Purchaser Page7

---

 

[81-2 USTC ¶9637] United States of America , Plaintiff v. William Ezra Powell and Evie W. Powell, Defendants

U. S. District Court, So. Dist. Ga. , Dublin Div., Civil Action No. CY379-32, 7/27/81

[Code Sec. 6323]

Tax liens: Transfer of property prior to filing of lien: Purchaser: Qualifications as.--The interest of the taxpayer's wife in property transferred to her by the taxpayer after a tax assessment but prior to the filing of the notice of tax lien on the property did not have priority over the federal tax lien. She did not qualify as a "purchaser" because she did not give "adequate and full consideration" for the conveyance of the property until after the government had filed its notice of tax lien.

Gerald B. Leedom, Department of Justice, Washington , D. C. 20530, for plaintiff. Joe W. Rowland, State Court, Wrightsville , Georgia , for defendants.

Order

BOWEN, Jr., District Judge:

Defendant William Ezra Powell was assessed distilled spirit excise taxes in the amount of $17,491.21 on March 8, 1976, 26 U. S. C. §§ 5001, 5005 (1976). In this action against William Ezra Powell and his wife Evie W. Powell, plaintiff seeks to reduce to judgment the amount of the assessment plus interest and all other statutory additions. Plaintiff further claims a federal tax lien on all property owned by William Ezra Powell as of the date of the assessment, and specifically seeks to foreclose the claimed federal tax lien on property described in paragraph 11 of plaintiff's complaint.

By order entered July 25, 1980 , the Court granted summary judgment in favor of plaintiff against William Ezra Powell on the issue of Powell's liability for the subject tax as well as the amount of the tax assessment. The remaining issues raised by the prayer for foreclosure of the tax lien and judicial sale of the property described in paragraph 11 of plaintiff's complaint were tried before the Court sitting without a jury. Pursuant to Fed. R. Civ. P. 52, the Court enters the following findings of fact and conclusions of law on those issues. The findings of fact stated herein are virtually the same as those announced at the close of the trial. There have been changes in word order, sequence and grammar, but not substance.

Findings of Fact

Defendants William Ezra Powell and Evie W. Powell are husband and wife and have been married for some 37 years. During the course of their marriage, they have engaged in several real estate transactions which are pertinent to this action. In 1953, defendants purchased, as tenants in common, a certain lot [hereinafter "residence property"] from Velma Webb Perkins for the sum of $1,500.00. Defense Exhibit O. Subsequently, on January 18, 1958 , for financial reasons, as opposed to the affection recited in the deed, Defense Exhibit P, Mrs. Powell acquired Mr. Powell's interest in the residence property for the sum of $1,000.00.

Plaintiff's prayer for foreclosure and sale pertains to certain Johnson County real property which Mr. Powell purchased at public auction in August, 1975. On August 9, 1975 , Mr. Powell gave a binder in the amount of $1,000.00, drawn on defendants' joint checking account, to the auctioneering firm of Hudson & Marshall, Inc. Defense Exhibit A. Since the transaction was to be closed within 30 days of a successful bid, the purchase price of $8,250.00 was quickly financed by a loan agreement from the Bank of Wrightsville, executed August 11, 1976 , for which both defendants signed. Defense Exhibit B. The note was secured by the residence property, which, as discussed earlier, Mrs. Powell owned in her individual capacity. Deed to Secure Debt, Defense Exhibit C. Thereafter, the loan proceeds were paid into defendants' joint checking account, from which Mr. Powell paid the balance of the purchase price for the property on August 22, 1975 . By an indenture, dated and recorded on September 2, 1975 , title to the subject property was vested solely in Mr. Powell. Government Exhibit 1.

On March 8, 1976, a delegate of the Secretary of the Treasury of the United States timely made an assessment, pursuant to 26 U. S. C. §§ 5001, 5005, against defendant William Ezra Powell in the amount of $19,096.01. Notice of the assessment and a demand for payment, pursuant to 26 U. S. C. §6303(a), were given to Mr. Powell on the same date. Upon Mr. Powell's failure to pay the aforesaid assessment, after demand, a federal tax lien arose in favor of plaintiff as of March 8, 1976 . Since, such a federal tax lien encumbers "all property and rights to property, whether real or personal, belonging to [the taxpayer]," 26 U. S. C. §6321, the subject property owned by Mr. Powell in fee simple was so encumbered as of March 8, 1976.

Twelve days after assessment, notice, demand and attachment of the federal tax lien, Mr. Powell executed an indenture, on March 20, 1976 , by which he conveyued the subject property to defendant Evie W. Powell for the stated consideration of "$1.00 and Other Valuable Consideration." Government Exhibit 4. The face of the March 20, 1976 indenture shows that no real estate transfer tax was paid for this transfer. The deed was subsequently recorded at the Johnson County Clerk's Office on March 22, 1976 . The weight of the evidence shows that the instrument of transfer was received by Mrs. Powell after it was executed and filed for the record. Thereafter, on June 24, 1976 , notice of the federal tax lien on the subject property was duly filed in the land records of Johnson County , Georgia . 26 U. S. C. §6323(f).

On July 14, 1976 , a payment of $1,886.81 was made on the August 11, 1976 note from Mrs. Powell's funds. Defense Exhibit H. Additionally, on the same date, the August 11, 1976 note was renewed in the remaining amount of $7,050.00. In contrast to the original note, however, Mrs. Powell was the first signatory on the renewal note, and Mr. Powell was the second. The balance of the note was ultimately paid by Mrs. Powell on November 11, 1977 . Defense Exhibit K.

Mr. Powell's purpose in the March 20, 1976 transfer was to place property of value beyond the reach of his tax creditor. Mrs. Powell, the grantee, was not a bona fide purchaser for value without notice.

Conclusions of Law

At the time of the tax assessment and demand for payment made by the United States , and, upon Mr. Powell's refusal or failure to pay the same, a federal tax lien upon all property belonging to Mr. Powell arose in favor of the United States on March 8, 1976 . 26 U. S. C. §6321. See generally United States v. Union Central Life Ins. Co. [62-1 USTC ¶9103], 368 U. S. 291 (1961); United States v. Mitchell [65-2 USTC ¶9581], 349 F. 2d 94 (5th Cir. 1965). In determining the taxpayer's rights to property to which a federal tax lien could attach, reference must be had to state law, see Metropolitan Dade County v. United States [81-1 USTC ¶9173], 635 F. 2d 512, 514 (5th Cir. 1981), while, in deciding the priority of competing liens, federal law controls. See Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 514 (1960); Randall v. H. Nakashima & Co., Ltd. [76-2 USTC ¶9770], 542 F. 2d 270 (5th Cir. 1976). Thus, since under state law, Mr. Powell held sole legal and record title to the subject property in fee simple on March 8, 1976 , a federal tax lien in favor of the United States attached to the property on that date.

Section 6323(a) of Title 26 provides: "The lien imposed by section 6321 shall not be valid against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof . . . has been filed by the Secretary." (emphasis added). By the terms of this statute, then, any transferee taking title to the subject property subsequent to March 8, 1976 , and prior to the filing of notice of the tax lien on June 24, 1976 , with the exception of a "purchaser, holding of a security interest, mechanic's lienor, or judgment lien creditor," took title subject to the federal tax lien. Since Mrs. Powell was a transferee of the subject property within the period from March 8, 1976 , to June 24, 1976 , her interest is prior to that of the government's unless she qualifies under one of the above-enumerated statutory exceptions.

The only statutory exception germane to this action is "purchaser," which is defined as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice." 26 U. S. C. §6323(h)(6). Accordingly, if, prior to government's filing of notice of its tax lien on June 24, 1976 , Mrs. Powell became a "purchaser" of the subject property, then her interest has priority over the lien of the United States . The pertinent inquiry, therefore, is whether Mrs. Powell qualifies as a "purchaser" as that term is defined in section 6323(h)(6).

The earliest date from which Mrs. Powell may claim an interest in the subject property "valid under local law against subsequent purchasers without actual notice" is March 22, 1976, the date on which the indenture from William Ezra Powell to Evie W. Powell was recorded in the Johnson County Clerk's Office. Ga. Code Ann. §29-401.1 (1980). The issue is whether, subsequent to March 22, 1976 and prior to June 24, 1976 , Mrs. Powell gave "adequate and full consideration in money or money's worth" for the subject property. The burden of proof on this issue rests with the defendant. See Coventry Care, Inc. v. United States [74-1 USTC ¶9163], 366 F. Supp. 497 (W. D. Penn. 1973); Filipowicz v. Rothensies [42-1 USTC ¶9300], 43 F. Supp. 619 (E. D. Penn. 1942).

A review of the evidence in this case reveals that the first "money" given by Mrs. Powell for the subject property was a partial payment on the August 11, 1975 note made on July 14, 1976 , some 20 days after notice of the federal tax lien was filed. Thus, to qualify as a "purchaser," the burden was on Mrs. Powell to show that she gave adequate and full consideration in money's worth for the subject property prior to June 24, 1976 . After thorough review of the evidence, the Court concludes that defendant has not carried this burden.

The facts show that the subject property was acquired by Mr. Powell, in August, 1975, for his sole account as an investment property. The purchase price was financed by a note from the Bank of Wrightsville for which Mr. Powell was first signatory and Mrs. Powell was co-maker. As security for the note, Mrs. Powell contemporaneously executed a deed to secure debt in favor of the Bank of Wrightsville on property which she owned individually. First payment on the note was not made until July 14, 1976 , from Mrs. Powell's funds, at which time the note was renewed with Mrs. Powell as first signatory. The balance of the note was not paid until November 15, 1977 .

The term "money or money's worth" is defined as:

money, a security (as defined in paragraph (d) of this section), tangible or intangible property, services, and other Money or money's worth also includes any consideration which otherwise would constitute money or money's worth under the preceding sentence which was parted with before the security interest would otherwise exist if, under local law, past consideration is sufficient to support an agreement giving rise to a security interest. A relinquishing or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights is not a consideration in money or money's worth. Nor is love and affection, promise of marriage, or any other consideration not reducible to a money value a consideration in money or money's worth.

26 C. F. R. §301.6323(h)-1(a)(3) (1980).

On the facts, as outlined above, and, on the basis of the record developed at trial, the Court can discern no evidence to support a finding that, after recordation of the conveyance of the subject property on March 22, 1976, and before filing of the tax lien on June 24, 1976, Mrs. Powell gave any "money's worth" in consideration for the property conveyance.

Mrs. Powell argues that, in exchange for the March 20, 1976 conveyance from her husband, she assumed the full indebtedness to the Bank of Wrightsville on the August 11, 1975 note. Yet, no objective evidence has been proffered, to support this contention, and no release of William Ezra Powell's obligation appears on the note. Moreover, the lack of any objective evidence of the purported "assumption" has special significance, since, under Georgia law, "a promise to answer for the debt . . . of another" is not binding unless it is in writing and signed by the promisor. Ga. Code Ann. §20-401(2) (1977).

In sum, the Court finds that any consideration in money or money's worth given by Mrs. Powell for the subject property occurred after the government duly filed its notice of federal tax lien on June 24, 1976 . Thus, the federal tax lien has priority over her interest in the subject property.

Accordingly, judgment is entered for the United States . Counsel for the plaintiff is directed to submit a proposed order for the judicial sale of the property described in paragraph 11 of the complaint. Said proposed order shall be consistent with the present Order of the Court and with the requirements of 28 U. S. C. §§ 2001-2002, and shall be filed with the clerk no later than forty (40) days from the date of notice of this Order.

 

 

[80-1 USTC ¶9119] District Divine Science Church of Allen County , Plaintiff v. United States of America , Defendant

U. S. District Court, No. Dist. Ind. , Fort Wayne Div., Civil No. F. 79-100, 12/4/79

[Code Sec. 6323]

Lien for taxes: Priority: Purchasers: Bona fide purchasers.--A church, of which a taxpayer was a trustee, was not a bona fide purchaser of a taxpayer's property because adequate consideration was not paid for the property. Additionally, the trustees themselves had the knowledge of the organization tax liability and the transfer was not made in good faith.

[Code Sec. 6331]

Levy and distriaint: Effect of levy.--A levy on property subsequently transferred to the taxpayer reduced such property to the possession of the government. Accordingly, the occupants of the property were to remove themselves, provided that the United States Court of Appeals did not accept the taxpayer's appeal of the District Court's denial of its request for a temporary restraining order.

District Divine Science Church c/o 6132 Flatrock Road, Hoagland, Indiana 46745, pro se. David T. Ready, United States Attorney, Fort Wayne, Indiana 46801, for defendant.

Memorandum of Decision and Judgment Order

ESCHBACH, District Judge:

This cause is now before the court on defendant's October 12, 1979 motion for summary judgment. The plaintiff filed a motion in response to defendant's motion for summary judgment on November 1, 1979. For the reasons which follow, defendant's October 12, 1979 motion for summary judgment and for order to vacate premises will be granted.

This civil action results from the efforts of the United States of America to collect United States individual income taxes from Dr. Harry J. Reith and Sandra G. Reith. According to affidavits on file in the records of this cause, the said taxpayers owed an income tax for the taxable year 1977 of $13,998.80, of which they remitted only $635.00. This resulted in a deficiency assessment followed by efforts on the part of the government to collect thereon by pursuing real estate owned by the taxpayers and allegedly transferred to the plaintiff church herein.

By affidavits filed in this case, Harry J. Reith and Amos F. Gatchell describe themselves as trustees of the plaintiff organization, the District Divine Science Church of Allen County (Indiana). Harry J. Reith is described as a "duly ordained reverend" of the parent church, the Life Science Church. Reith states that he is presently serving in the capacity of reverend for the District Divine Science Church of Allen County. Affiant Amos R. Gatchell describes himself as a member of the congregation of the plaintiff organization; Amos R. Gatchell, the father-in-law of Harry J. Reith, is also named as a trustee of the plaintiff organization in this case. Affiants state that the District Divine Science Church acquired title to the real estate at issue herein, situated on Flat Rock Road, by quit claim deed duly recorded on September 25, 1978. Although Harry J. Reith and Sandra G. Reith, also named as a trustee of the plaintiff organization, purportedly conveyed the real estate to the plaintiff organization, Harry J. Reith and his family have continued to reside at such location.

Even though the taxpayers' tax liability for the year 1977 was self-assessed, the taxpayers remitted only $635.00 with respect thereto. Accordingly, attempted collection of the past-due amount was undertaken by the Internal Revenue Service. As early as May of 1978, Service personnel were in communication with the taxpayers with a view toward working out a method of payment of the past-due taxes. In this regard, various discussions took place from May of 1978 through September 27, 1978 between the taxpayers, or their representative, and Revenue Officer Wade W. Prentice.

