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United States of America , Plaintiff v. Allen E. Kroblin and Pamela A. Kroblin, Defendants.

U.S. District Court, No. Dist. Okla. ; 02-C-345-B, June 24, 2004 .

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[ Code Sec. 6323]

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.

[ Code Sec. 7403]

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 ( Oklahoma ) 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.

ORDER

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.

The United States 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.

The United States 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 United States 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.

Lien Priority

26 U.S.C. §6321 imposes a lien on property belonging to a liable taxpayer. Section §6321 provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any 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 such person.

26 U.S.C. §6322 provides that the lien arises at the time the assessment is made. 26 U.S.C. §6323(a) provides:

The lien 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 United States 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 United States 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). The United States has a valid tax lien on the subject property, and the conveyance of February 27, 1990 was made subject to that lien.

Sale of the Property

The United States 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. §7403(a) 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 that §7403 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 Rogers Court 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. Id. 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. Id. at 2151-52.

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 [ 95-2 USTC ¶50,502], 898 F.Supp. 792, 796 (D. Kan. 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, Oklahoma 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 Rodgers Court makes it clear that they are not an "exhaustive list," and should not exclude consideration of common sense and special circumstances. Id. 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 United States 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.

 

 

In 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, Rob 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, Rob in Hunley, Steven J. Lusk, Trustee, Defendants.

U.S. Bankruptcy Court, East. Dist. Tenn. ; 01-31472, 01-31712, 292 BR 613, November 18, 2002 .

[ Code Sec. 7122]

Tax liens: Offer in compromise: Satisfaction of tax debt: Evidence. --

A small 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 agreement.

[ Code Sec. 6323]

Tax liens: Attachment of lien to real property: Release by IRS. --

Federal tax 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.

J. Myers Morton, Morton & Morton, PLLC, for plaintiffs. Harry S. Mattice, Jr., United States Attorney, Pamela G. Steele, Assistant United States Attorney, Jason S. Zarin, Department of Justice, for I.R.S. F. Chris Cawood, for Rob ert and Melissa Long.

MEMORANDUM 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' Response to United States ' 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). (West 1993).

I

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 , Knoxville , Tennessee (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 Rob 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

II

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 (1986).

III

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 ending December 31, 1989 , and December 31, 1992 . These taxes were assessed on May 28, 1990 , and October 4, 1993 , respectively.

(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 , and December 31, 1996 . These taxes were assessed on October 2, 1995 , September 9, 1996 , and September 29, 1997 , respectively.

(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, Knoxville , Tennessee ." 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 full."

IV

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:

§6321. Lien for taxes.

 

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.

I.R.C. §6321 (West 2002).

§6322. Period of lien.

 

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

I.R.C. §6322 (West 2002).

§6325. 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 --

 

(1) Liability 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 certificate. --

 

(1) 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 lien[.]

I.R.C. §6325(a)(1) (West 2002).

§7122. Compromises.

 

(a) 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; ...

 

(b) Record. --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, and

 

(3) The amount actually paid in accordance with the terms of the compromise.

 

Notwithstanding 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 ( E.D. N.Y. 1999) (quoting In re Rob ert Turner Optical, Inc. [ 94-2 USTC ¶50,555], Bankr. No. 93-01004, 1994 WL 779352, at *4 (Bankr. N.D. Ala. Sept. 8, 1994)). To be unenforceable under I.R.C. §6322, "all of the [IRS's] remedies ... must be extinguished." Id. at 839 (quoting Dillard v. United States (In re Dillard), 118 B.R. 89, 93 (Bankr. N.D. Ill. 1990)).

V

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 Real Property.

"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 effectuated. Id. (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. Id. (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 requirement.

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

VI

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 Property.

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 Jade Road property allegedly transferred to the Longs is encumbered with the Federal Tax Liens in the Plaintiffs' names prior to and at the time of the transfer.

VII

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.

ORDER

Pursuant to the Memorandum on United States ' Motion for Summary Judgment filed this date, the court directs the following:

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 properties.

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.

SO ORDERED.

¹ 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."

² 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 and Rob ert and Melissa Long do not oppose the Motion, summary judgment will be granted the IRS as to them. See supra 1.

³ 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.

