Refiling

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[97-2 USTC ¶50,794] In re George C. Cole and Bessie L. Cole, Debtors

U.S. Bankruptcy Court, Dist. Mass., 96-40828-HJB, 3/13/97, 205 BR 668, 205 BR 668

[Code Sec. 6871 ]

Bankruptcy: Trustee: Motion to compel transfer of assets.--

A bankruptcy trustee's motion to compel married debtors to transfer to the bankruptcy estate all of the assets of a realty trust of which the wife was the sole beneficiary was not resolved. An evidentiary hearing was required to determine whether there was equity for the estate in the assets. BACK REFERENCES: ¶41,430.0245

[Code Secs. 6323 and 6502 ]

Tax liens, existence of: Refiling of notice, failure to: Priority: Avoidance: Benefit to bankruptcy estate.--

IRS tax liens, which attached more than six but less than ten years previously to married debtors' property that was transferred to a realty trust of which the wife was the sole beneficiary, were still in existence because the collection period had been statutorily extended from six to ten years. However, the IRS was required to file new notices of the liens but failed to do so prior to the expiration of the refiling period. Thus, the IRS's claims lost their priority status with respect to existing mortgages as well as the bankruptcy trustee.

Carl D. Aframe, One Exchange Place , Worcester , Mass. 01608-1500 , for debtors. Joseph H. Reinhardt, Hendel, Collins & Newton, P.C., 101 State St., Springfield, Mass. 01103, for Trustee. Bruce D. Levin, Bernkopf, Goodman & Baseman, 125 Summer St., Boston, Mass. 02110-1612, for Charles Calabrese. Paul R. Salvage, Bacon & Wilson, P.C., 33 State St., Springfield, Mass. 01103, for John Burritt.

MEMORANDUM OF DECISION

BOROFF, Bankruptcy Judge:

Before the Court for determination is a "Motion to Compel Turnover" (the "Motion") filed by the Chapter 7 Trustee, Joseph B. Collins (the "Trustee"). The Trustee seeks an order of the Court compelling a Ms. Jacqueline E. Powell ("Ms. Powell"), the daughter of George and Bessie Cole (individually, "Mr." or "Mrs." Cole, or jointly, the "Debtors") and the trustee of C & C Enterprise Realty Trust (the "C & C Trust"), to transfer all the assets of the trust to the Trustee. ¹ Mrs. Cole is the sole beneficiary of the C & C Trust.

The Debtors argue that an order compelling Ms. Powell to transfer those assets is not appropriate, because there is no equity in the said assets for the estate. The Trustee appears to contend that the existence of equity in the assets of the C & C Trust is irrelevant, and that the assets should be transferred to the Trustee in any event. Nevertheless, the parties appear to have reached common ground on a single conclusion. They agree that because certain federal tax liens appear early in the chain of encumbrances on the assets of the C & C Trust, the Trustee might employ them, pursuant to 11 U.S.C. §724(b), to pay admin istrative expenses of the estate. Of course, for the Trustee to have such power, the liens must be valid, on which point the parties disagree. The Debtors claim that the liens have expired by operation of law, while the Trustee contends that a 1990 Congressional act has extended the validity of the liens. The Debtors concede, however, that if the following question of law is answered by the Court in the affirmative, the Motion should be allowed:

Did the Omnibus Budget Reconciliation Act of 1990, Section 11317 amending §6502 of the Internal Revenue Code, extend the effectiveness of the Tax Liens on real estate in Massachusetts for an additional four years beyond the date when the Tax Liens would have otherwise expired?

"Stipulation on Motion to Compel Turnover of Beneficial Interest in C & C Enterprise Realty Trust Relating to Harvey Street and 100 Garvey Drive Real Estate," dated December 13, 1996 (the "Stipulation of Facts"), ¶5.

For the reasons set forth below, the Court determines that the above question presents two very separate issues, and that their resolution neither precludes nor mandates allowance of the Motion before the Court.

I. Facts

No material facts are in dispute relative to the issue here presented. ²

In 1987 and 1988, the IRS recorded a number of Notices of Federal Tax Lien ("NOFTLs") in the Commonwealth of Massachusetts Hampden County Registry of Deeds (the "Hampden Registry") against one or both of the Debtors. Only five of these NOFTLs are at issue here: (1) a September 30, 1987 NOFTL for taxes assessed on March 30, 1987 and May 25, 1987, totaling $28,172.03; (2) a November 23, 1987 NOFTL for a tax assessed on September 21, 1987, totaling $3,333.63; (3) an April 21, 1988 NOFTL for a tax assessed on February 8, 1988, totaling 2,288.47; (4) a May 27, 1988 NOFTL for taxes assessed on April 4, 1988 and March 21, 1988, totaling $17,932.92; and (5) an August 18, 1988 NOFTL for a tax assessed on May 30, 1988, totaling $4,298.01. ³ If the NOFTLs are still valid, the federal tax liens represent the first priority liens on the real estate held by the C & C Trust.

At the time that the said tax liens were assessed, 26 U.S.C. §6502, entitled "collection after assessment," provided as follows:

(a) Length of period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--

(1) within 6 years after the assessment of the tax, or

(2) prior to the expiration of any period for collection agreed upon in writing by the Secretary [of the Treasury] and the taxpayer before the expiration of such 6-year period. . . .

26 U.S.C. §6502(a) (1988).

On December 5, 1988, the Debtors formed the C & C Trust, a Massachusetts nominee trust, naming Ms. Powell as the trustee and Mrs. Cole as the sole beneficiary. On December 8, 1988, two parcels of real property were transferred to Mr. Cole ⁴: (1) the Debtors' residence, located at 100 Garvey Drive, Springfield, Massachusetts, and (2) a parcel of commercial real estate located at Lot A, Harvey Street, Springfield, Massachusetts. On that same date, Mr. Cole transferred his interest in both properties to Mrs. Cole, who then transferred her interest to Ms. Powell as Trustee of the C & C Trust. With regard to the Garvey Drive property, the deeds transferring the property first to Mr. Cole, then to Mrs. Cole, and then to Ms. Powell were all recorded in the Hampden Registry on December 8, 1988. With regard to the Harvey Street property, only the deed transferring the property to Mr. Cole was recorded in the Hampden Registry on December 8, 1988 . The other two deeds, transferring the property from Mr. Cole to Mrs. Cole and then to Ms. Powell as trustee of the C & C Trust, were recorded in the Hampden Registry on January 5, 1989 . ⁵

On February 21, 1996 , the Debtors filed a petition in this Court under Chapter 7 of the Bankruptcy Code, and the Trustee was subsequently appointed. On June 18, 1996 , the Trustee filed the instant Motion, and the Debtors responded with an opposition. ⁶ After an initial nonevidentiary hearing on the matter, the Motion was scheduled for an evidentiary hearing. However, on December 16, 1996 , the parties filed the above-referenced Stipulation of Facts, which they have suggested left no material facts in dispute. Accordingly, the evidentiary hearing was canceled and the Court took the Motion under advisement. On December 30, 1996 , the parties submitted memoranda in support of their positions (respectively, "Trustee's Memo." and "Debtors' Memo.").

II. Positions of the Parties

The federal tax liens were assessed and recorded more than six but less than ten years prior to the commencement of this case. The Trustee argues that the Omnibus Budget Reconciliation Act of 1990, which extended the statute of limitations for IRS tax liens from six years to ten years applies to the liens at issue. ⁷ He contends that since "each and every one of these liens was less than six years old when P.L. 101-508 was enacted[,] . . . under the plain language of the statute, the effectiveness of each and every one of these liens is extended to ten (10) years." Trustee's Memo. at 3.

The Debtors argue that, regardless of the Omnibus Budget Reconciliation Act of 1990, the liens are no longer valid. They note that a new NOFTL was not filed prior to the "Last Day for Refiling" ⁸ indicated on the NOFTLs. Debtor's Memo. at 4-7. The Debtors point to Massachusetts Conveyancing Association Title Standard Number 54, which reports in a comment: "It is the practice of the [IRS] to place a date in column (e) of the Notice of Federal Tax lien form which operates as a certificate of release if a refiling of the lien is not made by said date." Accordingly, the Debtors argue:

Title examiners rely upon the Title Standard and the last day for refilling as indicated on the Federal Tax Liens when they are conducting their title review. If this Court were to rule otherwise in this case of first impression, then hundreds, if not thousands, of title certifications throughout Massachusetts , if not throughout the U.S. , would be jeopardized by this automatic retroactive extension of the lien.

Id. at 7.

III. Discussion

Some background on the manner in which federal tax liens attach and are collected is necessary. A federal tax lien is created by operation of statute when a taxpayer refuses or neglects to pay a tax after payment is demanded. 26 U.S.C. §6321. The lien extends to "all property and rights to property, whether real or personal, belonging to" such person. Id. The amount of the lien is the tax owed "including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto." Id. The lien "continue[s] until the liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time." 26 U.S.C. §6322. Time lapses when the period for collection of the lien runs under §6502(a). Prior to the passage of Public Law No. 101-508, that period ended six years after assessment of the underlying taxes, unless the taxpayer agreed to lengthen the period pursuant to §6502(a)(2). The amendment extended the collection period to ten years. Pub.L. No. 101-508, §11317(c).