In response, Mrs. Reith expressed her views that taxes and government spending were too high; that the Reiths were going to transfer real estate into their children's names; and that Dr. Reith ¹ would join the "church" to avoid paying any more taxes. These representations are not disputed.

Two meetings between the taxpayers and IRS Officer Prentice were scheduled but cancelled by the taxpayers. Thereafter, on September 29, 1978 , Prentice filed a Notice of Federal Tax Lien at the Allen County, Indiana, Court House. At that time he learned that the taxpayers had, on September 25, 1978 , executed a quit claim deed purporting to transfer the real property referred to in the complaint herein to the District Divine Science Church .

Thereafter, the Service seized the subject real property and offered it for sale. In order to prevent this sale, plaintiff filed the instant proceeding. However, this court, by Memorandum of Decision and Order entered May 25, 1979 , refused to grant the requested temporary restraining order prohibiting the sale as plaintiffs sought. Accordingly, on May 29, 1979 , the sale went forward and the property was purchased by the United States . When the period of redemption expired, the District Director, Internal Revenue Service, Indianapolis , Indiana , executed an appropriate deed in favor of the United States , which deed was duly recorded.

From the filings relating to the summary judgment motions, including the answers to interrogatories and requests for admissions filed shortly after the initial motion, it is clear there is no genuine issue of any material fact. The parties differ only as to the legal conclusions. ²

The question at issue is whether the levy here involved was proper. Plaintiff contends that as the notice of tax lien was not filed until September 29, 1978 , some four days after the subject real estate was transferred by quit claim deed to the plaintiff organization, no tax lien was valid as against the plaintiff organization. 26 U. S. C. §6323. Defendant, however, contends that the plaintiff organization was not a "purchaser" within the meaning of 26 U. S. C. §6323, and therefore cannot claim the protection of that statute.

Section 6321 of Title 26 of the United States Code provides the following:

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.

As the tax was self assessed for the tax period ended December 31, 1977 , Harry J. Reith and Sandra G. Reith transferred the property to the church knowing that there were taxes due and owing for which a tax lien existed. As stated in §6321, a lien arises in favor of the United States on all property, real or personal, belonging to a taxpayer who is liable to pay any tax and who neglects or refuses to pay the same after demand has been made. Demand was made as early as May 1978 some five months prior to the transfer when Internal Revenue Service personnel approached the Reiths to devise a method of payment. The date of such lien is the date of the making of the assessment, and the lien continues in effect until satisfied. Thus, the United States ' tax lien encumbered the subject property at the time of the transfer, but as plaintiffs contend, such lien is not valid against any purchaser until notice thereof has been filed in the office designated by law of the state in which the property subject to the lien is situated. Solomon v. Gross [59-2 USTC ¶9758], 176 F. Supp. 836 (D. N. J. 1959).

However, the protection provided by 26 U. S. C. §6323 for "purchasers" is not available to the plaintiff organization and the lien in favor of the United States is valid as against the plaintiff organization.

Section 6323 of Title 26 of the United States Code provides in pertinent part:

(a) Purchasers, holders of security interests, mechanic's lienors, and judgment lien creditors.--The lien imposed by section 6321 shall not be valid as against any purchaser . . . until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

* * *

(h) (6) Purchaser.--the term "purchaser" means 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 . . ..

In plaintiff's answers to defendant's first set of interrogatories, plaintiffs state that as indicated by the quit claim deed, the sum of $1.00 was given to the transferors at the time of the transfer. They further state that the church also agreed to assume the payment of the mortgage at Waterfield Mortgage Company which then totalled $42,794.19. Plaintiff concludes, therefore, that the "total fair market value of the consideration paid would be $42,795.19." This sum would not, however, be adequate and full consideration in money or money's worth within the meaning of 26 U. S. C. §6323.

In an affidavit filed in a companion case, affiant Harry J. Reith states that the value of the subject property exceeds the amount of the tax liability of the individual taxpayers, Harry J. Reith and Sandra G. Reith, by the sum of at least $45,000.00. As the notice of tax lien filed on September 27, 1978 was in the amount of $14,080.22 and as the consideration which plaintiff claims was paid is some $2,000 less than the $45,000 difference cited by Harry J. Reith, it can be concluded that at the time of the transfer the subject property was worth some $16,000.00 more than the amount of the mortgage assumed by the plaintiff organization. Thus, the assumption of the mortgage in this case could not be regarded as "adequate and full consideration" in payment for the real estate. And, as the plaintiff organization is not a "purchaser" within the meaning of 26 U. S. C. §6323, the plaintiff organization does not enjoy the protection provided purchasers by that statute. See United States v. Galvin [61-2 USTC ¶9755], 199 F. Supp. 4 (E. D. N. Y. 1961).

Further, the plaintiff organization is not a bona fide purchaser of the property at issue here. In order to be a bona fide purchaser of property, a grantee must have taken the property for value and without any knowledge of any outstanding conveyance or obligations respecting the property, and without any notice of any fact, which, if pursued, would lead to such knowledge. Sullenger v. Baacher, 102 N. E. 380 (App. Ct. Ind. 1913), cited with approval in Coons v. Baird, 265 N. E. 2d 727 (App. Ct. Ind. 1970). Here, two of the trustees of the plaintiff organization are the very persons who conveyed the property to the plaintiff organization subsequent to their self assessment of the tax. As those persons, Harry J. Reith and Sandra G. Reith, must be charged with knowledge of their own tax arrearages and with knowledge of the resulting tax lien on their property (see Solomon, supra), so must the plaintiff organization be charged with such knowledge; the knowledge of the trustees must in this instance be attributed to the plaintiff organization. Thus, the plaintiff organization cannot claim that it was a purchaser in good faith of the subject property. The grantee of property transferred by a quit claim deed can be considered a bona fide purchaser if the purchase was made in good faith and for a fair price. But as shown above, the transfer cannot be said to have been made in good faith and cannot be said to have been made for a "fair price."

Under these circumstances, the levy involved in this action was proper, and the United States is entitled to a summary judgment order dismissing plaintiffs' complaint with prejudice, and awarding defendant its costs.

The Internal Revenue Service seized the property described below pursuant to Section 6331 of Title 26 of the United States Code:

Part of the Northeast 1/4 of the Northeast 1/4 of Section 21, Township 29 North, Range 13 East, Allen County, Indiana, being described as follows, to-wit:

Commencing at the Northeast corner of Section 21, Township 29 North, Range 13 East, thence West along centerline of the Flat Rock Road, a distance of 330 feet for a point of beginning; thence South parallel with the East section line a distance of 663.70 feet to a point; thence West and parallel with said North section line, or Flat Rock Road, a distance of 330 feet to a point; thence North parallel with the East section line a distance of 662.50 feet to the center of the Flat Rock Road; thence East and along the center line of said Flat Rock Road, a distance of 330 feet; containing 5.03 acres, more or less.

The above-described property was advertised to be sold on May 29, 1979 , pursuant to 26 U. S. C. §6335. The sale went forward on the scheduled date, and there being no bids received at the sale, the property was declared purchased for the United States at the minimum price determined prior to the sale, in accordance with 26 U. S. C. §6335(e)(i). The taxpayers had 120 days to redeem the above-described property but they neglected to do so. Therefore, on September 27, 1979, a deed to the purchaser, the United States of America, was executed and thereafter filed pursuant to 26 U. S. C. §6338. As the United States of America is now the owner of the above-described real estate, it is entitled under the provisions of 26 U. S. C. §7402 to an order requiring the taxpayers, or anyone else, occupying the subject real estate to remove themselves forthwith.

Judgment Order and Order to Vacate Premises

Accordingly, defendant's October 12, 1979 motion for summary judgment and for order to vacate premises is hereby granted and plaintiff's complaint is now dismissed with prejudice.

The taxpayers, or any other persons or organizations occupying the property described above situated on Flat Rock Road shall remove themselves forthwith. Provided, however, that as plaintiff herein is now endeavoring to appeal this court's denial of their original request for a temporary restraining order to the United States Court of Appeals, the execution of this order is stayed pending a ruling by the United States Court of Appeals as to whether that court will accept the appeal. Provided further, that if such appeal is accepted, then and in that event, this order is stayed pending the outcome of that appeal.

Costs are awarded to defendant.

¹ During the presentation in chambers by counsel for both parties on plaintiff's motion for a temporary restraining order, former counsel for plaintiff represented that Dr. Harry J. Reith is a practicing dentist.

² While the United States has contended that there was no consideration for the transfer, plaintiff contends that there was, in fact, consideration for the transfer. However, as the amount of consideration which even plaintiff contends passed must be regarded as insufficient, see infra, such a difference does not constitute a material issue of fact so as to defeat defendant's motion for summary judgment.

 

 

[83-1 USTC ¶9183] United States of America , Plaintiff v. Mac Cement Finishing Corporation, v. Brown Floor, Inc. and Thaddeus E. Dziergas, Defendants.

U. S. District Court, No. Dist. N. Y., 77-CV-134, 546 FSupp 52, 6/18/82

[Code Sec. 6323]

Lien for taxes: Purchaser: Consideration paid.--Consideration amounting to 45% of fair market value which was paid by the buyer of real property that was subject to a federal tax lien was not full consideration as required by Code Sec. 6323. Since the buyer was not a purchaser for full and adequate consideration or a bona fide bargain purchaser, the tax lien attached to the property even though notice was not filed until after the conveyance.

Stephen T. Lyons, Department of Justice, Washington , D. C. 20530, for plaintiff. Peter P. Panels, Panels and Panels, 1010 University Bldg., Syracuse, N. Y. for defendants.

Memorandum-Decision and Order

I

MINER, District Judge:

In this action the Government seeks to reduce to judgment an outstanding federal tax liability of defendant Mac Cement Finishing Corporation (hereinafter "Mac"), to foreclose federal tax liens against certain real property located at Syracuse, New York, and to obtain a deficiency judgment against Mac for such part of the tax liability as remains unsatisfied after the foreclosure. Jurisdiction is asserted under the provisions of 26 U. S. C. §§ 7402 and 7403 and of 28 U. S. C. §§ 1340 and 1345. The action has been submitted for the Court's determination upon a stipulation of facts entered into by the attorney for the plaintiff and the attorney for defendant V. Brown Floors, Inc. (hereinafter "Brown").

II

On June 3, 1974 and on June 10, 1974, the Internal Revenue Service assessed tax liabilities against Mac in the amount of $13,046.69 for unpaid tax liabilities for the first three quarters of 1973. A notice with demand for payment was served upon Mac on the same dates. As a result of the assessments, a lien in favor of the United States attached to all real property belonging to Mac. 26 U. S. C. §6321.

On July 17, 1974, certain real property consisting of a building and lot located at 449 Shonnard Street, Syracuse, New York, was conveyed by Mac to Brown. At that time, James McConnell was the sole shareholder of Mac and his uncle, Vernon Brown, was the sole shareholder of Brown. Mac had acquired the property on July 31, 1972 from defendant Thaddeus E. Dziergas for the total sum of $15,000-$3,000 in cash and the balance in the form of a purchase money mortgage held by Dziergas. The consideration for the conveyance from Mac to Brown was $7,857.01-$500 in cash and the balance by the assumption of the Dziergas mortgage. The fair market value of the property at the time of the transfer was $17,000. ¹

A notice of lien with respect to the assessment against Brown was not filed until September 17, 1974 . Accordingly, the parties have agreed that the sole issue before the Court is whether Brown was a "purchaser" within the meaning of 26 U. S. C. §6323(h)(6). ²

III

The Internal Revenue Code provides that a lien for unpaid taxes shall not be valid against a purchaser, as defined in the Code, until notice of the lien has been filed. 26 U. S. C. §6323(a). Here, no notice was filed until after the conveyance to Brown. A purchaser is defined as "a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice." 26 U. S. C. §6323(h)(6). Since no issue has been raised respecting notice to Brown, the inquiry here must focus on whether Brown's payment for the property constituted an adequate and full consideration.

Little guidance has been furnished for the measurement of adequate and full consideration. Obviously, where nothing of value has been furnished, such consideration is lacking. Coventry Care, Inc. v. United States [74-1 USTC ¶9163], 366 F. Supp. 497 (W. D. Pa. 1973) (25% interest in proposed business venture, given in return for promissory note, found to be valueless). The amount paid cannot be so small as to have little worth relative to the value of the property acquired, but a bona fide bargain purchaser is not precluded. S. Rep. No. 1708, 89th Cong., 2nd Sess. 14, reprinted in 5 Rabkin and Johnson, Federal Income, Gift and Estate Taxation §73.06B(12) p. 7339f. However, the consideration should have a reasonable relationship to the true value of the property acquired. 26 CFR §301.6323(h)-1(f)(3).

Here, the consideration paid ($7,857.01) was approximately 45% of fair market value ³ ($17,000). By virtue of the stipulation of the parties and the consequent limitation of the evidence available to the Court, there is no showing that Brown was a bona fide bargain purchaser. Upon the facts presented, the Court finds that the consideration paid did not have a reasonable relationship to the property's true value and, therefore, that Brown was not a purchaser within the Code's definition. To put it another way, the consideration furnished by Brown cannot be designated "full" in any sense, even if it were possible to characterize it as "adequate." Accordingly, the Government is entitled to the relief sought in the complaint.

IV

The foregoing constitutes the findings required under the provisions of Fed. R. Civ. P. 52(a). The attorney for the Government is directed to settle a judgment, consistent with the foregoing, on notice to the attorney for defendant Brown.

It is so Ordered.

¹ "On July 17, 1974 , the fair market value of the property located at 449 Shonnard Street , Syracuse , New York , was $17,000." (¶5, Stipulation of Facts).

² This issue relates solely to the foreclosure of the lien. Since Mac has defaulted in answering, its liability is not in issue here, and judgment may be entered accordingly. The mortgage held by defendant Dziergas has been completely liquidated, and the Court determines that he has no interest in the property.

³ Fair market value commonly is defined as an "amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having knowledge of the relative facts." Black's Law Dictionary 537 (5th ed. 1979).