⁴ 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 assessment was 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 released.

⁵ 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.

 

[2002-1 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

U.S. District Court, So. Dist. Ind. , Indianapolis Div., IP 01-0768-C-B/S, 1/21/2002 , 2002 U.S. Dist. LEXIS 918.

[Code Sec. 6303 ]

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.

[Code Sec. 6323 ]

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.

[Code Sec. 7402 ]

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 ( Indiana ) law, the standard for appointment was made pursuant to the exigencies of the case as well as to clear statutory authorization.

Douglas Snoeyenbos, Department of Justice, Washington , D.C. 20530 , for plaintiff. Stephen K. Miller, Hughes & Miller, Indianapolis , Ind. , 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, Trustee.

ENTRY GRANTING MOTION FOR SUMMARY JUDGMENT

BARKER, District Judge:

This matter 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.

Factual Background

John Bartle and Rebecca McCowan Bartle are husband and wife, residing at 16535 East 114th Street , Fishers, Indiana . ¹ 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 Bartle's Muncie 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. Id. 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.

Immediately 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 Inverness 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 assessments. Id. P 5. To date, certain portions of these assessments remain unpaid. Id. 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

Standard of Review

Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue 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. Anderson v. Liberty Lobby, Inc., 477 U.S. 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. Id. 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 U.S. at 255; Del Raso v. U.S. , 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 Kankakee , 246 F.3d 927, 933 (7th Cir. 2001); Slowiak v. Land O'Lakes, Inc., 987 F.2d 1293, 1295 (7th Cir. 1993).

Legal Issues

The Government 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:

The Secretary 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.

26 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.' " Eschweiler [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).

Defendants do 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.

Defendants 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 Muncie 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 John Bartle's Muncie address, the address Bartle had repeatedly used in his filings with the IRS, the Government properly met the statutory notice requirements.

Defendant 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.

To protect 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. Id. §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 money value." Id. §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. Ill. 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 ( W.D. N.Y. 1995).

Defendants 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 admin 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 this action.

Finally, the 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 Indiana 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.

Conclusion

The Government 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.

¹ 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.

² 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 briefed.

³ 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.

⁴ 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 attention.

⁵ Under Indiana law, past consideration is not sufficient to support a new obligation. Comstock v. Coon, 135 Ind. 640, 35 N.E. 909, 911 ( Ind. 1893); Field v. Alexander & Alexander of Indiana, Inc., 503 N.E.2d 627, 631 (Ind. Ct. App. 1987).

 

 

[2001-1 USTC ¶50,367] United States of America , Plaintiff v. Harold Morrell and Michael F. Morrell, Defendants

U.S. District Court, East. Dist. N.Y., 97 CV 5344 (NG), 3/23/2001

[Code Sec. 6323 ]

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.

[Code Sec. 6323 ]

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.

[Code Sec. 6323 ]

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.

ORDER

GERSHON, District Judge:

The United States 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.

The Facts

The facts, 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 Statement.

The IRS 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 Suffolk County 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.

Harold and Dolores Morrell transferred real estate, stocks and other securities to their son, defendant Michael F. Morrell. The real estate, a home in Suffolk County 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.

Harold Morrell 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.

Michael 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.

Harold Morrell 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 transfers. ³ Harold Morrell testified as follows as to the timing of the alleged support agreement in relationship to the transfer of property:

Q. In 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 you support?

A. Yes.

*****

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. Everything was oral?

A. Oral.

Q. Did your son ever tell you what he would do for you in the way of providing you support?

A. He would support us the way we were--the way we lived, you know.

Michael 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.

Michael 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 April 1992.

In October 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.

The government 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.

The property 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 U.S. 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.

Because the 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.

Examination of 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, 1995.

Discussion

Summary Judgment Standards

Motions for 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 U.S. 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 U.S. at 586. The party must produce specific facts sufficient to establish that there is a genuine factual issue for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).

"Purchaser" Under 26 U.S.C. §6323(a)

Section 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." Id. §301.6323(h)-1(a)(3).

No reasonable 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 statute.

Second, there 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 [93-2 USTC ¶50,556 ], 832 F.Supp. 574, 582 (E.D.N.Y. 1993) (promises of future services are not "fair consideration" under §273).