In order to ensure that the tax lien has priority over subsequent interests or encumbrances, the IRS is required to file a NOFTL. If a NOFTL is not filed, the lien is "not . . . valid as against any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor." 26 U.S.C. §6323(a); see also Kitaeff v. Massachusetts Bay Transportation Authority (In re Bay State York Co., Inc.), 204 B.R. 277, 282 (Bankr.D.Mass.1996).

Thus, a distinction must be drawn between whether an IRS lien exists and whether it can be enforced (is "valid") against a particular creditor or purchaser. ⁹ It exists as long as the debt has not been satisfied and the period for collection has not run. However, the lien is valid against a purchaser or creditor only where a NOFTL has been filed in accordance with §6323(f) prior to the purchase of or perfection of the creditor's interest in the property. §6323(a).

A. Whether the IRS liens exist

The 1990 act provided that the new ten year statute of limitations applied to "taxes assessed on or before [ November 5, 1990 ] if the period specified in section 6502 [prior to the amendment] . . . for collection of such taxes [had] not expired as of such date." Pub.L. No. 101-508, §11317(c). The language of the statute is plain, so the Court must apply its ordinary meaning. United States v. Ron Pair Enter., Inc. [89-1 USTC ¶9179], 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989); Martin v. Bajgar (In re Bajgar), 104 F.3d 495, 497-98 (1st Cir. 1997). Effectively, where an assessment underlying a federal tax lien was made less than six years before November 5, 1990 , the new ten-year statute of limitations applies to the lien. See Behren v. United States [96-1 USTC ¶50,254], 82 F.3d 1017, 1018-19 (11th Cir. 1996) (where six-year period specified by §6502(a)(1) would have expired on November 28, 1990, 23 days after enactment of Public Law No. 101-508, "the amendment to §6502 applies by its terms"); see also Foutz v. U.S. [96-1 USTC ¶50,029], 72 F.3d 802, 803-04 (10th Cir. 1995) (where taxpayer executed an agreement to extend collection period to a date after the enactment of Public Law No. 101-508 pursuant to §6502(a)(2), period was extended to ten years by the amendment); Kaggen v. Internal Revenue Serv. [95-1 USTC ¶50,304], 57 F.3d 163, 163-64, aff'd on reh'g [95-2 USTC ¶50,635], 71 F.3d 1018 (2d Cir. 1995) (same).

The period for collection of the earliest of the IRS liens extended to March 30, 1993 under the former version of §6502(a)(1). Since the statute of limitations had not expired as to any of the IRS liens as of November 5, 1990 , the amendment of §6502(a)(1) applied to all of the IRS liens. Accordingly, the federal tax liens all exist.

B. Whether the IRS liens are valid against the interests of others

Because the collection period for a tax lien can be extended beyond the ten-year statute of limitations in certain circumstances, ¹⁰ Congress established a system of "refiling" an IRS lien when the collection period is lengthened. See 26 U.S.C. §6323(g). Each NOFTL (including those involved here) set forth a "Last Day for Refiling," which is calculated by adding ten years (previously six years) and thirty days to the date of assessment of the particular tax involved. See 26 U.S.C. §6323(g)(3). For example, with respect to the NOFTL involving a tax assessed on September 21, 1987 , the last day for refiling was reported as October 21, 1993 .

The Internal Revenue Code establishes a "required refiling period" which is the one-year period ending on the last day for refiling. §6323(g). If a new NOFTL is filed within this period, the lien will continue to exist and will maintain the priority it had under the original NOFTL. If the refiling deadline passes without action by the IRS, the existing NOFTL operates as a certificate of release. ¹¹ This certificate operates as "conclusive [evidence] that the lien referred to in such certificate is extinguished." 26 U.S.C. §6325(f)(1)(A).

If an NOFTL is not timely refiled but the collection period for the lien has not yet expired, the IRS can issue a "Certificate of Revocation" of the certificate of release. See §6325(f)(2) (where IRS determines that certificate of release "was issued erroneously or improvidently," certificate may be revoked and lien reinstated by filing notice of such revocation); Internal Revenue Manual §5350, sub-section 535(16)(2) (May 13, 1994) ("[A] Certificate of Revocation should be issued to revoke a self-releasing lien in those instances in which a new lien has been filed late."). However, "[t]he reinstated lien is not valid against any [purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor] until notice of the reinstated lien has been filed in accordance with the provisions of [§6323(f) subsequent to or concurrent with the time the reinstated lien became effective." 26 C.F.R. §301.63251(f)(2)(iii)(b) (1996).

The reinstated lien will be valid against the aforementioned property interests only from the date the new NOFTL is filed; it is not retroactive to the filing date of the first NOFTL. §6325(f)(2); 26 C.F.R. §301-6323(g)-1(a)(4) (1996); United States v. Winchell [92-1 USTC ¶50,394], 793 F.Supp. 994, 996 (D.Colo. 1992). As a result, if the refiling deadline is missed, any security interests previously junior to the IRS liens would achieve seniority, provided that they were recorded or perfected before a new NOFTL was recorded. See S.Rep. No. 89-1708, part II.A.7 ("[I]n the case of a late refiling, any security interest arising after the prior filing of the tax lien, but before the refiling, obtains a priority to the same extent and under the same conditions as if no tax lien had been filed prior to the time of the late refiling.") U.S.Code Cong. & Admin.News 1966 pp. 3722, 3733; see also Title Guar. Co. v. Internal Revenue Serv., 667 F.Supp. 767, 770-71 (D.Wyo. 1987) ("The Government's failure to refile its federal tax lien within the required refiling period has nullified the effect of the prior filing causing the federal tax lien to lose its priority."); United States v. Stonehill [83-1 USTC ¶9285], 702 F.2d 1288, 1300 (9th Cir. 1983); Timothy R. Zinneeker, When Worlds Collide: Resolving Priority Disputes Between the IRS and the Article Nine Secured Creditor, 63 Tenn. L.Rev. 585, 591-92 (1996) ("Failure to timely refile the notice [of federal tax lien] does not invalidate the lien, but it does adversely affect its priority.").

Here, the collection period was extended due to the amendment of the statute of limitations in 1990. Whether or not a new NOFTL must be timely filed in order to preserve the IRS's priority during that extended period appears to be a question of first impression.

"The sine qua non of §6323 is notice to subsequent takers of the existence of the IRS lien." Davis v. United States [89-2 USTC ¶9592], 705 F.Supp. 446, 453 (C.D.M.1989). Analogous situations have arisen where the taxpayer is so incorrectly identified in an original NOFTL that the recordation does not provide constructive notice of the tax lien against the taxpayer. In such situations, courts have uniformly held that the NOFTL is insufficient to give the IRS rights superior to subsequent purchasers of or encumbrances in the taxpayer's property. Hudgins v. Internal Revenue Serv. [92-2 USTC ¶50,341], 967 F.2d 973, 976 (4th Cir. 1992); United States v. Sirico [66-1 USTC ¶9209], 247 F.Supp. 421, 422 (S.D.N.Y.1965) ("The test is not absolute perfection in compliance with the statutory requirement for filing the tax lien, but whether there is substantial compliance sufficient to give constructive notice and to alert one of the government's claim."); Reid v. Internal Revenue Serv. (In re Reid), 182 B.R. 443, 447 (Bankr.E.D.Va. 1995); Ducote v. United States (In re de la Vergne), 156 B.R. 773, 779 (Bankr.E.D.La. 1993).

In the instant situation, there appears to be nothing which would alert a bona fide purchaser or holder of a security interest that the subject tax liens still existed for four years after the release date set forth on the NOFTLs. Anyone conducting a title search of the Debtors' property would not be aware that the tax liens still attached. The extension of the collection period alone would not provide to a third party the constructive notice necessary under the circumstances.

Furthermore, it is not surprising that the Internal Revenue Service has given this matter some consideration. Indeed, the Internal Revenue Manual provides in relevant part:

In November, 1990 the statute of limitations for collection was extended from six years to ten years. Due to the creation of the "self-releasing" notice of lien, it is necessary to record a "corrective lien" for each unsatisfied and unexpired lien before the [last day for refiling]. . . . It is imperative that corrective liens be recorded timely to prevent the premature release of the original liens. If the original lien is erroneously released, our priority is lost.

Internal Revenue Manual §5350, sub-section 535(12)(1) ( April 29, 1992 ). Thus, the IRS itself recognized the duty to file new NOFTLs as a result of the 1990 amendment. ¹² Accordingly, the Court holds that absent the filing of a new NOFTL prior to the release date in the original NOFTL, reflecting an extension in the collection period, an IRS tax lien, albeit in existence, loses its priority against the interests of a purchaser, holder of a security interest, mechanics lienor, or judgment lien creditor, whose claim is perfected prior to the date of the filing of the new NOFTL.

