, an unenforceable
promise of future support is not "adequate and full consideration
in money or money's worth" under any rational construction of the
is no genuine issue of fact as to the existence of an agreement, even an
oral one, in which Michael Morrell furnished consideration in exchange
for which Harold and Dolores Morrell transferred these properties to
him. Michael Morrell testified at his deposition that his best
recollection was that any discussion he had with his father concerning
support occurred after the property had already been placed in his name
by the unilateral action of his parents. Viewed most favorably to him,
Harold Morrell admitted that he could not recall whether any such
discussion preceded or followed the transfers. Accordingly, there is no
basis for a reasonable jury to find that consideration was furnished in
exchange for the transfers of property, even if any such promise would
have been enforceable.
Third, even if
there had been an agreement that was enforceable before the transfers
took place, Michael Morrell's promise to support his parents is not
"adequate and full consideration in money or money's worth"
for the immediate conveyance of unencumbered assets worth over $800,000
(or almost $1.2 million when the Dean Witter New York Tax Free Inc. Fund
is included, see pp. 13-14 infra). The issue of adequate
consideration is a matter of federal and not state law, and as the
Second Circuit has stated, "a finding that [taxpayer] conveyed the
Property to her daughters for adequate consideration under New York law,
while helpful, does not provide a rule of decision that [the daughters]
are federally protected 'purchasers' under Section 6323(a)." United
States v. McCombs [94-2 USTC ¶50,363], 30 F.3d 310, 330 (2d Cir.
1994). Nevertheless, in the absence of reported federal cases construing
Section 6323's requirement of "adequate and full
consideration" when the consideration furnished by the reputed
purchaser is a promise of parental support, and notwithstanding the
variations in statutory language, the New York decisions that have
construed the requirement of "fair consideration" under
Section 273 of New York Debtor and Creditor Law in similar circumstances
are persuasive. 4
Courts have rejected repeatedly the argument that promises of future
support constitute fair consideration within the meaning of Section 273.
Schmitt, 98 A.D.2d at 936 (purchaser's promises to take over
payments on mortgage, furnace and taxes, to permit debtors to remain in
house rent-free, and to convey ten acres to debtors' sons did not
constitute "fair consideration" under §273; "[s]uch
promises . . . are akin to promises of future support, which are
insufficient as a matter of law to be considered a fair equivalent of
the property transferred"); Petition of National City Bank of
New York, 269 App. Div. 1040 (2d Dep't 1945) (promise of future
support is not fair consideration); see United States v. Bushlow
¶50,556 ], 832 F.Supp. 574, 582 (E.D.N.Y. 1993) (promises of future
services are not "fair consideration" under §273).
concede that Harold and Dolores Morrell divested themselves of virtually
all their assets when they conveyed their real and personal property to
their son, which rendered them unable to satisfy their tax obligations,
and received nothing in return except at most an oral promise of
support. It is not reasonable to find this promise to be "adequate
and full consideration in money or money's worth."
argue that, even if Michael Morrell is not a purchaser within the
meaning of Section 6323(a), he is entitled to an "equitable
lien," that is superior to the government's lien, for the hundreds
of thousands of dollars he spent to support his parents. Pursuant to 26
U.S.C. §6323(i)(2), equitable subrogation applies in certain
circumstances where a transferee of property or a junior lienor has
satisfied a lien that is superior to the tax lien. The statute provides:
"Where, under local law, one person is subrogated to the rights of
another with respect to a lien or interest, such person shall be
subrogated to such rights for purposes of any lien imposed by section
6321." Equitable subrogation is designed to avoid the unjust
enrichment that would occur if the government could reap the benefit of
having the senior lien satisfied but deprive the party who satisfied
that senior lien of any benefit in a foreclosure proceeding. To avoid
such unfairness, the party that satisfied the senior encumbrance is
allowed to assume the position that had been occupied by the original
holder of the senior lien, if equitable subrogation is authorized by
state law. See United States v. Avila [96-2 USTC ¶50,357], 88
F.3d 229, 237-39 (3d Cir. 1996); Mort v. United States [96-1 USTC
¶50,315], 86 F.3d 890, 893-95 (9th Cir. 1996); Progressive Consumers
Federal Credit Union v. United States [96-1 USTC ¶50,160], 79 F.3d
1228, 1234-37 (1st Cir. 1996).
Even assuming arguendo
that the Second Circuit would recognize a non-statutory equitable
doctrine applicable to tax liens, equitable principles do not point to
the relief requested. 5
Michael Morrell did not satisfy a senior encumbrance on any of these
properties; indeed, there was no mortgage on the real property. Nor did
Michael's payments to his parents confer any benefit upon the
government. Michael Morrell received property from his parents that they
should have used to satisfy their indebtedness to the government and
then gave money back to his parents so that they could continue to live
in the same style as that to which they were accustomed, as if they had
never incurred liability pursuant to an agreed judgment. Equity is not
served by giving Michael Morrell credit for these payments to his
of Funds for Annuity
undisputed that the residence and over $400,000 worth of securities were
transferred from Harold and Dolores Morrell to Michael Morrell after the
assessments were made. On review of the entire record, the undisputed
facts also establish that additional securities worth approximately
$380,000, consisting of 33,769 shares of Dean Witter New York Tax Free
Inc. Fund also were transferred to Michael by his parents. With no
supporting documentation of any kind, Michael Morrell claims that he
purchased the 33,769 shares of the Dean Witter New York Tax Free Inc.
Fund with his own money. There is no explanation for the astounding
coincidence that a year before, the taxpayers had the exact same number
of shares of the same fund in their account. Moreover, Harold Morrell
testified that he transferred all of his assets to his son, ostensibly
so that Harold and Dolores could qualify for government medical
assistance, and defendants offer no other explanation for the fact that
the 33,769 shares of the fund the parents held in 1990 were no longer
owned by them later. Since all other securities were conveyed from
parents to son by directing transfer of the securities from the parents'
Dean Witter account to the son's Dean Witter account, there is no
rational basis for concluding that the 33,769 shares in Michael
Morrell's account had not also been transferred in the same manner.
no rational juror could find that the transfer of this fund was made by
the parents to their son before the liens had attached. As set forth in
the Facts section above, Harold Morrell testified that the transfer of
all assets held by him and his wife to Michael took place pursuant to
one plan to divest themselves of all assets. Michael Morrell testified
that all securities he received from his parents were transferred after
the residence had been conveyed to him; it is undisputed that the real
property was transferred approximately six months after the assessments.
The parties agree that the assessments were made in November and
December 1990, the real property was conveyed in May 1991, and that
other securities were transferred in May 1991 and April 1992.
Accordingly, there is no basis in the undisputed evidence for finding
that the Dean Witter New York Tax Free Inc. Fund was transferred before
Morrell's argument that the government is not entitled to foreclose on
the annuity to the extent that it represents appreciation in the value
of the security holdings after the transfers of assets from the
taxpayers is erroneous. He does not question the well-settled principle
that the lien follows the property. "The transfer of property
subsequent to the attachment of the lien does not affect the lien, for
'it is of the very nature and essence of a lien, that no matter into
whose hands the property goes, it passes cum onere. . . .' "
United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57 (1958)
(citations omitted). This principle has been held to mean that the lien
attaches to any appreciation in the value of the property until the
taxpayer's liability has been discharge. Avila [96-2 USTC ¶50,357],
88 F.3d at 231, 233-34 (government lien is not limited to taxpayer's
equity when he conveyed the property subject to the lien; it also
attaches to the appreciation in the value of the property after the
conveyance); Han v. United States [91-2 USTC ¶50,486], 944 F.2d
526, 528-29 (9th Cir. 1991) (same); see United States v. Librizzi
[97-1 USTC ¶50,263], 108 F.3d 136 (7th Cir. 1997) (government's lien
extended to appreciated fair market value of deceased taxpayer's
interest in the property at the time of foreclosure and is not limited
to value at death).
the premises of defendant's argument, that the annuity was purchased
with appreciated assets and that the appreciation is attributable to
Michael Morrell's skillful and prudent management of his Dean Witter
account, are unfounded under the undisputed facts recited earlier.
Almost all of the appreciated value in the Dean Witter account was taken
out of it by Michael between 1992 and the account's liquidation in late
1995; and, with the inclusion of approximately 380,000 from the New York
Tax Free Inc. Fund that defendant omitted in advancing his contention,
the remaining minimal appreciation is attributable to passive
reinvestment of interest and dividends which there is no persuasive
reason to exempt from the government lien.
The motion of
United States of America
for summary judgment is granted. The government should submit a proposed
judgment on fourteen days' notice to the defendants.
Dolores Morrell died after this action was commenced and is no longer a
The parties agree that the fact that certain transfers were made after
the attachment of the liens but preceded their filing, is not
determinative in this case.
Harold and Dolores Morrell in fact continued to retain ownership of a
condominium, but the government is not seeking to foreclose on that
property in this proceeding.
N.Y. Debtor & Creditor Law §273 declares that any conveyance made
by a person who is thereby rendered insolvent is constructively
fraudulent as to creditors regardless of the transferor's "actual
intent if the conveyance is made or the obligation is incurred without a
fair consideration." Section 272 provides that "fair
consideration" is given for property when, as a fair equivalent for
it and in good faith, property is conveyed or an antecedent debt is
satisfied, or when the property is received in good faith to secure a
present advance or antecedent debt in an amount not disproportionately
small as compared with the value of the property. Schmitt v. Morgan,
98 A.D.2d 934, 935 (3d
), appeal dismissed, 62 N.Y.2d 914 (1984).