 

 

[78-1 USTC ¶9172]Georgia-Pacific Corporation, a Delaware corporation, Plaintiff v. Lazy Two T Ranch, Inc., a Nevada corporation; Melburne Valley Properties, Inc., a Nevada corporation; and United States of America, Defendants

U. S. District Court, No. Dist. Calif. , No. C-75-1667-SC, 9/19/77

[Code Secs. 6213 and 6323--Result unchanged under the '76 Tax Reform Act]

Liens for taxes: Validity of lien: No notice of deficiency.--Two earlier opinions of the court (see Georgia-Pacific Corp. at 76-2 USTC ¶9666 and 77-1 USTC 77-1 USTC ¶9430), finding that the purchaser of a promissory note had greater rights than the government because the government did not have a valid lien on the funds of the note, were vacated and a stipulated judgment was substituted. Under the stipulated judgment, the government was awarded a portion of the interpleaded funds in satisfaction of unpaid taxes.

Joseph A. Darrell, Thelen, Marrin, Johnson & Bridges, Two Embarcadero Center, San Francisco, Calif. 94111, for plaintiff. Michael R. Pinatelli, Jr., Stokes, Clayton & McKenzie, 333 Franklin St., Suite 202, San Francisco, Calif. 94102, for defendant. James L. Browning, Jr., United States Attorney, John M. Youngquist, Assistant United States Attorney, San Francisco , Calif. , for United States .

Stipulation

CONTY, District Judge:

IT IS HEREBY AGREED AND STIPULATED by and between the parties having appeared in this action, by their respective undersigned attorneys, as follows:

1. The fund of money interpleaded and deposited by plaintiff with the registry of the Court is $48,279.47, plus interest earned on said fund from and after its receipt by the Clerk and deposit in an interest-bearing account pursuant to the Court's order of October 23, 1975 .

2. The named party-defendants were served with copies of the summons and complaint in this action, excepting the defendant MELBURNE VALLEY PROPERTIES, INC., and have answered the complaint and made cross-claims.

3. The named party-defendant MELBURNE VALLEY PROPERTIES, INC., is not a necessary nor a real party in interest as to the subject matter of this litigation and, not having been served with process nor having otherwise appeared in this action, the parties hereto stipulate and agree that MELBURNE VALLEY PROPERTIES, INC., be ordered dropped as a named party-defendant.

4. A judgment in this action was entered on April 20, 1976, was appealed to the United States Court of Appeals for the Ninth Circuit by notice of appeal filed by the defendant UNITED STATES on July 27, 1976, and by the defendant LAZY TWO T RANCH, INC., on August 27, 1976, and the case was later remanded by said Court of Appeals to this Court for further proceedings by order filed August 1, 1977, pursuant to a stipulation for remand filed by and between all appellants and appellees in that Court on July 7, 1977. The mandate on remand was received and filed in this Court on August 3, 1977 .

5. The parties having now settled their differences on the subject matter of this action hereby stipulate, agree and request that the Court now order:

(a) Vacation and withdrawal of its opinion and order filed on April 19, 1976 ;

(b) Vacation of its judgment filed on April 19, 1976 and entered April 20, 1976 ;

(c) Vacation and withdrawal of its opinion and order filed on June 11, 1976 ; and

(d) Filing and entry of judgment in the form attached hereto as Appendix A and incorporated by this reference as a part of this stipulation.

6. Upon the receipt of this stipulation subscribed in behalf of all parties hereto, the attorneys for the defendant UNITED STATES shall submit this stipulation and order to the Court and shall contemporaneously lodge with the Court the original of the forms of judgment set forth in Appendix A for approval, filing and entry.

Order

It appearing that the foregoing Stipulation for Vacation of Judgment and for Entry of Judgment in Interpleader has been subscribed and submitted in behalf of plaintiff and all defendant-claimants in this action, that said stipulation is dispositive of this action, and that good cause exists therefor;

NOW THEREFORE, said stipulation is hereby approved by the Court and it is:

(1) ORDERED that the named party-defendant MELBURNE VALLEY PROPERTIES, INC., be and it hereby is DROPPED as a party-defendant in this action; and it is further

(2) ORDERED that the opinion and order of the Court filed in this action on April 19, 1976 (Docket Item No. 58) be and it hereby is VACATED, withdrawn and cancelled of record; and it is further

(3) ORDERED that the judgment of the Court filed in this action on April 19, 1976, and entered of record on April 20, 1976 (Docket Item No. 59) be and it hereby is VACATED, withdrawn and cancelled of record; and it is further

(4) ORDERED that the further opinion and order of the Court filed in this action on June 11, 1976 (Docket Item No. 73) be and it hereby is VACATED, withdrawn and cancelled of record; and it is further

(5) ORDERED that judgment in this action be forthwith filed and entered by the Clerk in the form appearing as Appendix A to this stipulation and order.

Judgment in Interpleader

Pursuant to the Stipulation and Order for Judgment in Interpleader filed in this action, it is hereby:

(1) ORDERED, ADJUDGED and DECREED that the plaintiff GEORGIA-PACIFIC CORPORATION be and it hereby is discharged from any and all further liability with respect to that fund interpleaded in this action in the sum of $48,279.47, constituting plaintiff's final payment under a certain note secured by a deed of trust on certain real property under an obligation owing by plaintiff to defendant LAZY TWO T RANCH, INC., as alleged and set forth in particular in the Complaint in Interpleader herein; and it is further

(2) ORDERED, ADJUDGED and DECREED that all defendants herein--to wit: LAZY TWO T RANCH, INC., and the UNITED STATES OF AMERICA--and each of them, their officers, agents and/or attorneys, be and they hereby are permanently enjoined and restrained from instituting or prosecuting any non-judicial proceeding and/or any proceeding in any state or federal court against plaintiff and/or said certain real property concerning said interpleaded fund and/or any obligations or liabilities of plaintiff with respect thereto; and it is further

(3) ORDERED, ADJUDGED and DECREED that the defendant LAZY TWO T RANCH, INC., shall forthwith convey to plaintiff all of its right, title and interest in and to that certain real property referred to in clause (1) above; and it is further

(4) ORDERED, ADJUDGED and DECREED that the fund in interpleader--to wit: the sum of $48,279.47 plus interest earned thereon from the date deposited by the Clerk in an interest-bearing account pursuant to the Court's order of October 23, 1975, to the date of the Clerk's withdrawal of said sum--shall be forthwith disbursed and paid over by the Clerk as follows:

(A) To the plaintiff GEORGIA-PACIFIC CORPORATION: the sum of $3,478.64, comprising $3,336.00 in attorneys' fees and $142.64 in costs;

(B) To the defendant UNITED STATES OF AMERICA: the sum of $15,627.93, to be applied by said defendant to pay and satisfy certain internal revenue tax assessments, including interest thereon through September 15, 1977, in accordance with certain agreements and stipulations entered into by and between the defendant UNITED STATES and the defendant LAZY TWO TO RANCH, outside of the record in this action; and

(C) To the defendant LAZY TWO T RANCH, INC.: the sum of the balance of said fund reduced by the foregoing payments, including interest earned thereon -- set forth above;

and it is further

(5) ORDERED, ADJUDGED and -- CREED that each party-defendant shall bear its own costs and attorneys' fees in this action.

 

 

[77-1 USTC ¶9430]Georgia-Pacific Corporation, a Delaware corporation, Plaintiff v. Lazy Two T Ranch, Inc., a Nevada corporation; Melburne Valley Properties, Inc., a Nevada corporation; and United States of America, Defendants

U. S. District Court, No. Dist. Calif. , No. C-75-1667 SC, 6/11/76

[Code Secs. 6213 and 6323--result unchanged under '76 Tax Reform Act]

Liens for taxes: Validity of lien: No notice of deficiency.--The rights of a purchaser of a promissory note, a security, were superior to those of the government because the government's tax lien was invalid. The government had failed to send a notice of deficiency to the taxpayer at his last known address within the statutory period. Although the government claimed to have discovered evidence of the receipt of the notice, it was barred from presenting this evidence after summary judgment had been granted because it failed to exercise reasonable diligence in discovery of this evidence.

Paul R. Haerle, Joseph A. Darrell, Thelen, Marrin, Johnson & Bridges, 2 Embarcadero Center, San Francisco, Calif. 94111, for plaintiff. Michael R. Pinatelli, Jr., Stokes, Clayton & McKenzie, 333 Franklin St., #202, San Francisco, Calif. 94102, Martin A. Schainbaum, Assistant United States Attorney, San Francisco, Calif., for defendants.

Order

CONTI, District Judge:

This is a Rule 22 interpleader action pursuant to which Georgia-Pacific (G-P) has deposited the sum of $48,279.47 with the court.

On September 14, 1970, Melburne Valley Properties, Inc. sold a piece of land located in Mendocino County, California, to Boise Cascade Corp. Boise Cascade gave Melburne a promissory note for $225,605, secured by a deed of trust on the property. On February 15, 1973, Boise Cascade sold this property to G-P who took subject to the deed of trust. On October 21, 1974, Melburne assigned its interest in the promissory note to Lazy Two T. As a result of this, G-P became obligated to pay Lazy Two T the remaining monies due under the promissory note.

After the sale of the property to G-P, but before the assignment of the promissory note to Lazy Two T, the United States sent two tax deficiency notices to Melburne listing deficiencies for 1970 and 1971. The first was addressed to Melburne in Yerington, Nevada, at the address used on Melburne's tax returns for 1970 and 1971. The second was addressed to Melburne in Mendocino County, the locale of the property.

Melburne did not contest these tax deficiencies in the Tax Court within the 90-day statutory period, and on August 9, 1974, the government mailed Notices and Demands on Assessment to Melburne at "P. O. Box 34, Mendocino, California 95460". The back taxes listed in the notices were assessed against Melburne on August 12, 1974, and, on October 2, 1974, Notices of Federal Tax Lien with respect to Melburne's back taxes were filed in Mendocino County, California, Carson City, Nevada, and in the office of the Nevada Secretary of State. On February 12, 1975, a Notice of Levy was served on G-P by the IRS. On June 1, 1975 , the final payment under the promissory note became due and G-P interpleaded this payment into the court because of the conflicting claims of the IRS and Lazy Two T.

On April 20, 1976 , this court granted summary judgment in favor of Lazy Two T. The basis for this decision was the finding that no tax lien had arisen on behalf of the U. S. because no tax deficiency notice had been mailed to Melburne at its last known address, as required by 26 U. S. C. §6212.

Pursuant to Rule 59, F. R. C. P. the United States moves to alter or amend this court's judgment of April 20, 1976 , on the ground of newly discovered evidence.

Before a tax deficiency may be assessed against a taxpayer, the government must mail a notice of tax deficiency to the taxpayer at his last known address. If the taxpayer does not dispute this deficiency in the Tax Court within 90 days after mailing a tax is assessed against him in the amount of the deficiency. 26 U. S. C. §§ 6212, 6213. If, however, a deficiency notice is not mailed to the taxpayer at his last known address, but the taxpayer actually receives the deficiency notice within the 90-day period, a tax is still assessed. The reason for this is that the taxpayer has not been prejudiced by the government's failure to properly address its deficiency notice, and he still may contest the deficiency in the Tax Court. Alta Sierra Vista, Inc. v. Commissioner, Slip Memorandum, No. 74-2772 (9th Cir., decided January 12, 1976, marked "Do not publish"); Clodfelter v. Commissioner [76-1 USTC ¶9166], 527 F. 2d 754 (9th Cir. 1975).

The government contends that it has unearthed new evidence which establishes that Nancy Tunzi actually received the government's March 15, 1974 , deficiency notice addressed to Melburne at Mendocino , California , on March 20, 1974 . This notice was allegedly received five days after it was mailed, and, therefore, well within the 90-day statutory period. The evidence to which the government refers consists of a certified mail receipt signed by Nancy Tunzi. The receipt indicates that Nancy Tunzi signed in the capacity of Secretary of Melburne Valley Properties. ¹

New evidence notwithstanding, there are two reasons why this court should not alter or amend its judgment of April 20, 1976: (1) the government has failed to show that it could not, with reasonable diligence, have discovered the new evidence prior to the hearing on the motion for summary judgment; and (2) summary judgment is proper on other grounds.

(1) Reasonalbe Diligence: Rule 59, F. R. C. P. provides that a court may grant a new trial in an action for any of the reasons for which new trials have hithertofore been granted, provided that a motion to amend or alter a judgment is served upon the court within 10 days after entry of the judgment. A new trial may be granted under Rule 59, F. R. C. P. on the ground of newly discovered evidence, but the evidence must be such that it was not discoverable by a diligent search prior to the time of the trial. 6A, Moore 's Federal Practice, ¶59.08[3] p. 59-115. Further, in the Ninth Circuit, where a party moves for rehearing of a motion for summary judgment on the basis of new evidence, the party must show that it could not, with reasonable diligence, have discovered and produced such evidence at the original hearing. Engelhard Industries, Inc. v. Research Instrumentals, 324 F. 2d 347, 352 (9th Cir. 1963), cert. den. 377 U. S. 912.

The new evidence which the government seeks to introduce at this time was available to it as early as March 20, 1974 . The government's affidavit in support of the admission of this evidence attests that the government only began inquiring into its existence during the week prior to the hearing on the motions for summary judgment. (Affidavit of Cynthia White.) Neither the government's motion for summary judgment nor the parties' joint pretrial order lists "actual receipt within the 90-day period" as an issue of material fact. Finally, on April 12, 1976 , Lazy Two T sought a continuance of the trial date based upon newly discovered evidence. The government opposed this continuance for the reason that it had all the evidence it needed to conduct the trial. The government's opposition went on to state as follows:

The material facts and issues are crystalized in the motions for summary judgment. The facts admitted by Lazy Two T together with the facts relied upon by the United States in its motion for summary judgment reveal that this matter can be resolved by that procedure.

There is no reason why the evidence relied upon by the parties in their respective motions for summary judgment does not control the disposition of this matter * * * The material controlling facts are presently available as revealed by the affidavits in support of the respective motions for summary judgment and the joint pretrial order.

It is, therefore, submitted that there is no reason to delay disposition of this matter. The material facts are clear and supported by affidavits or agreed upon in the joint pretrial order. (Opposition of U. S. A. to Continuance, filed April 13, 1976, p. 2, lines 10-27).

The government, in effect, is attempting not only to introduce new evidence but also to inject a new issue of material fact into the suit. There is no reason why the government could not have identified this issue prior to filing for summary judgment. In light of this the court finds that the government did not exercise due diligence in the discovery of this evidence, and on this basis its motion to alter or amend is denied.

(2) Alternate Ground for Summary Judgment: Notwithstanding the government's discovery of new evidence, summary judgment is still appropriate in this case on other grounds.

26 U. S. C. §6323(b)(1) provides that a government tax lien shall not be valid against the purchaser of a security who did not have actual notice or knowledge of the existence of the lien at the time of purchase. The promissory note involved here qualifies as a security as defined in 26 U. S. C. §6323(h)(4).