Here, the refiling deadlines stated on the five NOFTLs at issue passed without the filing of new NOFTLS, and in fact, the IRS still has not filed new NOFTLs. The IRS's failure to file new NOFTLs within the required refiling period destroyed their priority as against the existing mortgages, as well presumably as against the rights of the Trustee afforded by 11 U.S.C. 544(a). ¹³

C. Now what?

The Motion before the Court seeks that the Court order the Debtors to turn over to the Trustee various assets including those held in the C & C Trust. The Debtors argue that turnover of the C & C Trust assets is not appropriate, because there is no equity for the estate in those assets. The Trustee totally rejected the Debtors' opposition, but became enamored of the contention that the equity issue could be avoided because the federal tax liens on the trust assets and §724(b) ¹⁴ together afforded to the estate a benefit which dictated that the Motion be granted. Unfortunately for the Trustee, the Court finds that the Trustee has no meaningful rights under §724(b). The subject NOFTLs no longer enjoy their priority position and even if the NOFTLs were now refiled, the Trustee would have the ability to avoid the liens altogether, pursuant to 11 U.S.C. §545(2). ¹⁵ See 5 COLLIER ON BANKRUPTCY §545.03[4] at 545-12 (15th ed. rev. 1996) ("If . . . notice of the tax lien has not been filed before bankruptcy, or has been imperfectly filed, it would not be valid as against a hypothetical bona fide purchaser as required by section 545(2), and thus would be subject to avoidance by the trustee."). Finally, §724(b) only affords a benefit to the estate if the subject tax liens are unavoidable.

IV. Conclusion

Through the Stipulation of Facts, the parties framed a question of law, which they supposed would lead to a resolution of the Motion. That effort has failed. The Court's conclusions as set forth above amply demonstrate that the Trustee will not be able to achieve a benefit for the estate by invading any federal tax liens, pursuant to §724(b).

Nevertheless, still unanswered is whether the C & C Trust assets have any equity for the estate, pursuant to §541(a), assuming that the federal tax liens are avoided altogether, pursuant to §545(2). This dispute has returned to its beginning point. Absent settlement, resolution of the Motion will require an evidentiary hearing to determine whether there is equity for the estate in the assets of the C & C Trust. Therefore, the court will schedule a status conference to determine the Trustee's appetite for such a hearing.

¹ In the Motion, the Trustee also sought an order compelling Mr. Cole to turnover an amount of money attributable to prepetition lottery winnings. However, the Trustee subsequently indicated to the Court that he did not intend to pursue such an order because he was unable to determine whether the Debtors had any lottery proceeds in their possession as of the Petition Date. Accordingly, the "Motion to Compel Turnover" is deemed withdrawn with respect to the lottery winnings.

² On December 16, 1996 , the parties jointly filed the Stipulation of Facts in which they reached agreement as to all facts disputed in the Motion. This Court's findings, therefore, are based on facts agreed to by the parties either in the Motion or the said Stipulation of Facts.

³ Only the last NOFTL applied to both Debtors. The first four NOFTLs listed Mr. Cole and "George Cole Trucking" as the affected taxpayers.

⁴ The Stipulation of Facts fails to disclose the source of the transfers to Mr. Cole.

⁵ The assets of the C & C Trust also include a 1994 Lincoln Town Car, but the Stipulation of Facts does not address that asset.

⁶ The Debtors also filed a "Motion to Amend Schedules" on June 27, 1996 . The Debtors requested that Schedule B be amended to reflect the beneficial interest of the C & C Trust owned by Mrs. Cole, listing the equity as $0, and that Schedule C be amended to reflect a $15,000 exemption taken under 11 U.S.C. §522(d)(1) on behalf of Mrs. Cole due to her property interest in real estate. On July 3, 1996 . the Trustee filed an Objection to the Motion to Amend Schedules. A hearing was held on August 7, 1996 . However, the matter was then continued generally pursuant to a joint request of the parties.

⁷ See Omnibus Budget Reconciliation Act of 1990, Pub.L. No. 101-508, §11317(a), 104 Stat. 1388 (1990); see also 26 U.S.C. §6502 (current version). The 1990 statute also provided, in relevant part:

(c) EFFECTIVE DATE.--The amendments made by this section shall apply to--

(2) taxes assessed on or before [November 5, 1990] if the period specified in section 6502 of the Internal Revenue Code of 1986 (determined without regard to the amendments made by subsection (a)) for collection of such taxes has not expired as of such date.

Pub.L.No. 101-508, §11317(c).

⁸ The last day for refiling indicated on the five NOFTLs at issue here was the date six years plus thirty days post-assessment of the underlying tax(es). For instance, the first NOFTL concerned taxes assessed on March 30, 1987 and May 25, 1987 , and the last days for refiling were given as April 29, 1993 and June 24, 1993 . respectively.

⁹ Section 6323(a) uses the word "valid" to describe the priority of the tax lien against the rights of parties other than the taxpayer.

¹⁰ The statute of limitations may be extended by written agreement of the parties. §6502(a)(2). In addition, the collection period will be suspended in a number of circumstances. §6503. For example, the limitation period will be suspended while the automatic stay is in effect as a result of the pendency of a bankruptcy case. 26 U.S.C. §6503(h). If such a suspension occurs, the lien is effectively extended by the length of the suspension period. Thus, whether or not an IRS lien has expired cannot be determined solely by examining whether the ten-year period has terminated.

¹¹ The standard form used by the IRS to record NOFTLs provides: "[U]nless notice of lien is refiled by the date [specified], this notice shall, on the day following such date, operate as a certificate of release as defined in [§]6325(a)." IRS Form 668(Y), Notice of Federal Tax Lien Under Internal Revenue Laws. The IRS is required to provide a certificate of release for tax liens under 26 U.S.C. §6325(a).

¹² In their respective memoranda, the parties have sought to introduce additional views of the IRS. In support of their position, the Debtors refer to a November 16, 1990 letter from the an IRS representative to a title insurance company. In support of his position and by way of affidavit, the Trustee submits a contrary view of the IRS, achieved through a telephone conversation with yet another IRS representative. Neither communication would be admissible over objection in an evidentiary hearing, the views are conflicting, and in any event, neither is grounded in a document as critical to IRS operations as its manual.

¹³ 11 U.S.C. §544(a) provides:

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by--

(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists; or

(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.

¹⁴ 11 U.S.C. §724(b) provides in relevant part:

(b) Property in which the estate has an interest and that is subject to a lien that is not avoidable under this title and that secures an allowed claim for a tax, or proceeds of such property, shall be distributed--

. . . . .

(2) second, to any holder of a claim of a kind specified in section 507(a)(1), 507(a)(2), 507(a)(3). 507(a)(4), 507(a)(5), 507(a)(6), or 507(a)(7) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien. . . .

¹⁵ 11 U.S.C. §545(2) provides:

The trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien--

(2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists. .

 

 

[97-2 USTC ¶50,630] In re Harriet Bourque, Debtor. Harriet Bourque, Plaintiff-Appellant v. United States of America , Internal Revenue Service, Defendants-Appellees

(CA-2), U.S. Court of Appeals, 2nd Circuit, 96-5122, 8/27/97, Affirming a District Court decision, 96-2 USTC ¶50,620

[Code Secs. 6323 and 6871 ]

Tax liens: Duplicative notice: Validity of.--Duplicative notices of tax lien filed by the IRS against life insurance proceeds received by a widow following her husband's death were valid even though the notices covered the same tax assessments. While a notice of tax lien affects the priority of the lien against the claims of third-party creditors, the filing of the notice does not affect the validity of the lien itself. Moreover, the Reg. §301.6323(g)-1(a) implicitly authorizes the IRS to file a new notice of an existing lien at any time, regardless of whether the document is an original notice or a refiling. Thus, the IRS did not exceed its authority when it filed the duplicative notices.

James B. Anderson, John A. Serafino, Ryan, Smith & Carbine, Ltd., 98 Merchants Row, Rutland , Vt. 05702 , for petitioner-appellant. Charles R. Tetzlaff, United States Attorney, Burlington, Vt. 05402, Loretta C. Argrett, Assistant Attorney General, Gary D. Gray, Sarah Kay Knutson, Department of Justice, Washington, D.C. 20530, for defendants-appellees.

Before: CALABRESI and PARKER, Circuit Judges, and MCCURN, District Judge. ^*

CALABRESI, Circuit Judge:

Following a seven-year battle with cancer, Harriet Bourque's husband died and left her with slightly more than $108,000 in life insurance proceeds. Mrs. Bourque was also left with substantial liabilities for tax deficiencies that were incurred during the last years of her husband's life. The IRS filed several notices of tax lien against her property, the most significant parts of which are the life insurance proceeds. Two such notices are the subject of this appeal.

I. Background

The facts of this case are not in dispute. On February 7, 1994 , the IRS filed a notice of tax lien dated January 29, 1994 , in the amount of $36,305.46. That notice reflected liens resulting from the Bourques' tax deficiencies for the years 1986 through 1991. ¹ Eight days later, the IRS filed a second notice, also dated January 29, 1994 , this one in the amount of $39,677.03. It was duplicative of the first notice, except that it included an additional $3,371.57, which Bourque owed for 1992.

Bourque seeks to exercise the trustee's powers under sections 522(h)-(i) and 544(a) of the Bankruptcy Code, 11 U.S.C. §§522(h)-(i), 544(a), to avoid those liens and preserve the life insurance proceeds--which are exempt from bankruptcy creditors--for the estate. ² She argues that, because the IRS filed two notices of the same liens, the liens themselves are not "a tax lien, notice of which is properly filed." Hence, the liens are avoidable. The IRS counters that there is no statutory prohibition against the filing of multiple notices, and contends that the liens remain valid regardless of the number of notices it files. It does not, of course, seek to collect twice on the same deficiency.