In McCombs [94-2 USTC ¶50,363], 30 F.3d at 333, the court in
dictum apparently applied the equitable subrogation doctrine of §6323(i)(2)
without citing the statute.
¶50,430] Scottsdale Insurance Company, Plaintiff v. English Furniture
Industries, Inc., et al., Defendants
District Court, So. Dist. Ind., Indianapolis
Div., IP 97-1380-C-T/G, 3/19/99
Secs. 6321 and 6323 ]
Liens and levies: Attachment: Property: Ownership of: Abandonment:
Bankruptcy: Casualty loss: Insurance proceeds: Interpleader: Validity
and priority.--Federal tax liens against manufacturing equipment
transferred between two commonly owned companies attached to casualty
loss insurance proceeds that were payable to the transferee upon the
equipment's destruction by fire. The evidence established that the
transferor company owned the equipment at the time when the tax lien was
filed. Thus, the equipment was encumbered by a federal tax lien and
remained so even after the conclusion of the transferor's subsequent
bankruptcy case. The fact that the equipment was operated at the same
location after the transferor's bankruptcy case was concluded
constituted evidence of the transfer of ownership. Since no proof of
consideration for the transfer was adduced, the transferee did not
qualify as a bona fide purchaser, and the property remained encumbered
by the tax liens.
Liens and levies: Attachment: Property: Ownership of: Casualty loss:
Insurance proceeds: Validity and priority: Purchaser: Lack of
consideration.--Federal tax liens against manufacturing equipment
that was transferred between two commonly owned companies attached to
casualty loss insurance proceeds that were payable to the transferee
upon the equipment's destruction by fire. The equipment remained at the
same location and was operated by the transferee after the conclusion of
the transferor's bankruptcy case. Since the transferee acquired the
equipment without consideration, it did not qualify as a bona fide
purchaser, and the property remained encumbered by the tax liens.
ENTRY REGARDING CLAIMS TO FUND
Scottsdale Insurance Company ("
"), filed an interpleader action in the Crawford Circuit Court
located in English, Indiana, on
April 17, 1997
, to determine rights to proceeds from a casualty loss on an insurance
policy issued to "English Furniture, Inc., which also is known as
English Furniture Company, a close[d] corporation and English Furniture
Industries, Inc." (Compl. at ¶4.) On August 22, 1997, Defendant
United States of America
, removed this action to this court. On April 17, 1998, this court held
a hearing on claims from funds on deposit in this action. On July 16,
1998, the court found in favor of Corporate Development Resources, Inc.
("CDR") and against English Furniture Industries, Inc. and
English Furniture Company on CDR's cross-claim in the amount of
$230,985.78 plus interest at the statutory rate and ordered release of
the funds for payment of CDR's claim. With this Entry the court
determines the priority and validity of the remaining claims to the
Factual and Procedural Background
In March 1996,
a fire destroyed EF's (the court refers to English Furniture Industries,
Inc. and English Furniture Company concurrently as "EF")
manufacturing facility at 200 West Church Street in English in Crawford
County, Indiana. EF made a claim against a casualty insurance policy,
policy number CFS062492, issued by Scottsdale to "English
Furniture, Inc.", (Stipulated Ex. 1), which also is known as
English Furniture Company, a close[d] corporation and English Furniture
Industries, Inc." (Compl. at ¶4.) The claim exceeded the actual
policy limits that follow below:
Real property $200,000
Personal property $250,000
(See Stip. Exs. 1 and 4.)
deposited the policy limits, plus interest, for a total of $455,000 with
the Clerk of the Crawford Circuit Court, where this case was initiated
and remained before removal by the
") on August 22, 1997. The interpleader complaint names as
creditors of EF, among others, the
("US"), CDR, and Designe' Tech, Inc. ("DT"). The
was named based upon notices of levy, notices of federal tax liens, and
final demands issued to
relating to certain tax liabilities of EF.
Leverenz, revenue officer for the United States Internal Revenue Service
(the "IRS") at the
post, was assigned to a federal tax deposit alert on July 2, 1992,
involving DT, a manufacturer of office furniture located on
in English, Indiana, which had failed to make federal tax deposits. She
investigated DT for the nondepositing of trust fund taxes (the income
taxes withheld from employees, the employees' share of social security
payments and the employer's share of social security payments) for 1992.
On July 14,
1992, Ms. Leverenz visited DT's facility at
200 West Church Street
at which time she met William E. and Betty Litchfield, who along with
William's sister, Margaret Salb, owned DT. Ms. Leverenz made demand for
payment on behalf of the IRS related to the trust fund taxes, and among
other things, toured the entire facility, and inspected DT's property at
the facility. During the visit, the Litchfields informed Ms. Leverenz
that DT owned the property in the building. Ms. Leverenz did not review
any documents to determine what equipment was owned by DT, but relied
upon the Litchfields' statements and the financial statement (IRS Form
433B) provided that day by William E. Litchfield under penalty of
perjury stating that the equipment in the facility were the assets of
DT. Because the IRS was preparing to seize DT's assets, Ms. Leverenz
took an inventory of DT's assets at the
filed federal tax liens with the
against "Designe' Tech, Inc. a corporation, trading as Designe'
Tech Fine Office at
200 W. Church Street
, English, Indiana." (Stip. Ex. 6.) A lien of $85,265.31 was filed
on August 17, 1992, and a lien of $33,527.08 was filed on September 8,
1992. (Stip. Ex. 6 at 1-2.)
On March 1,
1993 DT filed a bankruptcy petition for Chapter 11 reorganization which,
on December 14, 1993, was converted to a Chapter 7 liquidation.
(Stipulated Ex. 3.) In connection with its Chapter 7 bankruptcy, DT
filed certain schedules, including a personal property schedule. DT
represented that it had a $3,000.00 interest in Item 26 (office
equipment, furnishings and supplies, computer, typewriter, copier,
calculators, and furniture) of the personal property schedule, and no
secured creditors were listed. (Stip. Ex. 7.) DT represented its
interest in Item 27 (machinery, fixtures, equipment and supplies used in
business) as $54,345.00, and no secured creditors are listed. William E.
Litchfield, as president of DT, on June 13, 1994, declared under penalty
of perjury that personal property schedule was true and correct. (
) On November 16, 1994, the U.S. Bankruptcy Court for the Southern
District of Indiana issued its Order In No Asset Case, wherein, in
reliance on the trustee's report that DT had no assets, abandoned the
scheduled property of DT's bankruptcy estate. (Stip. Ex. 3.) The case
was closed on November 17, 1994. (
In July 1995,
Cindy Ragains, an IRS Revenue Officer in the
district, was assigned to collect back due employment taxes, including
trust fund taxes withheld from employees' wages, from English Furniture
Company ("EF Company"). On July 13, 1995, she went to EF
facility in English, Indiana and spoke with William E. Litchfield who
identified himself as the office manager and told him that the owner was
William David Litchfield ("David Litchfield" or
"David"), the son of William E. Litchfield and his wife, Betty
Litchfield. On July 20, Ms. Ragains met with David Litchfield, who gave
her financial information and represented that he owned the business. He
then said the business had gone public and had approximately 100
investors. The business, however, was operated by David and William E.
Litchfield both before and after the company had gone public.
visited EF Company at its
facility approximately seven or eight times when she was attempting to
collect the taxes. During her second meeting with David Litchfield, he
identified EF Company's assets on a financial statement and gave her a
list of the company's assets and the accounts receivable. On July 20,
1995, he provided her a list of the corporate assets of the equipment at
EF (Stip. Ex. 16). He advised her that some of the assets were not EF's
but belonged to other companies, including DT and Davann, Inc.
Thereafter, every time Ms. Ragains met with David Litchfield, she
requested him to provide documentation to show ownership of the
equipment, but he never did.
In an effort
to determine who owned the assets at the
facility, Ms. Ragains secured the tax returns for DT and EF Company.
DT's U.S. Corporation Income Tax Return for 1991, signed by William E.
Litchfield as vice president, lists building and other depreciable
assets worth $104,880, accounts receivable, and inventory. (Stip. Ex.
10.) DT's return for 1992, signed by William E. Litchfield as vice
president, lists building and other depreciable assets worth $95,040.
(Stip. Ex. 11.) The 1991 and 1992 returns list depreciation for
equipment in the amounts of $15,834 and $15,834, respectively. Neither
of these returns lists any residential rental property or nonresidential
Corporation Income Tax Return for EF Company for
February 16, 1994
December 31, 1995
, was signed by David Litchfield as president of the company. (Stip. Ex.
9.) Items 10A and 10B of Schedule L of the return show buildings and
other depreciable assets worth $63,989 at the end of the year, with a
depreciation of $2,915. No assets were listed for the beginning of the
year. The return also shows property depreciated over ten years worth
$63,225. EF claimed it had property described as machinery and equipment
worth $61,632, and when office equipment and furnishings and fixtures
were added in, the total assets were $63,989.
Corporation Income Tax Return for 1993 lists the following assets only:
land worth $5,000, a building in French Lick worth $71,733, and $115 in
cash. (Stip. Ex. 12.) Davann's U.S. Corporation Income Tax Return for
1994 lists the same assets and only these assets. (Stip. Ex. 13.) 1
Davann did not report any equipment on its personal property returns.