The question for the court is whether Lazy Two T, as the subsequent purchaser of the promissory note in question, had actual knowledge of the existence of a government tax lien against Melburne at the time of its purchase on October 21, 1974 .

The scenario for the establishment of a federal tax lien is as follows: (1) The government must send a notice of tax deficiency by certified or registered mail to the taxpayer at his last known address. 26 U. S. C. §6212. (2) The taxpayer, within 90 days after mailing of the notice, may petition the tax court for re-determination of the deficiency. 26 U. S. C. §6213(a). (3) If the taxpayer does not file a petition within 90 days, the tax deficiency is assessed against the taxpayer and is payable upon notice and demand. 26 U. S. C. §6213(c). (4) Notice of the tax assessment and demand for payment must be made to the taxpayer within 60 days after the assessment. The notice must be left at the taxpayer's dwelling or usual place of business or mailed to his last known address. 26 U. S. C. §6303. (5) If the taxpayer, after notice and demand, refuses to pay the amount of taxes due, then a tax lien arises in favor of the United States . 26 U. S. C. §6321. (6) Finally, if notice and demand on assessment is not given to the taxpayer at his last known address or usual place of business, no lien arises. U. S. v. Coson [61-1 USTC ¶9219], 286 F. 2d 453, 462 (9th Cir. 1961).

The court decided in its April 20, 1976 , order granting summary judgment in favor of Lazy Two T that no federal tax lien had arisen, because the government's deficiency notice was not addressed to Melburne at its last known address. Since the deficiency notice was invalid, no valid tax assessment arose upon which notice and demand for payment could be made. If this court allowed the government's new evidence to be admitted and assuming its authenticity, the deficiency notice in question would be rendered valid and a valid tax assessment would arise therefrom. However, a valid tax lien would not arise unless notice and demand were mailed to Melburne at its last known address or usual place of business or unless Melburne had actually received the notice and demand.

Here, the government mailed its notice and demand on August 9, 1974 , to Melburne at " P. O. Box 34 , Mendocino , California 94560 ". This was not Melburne's last known address nor its usual place of business. Neither Melburne nor Lazy Two T received actual notice of this demand until April 6, 1976 . This was after the date of the transfer of the security in question to Lazy Two T. The government does not dispute this in its motion for summary judgment

As a result of the government's failure to send a proper notice and demand to Melburne and in the absence of Melburne's actual receipt of the demand before transfer of the property to Lazy Two T, a valid tax lien did not arise, if at all, until after the transfer. Therefore, Lazy Two T did not have actual knowledge of a tax lien at the time of the purchase in question. As a result, it takes free of any tax lien which might have subsequently arisen. 26 U. S. C. §6323(b)(1).

In accordance with the foregoing, it is ordered that the United States ' motion to alter or amend this court's judgment of April 20, 1976 , be, and hereby is, denied.

¹ This creates a factual controversy, because Nancy Tunzi's affidavit of April 15, 1976 , attests that while she is Secretary of Lazy Two T, she has not held office in Melburne Valley Properties since December 20, 1973 .

 

 

[79-1 USTC ¶9192]Henry T. Haye, Jane S. Haye, et al., Plaintiffs v. United States of America , Defendant

U. S. District Court, Cen. Dist. Cal., No. CV 78-2423-RJK, 461 FSupp 1168, 12/13/78

[Code Sec. 6323]

Lien for taxes: Notice: Wrong name.--Purchasers of land subject to a federal tax lien were granted an injunction against the enforcement of the lien. The Court found that the IRS did not file proper notice of the lien because both the first and last names of the delinquent taxpayer were misspelled. The defective notice prevented the purchasers from determining the existence of the lien because the filing system in the state was indexed by name only. Since a reasonable and diligent search would not have revealed the existence of the lien to subsequent purchasers, the lien was invalid against the purchasers.

Francis J. Cunningham III, Mazirow, Schneider, Forer & Lawrence, Inc., One Century Plaza , Los Angeles , California 90067 , for plaintiffs. William J. James, Assistant U. S. Attorney, Andrea S. Ordin, United States Attorney, Los Angeles California 90012, for defendant.

Memorandum of Decision and Order

KELLEHER, District Judge:

Simply put, the genesis of this litigation lies in the complete and utter inability of several parties to correctly spell the name "Castillo." As will develop, one Manuel de J. Castillo took title to a parcel of real property in 1971. The deed, duly recorded, referred to him as "Cattillo." Years later, Dr. Castillo fell into tax trouble with the federal government. The IRS duly filed its Notice of Tax Lien (Form 688) with the Los Angeles County Recorder's office. The Notice, however, referred to Dr. Castillo as "Manual de J. Castello," misspelling both his first and last names. Castillo subsequently transferred the property to a "friend," who thereupon--without Castillo's knowledge--transferred the parcel to plaintiffs. All the transactions were duly recorded. The government, on the basis of its tax lien, now wishes to sell the parcel. The plaintiffs, understandably attached to their homestead, resist this effort.

The plaintiffs filed this complaint to quiet title to real property, to cancel a federal tax lien, and to seek injunctive relief on June 22, 1978 . The United States had seized the property on June 8, 1978 , pursuant to its levy, and was planning to conduct a sale of the same property on June 27, 1978 . On June 26, 1978 , the Court granted plaintiffs' request for a preliminary injunction by minute order. A formal order to that effect was lodged and signed on June 28, 1978 . The preliminary injunction required the defendant, the United States of America , to refrain from selling the plaintiffs' property pursuant to a tax lien during the pendency of this action. Plaintiffs filed their request for judicial notice and motion for summary judgment on October 27, 1978 . The government's opposition was filed November 8, 1978 , contesting only plaintiffs' motion for summary judgment. No opposition was filed with respect to plaintiffs' request for judicial notice.

Briefly, the plaintiffs contend that the United States District Court has jurisdiction to quiet title to the real property and to grant the requested permanent injunction. They further argue that (a) a title insurance company is not an agent of the insured (i. e the plaintiffs) for purposes of imputing knowledge of the existence of federal tax liens, and (b) the lien recorded pursuant to 26 U. S. C. §6321 was and is invalid in that it failed to give actual or constructive notice of its existence to a person of ordinary intelligence and diligence. They concluded that the Court should enter a judgment quieting title to the real property in plaintiffs' name and permanently enjoining the government from selling or attempting to sell all or any portion of that real property pursuant to its invalid tax lien.

Defendant agrees that the Court has jurisdiction over wrongful levy actions (see 28 U. S. C. §3146(e)) and over quiet title actions which do not challenge the merits of the underlying tax assessment. ¹ It argues, however, that the Court has no jurisdiction to cancel a federal tax lien, and further argues that a complete cancellation would be inappropriate, as "the federal tax lien attached to all property and rights to property of the delinquent taxpayer [in this case, someone other than the plaintiffs] and affects both individuals and property not before this Court." ² The government further argues that the plaintiffs were not "purchasers" within the ambit of 26 U. S. C. §6323(a) as that term is defined in 26 U. S. C. §6323(h)(6), because their title was not valid under local law as against subsequent purchasers without actual notice. The government alleges plaintiffs' title was unmarketable because of variations in the spelling of the name of a prior grantor within the plaintiffs' chain of title, and this, it is claimed, is fatal under §6323(h)(6). Finally, the government contends its tax lien, as filed, was sufficient to give notice to the plaintiffs of the federal tax lien on their property.

A. Jurisdiction. The Court has jurisdiction over the instant matter by virtue of 28 U. S. C. §1346(e), which states that

[t]he district courts shall have original jurisdiction of any civil action against the United States provided in Section 7426 of the Internal Revenue Code of 1954.

26 U. S. C. §7426(a)(1) provides, in pertinent part, that

[i]f a levy has been made on property . . . any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in . . . such property . . . may bring a civil action against the United States in a district court of the United States.

Subsection (b)(1) limits the form of relief a district court may grant in such a situation:

The district court shall have jurisdiction to grant only such of the following forms of relief as may be appropriate in the circumstances:

(1) Injunction.--If a levy or sale would irreparably injure rights in property which the court determines to be superior to rights of the United States in such property, the court may grant an injunction to prohibit the enforcement of such levy or to prohibit such sale.

Thus, the Court has jurisdiction. And if the Court finds the rights of Haye superior to those of the United States in the property, it may issue an injunction prohibiting the United States from enforcing its levy if the Court further finds that such enforcement would, in absence of the decree, cause irreparable harm.

B. Propriety of Summary Judgment. Fed. R. Civ. P. 56(a) states that "[a] party seeking to recover upon a claim . . . may, at any time after the expiration of 20 days from the commencement of the action . . . move, with or without supporting affidavits, for a summary judgment in his favor upon all or any part thereof." Summary judgment is appropriate under 26 U. S. C. §6323 if there are no "material, but undetermined question[s] of fact" outstanding. See Corwin Consultants, Inc. v. Interpublic Group of Companies, Inc. [75-1 USTC ¶9299], 512 F. 2d 605 (2d Cir. 1975) (summary judgment improper where taxpayer's domicile is unclear).

A review of the complaint, the government's answer thereto (as supplemented by certain admissions contained in its opposition to summary judgment), reveals the following uncontested facts:

The plaintiffs are residents of the County of Los Angeles , State of California . The plaintiff, Glendale Federal Savings and Loan Association, was and is now a corporation duly organized and existing under the laws of the United States , and doing business in the County of Los Angeles . That on or about May 17, 1977 , plaintiffs Haye bought the property in question from Isidore Schuman. Schuman, in turn, had received the property from the delinquent taxpayer, Manuel de Castillo on May 5, 1975 , after the government had filed a Notice of Federal Tax Lien on February 26, 1974 . The plaintiff Glendale Federal is a beneficiary of a Deed of Trust executed by plaintiffs Haye. The tax lien named as the taxpayer Manual De. J. Castello. Defendant seized the real property in question on June 8, 1978 , and the plaintiffs were unaware of the existence of the government's lien until that time.

The parties agree that the taxpayer's correct name is Manuel de J. Castillo. The parties agree that the Notice of Tax Lien was filed under the incorrect name of Manual de J. Castello. The parties further agree that Notice of Federal Tax Liens are recorded in Los Angeles County only by the name of the delinquent taxpayer.

Although the parties dispute certain "ultimate" factual issues, the Court concludes that the only issues remaining for determination are legal in nature, requiring the Court to interpret existing law and apply it to the uncontested factual recitals.

C. Summary Judgment Should Be Given to Plaintiffs. 26 U. S. C. §6321 provides that if a person fails to pay any tax, a lien shall arise in favor of the United States with respect to all property owned by the taxpayer. Manuel de J. Castillo was such a taxpayer, and the government duly assessed a deficiency on February 25, 1974 . On February 26, 1974 , a Notice of Federal Tax Lien (form 688) was filed with the Los Angeles County Recorder's Office, naming the delinquent taxpayer as "Manual de J. Castello." 26 U. S. C. §6323(a) provides that the "lien imposed by section 6321 shall not be valid as against any purchaser . . . until notice thereof which meets the requirements of subsection (f) has been filed . . .". 26 U. S. C. §6323(f)(3) provides that the "form and content of the notice referred to in subsection (a) shall be prescribed by the Secretary or his delegate. Such notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien." There are two threshold issues. First, are the plaintiffs "purchasers" within the ambit of section 6323(a)? If so, did the IRS satisfy the requirements of section 6323(f)(3)?

1. Plaintiffs Are Purchasers. The government asserts that the plaintiffs are not "purchasers" as that term is used in 26 U. S. C. §6323(a). The government maintains that because the title the plaintiffs acquired was clouded (i.e. Castillo's name was spelled "Cattillo" in the 1971 conveyance to him) the plaintiffs' title is "unmarketable." The inference made by the government is that an "unmarketable" title is not "valid under local law as against subsequent purchasers without actual notice." Id. Thus, the government, argues, if the plaintiffs did not acquire a title valid as against subsequent purchasers without actual notice, they cannot be purchasers under §6323(h)(6). This is a novel argument. It is also an incorrect argument, as will be presently demonstrated.

First, that a title is "unmarketable" has nothing whatsoever to do with its validity as against subsequent purchasers without actual notice. "Recordation is a device to establish priority, but has nothing to do with conveying title." Lawler v. Gleason, 130 Cal. App. 2d 390, 395-6, 279 P. 2d 70, 74 (1955). Thus, a marketable title is defined as one that is free from reasonable doubt in law or in fact; one that may be readily sold to a reasonably prudent purchaser, or mortgaged to a person of reasonable prudence as security for the loan of money. See Peckham v. Stewart, 97 Cal. 147, 31 P. 928 (1893); 92 C. J. S. Vendor v. Purchaser, §191(a). Marketable title is, in that respect, an extremely artificial concept. For instance, property encumbered with a restrictive covenant is generally thought to be "unmarketable," regardless of whether or not the restrictions are seen as being beneficial. 92 C. J. S. Vendor v. Purchaser, §191(a). However, a title encumbered with a restrictive covenant is nonetheless recordable and protected against subsequent purchasers without actual notice. Therefore, the mere assertion of "unmarketability" does not exclude plaintiffs from the class of purchasers within the purview of 26 U. S. C. §6323(a), as that term is defined in §6323(h)(6).

Second, even if it is the law that an unmarketable title, duly recorded, provides no protection against subsequent purchasers for value without actual notice, it is not entirely obvious that the plaintiffs' title is unmarketable. Although

a title may be rendered unmarketable by a materially wrong [sic] designation of the grantor or grantee in a deed in the chain of title, unless the variance is immaterial and the objection frivolous or it is cured by competent evidence . . . a discrepancy between the name of a grantee in a deed and that of a grantor in a subsequent deed, both of which deeds have been of record of adverse title for a number of years, with no assertion based on the discrepancy, is insufficient to avoid a contract which provides for an abstract showing good title.

92 C. J. S. Vendor v. Purchaser, §195(c). See also Levitt v. 1317 Wilkins Corp., 58 N. Y. S. 2d 507 (Sup. Ct. 1945); Trinity Cathedral v. ETZ, 137 N. J. Eq. 261, 44 A. 2d 397 (1945).

Here the government neither makes an assertion of adverse title based on the 1971 misspelling, nor does it appear that Castillo's title wasn't "recorded for a number of years." On this evidence, most courts would not declare the plaintiffs' title unmarketable.

Finally, a generous reading of the government's allegations would find it asserting that the misspelling of Castillo's name in 1971 somehow rendered the Haye deed of no force and effect against subsequent purchasers for value without notice. Presumably, a subsequent purchaser could take title from "Cattillo" although the Haye family has taken title from "Castillo." The California law is directly to the contrary.