The bankruptcy court granted summary judgment on behalf of the IRS on the ground that the tax regulations implicitly authorize it to file multiple notices, and the district court affirmed. We agree, and similarly affirm.

II. Discussion

Bourque argues that the IRS violated the plain language of the Internal Revenue Code ("I.R.C.") when it filed duplicative lien notices. Specifically, she points to sections of the I.R.C. providing that when an individual fails to pay her tax liability, the amount owed "shall be a lien in favor of the United States," 26 U.S.C. §6321, and that such a lien shall not be valid against third-party creditors unless the IRS files notice of it in accord with I.R.C. §6323(f), see id. §6323(a). Bourque argues on appeal that by using the term "lien" in the singular rather than "liens" in the plural, Congress authorized the IRS to "file" one and only one tax lien for each annual income tax delinquency. Hence, she claims, the IRS exceeded its statutory authority when it filed a "duplicative tax lien."

As the bankruptcy court pointed out, Bourque's argument, though clever, is flawed. It confuses the statutory provisions regarding the placement of a tax lien with those describing what actions the IRS must take in order to provide notice of such a lien. Under §6321, a single lien in favor of the United States is created automatically whenever a tax delinquency occurs. The lien exists and is enforceable against the taxpayer regardless of whether the IRS chooses to file notice of it. Notice has its own quite different function. It neither creates the deficiency nor confirms the underlying liability, but is needed instead solely to establish the IRS' priority against third-party creditors. See 26 U.S.C. §6323 (a) (a tax lien is not valid against third parties unless the IRS files proper notice of it); see also 11 U.S.C. §522(c)(2)(B) (a tax lien is subject to avoidance in bankruptcy unless notice is properly filed). It follows that the fact that the word "lien" is used in the singular to explain its automatic creation tells us nothing about whether multiple notices are or are not permitted.

The parties point to nothing in the I.R.C. that explicitly authorizes the filing of multiple notices of the same lien in rapid succession. Nor does our independent review of the code reveal any such provision. But, while there is no direct authority for multiple filings in the I.R.C., neither is there any prohibition of them. In addition, as the bankruptcy court held, at least two sections in the Code of Federal Regulations clearly presuppose the existence of multiple notices for a single tax lien.

First, the regulations provide:

If a notice of lien is not refiled, and if the lien remains in existence, the Internal Revenue Service may nevertheless file a new notice of lien either on the form prescribed for the filing of a notice of lien or on the form prescribed for refiling a notice of lien. This new filing must meet the requirements of section 6323(f) and §301.6323(f)-1 and is effective from the date on which such filing is made.

26 C.F.R. 301.6323(g)-1(a)(4). Under this provision, the IRS is authorized to file a new notice of an existing lien at any time, regardless of whether the notice takes the form of an original notice or a "refiling." Thus, the regulation suggests that the IRS was not, in this case, required to file the second notice as an amendment to the first, and that it is irrelevant that the later one took the form of an original notice rather than of a refiling.

Second, and more persuasive, the regulations state:

In the event that two or more notices of lien are filed with respect to a particular tax assessment, the failure to comply with [the requirements for proper refiling] in respect of one of the notices of lien does not affect the effectiveness of the refiling of any other notice of lien.

26 C.F.R. §301.6323(g)-1(a)(1). This provision governs situations where the IRS has previously filed multiple notices of a lien, but fails to refile (i.e., renew) one of them in accord with 26 U.S.C. §6323(g). It states that either of two duplicative notices remains valid should the other expire. But this entails that both must have been valid simultaneously prior to the event rendering one invalid. Thus, the regulation clearly assumes the existence of multiple filings, all of which fulfill the statutory requirements and each of which establishes the government's priority with respect to other creditors.

Because a statutory lien arises automatically whenever a tax deficiency occurs, and because the regulations presuppose the existence and validity of multiple notices of lien, we conclude both that the IRS does not exceed its authority when it files duplicative notices, and that such notices do not affect the validity of the lien itself or undercut the government's position with respect to other creditors.

The judgments of the district and bankruptcy courts are affirmed.

^*MCCurn, Senior District Judge, sitting by designation.

¹ Although one tax lien is created for each year in which a deficiency occurs, Bourque concedes that the IRS is entitled to file a single notice encompassing multiple years of tax liability.

² Under §522(c)(2)(B) of the Bankruptcy Code, life insurance proceeds are exempt and liens against them are generally avoidable. "[A] tax lien, notice of which is properly filed," is effective against exempt property, however, and may not be avoided. 11 U.S.C. §522(c)(2)(B).

 

[92-1 USTC ¶50,297] United States of America , Plaintiff v. Valco Enterprises, Inc., Marlboro Savings Bank, Paul F. McAllister, and James E. Collins, Defendants

U.S. District Court, Dist. Mass., Civ. 80-1259-Y, 5/19/92

[Code Sec. 6323 ]

Tax liens: Validity against third parties: Purchasers: Notice.--Tax liens filed by the IRS in 1974 and 1975 on property owned by a company were effective against subsequent purchasers even though the name of the company on the title was different from the name of the company on the liens. The purchasers argued that a reasonable title search using the owner of record would not disclose tax liens against the property. However, the court disagreed for two reasons. First, that section of the code requiring tax lien indexing in such a manner that a reasonable inspection would reveal its existence applies only to interests in real property acquired after November 6, 1978 . Second, the court applied the reasoning of prior decisions that a notice of tax lien properly filed under the name of the taxpayer is sufficient to validate the lien against all property owned by the taxpayer, under whatever name acquired.

[Code Sec. 7465 ]

Tax liens: Sale of property: Notice.--Oral notice to the IRS of the sale of property that was the subject of liens and oral consent by the IRS to the sale of property did not destroy the liens even though the bank that sold the property alleged that the IRS told it to proceed with the sale and apply for a discharge of the lien after the sale. Such advice would have been a misrepresentation of law, for which collateral estoppel would not afford relief.

[Code Sec. 6323 ]

Tax liens: Discharge of liens: Refiling.--A tax lien filed by the IRS did not fail because of a failure to renew. Although it was not refiled within the six-year period, an exception to the refiling rule applied because the lien was the subject of a suit to which the U.S. was a party and which commenced prior to the expiration of the required refiling period.

MEMORANDUM OF DECISION

YOUNG, District Judge:

In this action, the United States seeks to foreclose certain tax liens against real property formerly owned by Valco Enterprises, Inc.; sell the property; and apply the sale proceeds to the unpaid taxes. The United States and Marlboro Savings Bank ("the Bank") have filed cross motions for summary judgment. Paul F. McAllister and James E. Collins, subsequent purchasers, have opposed the government's motion.

FACTS ¹

Valco, Inc. was incorporated under the laws of Massachusetts on May 9, 1960 . It owned certain land in the town of Hudson , Massachusetts ("the Property"). In July, 1970, Valco, Inc. gave a mortgage to the Bank on the Property. That mortgage was recorded in the Middlesex County Registry of Deeds. In March, 1973, Valco, Inc. changed its name to Valco Enterprises, Inc. This fact was never communicated to the Bank. According to the deed, title to the Property remained in Valco, Inc.

In 1974, Valco Enterprises, Inc. incurred tax obligations to the United States . Three notices of tax lien were recorded by the Internal Revenue Service ("IRS") in February and March, 1975, in the Middlesex County Registry of Deeds. They were indexed under the name Valco Enterprises, Inc., not Valco, Inc.

In September, 1975, the Bank foreclosed its mortgage. No written notice of the sale was given to the United States . No written consent was received. ²

On September 10, 1975 , defendant Paul McAllister purchased the Property from the Bank for $76,200. During September, 1975, the Bank applied to the IRS for a discharge from the tax lien. The IRS declined to approve the discharge. Four years later, McAllister sold the Property to defendant James Collins, subject to the Bank mortgage. The Bank mortgage remains outstanding today.

In June, 1980, the United States filed this action. The United States did not refile its notices of lien against Valco, Enterprises, Inc. at any time after the original filings in 1974 and 1975. The United States never filed notices of lien against Valco, Inc.

ANALYSIS

1. The tax liens filed by the IRS in 1974 and 1975 against Valco Enterprises, Inc. were effective against subsequent purchasers.

A lien against all of one individual's property automatically comes into existence if that individual neglects, or refuses after a demand, to pay any tax for which he is liable. 26 U.S.C. §6321 ; see Pioneer Nat'l Title Ins. Co. v. United States [81-2 USTC ¶9482 ], 1981 WL 1816 (D.N.J. 1981). The lien arises when an assessment is made and continues until the liability is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322 ; see Pioneer [81-2 USTC ¶9482 ], 1981 WL 1816. A lien is not valid against a purchaser of the encumbered property, however, unless proper notice has been filed prior to the sale. 26 U.S.C. §6323(a) . The requirements for proper notice are found in 26 U.S.C. §6323(f) .

Section 6323(f) provides that, in the case of real property, notice must be filed "in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated." Id. ; §6323(f)(1)(A)(i) . There is no dispute that notice of the tax lien was filed in the Middlesex County Registry of Deeds and that this was the proper place of filing pursuant to Massachusetts law.