Defendants 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."

Equitable Lien

Defendants 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 parents.

Source of Funds for Annuity

It is 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.

Furthermore, 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 the assessments.

Appreciation

Michael 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).

Furthermore, 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.

Conclusion

The motion of plaintiff United States of America for summary judgment is granted. The government should submit a proposed judgment on fourteen days' notice to the defendants.

SO ORDERED.

¹ Dolores Morrell died after this action was commenced and is no longer a party.

² 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.

³ 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.

⁴ 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 Dep't 1983 ), appeal dismissed, 62 N.Y.2d 914 (1984).

⁵ 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.

 

 

[99-1 USTC ¶50,430] Scottsdale Insurance Company, Plaintiff v. English Furniture Industries, Inc., et al., Defendants

U.S. District Court, So. Dist. Ind., Indianapolis Div., IP 97-1380-C-T/G, 3/19/99

[Code 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.

[Code Sec. 6323 ]

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

TINDER, District Judge:

The Plaintiff, Scottsdale Insurance Company (" Scottsdale "), 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 the 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 fund.

I. 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.) Scottsdale 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 United States (the " US ") on August 22, 1997. The interpleader complaint names as creditors of EF, among others, the United States ("US"), CDR, and Designe' Tech, Inc. ("DT"). The US was named based upon notices of levy, notices of federal tax liens, and final demands issued to Scottsdale relating to certain tax liabilities of EF.

Ellen M. Leverenz, revenue officer for the United States Internal Revenue Service (the "IRS") at the Louisville post, was assigned to a federal tax deposit alert on July 2, 1992, involving DT, a manufacturer of office furniture located on Church Street 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 Church Street facility.

Ms. Leverenz filed federal tax liens with the County Recorder for Crawford County , Indiana 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. ( Id. ) 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. ( Id. )

In July 1995, Cindy Ragains, an IRS Revenue Officer in the Indiana 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 Company's Church Street 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.

Ms. Ragains visited EF Company at its Church Street 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 Church Street 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 real estate.

The U.S. Corporation Income Tax Return for EF Company for February 16, 1994 through 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.

Davann's U.S. 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 depreciated it.

On October 11, 1995 , the IRS by Ms. Ragains and Ms. Leverenz, prepared for a return and seizure of EF Company's inventory at the Church Street 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 Church Street facility in 1995 that was not there when Ms. Leverenz observed the facility in 1992 under operation of DT.

Ms. Ragains last visited the Church Street facility on 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 submitted to Scottsdale , (Stip. Ex. 4), and the inventory list taken by Ms. Ragains and Ms. Leverenz in October 1995. (Stip. Ex. 15.).

The United States filed notices of federal tax liens with the County Recorder for Crawford County , Indiana 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 United States served notices of levies against William E. Litchfield, DT, William D. Litchfield, EF Company, and final demands on Scottsdale on June 4, 1996, and September 6, 1996, respectively.

Scottsdale 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 US , removed this action to this court.

On November 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 US .

On November 16, 1997, the Defendant the State of Indiana 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 US .

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.

On February 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.

On March 3, 1998 , Scottsdale was dismissed with prejudice from this action and awarded its claimed costs of $100.00.

On 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 US , and the State of Indiana , and CDR appeared. Other claimants, Maley & Wertz and Midwest Environmental, did not appear at the hearing.

II. Analysis

The US 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 US 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 US 's federal tax liens. The US 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 US 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.

A. Claimed Res Judicata of US's lien interest

EF contends that the judgment entered against DT and the default judgment entered against EF Company are res judicata of the US '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 US '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 US 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 US 's claim arising from its federal tax liens.

B. Determination of Ownership of Property

The evidence 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.

The court finds that DT's equipment was encumbered by the US '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).

The court 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 Church Street 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 Church Street 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

The Defendants 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 Scottsdale and Corporate tax return, EF Company claimed ownership of that equipment.

The court 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.

In addition, when asked by Revenue Agent Ragains who owned the property at the Church Street 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 Church Street facility appears to be yet another attempt to claim or disclaim ownership when it suits the interests of EF and its related entities.

The court 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

EF's contention that DT had no assets because of the replevin action of the City of English 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.