Thus, in Fallon v. Keough, 38 Cal. 44, 99 Am. Dec. 347 (1869), the Alcalde of San Jose granted a lot to one "Darby O'Fallon," the nickname of Jeremiah Fallon. Fallon subsequently conveyed the lot twice, once under the nickname (i. e. Darby O'Fallon) and once under his Christian name (i. e. Jeremiah Fallon). The issue before the Court, of course, concerned which purchaser had the valid title. The Court noted that the first purchaser (who took under Fallon's Christian name) had duly recorded the conveyance, and was entitled to a protected title, notwithstanding the fact that the conveyance was made in a name other than that under which the vendor originally acquired title. The Court there recommended that the Recording Statute include a provision whereby a conveyance in a name other than the name of the grantee should be noted in the recording for the protection of subsequent purchasers. The California legislature indeed added such a provision. See California Civil Code §1096; Puccetti v. Girola, 20 C. 2d 574, 576-9 (1942) (per Traynor, J.). However, as Judge Traynor indicated in his opinion, the purpose of the statute was to avoid the spectre of an intentional "wild title" stalking the recorded property by virtue of a person's name change or use of a false name to take title. Here, there is no allegation that the misspelling was anything other than a mistake. As a mistake, the provisions of §1096 are inapplicable, and plaintiff's title remains valid as against subsequent purchasers without actual notice under the doctrine set forth in Fallon, supra.

Finally, the Glendale Federal Savings and Loan Association is also a "purchaser," as that term is defined in 26 U. S. C. §6323(h)(6), by reason of the fact that it is a holder of a security interest in the property.

2. The Government Failed the Test of Section 6323(f)(3). Section 6323(f)(3) authorizes the Secretary or his delegate to prescribe the correct form of notice. The proper form so prescribed is denominated "Form 688":

The notice referred to . . . shall be filed on Form 688, "Notice of Federal Tax Lien under Internal Revenue Laws". Such notice is valid notwithstanding any other provision regarding the form or content of a notice of lien. For example, omission from the notice of lien of a description of the property subject to the lien does not affect the validity thereof even though State law may require that the notice contain a description of the property subject to the lien.

26 C. F. R. §301.6323(f)-1(c).

The form sets forth (a) the name of the taxpayer, and (b) his residence. Because the residence of Manuel de J. Castillo was not the subject property, the plaintiffs could not have obtained notice of the lien by screening the records in that fashion. Further, the uncontroverted facts show that the government incorrectly spelled the name of the taxpayer on Form 688. The misspelling of Castillo's first and last names caused the Notice to be indexed approximately nine pages and one thousand names prior to its proper location in the Los Angeles County Recorder's General Index. A review of the case law indicates that a misspelling does not automatically render the tax lien invalid under §6323(a). However, where the indexing system is only by the taxpayer's name (compare: Richter's Loan Co. v. United States [56-2 USTC ¶9706], 235 F. 2d 753 (5th Cir. 1956) (Florida System gave purchasers a number of methods for checking for Federal Tax liens)) the issue is whether the lien would be disclosed by a reasonable and diligent search of the General Index. United States v. Sirica [66-1 USTC ¶9209], 247 F. Supp. 421, 422 (S. D. N. Y. 1965). However, it should be kept in mind that

[t]he Commissioner, having drafted the form which required the naming of the taxpayer against whom the lien is claimed, should not ask the Court to place in the notice the names of persons whom his draftsman attempted to include by the insertion of the abbreviation . . . "et alii." . . . To require the Commissioner to abide by the rules which he obviously felt were required . . . is nothing more than good common sense.

F. P. Baugh, Inc. v. Little Lake Lumber Co. [61-2 USTC ¶9726], 297 F. 2d 692 (9th Cir. 1961, cert. denied, 370 U. S. 909 (1962).

Here, the IRS drafted Form 688. Because the name of the taxpayer is crucial under the California Indexing System, the IRS should be required to hold fairly strict standards as to the correctness of the name used on the form. Here, reasonable and diligent search probably does not encompass a search of over 1,000 names and nine pages of the General Index, especially where the name is a common Hispanic name like Castillo. Even if such is reasonable, the plaintiffs would have had the further problem that the taxpayer's first name was incorrectly spelled. Taken together, no reasonable and diligent search would have revealed the Federal Tax Lien.

Thus, the form of notice does not comport with the requirement of section 6323(f)(3), as that is interpreted in the IRS' own regulations. Because the notice failed to so comply, plaintiffs Haye and plaintiff Glendale Federal fit within the purview of section 6323(a), and the lien against the property in question is invalid as against them.

Finally, the government argues that a correct title search would not have begun with "Castillo" but rather with "de Castillo" or "Cattillo." They suggest that a reasonable person would have, at the very least, conducted a more thorough search. Furthermore, the government argues, the plaintiffs would have discovered the Federal Tax Lien. However, "Cattillo" is further away in the General Index from the Federal Tax Lien than "Castillo." For this reason, the Court believes the government's argument is to no avail, and the plaintiffs' motion for summary judgment is granted.

D. Judicial Notice. The plaintiffs request the Court to take judicial notice of the following documents:

(a) Deed to Cattillo, recorded July 15, 1971 ;

(b) Deed of Trust, trustor Castillo, recorded July 15, 1971 ;

(c) Notice of Federal Tax Lien, recorded February 26, 1974 ;

(d) Deed to Isidore Schuman, recorded September 23, 1975 ;

(e) Deed to plaintiffs Haye, recorded May 17, 1977 ;

(f) Deed of Trust, trustor plaintiffs Haye, recorded May 17, 1977 ; and

(g) Los Angeles County General Index (partial) for the years 1967 through 1977, inclusive.

The request for judicial notice arises under Fed. R. Ev. 201, which states, in pertinent part:

A judicially noticed fact must be one not subject to reasonable dispute in that it is either . . . (2) capable of accurate and ready determination by resort to sources whose accuracy cannot be questioned.

Fed. R. Ev. 201(b)(2).

Subsection (d) makes the taking of judicial notice mandatory if the Court is so requested and supplied with the necessary information Here, because all the deeds are recorded with the Los Angeles County Index, they are not subject to reasonable dispute. Further, they are capable of accurate and ready determination. The same is true for the General Index itself. The Court hereby takes judicial notice thereof, and orders as follows:

1. Plaintiffs Henry T. Haye and Jane S. Haye are purchasers, within the meaning of 26 U. S. C. §6323(a) and as defined in 26 U. S. C. §6323(h)(6), of the real property legally described as:

Lots 3 and 4 in Block 10 of Tract No. 10731, in the City of Los Angeles , as per map recorded in Book 202 Pages 20 and 23 inclusive of Maps, in the office of the County Recorder of said County. EXCEPT from said Lots, that portion thereof described as follows:

Beginning at the Northwesterly corner of said Lot 3; thence along the Westerly line of said Lot 3, South 12 degrees 33'20" West 204.35 feet; thence South 80 degrees 12"34" East 133.52 feet to a point in the Easterly line of said Lot 3, that distance thereon South 23 degrees 36"41" West 137.39 feet from the Northerly corner of said Lot 3; thence South 61 degrees 12"34" East 131.70 feet; thence North 40 degrees 34"50" East 124.49 feet to the Northerly line of said Lot 4; thence in a general Westerly direction along the Northerly lines of said Lots 4 and 3 to the point of beginning. [Hereinafter referred to as "said real property"].

2. Plaintiff, Glendale Federal Savings and Loan Association, is a holder of a security interest in said real property, within the meaning of 26 U. S. C. §6323(a) and as defined in 26 U. S. C. §6323(h)(1).

3. The lien referred to in the Notice of Federal Tax Lien recorded as document number 2304 at Book M4614, Page 216 of the official records of the County Recorder of Los Angeles County, State of California, is not valid as against plaintiffs, and each of them, on the grounds that said Notice does not comply with the requirements of 26 U. S. C. §6323(f)(3).

4. Said Notice of Federal Tax Lien does not impart constructive notice of its existence or contents, or of the lien referred to therein, to anyone due to the misspelling of the taxpayer's name therein.

Based upon the foregoing, the Court finds that there is no genuine issue as to any material fact, that plaintiffs herein are entitled to judgment as a matter of law, and therefore orders that judgment be entered accordingly.

The Clerk shall send, by United States mail, a copy of this Memorandum of Decision and Order to counsel for all parties.

¹ The government initially denied that the Court had such jurisdiction.

² The Court does not, however, understand the plaintiffs to ask that the entire lien be cancelled. Rather, they ask that the lien be cancelled as to the subject property only.

 

 

[76-2 USTC ¶9671]Arizona Title Insurance and Trust Company, an Arizona corporation, Plaintiff v. Big Park Development Company, Inc., an Arizona corporation, et al., Defendants

U. S. District Court, Dist. Ariz. , No. Civ. 76-335 Pct. WPC, 7/22/76

[Code Sec. 6323]

Taxes: Liens: Government priority.--Government's motion for summary judgment granted and the Government's tax lien was given priority where another, alleged assignment made prior in time was of doubtful validity. The taxpayer purchased the other assignment for consideration by paying over a prior outstanding debt.

Favour & Beck, P. O. Box 1433 , Prescott , Ariz. , for plaintiff. George B. Nielsen, United States Attorney, Phoenix, Ariz., C. Randall Bain, 222 N. Central Ave., Phoenix, Ariz., John E. Lundin, 3400 Valley Bank Center, Phoenix, Ariz., George M. Ireland, 115 E. Goodwin St., Prescott, Ariz., for defendants.

Memorandum and Order

COPPLE, District Judge:

The instant action involves the question of the priority of tax liens as against the funds interpleaded by the Arizona Title and Trust Co. With the exception of defendant Wentworth etc. the other defendants have not answered and the Arizona Title and Trust Co. has dropped its claims for attorney's fees, etc.

Defendant Wentworth etc. claims priority under an "assignment" dated May 7, 1975 . If that assignmemt is valid the government does not have priority. If it is not valid the government prevails. In order to have a valid assignment in the present factual situation the defendant must have been a purchaser within the meaning of 26 U. S. C. §6323. Who is a purchaser is a question of federal and not state law. Enochs v. Smith [66-1 USTC ¶9378], 359 F. 2d 924 (5th Cir. 1966).

Defendant paid over as "consideration" for the "assignment" the amount of fees due and owing to it (a debt) by the assignor. One who "purchases" an assignment and for consideration offers the prior owing debt is not a "purchaser" within the meaning of 26 U. S. C. §6323. See, United States v. Scovil [55-1 USTC ¶9137], 348 U. S. 218, 75 S. Ct. 244 (1955); United States v. L. R. Foy Construction Company [62-1 USTC ¶9325], 300 F. 2d 207 (10th Cir. 1962); United States v. Texas Eastern Transmission Corp. [66-1 USTC ¶9350], 254 F. Supp. 114 (W. D. La. 1965); Grocers Wholesale Cooperative, Inc. v. Goodrick [66-1 USTC ¶9234], 251 F. Supp. 751 (S. D. Iowa 1966); United States v. Pavenick [61-2 USTC ¶9679], 197 F. Supp. 257 (D. N. J. 1961).

It is clear from the present record that the tax assessments were made on March 13 and 24, 1975, which was prior to the alleged assignment on May 7, 1975. The notice of lien was filed on May 15, 1975. Only by coming within the exception of 26 U. S. C. §6323 can the defendant prevail. He failed to so do.

The Court also notes that, while not briefed by the parties, there is a serious question whether the letter of May 7, 1975 constitutes a valid and binding "assignment" in any event.

IT IS ORDERED:

The government's motion for summary judgment is granted. Counsel for the government will promptly prepare and submit for approval and signature a form a judgment consistent with the foregoing.

Judgment

Defendant United States, having moved for an order directing entry of final judgment on this Court's order of July 22, 1976, which granted it summary judgment, good cause appearing,

IT IS HEREBY DETERMINED, pursuant to Rule 54(b), F. R. Civ. P., that there is no just reason for delay in the entry of final judgment in favor of the United States on the order of this Court dated July 22, 1976 granting the government's motion for summary judgment.

IT IS ORDERED that such final judgment is hereby entered and the tax claim of the United States against Defendant Big Park Development Company, Inc., an Arizona corporation, is hereby found to be superior to the claims, interests or liens of all other parties herein.

IT IS FURTHER ORDERED that Plaintiff Arizona Title Insurance and Trust Company will forthwith turn over to the United States proceeds of the interpleaded funds sufficient to pay the delinquent final tax, late payment penalty and accrued interest of Big Park Development Company for the third and fourth quarters of taxable year 1974, as calculated by law to date of payment by Plaintiff.

IT IS FURTHER ORDERED that Plaintiff is not entitled to attorney's fees or costs against Defendant United States.

It appearing that the interpleaded funds are more than sufficient to satisfy the federal tax lien,

IT IS FURTHER ORDERED that the remaining defendants will promptly litigate their respective priorities or promptly move for removal of this cause back to Yavapai County Superior Court under docket no. 32262.

 

 

[76-2 USTC ¶9623]The First National Bank of Cartersville v. Lamar B. Hill v. United States of America

U. S. District Court, No. Dist. Ga., Rome Div., No. 2422, 412 FSupp 422, 5/12/76

[Code Sec. 7426]

Nontaxpayer action: Wrongful levy: Property owner: Misappropriation.--A federal tax lien could not attach to a property interest of taxpayer since it was undisputed that taxpayer had embezzled approximately $4,700,000 from the bank; therefore he obtained no title to or property rights in these funds and he obtained no rights to any property which was purchased with these embezzled funds but would instead hold the same as constructive trustee for the bank, who was the rightful owner.

Neel & Smith, Box 159 , Cartersville , Ga. , for First Nat'l. Bank of Cartersville. Gettle, Fraser & Berthold, 116 Paces 75 Park, 1401 W. Paces Ferry Rd. N. W. , Atlanta , Ga. , for Hill. William D. Mallard, Jr., Assistant United States Attorney, Atlanta , Ga. , for U. S.

Order

O'KELLEY, District Judge:

By order dated December 22, 1975, this court held that the federal tax lien of the United States took priority over the equitable liens claimed by the First National Bank of Cartersville [hereinafter referred to as the "Bank"] as to certain property in the name of Lamar Hill which was allegedly purchased with proceeds of funds he embezzled from the Bank. See First National Bank of Cartersville v. Hill [76-1 USTC ¶9254], 406 F. Supp. 351 (N. D. Ga. 1975). The Bank now moves this court for reconsideration of that order, alleging that such interpretation of the relative priorities would result in the Bank's being denied due process of law. There is also before the court a motion of the Commercial Bank & Trust Company of Griffin , Georgia , for leave to file an amicus curiae brief in support of the Bank's motion for reconsideration. The Commercial Bank & Trust Company is involved in other litigation in this court which involves similar issues. The motion for leave to file an amicus brief is GRANTED.