Because a federal tax lien is created entirely by federal statute, federal law establishes the content of a sufficient filing. United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871, 873 (9th Cir. 1987) (citing United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 240 [1960]). ³ Section 6323(f)(3) provides that "[t]he form and content of the notice . . . shall be prescribed by the Secretary [of the Treasury]" and that "[s]uch notice shall be valid notwithstanding any other provision of law regarding the form or content of a notice of lien." 26 U.S.C. §6323(f)(3) . Pursuant to this authority, the Secretary has published regulations which require simply that "[t]he notice . . . shall be filed on Form 668, 'Notice of Federal Tax Lien under Internal Revenue Laws.'" 26 C.F.R. §301.6323(f)-1(c)(1) . In the instant case, no evidence regarding Form 668 has been submitted, but no one suggests that the wrong form was used.

Section 6323(f)(4) , as amended on November 6, 1978, requires indexing the tax lien in the local registry of deeds when state law mandates that a lien is not valid against a purchaser unless such lien is recorded in a public index in such a manner that a reasonable inspection of the index would reveal its existence. Massachusetts has such a law and, hence, indexing is required. See Mass. Gen. L. ch. 183, §4 .

It is undisputed that the IRS indexed its tax liens in the Middlesex Registry of Deeds under the name of Valco Enterprises, Inc. The defendants assert that since record title of the property was in Valco, Inc., a reasonable title search using the owner of record would not disclose tax liens against the property. The defendants' arguments fail, however, for the following reasons.

First, section 6323(f)(4) is inapplicable to the instant case. The language relied upon by the defendants was added to the statute in 1978 and only applies to "interests in real property acquired after the date of the enactment of this Act [ Nov. 6, 1978 ]." 26 U.S.C. §6323 . Since the IRS acquired its interest in the property in 1974 and 1975, the statute does not apply. ⁴ See Puls v. United States [74-1 USTC ¶9322 ], 387 F.Supp. 760 (N.D. Cal. 1974).

Second, even if this language were applicable, the IRS would still win. In United States v. Polk, the Ninth Circuit rejected arguments similar to those made in the instant case. In Polk, a purchaser bought property at a mortgage foreclosure sale that was encumbered with a tax lien. The lien was filed under the taxpayer's proper legal name, "Roy Bruce Polk." The property was recorded only under the name of "Bruce Polk." The Ninth Circuit rejected the purchaser's argument that the statutory scheme was inadequate to give notice to subsequent purchasers. Rather, the court explained that the IRS is required to file the lien notice only under the taxpayer's legal name and is not required to file under every name in which the IRS knows the taxpayer has recorded title to property. Polk [87-2 USTC ¶9432 ], 822 F.2d at 873. The court adopted the reasoning of Pioneer, which stated that "Section 6323(f) . . . clearly provides that a notice of tax lien properly filed under the name of the taxpayer is sufficient to validate the lien against all property owned by the taxpayer, under whatever name acquired." Polk [87-2 USTC ¶9432 ], 822 F.2d at 874 (quoting Pioneer [81-2 USTC ¶9482 ], 1981 WL 1816, *4). The Polk court continued, explaining that "[i]f Congress had intended to impose upon the IRS the duty to investigate what property is owned by a delinquent taxpayer, record the name under which it was acquired, and file a separate notice of tax lien for each such name, it could have done so." Id. The federal statutory scheme preempts any contrary state regulation.

This Court agrees with the other courts that have held that the controlling federal statute provides all the process that is due, and this Court rules that a reasonable search for federal tax liens against a corporate entity encompasses a search of the relevant indices for that corporation by whatever name it is or has been known.

The defendants rely on a number of cases which hold that a federal tax lien may be invalidated if the IRS misspells or otherwise materially alters a taxpayer's name in its notice of lien, such that a reasonable and diligent search by a purchaser would not reveal the existence of the lien. See, e.g., Haye v. United States [79-1 USTC ¶9192 ], 461 F.Supp. 1168 (C.D. Cal. 1978). These cases are irrelevant here, however, because in the instant case the IRS used the proper name of the taxpayer. See Polk [87-2 USTC ¶9432 ], 822 F.2d at 873.

For these reasons, the IRS did establish a valid lien on the property and it was effective against subsequent purchasers.

2. Oral notice to the IRS of the sale and oral consent by the IRS to the sale do not destroy the lien.

The defendants admit that no written notice was given to the IRS regarding the foreclosure sale. They also admit that no written consent was given by the IRS to proceed with the sale. Nevertheless, the defendants assert that oral notice was given to the IRS and that the IRS gave oral consent to the sale. They argue that oral notice and consent are sufficient to satisfy the statutory requirement; or alternatively, that the IRS made a misrepresentation to the defendants on which they relied to their detriment and as such the government should be equitably estopped from now asserting its lien.

The law is clear that a sale of property on which the United States has a lien, made pursuant to an instrument creating some other lien on the property,

shall . . . be made subject to and without disturbing such lien . . . if notice of such lien was filed . . . in the place provided by law for such filing . . . more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1) . . .

26 U.S.C. §7425(b)(1) .

Furthermore, notice of a sale of such property "shall be given (in accordance with regulations prescribed by the Secretary or his delegate) in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary or his delegate." 26 U.S.C. §7425(c)(1) (emphasis added).

The relevant regulations repeat the language of the statutory scheme by requiring notice "in writing by registered or certified mail or by personal service, not less than 25 days prior to the date of sale." 26 C.F.R. §400.4-1(c). ⁵ Moreover, a sale of the type described above "shall discharge or divest such property of the lien . . . if the United States consents to the sale of such property free of such lien or title." 26 U.S.C. §7425(c)(2) . Treasury regulations provide that "consent shall be effective only if given in writing . . . ." 26 C.F.R. §404.4-1(d)(1); 26 C.F.R. §301.7425-3(b)(1) .

The courts have confirmed that such notice is to be in writing. In Puls, the court ruled that notice to the IRS sent by regular mail, not special mail as required by the statute, is insufficient and that, even where the IRS had actual notice of the sale 24 days in advance, that is not enough. The Puls court refused to tamper with the established statutory requirements imposed by Congress:

This court cannot substitute its notions of what constitutes adequate notice for the type of nonjudicial sale in question where the national legislature, in response to specific tax collection problems thoroughly researched and considered, has articulated in clear language in statutory form what equals necessary notice. The court hesitates to tamper with the legislative scheme.

Puls [74-1 USTC ¶9322 ], 387 F.Supp. at 763.

The Tenth Circuit has likewise ruled that even actual notice to the IRS sent by regular mail is insufficient. Colorado Property Acquisitions, Inc. v. United States [90-1 USTC ¶50,055 ], 894 F.2d 1173, 1175 (10th Cir. 1990). The Tenth Circuit reasoned that "[t]he method of delivery of the notice has been directed by Congress and as such is mandatory." Id. The court continued, explaining that "[W]e recognize the harshness of this rule. This rule allows the IRS to receive actual notice, . . . ignore the notice and still retain the right to levy upon the property. The remedy, if any there is to be, must come from Congress and not from the Courts." Id.

Accordingly, any oral notice to the IRS is insufficient. ⁶ Although the requirement of written consent comes from the Treasury regulation and not from Congress, the regulation has the force of law and this Court is persuaded by the legal precedents.

The defendants assert that the IRS told the Bank to proceed with the sale and apply for a discharge of the lien after the sale. They assert that this is a question of fact. The IRS claims this is a question of law. This dispute is significant because, although the doctrine of equitable estoppel might be invoked against the IRS when misrepresentations made by admin istrative officials about factual matters have injured a taxpayer, the doctrine does not apply in tax cases concerning misrepresentations of law. Puls [74-1 USTC ¶9322 ], 387 F.Supp. at 764 (emphasis in original) (citations omitted).

In Puls, an IRS official told the taxpayer that a second notice resetting a sale date would conform to the notice requirements of certain statutes. Although the taxpayer relied to his detriment on this erroneous advice, the court ruled that this advice constituted a question of law as to which the doctrine of equitable estoppel is inapplicable: "the United States does not lose its revenue because of the erroneous ruling of an admin istrative official." Id.

So here. The Bank asserts that the IRS assured it that a discharge of the lien would be forthcoming once an application was submitted after the sale. If these representations were actually made, they misrepresent the requirements of the law. The governing law requires written notice prior to the sale and written consent by the director of the IRS in the district in which the sale is to take place. Alternatively, even if the statements of the IRS offical were construed as misrepresentations of fact, this Court rules that the doctrine of equitable estoppel will not lie against the United States . See Phelps v. Fed. Emergency Management Agency, 785 F.2d 13, 16-17 (1st Cir. 1986) (Supreme Court has consistently refused to apply the equitable estoppel argument against the government, no matter how compelling the circumstances).

3. The lien did not fail because of a failure to renew.

Once a federal tax lien has been filed, it is effective for six years. See 26 U.S.C. §§6322 & 6502(a)(1). The lien may, however, be effectively refiled within the period ending thirty days after six years from the original filing date. See 26 U.S.C. §6323(g)(3) . In the instant case, one of the liens was filed on February 26, 1975 . Therefore, the IRS would normally have had until March 28, 1982 , to refile. It is undisputed that the IRS did not refile prior to this date.

Section 301.6323(g)-1 of 26 C.F.R., however, provides an exception to this general rule. This section states in relevant part that:

the failure of the district director to refile a notice of lien during the required refiling period will not, following the expiration of the refiling period, affect the effectiveness of the notice with respect to:

(i) Property which is the subject matter of a suit, to which the United States is a party, commenced prior to the expiration of the required refiling period . . ..