Had Davann owned any equipment, it likely would have reported it and
October 11, 1995
, the IRS by Ms. Ragains and Ms. Leverenz, prepared for a return and
seizure of EF Company's inventory at the
facility for failure to pay taxes. 2
Though the inventory was seized, money was paid to release the
inventory. The revenue officers viewed EF's assets, inventoried the
equipment, taking photographs and making an inventory list, including
anything that looked of value on the list, that is, large pieces of
equipment. The inventory listed the machinery and equipment with a
description of each asset to the best of Ms. Leverenz and Ms. Ragains'
abilities, using serial numbers, identifying numbers, and values where
possible. (See Stip. Ex. 15 (a partial inventory taken in October
1995, listing the more valuable assets or heavy equipment of EF)). The
equipment observed by Ms. Leverenz and Ms. Ragains on October 11, 1995,
was the same equipment that Ms. Leverenz observed when she was in DT's
facility in 1992. No equipment was present at EF Company's
facility in 1995 that was not there when Ms. Leverenz observed the
facility in 1992 under operation of DT.
last visited the
March 14, 1996
. The equipment that Ms. Ragains had observed in October 1995 was still
present at the facility at that time, and no additional equipment was
present. Many of the same items are on EF's Statement In Proof of Loss
, (Stip. Ex. 4), and the inventory list taken by Ms. Ragains and Ms.
Leverenz in October 1995. (Stip. Ex. 15.).
filed notices of federal tax liens with the
against EF Company, a corporation, on April 1, 1996, in the amount of
$2,522.40 and on April 13, 1996, in the amount of $6,459.42. (Stip. Ex.
6 at 3-4.) The
served notices of levies against William E. Litchfield, DT, William D.
Litchfield, EF Company, and final demands on
on June 4, 1996, and September 6, 1996, respectively.
filed an interpleader action in the Crawford Circuit Court located in
English, Indiana, on April 17, 1997, to determine rights to the proceeds
under its insurance policy issued to EF. On August 22, 1997, Defendant
, removed this action to this court.
10, 1997, Defendant Maley & Wertz, Inc. asserted a cross-claim
against EF in the amount of $1,890.97, which represents a settlement
amount contained in an Agreed Order executed prior to removal by the
16, 1997, the Defendant the State of
asserted a cross-claim against EF in the amount of $21,496.71, which
represents a settlement amount contained in an Agreed Order executed
prior to removal by the
On February 3,
1998, the court granted CDR's motion for summary judgment on its
cross-claim against EF and awarded a judgment on four promissory notes,
plus interest, and attorney's fees. On February 4, 1998, the court's
summary judgment was entered, awarding to CDR a judgment in the amount
of $211,411.94, plus additional interest of $55.90 per day beginning
November 16, 1997, continuing to the date of entry of the summary
judgment, and attorney's fees in the amount of $10,000.00.
19, 1998, the court set a deadline for filing claims to the funds on
deposit. As of the deadline for filing claims, the only claims filed
were filed by CDR, English Furniture Industries, Inc. (seeking
attorney's fees); the State of Indiana (Department of Revenue and the
Indiana Department of Workforce Development): $21,496.71 plus interest,
penalties, and costs; Maley & Wertz, Inc.: $1,595.97 plus
post-judgment interest beginning October 13, 1995 at a rate of 8% per
annum; Midwest Environmental Services, Inc.: $600.00, Hartke &
Hartke: $50,000; Marann, Inc.: $165,161.61, and the US: $63,989 with
respect to the liens attached to the property of DT that it alleges was
transferred to or otherwise acquired by EF Company, and $10,001.37, plus
statutory interest, with respect to the liens that attached to the
property of EF Company with respect to its own tax liability, for a
total claim in the amount of $73,990.37. 3
The Crawford County Treasurer had filed a claim for $5,000 before this
action was removed, but did not file a claim in this court.
March 3, 1998
was dismissed with prejudice from this action and awarded its claimed
costs of $100.00.
April 17, 1998
, the court held a hearing on the validity and priority of the claims to
be filed on the fund. EF, Hartke & Hartke, Marann, Inc., the
, and the State of
, and CDR appeared. Other claimants, Maley & Wertz and Midwest
Environmental, did not appear at the hearing.
contends that it had valid federal tax liens upon DT's property and EF
Company that attached to the insurance proceeds in this case. The
argues that DT's equipment was acquired or otherwise transferred to EF
Company after the liens arising from the assessments against DT arose.
It contends that because EF Company was not a "purchaser"
within the meaning of the Internal Revenue Code, the transfer was made
subject to the
's federal tax liens. The
argues that even if DT's equipment was not transferred to EF Company, EF
Company was the operating nominee or alter ego of DT and, therefore, is
liable for DT's tax liabilities. Finally, the
contends that its claim is superior to all other claims, particularly
that of CDR since its federal tax liens against DT and EF Company were
filed before the April 30, 1996, assignment of EF's interest in the
proceeds to CDR.
Claimed Res Judicata of US's lien interest
that the judgment entered against DT and the default judgment entered
against EF Company are res judicata of the
's lien interest in the property of DT and EF Company. EF, however,
cites no authority for the proposition that a taxpayer can destroy the
's tax lien interest in the taxpayer's property by abandoning interest
in that property, which is what EF claims has occurred here. In fact,
the law is to the contrary. Abandonment of interest in property by a
taxpayer does not destroy any federal tax lien interest of the
in that property. See United States v. Mitchell [71-1 USTC ¶9451],
403 U.S. 190, 204-06 (1971) (holding renunciation under state law is
ineffective to defeat federal tax lien that attached to property rights
that vested prior to renunciation); United States v. Comparato
[94-2 USTC ¶50,354], 22 F.3d 455, 457-58 (2nd Cir. 1994) (retroactive
renunciations of interests in property pursuant to state law are
ineffective against federal tax lien); United States v. Grimm
[95-1 USTC ¶50,058], 865 F. Supp. 1303, 1312 (N.D. Ind. 1994) (stating
that once a federal tax lien attaches, a subsequent renunciation or
forfeiture under state law is ineffective against the lien). 4
Therefore, the court holds that neither the judgment entered against DT
nor the default judgment entered against EF Company bars the
's claim arising from its federal tax liens.
Determination of Ownership of Property
establishes that the equipment utilized by DT was owned by DT. (Stip.
Exs. 7, 10, and 11.) During Ms. Leverenz's first visit to DT's facility
in 1992, she asked who owned the property in the building, and William
E. Litchfield responded that it was owned by DT. In addition, DT's U.S.
Corporation Income Tax Returns for 1991 and 1992, signed by William E.
Litchfield as president under penalty of perjury, listed building and
other depreciable assets worth $104,880 and $95,040, respectively.
(Stip. Ex. 11.) Such assets would include equipment. None of DT's
schedules for these returns lists any expenses related to leasing of
either a building or equipment, thus corroborating the other evidence
that DT owned the property, including equipment, at its facility. In its
bankruptcy proceedings, DT continued to represent that it owned the
property, including equipment, used in its business. DT's bankruptcy
schedules, signed by William E. Litchfield under penalty of perjury,
claim over $57,000 in office equipment, furnishings, supplies,
machinery, fixtures, and equipment. The fact that DT's bankruptcy was
deemed a "no-asset" bankruptcy, is not decisive proof that DT
had no assets at the close of the bankruptcy case. A bankruptcy court's
determination that a Chapter 7 case is a "no-asset" case does
not bind this court to find that the debtor actually had no assets.
finds that DT's equipment was encumbered by the
's federal tax liens. The IRS assessed tax liabilities against DT for
unpaid withholding tax, unemployment tax, and social security, and on
August 17, 1992, and September 8, 1992, Notices of Federal Tax liens for
these liabilities were filed in the Crawford County Recorder's Office.
That the federal tax liens attached to all property and rights to
property of DT is not disputed. 26 U.S.C. §6321; United States v.
Rotherman [88-1 USTC ¶9135], 836 F.2d 359, 362 (7th Cir. 1988).
Further, even after the conclusion of DT's bankruptcy, DT's property
remained subject to the federal tax liens. See Dewsnup v. Timm,
502 U.S. 410, 417-18 (1992) (stating liens upon property of the estate
in a Chapter 7 bankruptcy remain on the property subsequent to the
bankruptcy); United States v. Bess [58-2 USTC ¶9595], 357 U.S.
51, 57 (1958) ("the transfer of property subsequent to the
attachment of the lien does not affect the lien, for 'it is of the very
nature and essence of a lien, that no matter into whose hands the
property goes, it passes cum onere. . . .' "); United
States v. Librizzi [97-1 USTC ¶50,263], 108 F.3d 136, 138 (7th Cir.
1997) (federal tax lien continues to encumber interest in property
following transfer of that property); United States v. Davenport
[97-1 USTC ¶50,213], 106 F.3d 1333, 1336 (7th Cir. 1997) (holding
transfer of marital residence into tenancy by the entirety could not
defeat tax lien that already attached to husband's interest); United
States v. Sanabria [70-1 USTC ¶9363], 424 F.2d 1121, 1122 (7th Cir.