The United States has not responded to the Bank's motion for reconsideration but has filed a motion for partial summary judgment as to certain other property or funds of Lamer Hill which is in the possession of the Bank securing several of his promissory notes. The United States seeks to obtain priority on the excess of any amounts necessary to satisfy such promissory notes.

The facts of this case are set out in the December 22, 1975 , order. Briefly, Lamar Hill was the president of the Bank, and during such tenure he embezzled approximately $4,700,000 from the Bank. The United States made assessments for Hill's unpaid tax liabilities plus interest and penalties on these embezzled monies in an amount over $3,600,000 and duly filed the notice of federal tax liens. Judgments have been entered against Hill in favor of the United States for over $4,000,000 and in favor of the Bank for over $5,800,000. The question before the court initially, and now on the motion for reconsideration, is the relative priority of the federal tax liens vis-a-vis the constructive trusts claimed by the Bank on property purchased by Hill, allegedly with the embezzled funds.

In the December 22, 1975, order, this court noted that federal rather than state law governed in determining whether a state-created lien is sufficiently choate so as to prevail over a federal tax lien, see United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957), and held that at the time of the filing of the federal tax lien in the case sub judice the property subject to the Bank's lien had not yet been established and the amount of the lien had not been established so as to take priority over the tax lien. In so holding, this court relied on United States v. Pioneer American Ins. Co., supra; City of Dallas v. United States [67-2 USTC ¶9118], 369 F. 2d 645 (5th Cir. 1966); and United States v. Morrison, supra. Each of these cases dealt with situations where the federal tax lien was being sought against the property of the taxpayer. Pioneer American Ins. Co. dealt with a provision for attorney's fees in a mortgage on the taxpayer's property, City of Dallas dealt with a city tax lien on the taxpayer's property and Morrison dealt with an equitable vendor's lien for the unpaid purchase price of property purchased by the taxpayer. It has now been pointed out to the court by the amicus curiae that while federal law determines whether a state lien is sufficiently choate so as to defeat a federal tax lien, it must first be determined whether the taxpayer had property or a right to property to which the federal tax lien could attach, and this is a matter of state law. The extent of Hill's property interest in the property he allegedly purchased with proceeds of the embezzled funds was not considered in this court's December 22, 1975, order. It is contended that if Hill had no property interest in property purchased with embezzled funds, then there would be no property to which the federal tax lien could attach.

As to the principle that state law determines the question of the taxpayer's property rithts to which a federal tax lien can attach, the Supreme Court very succinctly stated the rule in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960):

The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had "property" or "rights to property" to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that "in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute." [Footnote and citation omitted.]

Id. at 512-513. See also United States v. Durham Lumber Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960); United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677 (10th Cir. 1973); Ideco Division of Dresser Industries, Inc. v. Chance Drilling Co., 422 F. 2d 165 (5th Cir. 1970); United States v. Gurley [69-2 USTC ¶9562], 415 F. 2d 144 (5th Cir. 1969). The import of this is that a federal tax lien can only attach to a property interest of the taxpayer which exists under state law, and if the taxpayer does not own the property or have rights to the property under state law, then the federal tax lien could not attach to such property, and, thus, the federal tax lien could not take precedence over the person with the rights of ownership in the property. In Aquilino, the Court dealt with a situation where subcontractors claimed a right to monies owed the contractor by the owner. The united States was seeking to enforce a tax lien on all property of the contractor. The Court noted that such claims of the subcontractors were not choate but held that if, under the applicable New York law, the contractor were found to hold the monies in trust for the subcontractors, then the contractor would not have such a property interest that the federal tax lien could attach. In Durham, the Court also held that where a general contractor did not have a property interest in the total amount due under a construction contract, the federal tax lien could attach only to that amount of funds which "remain unpaid after the owners have deducted a sum sufficient to pay the subcontractors." 363 U. S. at 526. In Hershberger, the Tenth Circuit held that where a wife owned an undivided one-half interest in homestead property under Kansas law, a federal tax lien against the husband could not attach to such interest. This holding was based on the fact that under state law, the wife had a present property interest rather than merely an exemption. In Gurley, the Fifty Circuit held that a federal tax lien could not attach to property of the taxpayer if such property were held as an estate by the entireties since under applicable Florida law, such an estate could not be charged with the individual debts of either spouse. In Dennis v. United States [74-1 USTC ¶9391], 372 F. Supp. 563 (E. D. Va. 1974), the district court held that a federal tax lien could not attach to monies held by the taxpayer which had been embezzled from the owner since under the common law, no title passed to the embezzler, and, thus, the taxpayer did not have a right of ownership to which the tax lien could attach.

It is a general rule of common law that no title is acquired by an embezzler, but that such title remains in the victim, who is the beneficial owner of a constructive trust which is imposed on such monies or on property purchased with such money. 38 A. L. R. 3d 1354; Dennis v. United States , supra. This is also the rule in Georgia . Adams v. McGehee, 211 Ga. 498 (1955); Luther v. Clay, 100 Ga. 236 (1897). In such a situation, the property remains that of the original owner, and the embezzler holds such property as the constructive trustee of the owner. Adams v. McGehee, supra; Luther v. Clay, supra; cf. Murray County v. Pickering, 196 Ga. 208 (1943); Stover v. Atlantic Ice & Coal Corp., 154 Ga. 228 (1922). Where the constructive trustee has invested such funds or has purchased other property, the real owner can follow it wherever it can be traced. Adams v. McGehee, supra; United States Fidclity & Guaranty Co. v. Richmand County, 174 Ga. 599 (1932); Knight v. Knight, 75 Ga. 386 (1885).

Since it is undisputed that Hill embezzled approximately $4,700,000 from the Bank, it is clear that he obtained no title to or property rights in these funds and that he obtained no right to any property which was purchased with these embezzled funds but would instead hold the same as constructive trustee for the Bank, who is the rightful owner. Since a federal tax lien can attach only to a property interest of the taxpayer which exists under state law, it is clear that the federal tax liens now in issue could not attach to any of the subject property if such property were purchased with proceeds from the embezzlement. Accordingly, this court's order of December 22, 1975 , holding that the United States has priority to the subject property is vacated and set aside, and the motion of the United States for partial summary judgment is DENIED. The Bank must have the opportunity to establish that the property in question was purchased with the embezzled funds. To the extent that the Bank can establish this, no federal tax lien can attach to such property.

The latest motion for partial summary judgment filed by the United States seeking priority on the excess of any amount obtained from the sale of property or from funds presently held by the Bank to secure certain promissory notes must also be denied for the same reasons discussed above. If the Bank can establish that the property and funds held by it to secure the above-noted promissory notes were obtained by Hill with embezzled funds, no federal tax lien can attach thereto. Accordingly, the motion of the United States for partial summary judgment filed March 9, 1976 , is DENIED.

The clerk of court is hereby directed to set this case (including the pending companion cases) for trial commencing July 7, 1976 .

 

 

[76-1 USTC ¶9254]The First National Bank of Cartersville v. Lamar B Hill v. United States of America

U. S. District Court, No. Dist. Ga., Rome Div., Civil Action No. 2422, 406 FSupp 351, 12/23/75

[Code Sec. 6323(a)]

Lien for taxes: Priority: Equitable lien pursuant to state law: Embezzled funds.--A federal lien for taxes on funds embezzled by a bank president had priority over the bank's earlier claim of an equitable lien resulting from a constructive trust in its favor by reason of the fact that the fraudulently obtained funds could allegedly be traced to some or all of its president's real estate investments. Here, neither the property subject to the bank's lien nor the amount of such lien was established at the time the federal tax lien was filed, so it was still contingent and not perfected to the extent required to defeat the valid federal tax lien.

Neel and Smith, Box 159 , Cartersville , Ga. , for plaintiff. Gettle, Fraser & Berthold, Suite D-116, Paces 75 Park, 1401 W. Paces Ferry Rd., Atlanta Ga., Beverly B. Bates, Assistant United States Attorney, Atlanta, Ga., for defendant.

Order

O'KELLEY, District Judge:

This action is before the court on the motion of the United States for partial summary judgment. The issue for determination is whether the federal tax has priority over an equitable lien claimed by the First National Bank of Cartersville (hereinafter referred to as "the Bank") as to certain real property. This case arises out of the following factual situation. Lamar B. Hill was president of the Bank from January 1, 1969, until February, 1972, and during this period he embezzled approximately $4,700,000.00 from the Bank. The United States made assessments for Hill's unpaid tax liabilities plus interest and statutory penalties on these embezzled funds in the amount of $3,621,511.04, and notices of the federal tax liens were duly recorded in the office of the Clerk of Bartow County Superior Court on June 6, 1972, and June 21, 1972. Judgment was entered on June 30, 1975, in favor of the United States against Hill for the unpaid amount of these assessments including interest and statutory additions accrued to date of judgment in the amount of $4,052,842.60, plus interest on that amount from the date of judgment. On June 30, 1975, judgment was also entered in favor of the Bank against Hill in the amount of $4,694,212.59 principal, plus interest of $1,249,770.17 through June 23, 1975, interest from June 24, 1975, to June 30, 1975, at the rate of seven percent per annum, contractual attorneys' fees of $14,270.43, and costs. Of this amount, approximately $4,601,546.33 represented the principal claim of the Bank against Hill for embezzlement.

The property which is the subject of this action is property which was owned by Hill. The Bank claims that to the extent it can trace the embezzled funds to some or all of this property, it has a claim superior to the federal tax lien by virtue of an equitable lien resulting from a constructive trust pursuant to Ga. Code Ann. §§ 108-106 and -107. This order will deal only with the question of who has priority as to the property which the Bank claims by the equitable lien. The Bank makes some reference to other property which is in its possession, custody, or control and to which the Bank claims priority by virtue of a security interest pursuant to a dragnet clause in a note; however, there is not presently sufficient information in the record to rule on that question.

The Bank relies essentially on Ga. Code Ann. §108-106(2), which provides that a trust is implied "[w]here, from any fraud, one person obtains the title to property which rightly belongs to another." This section is implemented by Ga. Code Ann. §108-107 which provides: "Whenever the circumstances are such that the person taking the legal estate, either from fraud or otherwise, cannot enjoy the beneficial interest without violating some established principle of equity, the court will declare him a trustee for the person beneficially entitled, if such person shall not have waived his right by subsequent ratification or long acquiescence." Where funds are embezzled, the victim can trace such funds into the property in which the embezzler invested them and obtain an equitable lien on such property under Georgia law. United States Fidelity and Guaranty Co. v. Richmond County, 174 Ga. 599 (1932). The Bank thus contends that since it has alleged that some or all of the property which is the subject of this suit was purchased with funds which were embezzled from it, the property is impressed with a constructive trust in its favor. Since the embezzlement and the purchase of the property occurred prior to filing of the tax lien and since the Bank filed a notice of lis pendens in connection with its suit to impress a constructive trust on the property prior to the filing of the tax lien, the Bank contends that its equitable lien takes priority over the federal tax lien.

The Bank fails to recognize that it is a matter of federal and not state law as to when a lien has acquired sufficient substance and has become so perfected as to defeat a federal tax lien. United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963); United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957). For a lien to be sufficiently established to defeat a federal tax lien, the identity of the lienor, the property subject to the lien, and the amount of the lien must be established. United States v. Pioneer American Ins. Co., supra. In the case sub judice, it is clear that the property subject to the lien is not established, nor was the amount of the lien established at the time of the filing of the federal tax lien. Whether the equitable lien exists in this case is contingent upon the Bank's proof in its suit. Until it establishes that the embezzled funds were used to purchase some or all of the property involved, and until it gets a judgment by a court pursuant to Ga. Code Ann. §108-107 impressing a lien on such property, its lien is not perfected to the extent required by federal law so that it will defeat a valid federal tax lien. Several analogous cases amplify this situation. In United States v. Pioneer American Ins. Co. [63-2 USTC ¶9532], 374 U. S. 84 (1963), the Court dealt with a mortgage which was superior to the federal tax lien. The mortgage provided for reasonable attorney's fees, and under state law the right to attorney's fees was enforceable at the time of default, which was prior to the filing of the federal tax lien, and the suit seeking such attorney's fees was also filed prior to the filing of the federal tax lien. The Court held that under federal law the claim for attorney's fees was not so perfected as to defeat the federal tax lien because the amount of the attorney's fees was not finally fixed in amount until after the federal tax lien was filed. Accordingly, the Court held that the mortgage was superior to the tax lien as to principal and interest but not as to attorney's fees. In City of Dallas v. United States [67-2 USTC ¶9118], 369 F. 2d 645 (5th Cir. 1966), the Fifth Circuit dealt with a case where the City of Dallas had a city tax lien pursuant to a city ordinance before the filing of the federal tax lien; however, the exact amount of the lien was unknown until after the filing of the federal tax lien. The court held that since the city lien was not certain in amount on the dates the federal liens were perfected, it was inchoate and inferior to the federal lien. In United States v. Morrison [57-2 USTC ¶9801], 247 F. 2d 285 (5th Cir. 1957), the Fifth Circuit had before it a case even more analogous to the present one. In that case a vendor of realty filed a suit to impress certain property with an equitable vendor's lien for the unpaid purchase price and contemporaneously filed a notice of lis pendens. According to Texas law, the equitable lien came into being at the time of the conveyance, and this predated the federal tax lien as did the filing of the suit to impress the lien. The Fifth Circuit noted that the lien's standing under Texas law was not enough but that the lien must satisfy federal standards. In discussing the lien, the court stated:

We need not elaborate on the Federal infirmities of this state lien. It is sufficient to point out that insofar as it bears on the competition for tax priorities, the lien, equitable in nature, arises only because equity in good conscience requires it to accomplish right and justice. Whether it exists depends on the equities which, in turn, depend upon facts . . .. As a secret lien it is, or may be, outranked by many liens of innocent purchasers or others. And, to enforce it, the only remedy available is an equitable action for foreclosure in which the debt and the lien must be established. [Citation omitted.] So, while once established by judgment under the doctrine of relation back, it has a high order in the state hierarchy, until the act of judgment occurs, it is, in the Federal view, as contingent as any other lawsuit.