The instant action was filed in 1980, and thus falls within the requirements of this regulation. In fact, the defendants concede that the actions of the IRS comply with the regulation. But they also argue that the regulation is contrary to the express language and legislative intent of 26 U.S.C. §6323(g) , which requires refiling within six years.

At least two cases have upheld the Treasury regulation and applied it as an exception to the statute. See e.g., Title Guar. Co. of WY, Inc. v. Internal Revenue Serv., United States Dep't of the Treasury, 667 F.Supp. 767, 771 (D. Wyo. 1987); Federal Deposit Ins. Corp. v. Internal Revenue Service [87-1 USTC ¶9332 ], 1987 WL 15460 (N.D.Ga. 1987).

In the instant case, the defendants concede that they have had notice of the lien since at least 1980, when they became involved in the present suit. The legislative history of 26 U.S.C. §6323(g) indicates that the purpose of the refiling requirement is to alert potential creditors to the uncertainty of using the property as security. See S. Rep. No. 1708, 39th Cong., 2d Sess., reprinted in 1966 U.S.C.C.A.N. 3722, 3733. The defendants here do not fit within that category. Accordingly, in the circumstances of this case, this Court upholds and applies the Treasury regulation as consistent with the goals of the governing statute.

CONCLUSION

For the foregoing reasons, the government's motion for summary judgment is GRANTED. The motion by the Marlboro Savings Bank for summary judgment is DENIED. The United States shall prepare a form of judgment.

¹ The parties all agree that the case is ripe for decision by summary judgment. All facts are undisputed unless otherwise noted.

² The Bank asserts that its counsel was contacted by James McLaughlin of the IRS early on the very day of the sale. The Bank alleges that the IRS informed it of the lien on the Property but gave oral consent to the sale and advised the Bank that it would remove the lien after the sale. The Bank asserts that it had no actual knowledge of the lien and that it relied on these assertions by the IRS. McLaughlin does not remember the conversation.

³ Although federal law determines the sufficiency of the filing and the priority of liens once attached, state law determines whether there is a property interest to attach. The defendants assert that under Massachusetts law, Valco Enterprises, Inc. had no property interest to which a lien could attach because record title to the property was in Valco, Inc. This argument is unpersuasive.

First, no party cites Massachusetts law to support this contention. Second, a tax lien attaches to any property interest which the taxpayer has, and need not be complete record title. Record title is not dispositive of the property interest. A property interest may involve factors such as use and possession. See Provincetown Chamber of Commerce, Inc. v. Grace, 14 Mass. App. Ct. 903 (1982) (Possessury interest in Chamber of Commerce, but record title in its predecessor, Board of Trade). It is the defendants who must come forward to show that the taxpayer had no attachable interest in the property. No such showing has been made here.

⁴ Section (f)(4) was originally added in 1976. Prior to this amendment, the pertinent statutory language provided only for a fillng "in a public index at the district office of the Internal Revenue Service for the district in which the property subject to the lien is situated." Pioneer [81-2 USTC ¶9482 ], 1981 WL 1816, *3. This is the language applicable to the tax lien in the instant case. It is undisputed that the IRS made such a filing. Even in the event that the language added in section (f)(4) were to be deemed retroactive, however, it still avails the defendants nothing.

⁵ The regulations in chapter 400 were promulgated in 1968 and are applicable in the instant case because the relevant time period is 1975. The government has cited inapposite regulations in chapter 301 which were not promulgated until 1976.

⁶ The government disputes that it even received oral notice but, given the law, this factual dispute is immaterial.

 

 

[90-1 USTC ¶50,061] Steven V. Davis and Judith A. Davis, Plaintiffs v. United States of America, Internal Revenue Service, Gillian Rongey, Defendants

U.S. District Court, Cent. Dist. Ill., Springfield Div., 87-3271, 12/27/89, 728 FSupp 513, 728 FSupp 513

[Code Sec. 6212 ]

Notice of lien: Name change.--Reasonable written and oral notice of a name change were effective when communicated to the IRS in a manner which should have reasonably led to the information being used to refile the Notice of Lien, so that the lien was extinguished. The IRS agent who filed the notice knew of the taxpayer's marriage and her subsequent change of name and he should have refiled the Notice of Lien. The taxpayer had no knowledge of the tax lien until after the property was sold.  

OPINION

MILLS, District Judge: Davis v. U.S. revisited.

On July 15, 1987 , the Internal Revenue Service issued a levy against "Gillian (Renslow) Rongey" and seized property at 4 Chatsford Court in Bloomington , Illinois . The Plaintiffs Steven and Judith Davis resided at 4 Chatsford Court at that time, pursuant to a contract for deed between them and Defendant Gillian Rongey. As a result of the IRS's actions, the Davises filed the instant suit seeking relief for wrongful levy and to quiet title; alternatively, the Davises seek relief against Gillian for breach of warranty in her sale of the premises to them.

By opinion entered February 7, 1989 , we denied cross motions for summary judgment, and instead held that this cause must proceed to trial. See Davis v. United States [89-2 USTC ¶9592 ], 705 F. Supp. 446 (C.D. Ill. 1989). We further held that the case would be governed by the following principles:

where the IRS has notice that a delinquent taxpayer has changed his or her name, and where the notice of tax lien was filed under the taxpayer's original name, the IRS is under an affirmative duty to refile the notice of tax lien to show the taxpayer's new name.

Id. at 453. We also held that

after the IRS has received reasonable notice of a name change, it will have a reasonable amount of time within which to refile its notice of lien.

Id. at 454.

As noted by the Davises in their trial brief, the above principles resulted in two issues being presented for trial: whether the IRS received reasonable notice that Gillian's name had changed, and if so, whether the IRS had a reasonable time within which to refile the notice of tax lien prior to the sale of 4 Chatsford Court to the Davises.

A bench trial has been held in this case, and pursuant to the Court's leave the parties have submitted post-trial memoranda. Although post-trial briefing was to have been concluded within 37 days following trial, numerous motions for extensions of time were filed and allowed, resulting in a significant delay before the case was finally ripe.

Ripe it now is, though, and the Court has fully considered the post-trial submissions in conjunction with the evidence introduced at trial. This opinion shall constitute the Court's final ruling upon these factual issues and the legal conclusions flowing therefrom.

FACTS

Although the factual backdrop was narrated in Davis I, let us recap those facts briefly here in Davis II.

Gillian married John (Jack) Renslow in 1972, and subsequently adopted his surname. This marriage ended in divorce on April 1, 1981 , but Gillian continued using the name Renslow until February 19, 1982 , when she married Richard Rongey. After this latter marriage, she changed her name on all important records, including her credit cards, her utility accounts, her bank accounts, W-2 forms filed with her employer, her nursing license, and her driver's license. She also began filing joint federal income tax returns with her new husband, Richard Rongey, beginning with the tax year 1982.

On July 20, 1981 --after Gillian had divorced Jack Renslow--the IRS made an assessment against Jack and Gillian Renslow for their joint income tax liability for the 1978 tax year. The assessment resulted from business activity of Jack Renslow of which Gillian had no knowledge and no proprietary interest beyond her marital status; all of Gillian's income was correctly reported on the joint return.

At the time the assessment was made, Gillian and Jack Renslow resided at the 4 Chatsford Court premises with Gillian's elderly mother. Title to this property was held by Corn Belt Bank of Bloomington, Illinois, and later (through a bank merger) by BancMidwest, as trustee of an Illinois-type land trust dated April 7, 1978, which was known as McLean County Land Trust #1327. As explained in our earlier order, because the title was held in the land trust, Gillian's interest in the property was personal property only--solely the right to receive rents, profits and proceeds. 705 F. Supp. at 448 n.2. Legal and equitable title were both held by the trustee, and accordingly all documents in the property's chain of title indicated the trustee as the owner of the property. In fact, title to the property was never held in the name Renslow.

In late 1981 or early 1982, the IRS file relating to the 1981 assessment against the Renslows was assigned to Thomas McAuley, the senior revenue officer in Bloomington , Illinois . He commenced collection activity, and as part of that activity he interviewed Gillian at least twice before February 9, 1982 . During these meetings, McAuley learned that Jack Renslow, after the couple's divorce, had moved to Arizona . Gillian also provided McAuley with all title information pertinent to 4 Chatsford Court . Additionally, at the second of these meetings Gillian introduced her then-fiance, Richard Rongey, to McAuley, and apprised McAuley of her plans to marry Rongey.

On February 8, 1982 , McAuley executed a Form 668, Notice of Federal Tax Lien Under Internal Revenue Laws, and this Notice was filed in the McLean County Recorder's Office on February 9, 1982 . The Notice identified assessments for, among others, the 1978 tax year; additionally, the Notice indicated that the taxpayer's names were "John & Gillian Renslow," and that their residence was " 4 Chatsford Ct. , Bloomington , IL 61701 ." Prior to filing the Notice, McAuley had researched title to 4 Chatsford Court and verified that the property was held in a land trust and that Gillian held a personal property interest only. In fact, McAuley and his supervisor determined to forego levying against the 4 Chatsford Court property because the land trust adversely affected the marketability of the property and a levy would have required substantial litigation. Nevertheless, McAuley filed his Notice of Federal Tax Lien.