1970) (stating that a lien for unpaid federal income tax continues until
the liability is satisfied or becomes unenforceable by reason of lapse
of time); In re Dillard, 118 B.R. 89, 92 (Bankr. N.D. Ill. 1990)
(stating the IRS's rights against liened property survive bankruptcy).
finds that DT's equipment was transferred or otherwise acquired by EF
Company for which no consideration was given. First, DT's equipment
remained at the
facility following DT's bankruptcy. Second, David Litchfield, as
president of EF Company, claimed on EF's initial tax return for February
16, 1994 through December 31, 1995, that at the end of the year, EF
Company had $63,989 in machinery and equipment, office equipment,
furnishings, and fixtures; no assets, however, were claimed at the
beginning of the year. In addition, Ms. Leverenz gave credible testimony
that the equipment she observed at the
facility operating under EF Company in October 1995 was the same
equipment she observed and was under the same operation as she observed
it when the facility was being operated as DT in 1992. Thus, DT's
equipment and other property was transferred to or otherwise acquired by
EF Company, and EF Company used the equipment so acquired. 5
have not offered any evidence to explain where or how EF Company
obtained its initial assets, specifically including the equipment
observed by Ms. Leverenz, other than through a transfer or other
acquisition from DT. 6
Nor have the Defendants offered any evidence which would support a
finding that DT was given any consideration from EF Company for the
equipment. Moreover, when it was to its benefit, as with its proof of
loss claim submitted to
and Corporate tax return, EF Company claimed ownership of that
rejects the Defendants' claims that EF Company owned only a part of the
property at issue and that Marann owned much of the property. In
particular, the court finds David Litchfield's testimony that Marann
owned the building and several pieces of equipment at
200 West Church Street
and leased them to EF Company not credible. The Defendants have not
produced any documentation to confirm any such leasing activity, and the
receipts for property which purport to be receipts for Marann,
Stipulated Exhibit 20, do not indicate that such property was still
owned by Marann at the time of the fire. With one exception, all of the
paperwork pertains to orders in 1987, more than 8 years before the fire.
Further, Marann did not file any income tax returns from 1993 forward,
and, therefore, did not report ownership of any assets, including rental
income. Had Marann owned any building or equipment, as is claimed, it
should have reported leasing income and would have been entitled to take
deductions for depreciation on the building and equipment. Marann's
failure to file any tax returns between 1993 and 1996 is strong
circumstantial evidence that it did not own the building and equipment
as is now claimed.
when asked by Revenue Agent Ragains who owned the property at the
facility, David Litchfield responded EF Company and Davann. Marann was
not mentioned. In response to her repeated requests for documentation of
such ownership, he produced only one document, a hand-written list
identifying EF Company and Davann as owners of assets at the facility.
Marann was not identified on that list. Indeed, the evidence supports a
finding that EF Company has attempted to gain the benefits of ownership
of this property, such as tax deductions for depreciation of the
property and realization of insurance proceeds, while attempting to
avoid the detriments of such ownership, that is, attachment of the
federal liens. The claim that Marann owned the building and much of the
property at the
facility appears to be yet another attempt to claim or disclaim
ownership when it suits the interests of EF and its related entities.
concludes that DT's property was transferred or otherwise acquired by EF
Company for no consideration and, therefore, that the property was
subject to the federal tax liens. The bankruptcy schedules filed by DT
and the bankruptcy court's docket sheet reflect no distribution of DT's
assets during the bankruptcy. (Stip. Exs. 3 at 9-13 and 7 at 1-5.) DT's
property was fully encumbered by the SBA and, therefore, was abandoned
by the bankruptcy estate, which resulted in DT's case becoming a
"no asset" bankruptcy. 7
The court has taken judicial notice of the fact that a bankruptcy
court's determination in a Chapter 7 case that the case is a "no
asset" case does not equate with a judicial determination that the
debtor actually had no assets. (Tr. at 59-60.) The SBA never foreclosed
on its interest in DT's assets, and DT's property subsequently was
transferred or otherwise acquired by EF Company. 8
contention that DT had no assets because of the replevin action of the
is not supported by the evidence. The replevin action was conducted
before the bankruptcy; in its bankruptcy filings DT listed equipment
valued in excess of $57,000 with no secured creditors named; and the
same equipment that was present at DT's facility before the bankruptcy
was present at the facility when EF Company began operation.
has not established that EF Company owned any equipment which was
formerly owned by DT because the
has not produced any documentary evidence as to ownership. Such
documentation is not necessary, where, as here, the credible evidence,
discussed above, establishes that DT had owned the equipment and then
the equipment was transferred or acquired by EF Company who claimed
ownership of that equipment. (See supra at 12-16.) EF also
contends that the
' claim that it can establish ownership based on the financial statement
as to DT's assets provided by William Litchfield in 1992 is flawed
because the records were destroyed. The unavailability of this statement
goes to the weight to be given it, rather than the admissibility of Ms.
Leverenz's testimony as to its former existence. In any event, as
discussed above, the financial statement was not the only piece of
evidence which supports the
's claim that DT owned the property at its facility. (See supra
rejects EF's contention that the
had to prove which company owned a particular piece of equipment as
well. The evidence is that when Ms. Leverenz visited DT's
facility in 1992 William Litchfield represented to her that DT owned the
building and all of the property within it. When Ms. Leverenz returned
to the facility in 1995 when it was operated as EF Company, she observed
the same equipment in much the same operation. Extensive evidence
supports a finding that EF Company owned the equipment she observed. (See
supra at 13-16.) Because there is evidence that all the equipment
observed in 1992 was owned by DT and then this same equipment--all of
it--was owned by EF Company, the
was not obligated to prove which company owned a particular piece of
equipment. Ms. Ragains' personal belief as to who owned the equipment is
not the sum total of the evidence regarding ownership of the equipment.
finds that EF Company took DT's property subject to the federal tax
liens securing DT's tax liability. 9
A federal tax lien imposed by §6321, 10
like the tax lien in this case, is not "valid as against any
purchaser . . . until notice thereof which meets the requirements of
subsection (f) has been filed by the Secretary." 26 U.S.C. §6323.
"Purchaser" under §6323 generally means "one who
acquires title for a valuable consideration in the manner of vendor and
vendee." United States v. Scovil [55-1 USTC ¶9137], 348
U.S. 218, 221 (1955); United States v. Hoper [57-1 USTC ¶9508],
242 F.2d 468, 470-71 (7th Cir. 1957). Because EF Company did not acquire
title to DT's property for any consideration, EF Company is not a
"purchaser" within the meaning of §6323. Therefore, §6323
does not operate to invalidate the
's federal tax liens as against EF Company. Thus, when DT's property was
transferred to or otherwise acquired by EF Company, the federal tax
liens continued to encumber the property.
question the court must resolve is the value of DT's equipment that was
transferred or otherwise acquired by EF Company and thus subject to the
's federal tax liens. EF contends that the
failed to produce evidence as to the value of any piece of equipment.
That contention is erroneous. The Sworn Statement in Proof of Loss,
signed by David Litchfield and submitted to
as proof of EF's claim, is evidence of the value of the equipment
destroyed in the fire.
determines the value of the EF Company's property subject to the tax
liens arising from DT's tax liability as follows. The Statement in Proof
of Claim claimed a loss, excluding the building, worth a total of
$366,025.42. (Stip. Ex. 4.) 11
Of these, $198,472 was the claimed value of the equipment destroyed
($112,425.42 represented work in progress and $55,128 represented
finished goods.) Under the insurance policy, $256,000 was assigned to
losses other than the loss of the building. Thus, the amount of
equipment identified in the Proof of Claim is 54.224% of the total value
of the non-building assets claimed destroyed in the fire (198,472
divided by 366,025.42). The equipment EF Company acquired from DT is
valued at $88,073, which is 44.376% of the total equipment claimed
destroyed ($88,073 divided by $198,472). (Stip. Exs. 4, 15.) This yields
$61,599.85 in insurance proceeds for the loss of the equipment EF
Company acquired from DT ($256,000 (insurance proceeds applicable to
non-building loss) x 54.224% x 44.376%)).
rejects EF's analysis of the insurance proceeds. To obtain the value of
the lost equipment, EF relies, in part, on the value listed in a
financial statement provided by the accounting firm of Want & Ender:
$65,612.16. (Stip. Ex. 5.) The evidence, however, establishes that this
financial statement was unaudited, that is, in preparing the statements
the accountant relied on the financial information provided by EF
("We have not audited or reviewed the accompanying financial
statements. . . .")) It is noted that the value of the equipment
listed in the financial statement is much less than the value submitted
to Scottsdale as the basis for the claim, (Stp. Ex. 4), and there is no
indication in the evidence that in determining the value of the
destroyed equipment Scottsdale relied on the unaudited financial
statements rather than the sworn statement provided by David Litchfield.
EF also relies on the Marann receipts totaling $34,946.20. For the
reasons discussed previously, (see supra at 14-15), the court
finds that the evidence does not support the claim that Marann owned the
equipment as represented in these receipts, and, therefore, the court
does not include the values taken from the receipts in calculating the
value of the loss. The court finds that $61,599.85 is the value of the
loss of the equipment EF Company acquired from DT. Therefore, the
is entitled to $61,599.85 plus interest from the proceeds on deposit
with respect to the federal tax liens that attached to the property of
DT transferred or otherwise acquired by EF Company.
claims $10,001.37 arising from the federal tax liens it filed against EF
Company on April I and 13, 1996. EF has not disputed this claim. The
's federal tax liens against EF Company attached to any insurance
proceeds to which EF Company was entitled at the time of the loss. See
In re Key West Restaurant & Lounge, 54 B.R. 978, 986 (N.D. Ill.