247 F. 2d at 288-89.

In the present case, the Bank contends that the United States had notice of its claim since it filed a notice of lis pendens at the time it filed its suit. Morrison also discussed this question:

Since the Vendor, asserting here his equitable vendor's lien, has neithr the status of a "mortgagee, pledgee, purchaser, or judgment creditor," the right of the Government to the tax lien (footnote omitted) under Section 6321 is not affected by the race between the Notice of Tax Lien . . . and the Vendor's lis pendens for recordation (footnote omitted) under Section 6323, and the question of priority must be determined by other considerations. . . .

Similarly, in the case sub judice, until there is a judgment impressing a trust on specific property in favor of the Bank, under the federal test to be applied, the equitable lien is contingent and cannot, therefore, take precedence over the previously filed federal tax lien, and this is so even though the Bank filed its notice of lis pendens.

The Bank also claims that it is a "purchaser" within the meaning of 26 U. S. C. §6323(h)(6) and that, therefore, the federal tax lien is not valid pursuant to 26 U. S. C. §6323(a). There is no merit in this contention. The statute deals with purchasers "in the ordinary sense." The Ninth Circuit noted in United States v. Hawkins [56-1 USTC ¶9143], 228 F. 2d 517 (9th Cir. 1955), that "a 'purchaser within the meaning of §3672 [now §6323] usually means one who acquires title for a valuable consideration in the manner of vendor and vendee.'" 228 F. 2d at 519. The Bank's contention that it is a purchaser due to the constructive trust impressed on the property clearly does not come within the above definition.

The Bank has cited the court one case where it was held that the federal tax lien did not take precedence over funds obtained by fraud and also did not take precedence over the victim's claim to property purchased with those funds. See Dennis v. United States [74-1 USTC ¶9391], 372 F. Supp. 563 (E. D. Va. 1974). While the reasoning and decision in that case is appealing, there were no factual questions left undecided since it was stipulated that the funds and property involved were the property of the victim. The court stated that it would not go behind the stipulations. Dennis also did not consider the federal requirement that the claim must be fully perfected and not contingent before the claim could take precedence over a federal tax lien as discussed above.

For the foregoing reasons, the motion of the United States for partial summary judgment is GRANTED. The federal tax lien on all property not in the possession, custody, or control of the Bank takes precedence over the claim of the Bank.

Counsel for the government and the Bank have indicated that the case can be concluded after this ruling. Counsel are directed to present any proposed order to the court in Atlanta at 4:30 p. m. on January 15, 1976 .

 

 

[74-2 USTC ¶9510]United States Treasury Department (Internal Revenue Service), et al., Plaintiffs, Community State Bank of Independence, Louisiana, Plaintiff-Appellee, v. United States of America, Intervenor-Appellant v. John S. Garrett, Defendant.

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 73-3174, 493 F2d 908, 5/10/74, Affirming District Court, 73-2 USTC ¶9643, 360 F. Supp. 232

[Code Secs. 6323 and 6331]

Tax liens: Priorities: Secured creditor: Property subject to: State legislator's salary.--A tax lien filed before a state legislator assigned his future salary to a bank as security for a loan had priority over the bank's security interest. However, the bank's claim had priority over a second tax lien filed after the bank's interest came into existence. Moreover, under federal law, the first lien could attach prior to the time any salary payments were made to the legislator. The assignment of the state senator's unearned salary was not against public policy of the State of Louisiana . Fulfilling the duties of a State Representative is not a full-time occupation in Louisiana and the assignment of the legislative salary did not deprive him of support and thus did not impair public service.

Rob ert S. Leake, Ass't United States Attorney, Douglas M. Gonzales, U. S. Attorney, Baton Rouge, La., John R. Schupp, Ass't U. S. Attorney, New Orleans, La., Fred B. Ugast, Acting Ass't Attorney General, Crombie J. D. Garrett, Scott P. Crampton, Meyer Rothwacks, Alfred S. Lombardi, Dept. of Justice, Washington, D. C. 20530, for U. S. Reginals J. McIntyre, Arthur W. Macy, Hammond, La. for appellee. William T. Reeves, Ass't Attorney General, Baton Rouge , La. , William L. Wilson, 451 Florida St. , Baton Rouge , La. , for other interested parties.

Before DYER, MORGAN and RONEY, Circuit Judges.

PER CURIAM:

The deciding issue on this appeal by the Government is whether the public policy of Louisiana precludes the assignment by a State Legislator of his governmental compensation as security for a loan.

Representative Richard E. Cheek, a Louisiana State legislator, assigned his legislative salary and allowances to the Community State Bank for thirty-one months as security for a $15,000 loan. Previous to the assignment, but on the same day, the Internal Revenue Service filed a tax lien against Cheek in the amount of $1,446.64, plus penalty and interest for underpayment of income taxes. Two and one-half months after the assignment, a second tax lien was filed against Cheek in the amount of $25,911.58.

When John S. Garrett, payroll disbursement officer for the Louisiana House of Representatives, became aware of the conficting claims against Cheek's salary, he invoked a concursus proceeding in the state court and deposited Cheek's salary with the Clerk. The Government removed the case to the United States District Court for the Eastern District of Louisiana.

On a motion for summary judgment the District Court established the following priority of claims: (1) the $1,446.64 tax lien; (2) the assignment to the Community State Bank; and (3) the $25,911.58 tax lien. Since the first two claims would exhaust Cheek's governmental salary deposited with the court, the tax lien would in effect be extinguished as to those funds if the assignment to the bank is valid.

On appeal the Government does not challenge the priority established by the District Court but asserts the invalidity ab initio of the assignment to the Community State Bank. Relying on McGowan v. City fo New Orleans , 118 La. 429, 43 So. 40 (1907), the Government argues that an assignment of a public official's unearned salary is against the public policy of Louisiana and is void.

McGowan is distinguishable from the case at bar: in that early Louisiana case, a minute clerk for the Orleans Parish Criminal District Court assigned one month of his unearned salary, comprising his sole income for that period, to the plaintiff. The Louisiana Supreme Court, in holding such an assignment void against public policy, stated that:

if the unearned salary of one day or one month may be assigned that of the officer's entire term may be in like manner assigned, and thus the officer deprived of the means provided for his support, and thereby the public service be imparied. . . . [I]t is that the man must lave, and that, if service is expected of him, he must be supplied with the means of livelihood.

43 So. at 40, 42.

Although no other cases have been cited as guidance for our determination of the present public policy of Louisiana , we think that the rationale of McGowan is not present in the case sub judice. McGowan rested on the policy against permitting a public employee to contract away his future earnings and thus depriving himself of his means of support. Fulfilling the duties of a State Representative is not a full-time occupation in Louisiana , however, since the Legislature does not convene throughout the year. A legislator's compensation is computed on a per diem basis corresponding to attendance at the legislative session. See L. S. A.--R. S. 24:31. The assignment of Cheek's legislative salary, therefore, does not "deprive [him] of the means provided for his support, and thereby the public service be impaired."

We agree with the District Court that the application of McGowan depends upon whether an assignment of a public officer's salary deprives him of his means of support and must be considered on a case-by-case basis. Cheek's assignment to the Community State Bank being valid, the Government's second tax lien must follow as a third priority.

Affirmed.

 

 

[73-2 USTC ¶9643]United States Treasury Department (Internal Revenue Service) et al. v. John S. Garrett

U. S. District Court, Middle Dist. La., Civil Action Number 71-152, 360 FSupp 232, 6/28/73

[Code Secs. 6323 and 6331]

Tax liens: Priorities: Secured creditor: Property subject to: State legislator's salary.--A tax lien filed before a state legislator assigned his future salary to a bank as security for a loan had priority over the bank's security interest. However, the bank's claim had priority over a second tax lien filed after the bank's interest came into existence. Moreover, under federal law, the first lien could attach prior to the time any salary payments were made to the legislator.

Douglas M. Gonzales, United States Attorney, Rob ert S. Leake, Assistant United States Attorney, Baton Rouge, La., for U. S. Reginald J. McIntyre, Macy & Kemp, 220 W. Thomas St., Hammond, La., for Community State Bank of Independence.

WEST, District Judge:

This suit began as a concursus proceeding filed in a State District Court in Baton Rouge , Louisiana . The concursus proceeding was commenced by John S. Garrett, the Speaker of the House of Representatives of the State of Louisiana , when conflicting claims were made against the accrued and prospective salary of State Representative Richard E. Cheek. Mr. Garrett, as Speaker of the House, was in charge of disbursing salaries due the members of the Legislature, when he became aware of the fact that there were four possible claims against the salary of Mr. Cheek. He immediately invoked a concursus proceeding in the State Court and deposited Cheek's accrued salary in the registry of the Court and obtained leave to so deposit future salary payments as they became due. All interested persons were ordered to appear and assert whatever claim they might have against the deposited funds. Subsequently thereto the United States of America intervened as a claimant and had the case removed to this Court. The basis of its claim is two tax liens, one in the principal amount of $1,446.64 and one in the principal amount of $25,911.58, filed against Cheek on November 4, 1969 and January 21, 1970 respectively.

The only other claimant before the Court is Community State Bank of Independence, Louisiana (hereinafter referred to as the "Bank"), who claims the sum of $13,007.00, plus accrued interest, being the balance due on a $15,000.00 loan made by the Bank to Cheek. Its claim is based on the fact that on November 4, 1969 , Cheek borrowed $15,000.00 from the Bank and as security therefor, in addition to giving a promissory note therefor, assigned to the Bank his legislative salary and allowances for the last two months of 1969, all of 1970 and 1971, and for the first five months of 1972.

There are no disputed factual issues involved, and all parties have now moved for summary judgment. The only question before the Court is whether the tax liens of the United States of the assignment to the Bank creates superior claims to the funds which have been deposited in the registry of the Court.

[Property Subject to Lien]

The Bank's first contention is that the federal tax lien could not attach to any funds of Cheek until they had been disbursed to him. That is, that it would not attach to salary payments which had not actually been made to Check when the attachment was filed. This argument is based on the contention that until the funds are disbursed they are State funds and not subject to attachment. The Bank relies on Weinstein, Bronfin & Heller v. LeBlanc, 192 So. 2d 130; 249 La. 936 (1966), which held that funds appropriated for legislative salaries, but not yet disbursed; could not be reached by State garnishment proceedings without the consent of the State. But the question of whether or not a federal tax lien can attach to accrued, unpaid salary is governed by federal and not state law. Title 26, U. S. C., §6331 specifically provides that levy may be made upon the accrued salary of wages of federal employees and officials, and the United States Supreme Court in Sims v. United States, 79 S. Ct. 641, 359 U. S. 108, 3 L. Ed. 2d 667 (1959) held that nothing in the Constitution requires that the salaries of State employees be treated any differently for federal tax purposes than the salaries of others. Also, 26 CFR §301.6331-1(a)(4)(ii) specifically provides that "accrued salaries, wages, or other compensation of any officer, employee, or elected or appointed official of a State or Territory, or of any agency, instrumentality, or political subdivision thereof, are also subject to levy to enforce collection of any Federal tax." Thus there is no doubt but that Cheek's accrued wages--all of which have now been paid by depositing them into the registry of the Court--are subject to a federal tax lien and subsequent levy. When the federal tax liens were filed they attached immediately to all of the rights that Cheek had in his future salary and a levy upon those funds would be operative whenever the salary was earned and paid. Thus, on November 4, 1969, when the United States filed its lien in the principal amount of $1,446.64 against Mr. Cheek, this lien became operative against his legislative salary, and the Government thus acquired the right to levy against those funds as they became due. At that time those funds had not been encumbered by any prior liens or assignments and consequently the United States had a first claim to them up to the amount of their lien. No subsequent assignment could affect the rights of the United States to those funds up to the amount of the lien. Hence, the right of the United States to a first claim on the deposited funds up to the total amount of its lien of November 4, 1969 primes any claims against those funds made now by the Bank.

[Priorities]

Subsequent to the filing of that lien, however, Cheek borrowed $15,000 from the Bank. As security for this loan he made an assignment of the legislative salary which he anticipated earning during the last two months of 1969, all of 1970 and 1971, and during the first five months of 1972. Thus, his future salary, as it accrued, became encumbered by that assignment to the extent of the unpaid balance of his loan from the Bank. This encumbrance could not, of course, affect the Government's prior right under its lien filed earlier on the same day, November 4, 1969, that the assignment was made. On January 21, 1970, some two and one half months later, the United States filed another lien against Mr. Cheek, this time in the principal amount of $25,911.58. Levy under this lien was then attempted against Mr. Cheek's future legislative salary. But the Government was then confronted with the assignment to the Bank made on November 4, 1969. There is no question but that the Bank's assignment primes this second lien and gives the Bank a prior claim on the deposited funds, after payment to the Government under its first lien of November 4, 1969, to the extent of the unpaid balance on the $15,000.00 loan. See Johansson v. United States [64-2 USTC ¶9743], 336 F. 2d 809 (CA 5-1964). The Government does not seriously quarrel with this conclusion as a general principal of law, but argues that the assignment by Cheek of his future legislative salary should be held null and void as against public policy. The Government points to McGowan v. City of New Orleans, 43 So. 40, 118 La. 429 (1907) wherein the Court held that an assignment of part of the salary of a public officer was, in that case, contrary to public policy. In the course of its opinion the Court said:

"The reason of the rule is that, if the unearned salary of one day or one month may be assigned, that of the officer's entire term may in like manner be assigned, and thus the officer deprived of the means provided for his support, and thereby the public service be impaired." (At page 40).

The Court in McGowan recognized that there was no statutory prohibition against the assignment of the unearned salary of a public officer but simply held that Louisiana Civil Code Article 1895 created an exception to other articles which allow assignment of incorporeal rights. Civil Code Article 1895 provides:

"The cause is unlawful, when it is forbidden by law, when it is contra bonos mores (contrary to moral conduct) or to public order."

But whether or not an assignment of wages is contrary to public policy must be considered on a case by case basis. In the present case this Court must certainly take cognizance of the fact that Mr. Cheek, and other State legislators, do not rely solely upon their legislative salary for support. The business of being a State legislator in Louisiana is a part-time endeavor and does not require legislators to forego other gainful employment. Consequently an assignment of a State legislator's salary does not deprive him of his means of support as was apparently found to be the case in McGowan.