EF contends that the US has not established that EF Company owned any equipment which was formerly owned by DT because the US 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 United States ' 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 US 's claim that DT owned the property at its facility. (See supra at 12-13.)

The court rejects EF's contention that the US had to prove which company owned a particular piece of equipment as well. The evidence is that when Ms. Leverenz visited DT's Church Street 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 US 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.

The court 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 US '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.

The next 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 US 's federal tax liens. EF contends that the United States 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 Scottsdale as proof of EF's claim, is evidence of the value of the equipment destroyed in the fire.

The court 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%)).

The court 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 Company. ( Id. ("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 US 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.

The US 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 US '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. Therefore, the US 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 US 's total claim to the insurance proceeds is $71,601.22 ($61,599.85 + 10,001.37) plus interest.

C. Priority of the US 's Federal Tax Liens

State law 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 U.S. 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.

The court 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 US 's federal tax liens take priority over the remaining claims of the claimants in this case.

D. 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 US 's claim to the insurance proceeds. Because the court finds that the US 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.

E. Distribution of Insurance Proceeds on Deposit

The court finds that insurance proceeds deposited with the court should be distributed to the following claimants in the following amounts:

Claimant                               Amount

The United States                     $71,601.22

Midwest
 Environmental                     600.00

Maley & Wertz                           1,595.97 plus 8% interest per

                                                 annum from 10-13-95

                                                 through 4-15-99

Crawford 

County
 
Treasurer

               5,000.00

State of 

Indiana

 (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.

The court's 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.

III. Conclusion

For the foregoing reasons, the Defendants' motion for judgment as a matter of law made at the close of the United States ' evidence and renewed motion to remand to state court are DENIED.

The court 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 US 's claim should be paid in full from a portion of the insurance proceeds on deposit with this court.

In addition, 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, Inc.

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.

If claimant 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.

Because the 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.

It is anticipated that Final Judgment will be entered in this case on April 15, 1999.

¹ It appears that both Davann's returns were signed by William E. Litchfield as president of Davann.

² 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." ( Id. 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." ( Id. 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.)

³ The US ' claim arising from the lien against EF Company apparently is not disputed by EF.

⁴ 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.

⁵ 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 Scottsdale policy was taken out and at the time of the fire, no property owned by DT was insured.

⁶ 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 bankruptcy.

⁷ 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 creditors.

⁸ 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 US 's liens against the assets formerly owned by DT are the only claims against those assets in this case.)

⁹ 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.

¹⁰ "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.

¹¹ The US claimed the total was $361,025.42. However, the US apparently misread the first of the three totals in the Sworn Statement, which the court reads as $198,472 but the US read as $193,472. The error appears to have been inadvertent.

 

 

[99-1 USTC ¶50,129] United States of America v. Theodore J. Scheve and Geraldine Scheve

U.S. District Court, Dist. Md., Civ. CCB-97-3556, 11/20/98

[Code 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 ( Maryland ) law, federal law gave the tax lien priority; thus, the tax lien was required to be satisfied before the individuals could be reimbursed.

MEMORANDUM

BLAKE, District Judge:

Now pending are the parties' cross-motions for summary judgment in this action by the plaintiff, the United States , 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.

BACKGROUND

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 sale by Prince George '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 lien. On 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).

The IRS 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 paid to Prince George '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.

ANALYSIS

Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment

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

The 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.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986) (emphasis in original).

"The 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 U.S. 317, 323-24 (1986)).

Section 7403 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 acknowledged that

[I]n §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 States.'

Washington v. United States [68-2 USTC ¶15,864], 402 F.2d 3, 7 (4th Cir. 1968) (quoting 26 U.S.C. §7403). In Washington , 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.

A. Notice of the Sale

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. Id. §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).

Here, the 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.

Therefore, the federal lien was not affected by the Prince George 's County tax sale to the Scheves and remains attached to a one-half fee interest in the property.

B. PRIORITY OF LIENS AND DISTRIBUTION OF THE PROCEEDS

In their 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.

The government 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); Washington [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. Id. "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 admin istration of the federal revenue statutes." Aquilino [60-2 USTC ¶9538], 363 U.S. at 514. Hence, the court must first address Maryland law to determine the extent of the property interest to which the IRS lien attached.