Bankr. 1985) (stating that at the moment of the fire, tax liens that
attached to property interest automatically attached to the property
right to recover proceeds from the insurer); see also Phelps v.
United States [75-1 USTC ¶9467], 421 U.S. 330, 334-35 (1975)
(federal lien attaching to taxpayer's property automatically attached to
the proceeds from the sale of that property); 26 U.S.C. §§6321, 6322.
has a right to the insurance proceeds in the amount of $10,001.37 plus
interest arising from its federal tax liens against EF Company. The
's total claim to the insurance proceeds is $71,601.22 ($61,599.85 +
10,001.37) plus interest.
Priority of the
's Federal Tax Liens
determines the extent of property interests of the parties to an action,
United States v. Rodgers [83-1 USTC ¶9374], 461 U.S. 677, 683
(1983); Librizzi [97-1 USTC ¶50,263], 108 F.3d at 137, Rotherman
[88-1 USTC ¶9135], 836 F.2d at 362; but federal law determines the
consequences of a federal tax lien that attaches to such interests,
including priority, of those property interests. See Rodgers
[83-1 USTC ¶9374], 461
at 683; Atlantic States Const., Inc. v. Hand, Arendall, Bedsole,
Greaves & Johnston [90-1 USTC ¶50,065], 892 F.2d 1530, 1534
(11th Cir. 1990); Rotherman [88-1 USTC ¶9135], 836 F.2d at 362.
previously has held that CDR's claim to a portion of the insurance
proceeds on file in this case was superior to any claims of any
claimants that were perfected after April 30, 1996, which was the date
of EF assigned its interest in the proceeds to CDR. The federal tax
liens were filed against DT and EF Company before April 30, 1996. 26
U.S.C. §6323 provides that a federal tax lien is good against innocent
third parties such as purchasers, holders of security interests,
mechanic's lienors, and judgment lien creditors upon filing of a notice
of the lien in the appropriate public office. 26 U.S.C. §6323(a), (f); see
Municipal Trust and Sav. Bank v. United States [97-1 USTC ¶60,275],
114 F.3d 99, 102 (7th Cir. 1997); Rotherman [88-1 USTC ¶9135],
832 F.2d at 362. Therefore, the court holds that the
's federal tax liens take priority over the remaining claims of the
claimants in this case.
EF's Renewed Motion to Remand
EF has renewed
its motion to remand this action to state court. Its motion to remand is
based on the court's rejection of the
's claim to the insurance proceeds. Because the court finds that the
has a valid claim arising from its tax liens against DT and EF Company
and that this claim is superior to any claim of any other claimant, the
court finds that the renewed motion to remand should be DENIED.
Distribution of Insurance Proceeds on Deposit
finds that insurance proceeds deposited with the court should be
distributed to the following claimants in the following amounts:
The United States $71,601.22
Maley & Wertz 1,595.97 plus 8% interest per
annum from 10-13-95
(Indiana Dept. of 21,496.71 plus interest, penalties
Work Force Development & Indiana and costs through
Department of Revenue) 4-15-99
Marann, Inc. -0-
Hartke & Hartke 50,000.00
TOTAL $150,293.90 plus interest, penalties
and costs as noted
With the remainder to English Furniture Industries, Inc., the insured on
the subject policy of insurance.
calculation reflects that of the $455,000 insurance proceeds originally
deposited, approximately $223,914.22 plus accumulated interest remains
on deposit with the court, which is sufficient from which to distribute
the above claims.
foregoing reasons, the Defendants' motion for judgment as a matter of
law made at the close of the
' evidence and renewed motion to remand to state court are DENIED.
holds that the US's claim to a portion of the interplead funds in the
amount of $61,599.85 with respect to the liens that attached to the
property formerly owned by DT that was transferred or otherwise acquired
by EF Company before the time of the loss, and $10,001.37 with respect
to the liens that attached to the property of EF Company with respect to
its own tax liability, for a total of $71,601.22 has priority over all
other claims of any other claimant. The
's claim should be paid in full from a portion of the insurance proceeds
on deposit with this court.
funds should be distributed to the following claimants from the
insurance proceeds as follows: (1) Midwest Environmental: $600.00; (2)
Maley & Wertz: $1,595,97 plus interest at 8% per annum from 10-13-95
through 4-15-99; (3) Crawford County: $5,000.00; (4) State of Indiana
(Indiana Dept. of Work Force Dev. and Indiana Dept. of Revenue):
$21,496.71, plus interest, penalties, and costs through 4-15-99; (5)
Marann, Inc.: $0.00; (6) Hartke & Hartke: $50,000.00; with any
remaining proceeds to be distributed to English Furniture Industries,
If Maley &
Wertz seeks interest in addition to the $1,595.97, then it is DIRECTED
to submit no later than April 5, 1999, its calculation of the interest
due it as of April 15, 1999. Failure to make a timely submission
constitutes waiver of any claim to interest.
the State of Indiana seeks interest, penalties, and/or costs, in
addition to the $21,496.71 then it is DIRECTED to submit no later
than April 5, 1999, its calculation of the interest due it as of April
15, 1999. Failure to make a timely submission constitutes waiver of any
claim to additional interest, penalties, and/or costs.
court has found that claimants Maley & Wertz and the State of
Indiana are entitled to the insurance proceeds in the above stated
amounts, their cross claims seeking lesser amounts (amounts agreed upon
by the claimants and English Furniture Industries, Inc. and English
Furniture Company) are DENIED.
anticipated that Final Judgment will be entered in this case on April
It appears that both Davann's returns were signed by William E.
Litchfield as president of Davann.
Ms. Leverenz testified that on October 11, 1995, she assisted Ms.
Ragains in the "seizure of . . . assets," (Tr. at 46),
whereas, Ms. Ragains testified that they seized "inventory of
English Furniture Company." (
at 86.) The court believes that Ms. Ragains' recollection is more
accurate than that of Ms. Leverenz. First, the term "assets"
is more general than the term "inventory" and the latter is a
subset of the former. Thus, in testifying that they seized
"assets" Ms. Leverenz was not completely incorrect. More
significantly, however, Ms. Ragains gave further testimony which
suggests that inventory rather than assets were seized. Right after
testifying that they seized inventory, Ms. Ragains testified: "I
viewed the assets while we waited for them to get the money to release
the inventory." (
at 86.) Thus, in her testimony regarding the seizure Ms. Ragains drew a
distinction between the inventory and assets; Ms. Leverenz, on the other
hand, did not. (See id. at 46-47.)
' claim arising from the lien against EF Company apparently is not
disputed by EF.
The court notes that Mapes v. United States, 15 F.3d 138 (9th
Cir. 1994), held that a retroactive renunciation of interest in an
estate defeated a federal tax lien because the lien never attached to
the interest. Mapes, however, appears to be contrary to authority
in the United States Supreme Court and other circuits and has not been
routinely followed or cited by other courts.
Because the court finds that EF Company had acquired DT's property at
least by October 1995, the court agrees with EF that at the time the
policy was taken out and at the time of the fire, no property owned by
DT was insured.
These pieces of evidence refute EF's argument that there was not a shred
of evidence in this case that DT retained any assets following its
The Small Business Administration ("SBA") had a lien on all
the equipment, inventory, and accounts receivable owned or thereafter
acquired by DT. (Stip. Ex. 3 at 12.) Since SBA's liens were upon all of
DT's assets, there were no assets remaining for distribution to other
The SBA has not asserted a claim to the proceeds in this case as a
result of its lien on DT's assets. Thus, the
's liens against the assets formerly owned by DT are the only claims
against those assets in this case.)
Because the court finds that DT's equipment was transferred or otherwise
acquired by EF Company, the court does not reach the issue whether EF
Company was the operating nominee or alter ego of DT.
"If any person liable to pay any tax neglects or refuses to pay the
same after demand, the amount (including any interest, additional
amount, addition to tax, or assessable penalty, together with any costs
that may accrue in addition thereto) shall be a lien in favor of the
United States upon all property and rights to property, whether real or
personal, belonging to such person." 26 U.S.C. §6321.
claimed the total was $361,025.42. However, the
apparently misread the first of the three totals in the Sworn Statement,
which the court reads as $198,472 but the
read as $193,472. The error appears to have been inadvertent.
United States of America
v. Theodore J. Scheve and Geraldine Scheve
District Court, Dist. Md., Civ. CCB-97-3556, 11/20/98
Secs. 6323 and 7425 ]
Foreclosure: Nonjudicial foreclosure sale: Notice: Discharge of
liens: Priority of liens: Federal tax lien: Lien for renovations and
maintenance.--Individuals who purchased real property subject to a
federal tax lien were not entitled, following a nonjudicial foreclosure
sale, to reimbursement for their costs of renovation and maintenance of
the property before division of the sale proceeds and satisfaction of
the IRS lien. Correspondence between the individuals' attorney and the
IRS discussing the possibility of a sale was not sufficiently definite
to constitute the statutorily required notice of sale. Thus, the IRS did
not fail to redeem the property in accordance with Code
Sec. 7425(d)(1) , and the tax lien was not discharged. Even assuming
that a lien for the renovations to the property arose in favor of the
individuals under state (
) law, federal law gave the tax lien priority; thus, the tax lien was
required to be satisfied before the individuals could be reimbursed.
are the parties' cross-motions for summary judgment in this action by
the plaintiff, the
, seeking to foreclose tax liens on certain real property currently
owned by Theodore and Geraldine Scheve, the defendants. For the reasons
that follow the plaintiff's motion will be granted and the defendants'
motion will be denied.