Under the circumstances of this case, this Court concludes that there is nothing contrary to public policy in the assignment by Mr. Cheek of his legislative salary and allowances to the Bank as security for the loan which the Bank made to him. Therefore, when the United States filed its second lien on January 21, 1970, any right that Mr. Cheek had or would acquire in his legislative salary for the last two months of 1969, all of 1970 and 1971, and for the first five months of 1972, was subject to a first claim by the United States pursuant to its tax lien of November 4, 1969, a second claim by the Community State Bank of Independence, Louisiana, pursuant to its assignment of November 4, 1969, and a third claim by the United States pursuant to its tax lien of January 21, 1970. Thus, the motions for summary judgment filed by the United States and the Community State Bank will both be granted in part and denied in part in accordance with the views expressed herein. Judgment will be entered herein recognizing the right of the United States under its federal tax lien of November 4, 1969, to take, by first priority, out of the funds deposited in the registry of the Clerk of this Court, the sum of $1,446.64, plus penalty and interest that might be due thereon, and recognizing the right of the Community State Bank of Independence, Louisiana, to have the second claim against the remaining funds on deposit pursuant to its assignment from Richard Cheek dated November 4, 1969, in the amount of whatever balance, plus accrued interest, might be due on the $15,000.00 loan as security for which the assignment was given, and recognizing as the third claim, the claim of the United States pursuant to its federal tax lien dated January 21, 1970, in the sum of $25,911.58, plus penalty and interest due thereon.

 

 

[67-2 USTC ¶9525]Edward V. Engel and John M. Cavalier, Plaintiffs v. The Tinker National Bank, Dorothy Carroll Zimmerman, United States of America, Industrial Commissioner of the State of New York, New York State Tex Commission, John T. Mather Memorial Hospital, Louis Traub, d/b/a Cinder Supply Service, Royal Indemnity Co., Brown Brothers Contractors Inc., Cooper Tire & Rubber Co., Makousky Bros., Walter C. Eichacker. Long Island White Trucks, Inc., Defendants

U. S. District Court, East. Dist. N. Y., 64 Civ. 485, 269 FSupp 199, 5/25/67

[1954 Code Sec. 6323]

Lien for taxes: Validity against third persons: Contract vendees.--The federal tax lien against a delinquent taxpayer had no validity against contract vendees who purchased two small houses under a conditional sales contract. They made a down payment and agreed to pay the balance in equal monthly installments with the right to accelerate payments; the deed to the property was not to be delivered until the final payment had been made. Under New York State law, the rights of the contract vendee are superior to all except bona fide purchasers for value--a category which does not include judgment creditors. The 1966 Federal Tax Lien Act redefined "purchaser" to include one who has entered into an executory written contract provided, he acquires an interest which is valid against subsequent purchasers without actual knowledge under applicable local law. Since, under New York law, their interest was superior and, since their interest was more than a lien or security interest, they were entitled to specific performance of the contracts unaffected by the tax liens.

Henry Weinberger, 109 W. 19th St. , New York , N. Y., for plaintiffs. Joseph P. Hoey, United States Attorney, Brooklyn, N. Y., Cyril Hyman, Assistant United States Attorney, New York, N. Y., for U. S.; Edward J. Gunnigle, Main St., Port Jefferson, N. Y., J. Timothy Shea, 1 Chase Manhattan Plaza, New York, N. Y., for Tinker Nat'l Bank; Leonard D. Wexler, Meyer & Wexler, 28 Manor Rd., Smithtown, N. Y., for L. Traub, d/b/a Cinder Supply Service, Defendants.

Opinion

WEINSTEIN, District Judge:

This case, involving liens and priorities on real property, was removed to this court from the New York Supreme Court, Suffolk County, on the petition of the United States. See 28 U. S. C. Sec. 2410 (United States may be made party in State court action to quiet title) and Sec. 1444 (removal to Federal court of action brought against the United States pursuant to Sec. 2410).

I. Facts

The basic document is an unrecorded conditional sales contract for two small houses in Selden , New York . It was executed on December 1, 1957 by plaintiffs (hereafter sometimes referred to as the contract vendees) and defendant Zimmerman (hereafter referred to as the contract vendor).

Contract vendees agreed to make a $1,000 down payment and to pay the balance in equal monthly installments of $63.30 for a period of eight years commencing January 1, 1958 , with the right to accelerate payments. They were required to pay taxes and assessments and to maintain specified insurance coverage. As is customary in this kind of conditional sale--a mode of acquiring real property now happily falling into disuse--a deed was not to be delivered until the final payment had been made.

Acting pursuant to the agreement exactly as would any purchasers of a new home, contract vendees, upon making their down payment, obtained the keys and entered into immediate possession. Each occupied one of the houses.

Their possession and occupation has been open and well known in the community continuously from December 1, 1957 to the present. Plaintiff Engel, working in conjunction with local contractors and the local bank, made substantial improvements; he added rooms, and installed fencing, heating, plumbing, electrical wiring and tiles. Plaintiff Cavalier installed a new roof. Each had a mail box with his name on it. They spent their weekends and vacations with their families improving and enjoying the premises. Beginning in July 1960 plaintiff Engel and his family made their house a permanent residence and the children attended local schools.

During the years when the contract vendees were regularly making payments and improving their homes, the contract vendor was increasingly best by creditors, one of them being the United States . On December 1, 1958 , the contract vendor assigned her contract with the plaintiffs to defendant Tinker National Bank (hereafter referred to as the bank) as collateral security for loans then in default. As consideration for the extension of additional credit, on June 24, 1959 she executed a quitclaim deed to the defendant bank. The deed was recorded on June 26, 1959 .

In compliance with a demand that all further payments pursuant to the contract be made to the bank, the contract vendees made their rigular monthly installments to the bank from July 1, 1959 through October 1, 1962 . They then notified the bank that they wished to exercise their right to pay the balance due on the contract--which then amounted to $2,220.32--and to have the property conveyed to them. On the ground that the deed was held solely as collateral security and that it was unable to convey title, the bank refused to issue a deed.

Thereupon, on December 12, 1962 , the contract vendees instituted an action in the New York Supreme Court, Suffolk County , against the bank seeking specific performance of their contract. That court, in an opinion by Tasher, J., denied plaintiff's motion for summary judgment without prejudice on the ground that the judgment creditors and lienors of the contract vendor 'should be joined as parties defendant and the various priorities and interests litigated in a single action." Engel v. The Tinker National Bank, Supreme Court, Suffolk County , Index No. 97063. The court cited with apparent approval an earlier County Court decision involving the contract vendor, contract vendees, bank, and a judgment creditor of the contract vendor which had characterized the bank's interest as a "collateral mortgage to secure a debt." Brown Brothers Contractors, Inc. v. Carroll Material Corp. et al., County Court , Suffolk County, Index No. 73833-1961.

In April 1964, plaintiffs amended their complaint in the Supreme Court action and joined additional defendants. The defendants are shown on the table below with the nature and amount of the claims against the contract vendees and their position in this court. In May 1964, on motion of the United States Attorney, the action was removed to the United States District Court for the Eastern District of New York.

II. Law

To unravel this tangle, it is necessary to consider plaintiffs' position with respect to all the defendants and the defendants' rights vis-a-vis each other. New York Law governs all priorities except those arising from United States tax liens which are controlled by federal statutes. Under the law of both jurisdictions, plaintiffs' rights are superior to those of defendants.

A. New York Law

Upon execution of the contract and payment in part, a contract vendee becomes "equitable owner pro tanto" of the property he contracts to purchase. Elterman v. Hyman, 192 N. Y. 113, 125, 84 N. E. 937 (1908). The lien of the judgment creditor "is subordinate to this outstanding equitable interest." 3 Powell on Property Par. 479 (1966). See also id. at Par. 450. Even without recording, the rights of a contract vendee are superior to all except bona fide purchasers for value--a category into which judgment creditors do not fall. Ledsal Realty Corporation v. Demkin, 141 N. Y. S. 2d 686 (Sup. Ct. 1955).

The bank's rights would be subservient to plaintiffs' equity even if the bank had not had knowledge of plaintiffs' interest. Phelan v. Brady, 119 N. Y. 587, 23 N. E. 1109 (1890) (mortgagee without notice denied right as against unrecorded purchaser in possession of tenement). A long, unbroken line of New York cases has held that a vendee in possession has rights superior to a bona fide purchaser on the theory that possession gives constructive notice of a contract vendee's rights. Moyer v. Hinman, 17 Barb. 137, 13 N. Y. 180 (1885). See N. Y. Law Rev. Commission Study, Possession of Land as Notice of Unrecorded Interest of Person in Possession, 561-71 (1959). Although this rule has been criticized as "an anachronism which lost its excuse for existence when the recording system was introduced" (Report of Committee on State Legislation of the Association of the Bar of the City of New York, Report No. 61, Bulletin No. 4, p. 194 (1956)), it remains the law of New York . Repeated legislative attempts to limit protection of the contract vendee in possession have failed. See, e.g., N. Y. Law Revision Commission, Recommendation Relating to the Effect of Possession of Real Property as Notice of Interests Claimed by the Person in Possession, 555-56 (1959); N. Y. Law Revision Commission Report 19-21 (1960).

So strong is New York's policy favoring the contract vendee in possession that he can continue to make payments to the contract vendor despite subsequently filed judgments and liens unless the judgment creditors diligently take affirmative action to enforce their rights against these payments under article 52 of the New York Civil Practice Law and Rules. As the New York Court of Appeals noted in the leading case of Moyer v. Hinman, 13 N. Y. 180, 183-184 (1855), supra:

". . . the docketing of a judgment against the vendor affords no notice of its existence, either actual or constructive, to the prior vendee of the judgment debtor. . . . [I]t may be said, a party holding a contract upon which payments remain to be made, may, before making such payments, examine for judgments against the vendor; but it would be an intolerable inconvenience to require this, where the payments, as is usually the case, are to be made annually or oftender; and should such examination ever be strict, that vendee would have to run the risk of an incumbrance intervening, while he was going from the office where the search was made to the residence of the vendor, to make the payment. It has been repeatedly decided that the docketing of a judgment or the recording of a mortgage is no notice to a prior purchaser. . . ."

The United States contends that any payments heretofore made to the contract vendor--and implicity to the vendor's assignee, the bank--are not entitled to receive any priority over the government's judgment (assigned to it by Valley Stream National Bank & Trust Co.) subsequent to the docketing of such judgment. However, " New York law is to the contrary." Leipert v. R. C. Williams & Co. [57-2 USTC ¶10,044], 161 F. Supp. 355, 359 (S. D. N. Y. 1957). The reasons for the New York rule are set forth in Moyer v. Hinman, quoted above. See also Trustees of Union College v. Wheeler, 61 N. Y. 88, 108-09 (1874). With respect to this judgment lien the government cannot sit back and wait while such payments are made and received in good faith and then retroactively upset conditions which resulted from its quiescence.

B. Federal Law

Under applicable federal law, contract vendees such as plaintiffs have rights superior to the tax liens of the United States , although this has not always been the case. In Leipert v. R. C. Williams & Co. [57-2 USTC ¶10,044], 161 F. Supp. 355 (S. D. N. Y. 1957), an apposite case, the court held that although contract vendees' rights under unrecorded contracts were superior to those of creditors with subsequently docketed judgments, the United States tax liens were entitled to a priority. The court's opinion was based upon the fact that contract vendees who had not received deeds did not qualify as "purchasers" within the meaning of Section 3672 of the 1939 Internal Revenue Code. Consequently they were unprotected against subsequently filed tax liens.

The Federal Tax Lien Act of 1966 has changed the result of the Leipert case. It redefined "purchaser" to include one who has entered into a written executory contract to purchase property, provided he thereby "acquires an interest (other than a lien or security interest) in property which is valid under local law as against subsequent purchasers without actual knowledge." 80 Stat. 1125 Sec. 101, I. R. C. Sec. 6323(h)(6). A tax lien is "not . . . valid . . . against any purchaser . . ." until notice has been filed. 80 Stat. 1125 Sec. 101, I. R. C. Sec. 6323(a). The 1966 lien provisions apply to the present United States tax liens since, in the words of the statute, the government tax lien "has [not] become final by judgment, sale or agreement before the date of enactment of this Act." 80 U. S. Stat. 1125, Sec. 114(b)(1).

Two issues are posed by the new definition of "purchaser." First, is the contract vendees' interest superior to that of subsequent purchasers without knowledge? Second, is the interest of the vendees one other than a lien or security interest? As noted above, New York law gives a contract vendee in possession a priority over purchasers without knowledge even in the absence of recording. The second question is somewhat more troublesome.

In the Leipert case, the court, after stating that "the plaintiffs did not become purchasers within Section 3672," continued by noting that "all the plaintiffs acquired [was] a vendee's lien as of the time the contracts were executed." Leipert v. R. C. Williams & Co., supra at 358. Leipert, however, involved contracts which specifically characterized the relationship between the parties as that of landlord and tenant. In the absence of such a clause, the contract vendee has more than a mere right to repayment. His interest "springs from the trust under which the vendor, as the legal owner, holds the land for the vendee, the equitable owner." Elterman v. Hyman, supra, 192 N. Y. at 125. Furthermore, the court in Leipert, when speaking of a "lien," was using this term in contrast to "record title" which it regarded as crucial to a "purchaser's" rights under the then statute. Since the new Federal Lien Law defines "purchaser" to eliminate record title as the sine quo non, the analysis of the court in Leipert is no longer relevant.

The legislative history of the Lien Law of 1966 suggests that the term "lien" as used in the statute was not designed to include an interest such as plaintiffs'. Indeed, the amendments were intended to aid persons in plaintiffs' position. The Senate Report states that "The definition of the term 'purchaser' makes clear that a purchaser who has not taken title to, or fully paid for, property is protected." S. Rep. No. 1708, 89th Cong., 2d Sess. (1966). As Plumb and Wright point out, commenting on the recent statutory changes, "one who has entered into a written executory contract to purchase property, or who has obtained an option to purchase property, is given all the protection of a 'purchaser' with title." Practice Handbook on Federal Tax Liens 66 (1967) (emphasis in original).

III. Remedy

At the trial, the parties sought a sale of the property. This remedy is entirely inappropriate in view of the existing rights of the plaintiffs and it is denied. See Federal Rules of Civil Procedure, Rule 54(c).

Since plaintiffs' interest is unaffected by the liens or judgments of any of the defendants to this action, upon payment of the remaining principal due under their conditional sales contract, with interest to date, they will be entitled to a judgment of specific performance of their contract. Such a judgment is recordable as evidence of title pursuant to section 297-b of the New York Real Property Law.

It is not necessary at this time for the court to decide whether the government's tax lien attached to the installment payments made to the bank. Cf. Plumb and Wright, Federal Tax Liens, 238-39 (1967). The amount to be paid into the Registry of the Court exceeds the amounts of the tax liens.

Plaintiffs will pay into the Registry of the Court the remaining principal with interest at 5% (the amount fixed by the contract of sale). This money will be distributed on order of this court after hearing the defendants to this action who have not yet adequately established their priorities.