1. Maryland Law--Determining the Property Interests

The federal 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 the United States 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 also United States 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 United States ' position as analogous to a co-owner, or cotenant, in the property to determine the extent of the United States ' interest in the improvements and renovations completed by the Scheves.

Under Maryland 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 ( Md. 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 improvements ⁵ 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.' " Id. 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 entitled." Id. 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 Maryland 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 U.S. at 514.

2. Federal Law--Priority of the Property Interests

"Federal tax liens do not automatically have priority over all other liens. Absent provision to the contrary, priority for purposes of federal law is governed by the common-law principle that 'the first in time is the first in right.' " United States v. McDermott [93-1 USTC ¶50,164], 507 U.S. 447, 449 (1993) (quoting United States v. New Britain [54-1 USTC ¶9191], 347 U.S. 81, 85 (1954)). 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 Prince George 's County ordering conveyance of the property to the Scheves.

In Glass v. Secretary, Department of Treasury IRS, the Kentucky 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. Id. at 39. Ms. Glass, like the Scheves, made significant improvements to the property. Id. The court discussed the current owner's property interest in the value of these improvements as a lien against the property. Id. 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. Id. at 39-40.

Assuming that 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 United States 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 Scheves.

A separate order follows.

ORDER

For the reasons stated in the accompanying Memorandum, it is hereby ordered that:

1. the motion for summary judgment by the Plaintiff, the United States , 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 record; and

5. the clerk of the court shall CLOSE this case.

¹ The total remaining taxes due as of April 13, 1998 was in excess of $400,000.

² Larry Commodore owned the other one-half interest.

³ Publication 487

⁴ 26 U.S.C. §7425 (1994).

⁵ 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. Id. at 352.

 

 

[99-2 USTC ¶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

(CA-5), 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 USTC ¶50,448

[Code 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.

Before: DEMOSS, PARKER and DENNIS, Circuit Judges.

BY THE COURT:

This appeal raises for our determination the validity of the district court's determination that the United States , 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, Texas.

The 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.

Accordingly, we DISMISS this appeal as moot.

 

 

[97-1 USTC ¶50,448] United States of America , Plaintiff v. Andrew E. Blanche, Cynthia D. Blanche, William S. Hewitt, Hank Wilson , and Lomas Mortage , U.S.A. , Defendants

U.S. District Court, West. Dist. Tex., San Antonio Div., Civ. SA-95-CA-0419, 2/28/97

[Code Sec. 6323 ]

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 ( Texas ) 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.

[Code Sec. 6323 ]

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

PRADO, District Judge:

On 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, 1345.

Plaintiff 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 U.S.A. and the Blanches alleging a conspiracy to deprive him of his property and seeking back rental payments for the Blanches' occupancy.

Immediately prior to trial, the Court was informed that Lomas Mortgage U.S.A. 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.

Pursuant to Federal Rules of Civil Procedure 52(a) and 58, the Court hereby enters the following findings of fact and conclusions of law.

FINDINGS OF FACT

The evidence 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, Texas.

(hereafter 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.

(4) Pursuant 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.

(5) The 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, 1991.

(8) The 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.

(9) The 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 inspection codes.

(10) The 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.

(11) Hewitt 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 the cost.

(12) Hewitt 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.

(14) According 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.

(15) The 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.

(16) The 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.

(17) The 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.

(18) During 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 U.S.A. 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.

(19) The 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 Tacoma , Washington , 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. Hewitt.

(21) After 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.

(22) After Lomas Mortgage U.S.A. 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 County Clerk 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.

(23) The 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:

2/25/94: Extensive work on the in-ground pool by Gary Pools to repair structural damage, install hot tub, and replace various inoperative items totaling $15,650.00;

3/14/94: Yard clearing by Richard Bosquez for a total of $293.50;

4/15/94: Water heater replacement by Mr. Rooter Plumbing totaling $3186.08;

1/26/95: Privacy Fence installation by Arrowhead Fence & Supply Co., Inc. totaling $637.00;

Date unknown: Electrical work by unknown company for $580.00;

Date unknown: Heating and air conditioning work by unknown company for $600.00;

Date unknown: Garage door & opener work by unknown company for $750.00.