In December of
1990, the IRS assessed taxes, interest, and penalties due against Mr.
Lewis Simpson for delinquent taxes for years 1984 through 1988. 1
At that time Mr. Simpson was the owner of one-half of the fee interest 2
in real property at 12412 Lampton Lane, Fort Washington, Maryland 20744
(hereinafter "the property"). The property was sold at a tax
's County in May of 1991 to Mr. and Mrs. Scheve. The property remained,
however, subject to a right of redemption by the previous owners. In
September of 1991 the IRS filed a notice of federal tax lien.
Mr. and Mrs.
Scheve then commenced correspondence, through their attorney, with the
IRS regarding the property. First, in a letter dated
May 12, 1993
, the Scheves contacted the IRS requesting a discharge of the federal
tax lien. The IRS responded on June 15, 1993, with a letter and
accompanying information 3
regarding the statute applicable to discharge of liens, 4
including the notice procedures required to pursue a discharge of the
June 18, 1993
the Scheves, again through their attorney, responded to the IRS and
explained that the Scheves were faced with a "Hobson's
choice." Either the Scheves could "take the property"
subject to the risk that they could not sell it unless the IRS waived
the lien as "[t]here is no way in the world the lien is ever going
to be paid off from the value of this property," or they could
"abandon [their] interest in the property." The IRS did not
respond to this letter. On December 8, 1993, the Circuit Court of Prince
George's County entered a decree foreclosing the rights of redemption on
the property and ordering the conveyance of the property to the Scheves.
Almost a year later, on November 21, 1994, the Scheve's attorney
requested a discharge of the IRS lien by letter. On December 14, 1994,
the IRS denied the Scheves' request for discharge noting the Scheves'
failure to provide notice of the sale to the IRS at least twenty-five
days before the sale pursuant to 26 U.S.C. §7425 (1994).
instituted an action in this court on
October 23, 1997
, to enforce the lien through sale of the property. The parties have
filed cross motions for summary judgment. Both parties acknowledge that
the Scheves should be equitably subrogated for the taxes the Scheves
's County to purchase the property. (Pl.'s Response to Defs.'s Mot.
Summ. J. at 4-5.) In their motion for summary judgment the Scheves
allege that they have spent $53,817.54 on renovations and maintenance.
They seek reimbursement for these expenses prior to the division of the
proceeds of the sale. The IRS responds that the federal tax lien extends
to the appreciated value of the property and that no lien for
improvements has priority over the federal tax lien.
Rule 56(c) of
the Federal Rules of Civil Procedure provides that summary judgment
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.
Supreme Court has clarified that this does not mean any factual dispute
will defeat the motion:
By its very
terms, this standard provides that the mere existence of some
alleged factual dispute between the parties will not defeat an otherwise
properly supported motion for summary judgment; the requirement is that
there be no genuine issue of material fact.
v. Liberty Lobby, Inc., 477
242, 247-48 (1986) (emphasis in original).
party opposing a properly supported motion for summary judgment may not
rest upon mere allegations or denials of [its] pleading, but must set
forth specific facts showing that there is a genuine issue for
trial." Rivanna Trawlers Unlimited v. Thompson Trawlers, Inc.,
840 F.2d 236, 240 (4th Cir. 1988). The court must "view the facts
and draw reasonable inferences in a light most favorable to the
nonmoving party," Shaw v. Stroud, 13 F.3d 791, 798 (4th Cir.
1994), but it also must abide by its affirmative obligation to ensure
that factually unsupported claims and defenses do not proceed to trial. Felty
v. Graves-Humphreys Co., 818 F.2d 1126, 1128 (4th Cir. 1987) (citing
Celotex Corp. v. Catrett, 477
317, 323-24 (1986)).
confers jurisdiction on the court to order the sale of property subject
to a federal tax lien and to direct the distribution of the proceeds. 26
U.S.C. §7403 (1994). In Washington v. United States, the court
§7403 Congress has expressly authorized the district court to subject
'any property' in which the delinquent taxpayer 'has any right, title,
or interest' to the payment of 'such tax or liability'; has required
that 'all persons' claiming any interest 'in the property involved' be
made parties to the proceeding; and has empowered the court to order a
sale of such property' and direct distribution of the proceeds of such
sale according to the 'interests of the parties and of the United
v. United States [68-2 USTC ¶15,864],
402 F.2d 3, 7 (4th Cir. 1968) (quoting 26 U.S.C. §7403). In
, the taxpayer owned a one-half fee interest in property that was also
subject to a prior lien by Metropolitan Life Insurance Company and the
dower interest of his wife. The court ordered the sale of the property
to satisfy the prior lien and dower interest and ordered the remainder
to be distributed to the government toward satisfaction of the tax lien.
Hence the Fourth Circuit has recognized the jurisdiction of the District
Court to order the type of relief requested by the parties in this case.
There are two
primary issues: first, whether, the Scheves gave the IRS proper notice
of sale under 26 U.S.C. §7425 sufficient to trigger an obligation on
the part of the IRS to redeem its lien on the property within 120 days
of the sale. Second, assuming proper notice was not given and the sale
to the Scheves did not affect the IRS's lien on the property, the 7
parties seek resolution as to the proper distribution of the proceeds
from a foreclosure sale by the IRS.
Notice of the
Pursuant to 26
U.S.C. §7425, a federal tax lien on property may be discharged by the
IRS under certain conditions. If the subject property is sold in a
nonjudicial foreclosure sale, the purchaser must give notice of the sale
via registered or certified mail or by personal service to the IRS no
later than twenty-five days prior to the sale. 26 U.S.C. §7425(c)(1).
If the IRS receives sufficient notice, the IRS may redeem the property
within 120 days of the date of sale.
§7425(d)(1). If the IRS does not receive notice in accordance with §7425(c)(1),
the federal tax lien remains intact, unaffected by the sale. See
Tompkins v. United States [91-2 USTC ¶50,540], 946 F.2d 817, 820
(11th Cir. 1991) (explaining that failure to notify the IRS of sale as
prescribed by §7425 results in IRS lien remaining intact).
Scheves contend that the correspondence they sent to the IRS in May and
June of 1993 constituted notice of sale. This assertion fails in several
respects. First, the letters request discharge of the federal tax lien
but do not definitively indicate that the property is going to be sold.
In fact, the June 1993 letter indicates that the Scheves were waiting
for a response from the IRS before finalizing the purchase of the
property since it was clear to them that they could not "sell it
unless the lien is waived or paid off" and that there was "no
way in the world" that the lien could be satisfied by the value of
the property. This correspondence does not indicate a definitive
intention to finalize the sale and is therefore not notice of sale
sufficient to meet the requirements of section 7425. Second, the statute
specifies limited means of delivery acceptable for the required notice,
such as by certified mail. The Scheves do not contend that they
satisfied this delivery requirement.
federal lien was not affected by the
's County tax sale to the Scheves and remains attached to a one-half fee
interest in the property.
PRIORITY OF LIENS AND DISTRIBUTION OF THE PROCEEDS
motion for summary judgment the Scheves seek reimbursement for the costs
they incurred in satisfying the Princes George's County Tax Assessment
and for additional expenses they incurred renovating and maintaining the
property. The government agrees that the Scheves should be equitably
subrogated for the expenses ($22,778.05) they incurred to satisfy the
state real property tax liens in purchasing the property.
contests, however, the Scheves' request for contribution or
reimbursement for renovations to the property. The government cites
several cases to support the proposition that the federal tax lien is
not limited to the value of the property at the time the lien attached
or at the time the taxpayer disposed of the property but rather extends
to the full appreciated value of the property until the lien is
satisfied. United States v. Avila [96-2 USTC ¶50,357], 88 F.3d
229, 233 (3d Cir. 1996); United States v. Blakeman [93-2 USTC ¶50,485],
997 F.2d 1084, 1092-93 (5th Cir. 1993); Han v. United States
[91-2 USTC ¶50,486], 944 F.2d 526, 528-29 (9th Cir. 1991). In those
cases, however, it was not clear whether the increase in property value
was due, in significant part, to improvements or renovations made by the
current owners. Accordingly, further analysis is required to resolve
whether the tax lien attached to a one-half interest in the value of the
property as increased due to the Scheves' renovations.
The process to
determine the proper priority and distribution of tax foreclosure sale
proceeds is well established. First, the court must look to state law to
determine the property interest of the taxpayer to which the IRS lien
has attached. Aquilino v. United States [60-2 USTC ¶9538], 363
U.S. 509, 512-14 (1960); First Am. Title Ins. Co. v. United States
[88-2 USTC ¶9408], 848 F.2d 969, 970 (9th Cir. 1988);
[68-2 USTC ¶15,864], 402 F.2d at 7. Second, the court turns to federal
law to determine the process for the distribution of the sale proceeds.