Gillian married Richard Rongey on February 19, 1982 , and immediately began using his surname and correspondingly ceased using the Renslow surname. As previously noted, she changed her name on all important records, including credit card accounts, bank accounts, and licenses; she even began sending Christmas cards to McAuley using the Rongey surname. She also conversed with McAuley on many occasions, and during those talks both she and he would use the surname Rongey.

As noted, McAuley and his superior decided not to seek to collect against Gillian, and so McAuley transferred the file to Phoenix , Arizona , to commence collection against Jack Renslow. Nevertheless, McAuley remained in contact with Gillian and informed her of the progress of the collection activities in Arizona . These communications were most often initiated by Gillian, who was very interested in the progress of the collection activities and was, as McAuley stated, extremely helpful in providing information pertinent to the collection efforts. At one point McAuley assured Gillian that the IRS would never seek to collect the assessment against her, but that "nasty" letters would be sent to her just before the limitation period expired on collection.

On November 19, 1986 , Gillian conveyed the 4 Chatsford Court property to the Davises by warranty deed, pursuant to a contract for deed. Prior to the sale, Gillian engaged the title company Mid-Illinois Title Services, Inc., to perform a title search on the property. The outcome of this search indicated that, among other things, no federal tax lien existed against the property. Additionally, Gillian herself had never been notified of the existence of the tax lien. Hence, the sale was consummated with the understanding of the parties that the property was free and clear of federal tax encumbrances. Gillian never informed the Davises or the title examiners, or even her own attorney, that she had previously used the surname Renslow. On the other hand, the name Renslow does not exist in the chain of title to 4 Chatsford Court anyway. Instead, the builder of the house at 4 Chatsford Court , Horizon Homes, Inc., deeded the property to Corn Belt Bank of Bloomington , Illinois , as trustee of McLean County Land Trust #1327. The beneficiaries of this trust were Gillian and her mother, but as their interest was personal property only, their names did not appear of record. Later, on account of a bank merger, BancMidwest became the trustee, and it deeded the 4 Chatsford Court property to Gillian Rongey on April 23, 1986 . Gillian then conveyed the premises to the Davises . In sum, nowhere in the grantor/grantee index for McLean County , Illinois , did the name Renslow appear in connection with the property at 4 Chatsford Court .

McAuley retired from the IRS in February of 1985. Neither the Davises nor Gillian learned of the existence of the tax lien until well after the closing date. The statute of limitations on collection of the assessment in question expired on July 20, 1987 . To stay the limitation period, the IRS issued a levy against "Gillian (Renslow) Rongey" on July 15, 1987 , and seized the property at 4 Chatsford Court . The present litigation ensued.

CONCLUSIONS OF LAW

We have already set out the issues to be determined based upon the evidence in this case. To reiterate, we must determine whether the IRS received reasonable notice of Gillian's name change, and if so, whether the IRS had a reasonable time within which to refile the tax lien prior to the sale of the property to the Davises . We now resolve both of these factual questions in the affirmative.

First, though, the IRS has requested that we reconsider our earlier ruling, and hold instead that the law does not require the refiling of a properly filed Notice of a federal tax lien when a taxpayer begins using a new name. However, we stand by our earlier ruling, and hereby reaffirm our holding that where the IRS has notice that a delinquent taxpayer has changed his or her name, and where the Notice of tax lien is filed under the taxpayer's original name, the IRS is under an affirmative duty to refile the Notice of tax lien to show the taxpayer's new name.

In addition, Gillian has asked this Court to reconsider our earlier denial of the Davises' motion for summary judgment based upon the cases United States v. Clark, 81-1 USTC ¶9406 (S.D. Fla. 1981), and Fleet Mortgage Corp. v. U.S. Conglomerate, Inc., 166 Ill. App. 3d 537, 519 N.E.2d 949 (1st Dist. 1984). Gillian argues that our ruling that §6323(f)(4) of the Internal Revenue Code applies only to jurisdictions in which the significant time for priority purposes is when a document is adequately indexed, as opposed to when it is adequately filed, 705 F. Supp. at 450-52, is too narrow a reading. She asks us instead to find that §6323 should apply here to defeat this tax lien on the basis that the tax lien was no longer "recorded in the index . . . in such a manner that a reasonable inspection of the index will reveal the existence of the lien" following Gillian's name change, within the meaning of §6323(f)(4) . The Court declines the invitation to reconsider our previous ruling, though, and we hereby reaffirm our denial of the Davises ' motion for summary judgment on that basis.

Having decided these preliminary issues, we may now turn to the issues identified by our earlier order. First, with respect to whether the IRS had reasonable notice of Gillian's name change, the IRS urges this Court to define "reasonable notice of a name change" to require the taxpayer to give clear and concise notice of the name change to the "proper person" within the IRS, in order to alert the IRS to the need to refile its notice. In support, the IRS argues that any notice short of such clear and concise notice being given to a designated IRS agent would invite abuse, and would result in unduly burdening the IRS admin istratively. Under §6212 of the Internal Revenue Code, the IRS is required to mail statutory notices of deficiency to a taxpayer at his last known address, and courts construing this section have held that the burden is upon the taxpayer to notify the IRS of any change in address. The IRS analogizes §6212 with the current situation, and asks that we find that the Davises failed to show that Gillian notified the IRS of her name change because she failed to inform the appropriate IRS agent with clear and concise notice of her name change. In fact, the IRS asks that we adopt an approach similar to that used by the IRS pursuant to its regulations concerning changes of address. Those regulations require that the taxpayer send written notice to either the District Director or the Service Center Director having jurisdiction over where the original notice of lien was filed, or that a subsequent or amended return of the same type of tax be filed which indicates on its face that there is a change of address. Under such a rule, the IRS argues that clearly the Davises have failed to establish that Gillian notified the IRS of her name change.

The IRS's proposal would eviscerate our earlier ruling. We have held that, in order to protect innocent subsequent purchasers, the IRS must refile its Notice of lien within a reasonable amount of time after receiving reasonable notice of a name change. The IRS would place the burden on the taxpayer whose name has changed to notify it of the name change, but that approach wholly ignores the fact that our rule is intended to protect subsequent purchasers. We therefore decline to adopt that strict approach, and instead hold that reasonable notice of a name change is effective when communicated to the IRS in any fashion which should reasonably lead to the information being passed on to an IRS employee with the authority, and with sufficient knowledge of the background of the case, to act upon that information.

We do not altogether discount the relevancy of certain change of address cases. As noted by Gillian in her post-trial memorandum, the change of address cases have continually noted the ease with which the IRS can cross-reference taxpayer information by means of social security numbers, and that such searches take less than a minute. See Wallin v. Commissioner of Internal Revenue [84-2 USTC ¶9768 ], 744 F.2d 674, 676-78 (9th Cir. 1984). The Wallin court also found relevant the fact that the change of address had been noted upon the taxpayer's new income tax return. In McPartlin v. Commissioner of Internal Revenue Service [81-2 USTC ¶9569 ], 653 F.2d 1185 (7th Cir. 1981), the court found significant several factors on the question of whether the IRS had been notified of the taxpayers' address change, including that the taxpayers had filed tax returns bearing their new address, that the IRS was aware of the new address as evidenced by its communications with the taxpayers at that new address, that the agent working on the case was aware of the address change, and finally that the taxpayers did not in any way conceal their new address.

We, too, find all these factors relevant to our determination that the IRS here received reasonable notice of Gillian's name change. The evidence is clear that neither Gillian nor the Davises in any way concealed the name change from the IRS. In fact, McAuley was well aware of Gillian's potential name change at the time he filed the Notice of lien on February 9, 1982 , having already met Gillian's fiance, Richard Rongey. Additionally, from the start McAuley was well aware that the property was not held in the name of Renslow, but rather title was in a land trust at that time. Thereafter, McAuley became fully aware that Gillian married Richard Rongey, and that she subsequently adopted his surname. Not only was he orally notified of the name change, but he also received communication in the form of Christmas cards bearing the new name; indeed, he was well enough aware of the name change that he knew to refer to Gillian as Gillian Rongey when he contacted her. Since McAuley was the agent responsible for filing the initial Notice of lien, it is reasonable to assume that he should be the party responsible for refiling the Notice of lien once the name change became known to him.

Above and beyond notice being communicated to McAuley, Gillian also notified the IRS by means of her tax returns of her name change. As Wallin noted, it would have been simple for the IRS to run a computer check on Gillian, using her social security number, to discover her changed name.

Although McAuley transferred the case file to Arizona in mid-1982, he remained in contact with Gillian and took an active role in overseeing the collection activities in the case. Further, although McAuley retired in February 1985, he had ample notice of the name change subsequent to the February 9, 1982 , filing of the Notice of lien within which to refile the notice prior to his retirement. Indeed, the first Christmas card with the Rongey surname was received by McAuley in December 1982, and in early 1983 the Rongeys filed their 1982 joint tax return listing the name Rongey. Ample evidence was introduced to support the conclusion that McAuley was well aware of the name change no later than late 1982 or early 1983. He therefore had until February of 1985, at his retirement, to refile the Notice of lien stating Gillian's new surname. This he failed to do.