"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 a uniform
istration of the federal revenue statutes." Aquilino [60-2
USTC ¶9538], 363
at 514. Hence, the court must first address
law to determine the extent of the property interest to which the IRS
Law--Determining the Property Interests
tax lien does not extend beyond the taxpayer, Mr. Simpson's, one-half
interest in the property at issue. Once a federal tax lien has attached
is, "in a sense, a co-owner . . . to the extent of the lien." Simpson
v. Thomas [59-2 USTC ¶9760], 271 F.2d 450, 452 (4th Cir. 1959); See
v. Metropolitan Life Ins. [58-1 USTC ¶9230; 58-2 USTC ¶9630], 256
F.2d 17, 25 (4th Cir. 1958). Hence, it may be instructive to analyze the
' position as analogous to a co-owner, or cotenant, in the property to
determine the extent of the
' interest in the improvements and renovations completed by the Scheves.
law, a cotenant is "entitled to a lien [or contribution] for the
amount expended by him on improvements . . . made upon the joint
property with [the cotenants'] knowledge or at their request." Hogan
v. McMahon, 80 A. 695, 697 (
1911); see also DiTommasi v. DiTommasi, 340 A.2d 341, 352 (Md.
Ct. Spec. App. 1975). In DiTommasi, the lower court ordered
contribution to be paid to the resident cotenant for permanent
made in the absence of agreement by the nonresident cotenant. DiTommasi,
340 A.2d at 352. The lower court reasoned that "it would be an
'injustice to allow the [nonresident cotenant] to profit, as he will at
the time of sale, from the permanent improvements made by the (resident
cotenant) to the property.' "
On appeal the court noted that the lower court's admitted "
'deviation . . . from the traditional property concept' [that approval
of the improvements by the cotenant is required] appear[ed] to have been
erroneous and the appellant appear[ed] to have been granted
contributions beyond that to which, under the law, she may have been
at 353. Hence, under this analogy it would be paramount whether the
"cotenant" (the federal government lien holder) gave its
approval or consent for the improvements. For reasons to be explained,
however, this issue need not be definitively resolved. The court will
assume, arguendo, that a lien arose under
law in the Scheves' favor for the renovations to the property.
Proceeding under this assumption, the court must next consider the
priority of the liens as prescribed by Federal law. Aquilino
[60-2 USTC ¶9538], 363
Federal Law--Priority of the Property Interests
tax liens do not automatically have priority over all other liens.
Absent provision to the contrary, priority for purposes of federal law
is governed by the common-law principle that 'the first in time is the
first in right.' " United States v. McDermott [93-1 USTC ¶50,164],
507 U.S. 447, 449 (1993) (quoting
[54-1 USTC ¶9191], 347 U.S. 81, 85 (1954)). A federal tax lien is
choate and perfected at the date of assessment and is valid against a
purchaser once proper notice has been filed. United States v. Vermont
[64-2 USTC ¶9520], 377 U.S. 351, 354 (1964); 26 U.S.C. §6323(a)
(1994). Thus, the tax lien was perfected in December of 1990 when it was
assessed and became effective against the Scheves on September 11, 1991,
prior to the final decree by the Circuit Court in
's County ordering conveyance of the property to the Scheves.
In Glass v.
Secretary, Department of Treasury IRS, the
district court analyzed facts similar to those in this case. [88-2 USTC
¶9600], 703 F. Supp. 38 (W.D. Ky. 1988). The taxpayer in Glass
had owned a one-half interest in the property at issue prior to the
purchase of the entire property by a new owner, the plaintiff Ms. Glass.
at 39. Ms. Glass, like the Scheves, made significant improvements to the
The court discussed the current owner's property interest in the value
of these improvements as a lien against the property.
The court held that since the IRS lien arose first, it had priority and
hence no contribution or reimbursement for the value of the improvements
to the property was due from the proceeds prior to the payment of the
federal tax lien.
the Scheves do, in fact, have a lien on the property in the amount of
the value of the renovations, the lien arose after the federal tax lien
was perfected and effective against the Scheves as purchasers. Hence, as
in Glass, the federal tax lien has priority over the Scheves'
potential lien for the value of the renovations.
Pursuant to 26
U.S.C. §6342, monies realized from the sale of property foreclosed upon
by the IRS shall be distributed first to satisfy "expenses of the
proceedings," next to satisfy any tax liability, and finally,
"[a]ny surplus proceeds remaining [shall] be credited or refunded
by the Secretary to the person or persons legally entitled
thereto." 26 U.S.C. §6342 (1994). Therefore, the proceeds of the
property (net of the expenses of the proceeding) should be distributed
as follows: First, the Scheves should be equitably subrogated for the
value of the state tax arrearage that they paid to purchase the
property. Second, the remaining proceeds should be divided one-half to
the Scheves and one-half to the
to the extent of the federal tax lien. Finally, in the event that the
one-half distribution after the equitable subrogation of the Scheves
exceeds the federal tax lien, the remainder shall be distributed to the
reasons stated in the accompanying Memorandum, it is hereby ordered
1. the motion
for summary judgment by the Plaintiff, the
, is GRANTED; and
2. the motion
for summary judgment by the defendants, the Scheves, is DENIED;
3. the order
of distribution of the sale proceeds (net of expenses) shall be: first,
to the Scheves for the value of the state tax arrearage that they paid
to purchase the property; second, the remaining proceeds shall be
divided equally between the Scheves and the United States, until the
federal tax lien is satisfied; and finally, any remainder shall be
distributed to the Scheves.
4. copies of
this Order and the accompanying Memorandum shall be mailed to counsel of
5. the clerk
of the court shall CLOSE this case.
The total remaining taxes due as of
April 13, 1998
was in excess of $400,000.
Larry Commodore owned the other one-half interest.
26 U.S.C. §7425 (1994).
Among the types of improvements were installation of a central air
conditioning unit, storm doors and windows, and a new bathroom sink, as
well as the completion of a paint job.
¶50,966] United States of America, Plaintiff-Counter Defendant-Appellee
v. Andrew E. Blanche, et al., Defendants Andrew E. Blanche, Cynthia D.
Blanche, Defendants-Cross Claimants-Counter Plaintiffs-Appellants v.
William S. Hewitt, Defendant-Cross Defendant-Appellee
U.S. Court of Appeals, 5th Circuit, 97-50482, 3/12/99, 169 F3d 956,
Dismissing as moot the appeal from a District Court decision, 97-1
Secs. 6323 and 7402 ]
Liens: Foreclosure on property during pendency of appeal:
Jurisdiction: Mootness: Federal National Mortgage Association.--A
taxpayer's appeal challenging an IRS tax lien on his real property was
dismissed as moot. During the pendency of the appeal, the Federal
National Mortgage Association, as holder of the first mortgage note on
the property, exercised its power of sale under the deed of trust
securing the note and the substitute trustee under the first deed of
trust sold the property to third parties at a foreclosure sale. Since no
party to the appeal raised any issue as to the validity of the first
mortgage lien, the foreclosure of the lien mooted any issues on appeal.
DEMOSS, PARKER and DENNIS, Circuit Judges.
raises for our determination the validity of the district court's
determination that the
, through the Internal Revenue Service, had a tax lien against the
following described property:
Lot Number One
(1), Block Number One (1), NORTHCLIFF COUNTRY CLUB ESTATES COMMUNITY,
SECTION 1, a subdivision in Guadalupe County, Texas, according to plat
recorded in Volume 4, Pages 63-65, Plat Records, Guadalupe County,
district court determined that such tax lien was valid in the amount of
$25,276.20 and ordered the foreclosure of such tax lien and the
distribution of the proceeds from the sale of the property as described
in the final Judgment of the district court filed on
February 28, 1997
This Court has
now been advised that during the pendency of this appeal, the Federal
National Mortgage Association as holder of the first mortgage note on
the above described property has exercised its power of sale under the
deed of trust securing such note; and the substitute trustee under the
first deed of trust has sold such property to third parties at a
foreclosure sale on December 1, 1998.
No party to
this appeal has raised any issue as to the validity of the first
mortgage lien; and the foreclosure of such lien effectively moots the
issues of this appeal.
we DISMISS this appeal as moot.
United States of America
, Plaintiff v. Andrew E. Blanche, Cynthia D. Blanche, William S. Hewitt,
District Court, West. Dist.
Tex., San Antonio Div., Civ. SA-95-CA-0419,
Tax lien: Validity against third parties: Purchasers.--A tax lien
attached to a delinquent taxpayer's real property and was effective
against married individuals who purportedly acquired the property by an
assumption deed from the taxpayer's wife. The transferees did not
qualify as purchasers under state (
) law because they did not acquire a valid interest in the property
prior to the filing of the lien. There was no evidence that the taxpayer
authorized his wife to dispose of their entire, joint-managed community
property, and the wife could not transfer her one-half, undivided
interest to the transferees. Also, the transferees forfeited their right
to specific performance under a contract for sale of the property when
they failed to secure financing to complete the purchase.
Estoppel: Detrimental reliance: Estoppel by silence.--The IRS was
not estopped from denying title to the transferees of real property
subject to a tax lien simply because they might have detrimentally
relied on an earnest money contract with the delinquent taxpayer. There
was no evidence that the taxpayer falsely represented to the transferees
that they were the owners of the property or that he had concealed any
material facts. Moreover, the transferees did not have a claim for
estoppel by silence because there was no evidence that the taxpayer
induced them to make improvements to the property, and the parties did
not have a confidential or fiduciary relationship.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
March 5, 1996
, a trial before the bench was held in the above-styled and numbered
cause. The case comes to this Court pursuant to the Internal Revenue
Code of 1986, as amended, 26 U.S.C. §§7402, 7403 and 28 U.S.C. §§1340,
United States (hereinafter "IRS") seeks to reduce to judgment
a federal income tax assessment against Defendant William S. Hewitt
(Hewitt), to foreclose a federal tax lien on certain real property, and
to receive a judgment for any unpaid tax liability not satisfied by the
sale of the property at issue. Defendants Andrew E. and Cynthia D.
Blanche (the Blanches) filed a counter-claim against Hewitt for specific
performance under a failed contract for sale of the property. Hewitt
filed a cross-claim against Lomas Mortgage
and the Blanches alleging a conspiracy to deprive him of his property
and seeking back rental payments for the Blanches' occupancy.
prior to trial, the Court was informed that Lomas Mortgage
had filed for bankruptcy. No representative of Lomas appeared at trial.
Consequently, Hewitt's conspiracy claim against Lomas and the Blanches
was severed by the Court prior to trial.
Federal Rules of Civil Procedure 52(a) and 58, the Court hereby enters
the following findings of fact and conclusions of law.
submitted to the Court in this trial shows as follows:
(1) On May 27,
1991, the IRS assessed a federal income tax liability against Defendant
William S. Hewitt for the 1990 tax year. As of March 1, 1996, this tax
liability totaled $25,276.20, and continues to accrue interest and
penalties until paid.
(2) At the
time of the tax liability assessment, Hewitt and his wife, Peggy L.
Hewitt, were the owners of certain real property described as:
Lot Number One
(1), Block Number One (1), NORTHCLIFF COUNTRY CLUB ESTATES COMMUNITY,
SECTION 1, a subdivision in Guadalupe County, Texas, according to plat
recorded in Volume 4, Pages 63-65, Plat Records, Guadalupe County,
referred to as "the property"). The IRS filed a tax lien on
the property on January 18, 1994, in Guadalupe County, Texas.
(3) On May 20,
1990, prior to the filing of the tax lien, the Hewitts entered into an
earnest money contract to sell the property to the Blanches.
to the terms of a lease option addendum in the Earnest Money Contract,
the Blanches began occupying the property on June 25, 1990, as lessees.
The lease option in the earnest money contract called for monthly
payments of $1000.00 for a period of one year beginning July 1, 1990
through June 30, 1991. A portion of that payment, $250.00 per month,
would be credited back to the Blanches at the end of the option, to be
applied to the purchase of the property.
purchase price of the property at the end of the contract period was
$139,500.00 minus the credit back of $3,000.00. In addition to the
monthly lease payments, the contract called for the Blanches to tender
earnest money of $100.00 with the initial contract, $2,500.00 on July 1,
1990, and $1,500.00 on January 1, 1991. The earnest money contract
further required the Blanches to secure outside financing for the
purchase of the property.
(6) A standard
inspection report on the property completed on June 19, 1990, by SIDCO
Inspection Service, revealed several needed repairs, including
structural problems with the roof. This report did not include
inspection of structural damage to the pool.
(7) All the
payments required under the contract were made by the Blanches, however,
they did not purchase the property on the closing date of August 31,
earnest money contract, including the lease option, expired by its own
terms on June 30, 1991. Thereafter, the Blanches remained in possession
of the property and continued to make $1000.00 monthly 'lease' payments.
Blanches did not complete their purchase of the property because they
believed that the Hewitts first needed to make repairs to the property
in order to bring it up to code. Based on conversations with their
broker, it was the Blanches' belief that the property did not meet city
Blanches spoke to two or three mortgage companies. They were told that
it would be impossible for them to secure financing if the property
failed to meet city codes. Based on what their broker told them, the
Blanches decided it would be a waste of money to actually put in an
application for financing before the repairs were done. Because no
application was made, the Blanches were never given or denied financing.
testified that he was unable to make most of the repairs because he was
living outside of the state. Hewitt argued that even if he failed to
make the repairs as required under the contract, the Blanches could have
made the repairs and they would have been reimbursed or, alternatively,
they could have opted out of the contract in light of the alleged cost
to repair the property. Nonetheless, Hewitt stated that he spoke with
Mr. Blanche a number of times after receiving correspondence 1
from him regarding the repairs in question and instructed Mr. Blanche to
either send him estimates or make the repairs and he would reimburse for
maintained that most of the needed repairs were minor except for the
roof, which Allstate Insurance Company replaced in May of 1991. There is
a factual dispute about the condition of the roof following these
repairs. The Blanches say that Allstate only replaced damaged shingles
and did nothing about the structural problems. Hewitt says he was
assured by the roofer that the roof was in good shape after the repairs
and contends that his obligation was satisfied. No inspection was done
after the Allstate repairs were complete.
(13) The terms
of the earnest money contract did not require Hewitt to make repairs
unless or until he was in "receipt of all loan approvals and
inspection reports." 2
The Blanches proceeded as if all the repairs found on the inspection
report were to be made by the Hewitts regardless of loan approval.
to the earnest money contract, repairs exceeding $1,500.00 would not be
covered by the Hewitts. 3
The addendum to the contract repeats two of the contract provisions. The
addendum specifies that a licensed inspector would inspect the property
and that the Hewitts would be responsible for making repairs based on
that inspection. There is nothing in the addendum to indicate that the
$1500.00 repair limit in the main body of the contract would not apply
to the repairs found by the inspection. The addendum merely states that
once the Hewitts' obligations are satisfied, all other repairs would be
up to the Blanches. The roof, in a special provision, had an additional
warranty expiring June 6, 1991.
Blanches insist that the Hewitts were obligated to make all the repairs
listed by the inspection report, notwithstanding the $1500.00 contract
limitation. Further, the Blanches appear to have believed that all
repairs were to be made before the Blanches had an obligation to apply
for third-party financing. These contentions are disputed by Hewitt and
are not consistent with the language of the contract itself.
Blanches have never tendered the full contract price for the property
and do not do so now. Mr. Blanche testified that with all the repairs
and improvements that have been made, he believes enough money has been
expended. However, the Court notes that at least some of the money went
to accommodate the Blanches' desire for improvements to the property,
not merely repair or replacement.
Blanches continued making the monthly lease payment of $1000.00 to the
Hewitts after the earnest money contract and lease option expired. 4
As of September 1991, the checks were made payable only to Peggy L.
Hewitt by her instructions; 5
the last payment being made on April 10, 1992.
the time the Blanches were making the checks payable to Mrs. Hewitt,
they discussed with her the possibility of purchasing the property by
taking the property as is, assuming the outstanding mortgage, and giving
her a $20,000 note in addition to the earnest money they already paid.
However, once Lomas Mortgage
began foreclosure proceedings, sometime in the early spring of 1992, the
Blanches and Mrs. Hewitt agreed to different terms. In consideration for
the assumption agreement, the Blanches were to take the property as is,
assume the unpaid mortgage balance of $59,703.43 and any other
encumbrances on the property, cure the default with the mortgage company
of $7,269.73, and apply the earnest money given under the contract that
had previously expired.
Blanches were concerned they would not have good title to the property
without Hewitt's signature. On May 8, 1992, the Blanches sent a letter
to Mrs. Hewitt explaining the need for power of attorney from Hewitt to
convey the property. At this point, the Blanches did not know whether
the Hewitts had divorced, separated, or even if Mrs. Hewitt was in
contact with her husband.
(20) Once the
assumption agreement and deed were drafted they were sent via facsimile
to Mrs. Hewitt in
, to be signed by both her and Hewitt. When they were returned via
facsimile to the Blanches, the only signature on the documents was that
of Mrs. Hewitt. The documents were notarized July 2, 1992, as the date
the assumption deed and assumption agreement were executed by Mrs.
receiving the documents from Mrs. Hewitt, the Blanches had a
conversation with her that led them to believe she had received approval
from her husband regarding the conveyance of the property. 6
Believing that Hewitt had consented to the sale, the Blanches sent the
assumption deed and agreement back to Mrs. Hewitt so she could have
Hewitt sign them. However, the Blanches never heard back from Mrs.
Hewitt regarding when Hewitt would sign the papers. The Blanches were
obviously still concerned that Hewitt's signature was not on the
documents. Consistent with this concern, a letter sent by Mrs. Blanche
to Mrs. Hewitt on September 20, 1992, reiterated the need for Hewitt's
signature on the documents.
instituted foreclosure proceedings, the Blanches were able to assume the
loan on the property by curing the default amount. The Blanches filed
the assumption deed, still unsigned by Hewitt, with the
of Guadalupe County, Texas on August 24, :L992. Thereafter the Blanches
began to take steps to repair and improve the property, all the while
believing they were the true owners of the subject property.
repairs and/or improvements of items made to the property by the
Blanches, in addition to the $969.00 expended prior to the expiration of
the Lease Option, include the following:
Extensive work on the in-ground pool by Gary Pools to repair structural
damage, install hot tub, and replace various inoperative items totaling
Yard clearing by Richard Bosquez for a total of $293.50;
Water heater replacement by Mr. Rooter Plumbing totaling $3186.08;
Privacy Fence installation by Arrowhead Fence & Supply Co., Inc.
unknown: Electrical work by unknown company for $580.00;
unknown: Heating and air conditioning work by unknown company for
unknown: Garage door & opener work by unknown company for