This Court therefore finds that the IRS had reasonable notice of Gillian's name change no later than the end of 1982 or early 1983. Further, this Court finds that the agent in charge, McAuley, had a reasonable amount of time--and therefore the IRS had a reasonable amount of time--in which to refile the Notice of tax lien before McAuley retired, and before the Davises purchased the property in late 1986.

In our earlier opinion, we stated that "[t]he only person who may have had knowledge of both the tax lien and the name change was Gillian Renslow-Rongey, but she denies knowing of the tax lien." 705 F. Supp. at 448. The evidence introduced during the trial clearly established that Gillian in fact had no knowledge or notice of the tax lien. It is abundantly clear that she was as innocent of wrongdoing as either of the other parties here. Indeed, we now retract that statement earlier made, because the only party shown to have had actual notice of both the name change and the tax lien was the IRS. In view of the policy considerations undergirding the Notice of tax lien provisions of the Internal Revenue Code, it is clear that the IRS should be the party to bear this loss. The whole affair could have been avoided had the IRS implemented earlier the internal policies now used by its field agents; we refer to the IR Manual, §5355.36 , pertaining to name changes, which was adopted on February 17, 1989 (just 10 days after our earlier ruling). This section provides as follows:

(1) A taxpayer may change his/her name after a notice of lien has been filed. To avoid disputes over lien priorities in subsequently acquired assets, another lien should be filed reflecting the new name or alias.

(2) The new lien should have the taxpayer's present name on the first name line. The second name line should indicate the previous name of the taxpayer preceded by the abbreviation "aka" for "also known as" or "fka" for "formerly known as."

The existence of this new procedure wholly defeats the IRS's claim that requiring it to file a new Notice of lien would be unduly burdensome. Had the IRS adopted these reasonable procedures several years earlier, it would have saved the Davises and Gillian, and itself, quite a lot of trouble. As for the IRS contention that a ruling against it will allow Gillian to escape her tax liabilities, two points should be made. First, if Gillian escapes her tax liabilities here, the IRS has only itself (through its agents) to blame. Following procedures calculated to provide reasonable notice of the identity of the taxpayer against whom a lien has been filed would have avoided that loss. Second, the contention is irrelevant to the issue before the Court. We are concerned here with the priorities between the Davises and the IRS; although the Davises have sued Gillian in the alternative in the event their claim for priority fails, that provides no nexus for this Court to shift the loss from the IRS to the Davises and then to Gillian on the IRS's posited "equitable" grounds. The Davises have sued Gillian for breach of warranty, but she will be liable for that only in the event we hold in favor of the IRS. As between the Davises and the IRS, which is the real relationship at issue, it is clear that the IRS has failed to perfect its Notice of lien, and therefore the Davises will take priority.

Ergo, it is hereby ORDERED that title to the premises at 4 Chatsford Court be QUIETED in the Davises , and that the IRS notice of tax lien involved herein be EXTINGUISHED. Further, the Court FINDS that Gillian Rongey is NOT GUILTY of any breach of warranty owed to the Davises by virtue of the IRS Notice of tax lien involved herein.

 

 

[89-2 USTC ¶9592] Steven V. Davis and Judith A. Davis, Plaintiffs v. United States of America, Internal Revenue Service, Gillian Rongey, Defendants

U.S. District Court, Cent. Dist. Ill., Springfield, Div., 87-3271, 2/7/89, 705 FSupp 446, (705 F.Supp. 446)

[Code Sec. 6323 ]

Lien for taxes: Priority: Notice of lien: Name change.--Summary judgment was denied to both the government and a purchaser of property who brought suit to quiet title against the IRS regarding the land upon which the government had imposed a tax lien. The seller of the property had placed it in an Illinois land trust after she purchased it and lived there during the time she was married to her first husband whom she later divorced. An assessment for delinquent taxes was made against the couple and a notice of federal tax lien was filed in the same month that this woman married her second husband and changed her name. Later the property was transferred from the land trust to the woman in her new married name and remained in this name when she sold it to the purchasers. A title search was conducted at the time of sale and no encumbrances were found under the seller's new name. The purchasers argued that when the seller's name changed after the notice of lien was filed and the IRS had notice of the name change, the original lien filing was no longer recorded in the index in such a manner that a reasonable inspection would reveal its existence. The court determined that the law granting the IRS authority to file notices of tax liens compelled them with an affirmative duty to refile under circumstances where the delinquent taxpayer changed his or her name and the original notice of tax lien was filed under the taxpayer's original name. Because the credibility of a witness was at issue, the seller had signed an affidavit that she notified the IRS of her name change, and several issues of material fact still existed, summary judgment was denied to both parties.

Hinshaw, Culbertson, Moelmann, Hoban & Fuller, 217 S. 17th St., Springfield, Ill. 62701, 222 N. LaSalle St., Chicago, Ill. 60601-1081, for plaintiffs. James A. Lewis, Assistant United States Attorney, Springfield, Ill. 62705, Debra L. Stefanik, Department of Justice, Washington, D.C. 20530, for the U.S. Barbara Fritsche, Rammelkamp, Bradney, Dahman, Kuster, Keaton & Fritsche, 232 W. State St., Jacksonville, Ill. 62651, for defendant.

Opinion

MILLS, District Judge:

Cross motions for summary judgment.

Both must be denied.

This cause must proceed to trial.

Facts

This case involves a mixture of the unique Illinois land holding device called a land trust, ¹ the all-encompassing scope of the federal tax lien, and an unreported name change. Both the Plaintiffs and the Internal Revenue Service claim priority interests in real property once owned by Defendant Gillian Rongey. Between the Internal Revenue Service (hereinafter IRS) and the Davises , there can be no real winner. For now, though, we must postpone making the hard choice between these two relative innocents.

Gillian Rongey has not always been known by that name; until February of 1982, she was known as Gillian Renslow. In 1978, Gillian Renslow and her mother purchased property at 4 Chatsford Court , Bloomington , Illinois , as joint tenants. Thereafter the property was placed in an Illinois land trust, which named BancMidwest as trustee. Gillian Renslow lived there with her husband, John Renslow.

In July of 1981 the IRS made an assessment against John and Gillian Renslow for their 1978 income taxes. A notice of federal tax lien, filed in February 1982 with the Recorder of Deeds for McLean County , Illinois , included the assessment for the 1978 taxes. The notice of tax lien named "John & Gillian Renslow" as the taxpayers, and stated that their residence was " 4 Chatsford Ct. , Bloomington , IL 61701 ."

Gillian Renslow divorced John Renslow in April of 1981 and married Richard Rongey on February 19, 1982 . On April 23, 1986 , title to 4 Chatsford Court was transferred from the land trust to Gillian Rongey. Later that year, on November 18, Gillian and Richard Rongey entered into a contract for the sale of 4 Chatsford Court to Steven and Judith Davis, the Plaintiffs here. Pursuant to the contract for sale, the Rongeys submitted a commitment from a title insurance company that no outstanding encumbrances, including tax liens, existed against the property. The Davises and the Rongeys consummated the contract for sale, and the Davises have apparently been making payments upon the property since.

The IRS has sought to foreclose upon 4 Chatsford Court , pursuant to its Notice of Tax Lien filed in the names of John and Gillian Renslow. In response, the Davises filed the instant case--which is a suit to quiet title--naming the United States of America , Internal Revenue Service; in the alternative, the Davises seek recovery from Gillian Rongey for false and fraudulent misrepresentations in her sale of the property to Plaintiffs.

The facts above summarized deserve to be reiterated in a context showing each party's point of view. The IRS filed its tax lien, naming Gillian Renslow, in 1982. The lien was filed in good faith, and was intended to reach all of Gillian Renslow's property. At that time, though, title to 4 Chatsford Court was held in an Illinois land trust; Gillian Renslow held only a personal property interest in the property. Later the property was transferred from the Illinois land trust into Gillian Rongey's name. When Gillian Rongey sold the property to the Davises , no notice of tax lien existed which named Gillian Rongey. The notice of tax lien, in fact, was filed before the property was transferred into Gillian Rongey's name. Hence, when the title searcher looked at the record to discover any encumbrances upon the property, there was absolutely no practical way he could have discovered that the notice of tax lien filed in 1982 covered the property at 4 Chatsford Court . ²

The perspective of the title examiner warrants further scrutiny.

Using the grantor-grantee index, the title examiner would discover that Gillian Rongey received title from the land trust. Searching the tax liens, the examiner would find none naming Gillian Rongey. Then, moving backward, the title examiner would see that the land trust received its title from the deed from Gillian Renslow and her mother back in 1978. The title examiner would discover no notice of tax lien naming the land trust or its trustee. The title examiner would perhaps discover a notice of tax lien naming Gillian Renslow, but that notice of tax lien was filed four years after Gillian Renslow had transferred the property into the land trust. Hence, the title examiner would find no outstanding tax liens naming any record titleholder of 4 Chatsford Court .

It is therefore clear that the IRS thought that its lien covered the subject real estate (withholding for the time being any discussion of whether the IRS had notice of Gillian Renslow's name change, and the effect such notice would have upon the IRS's notice of lien); further, the tax examiner--and hence the Davises--could find no outstanding encumbrances on the property from their record search. The only person who may have had knowledge of both the tax lien and the name change was Gillian Renslow-Rongey, but she denies knowing of the tax lien.

As noted at the outset, these cross motions for summary judgment are thus brought by two relatively innocent parties to this entire transaction.

Summary Judgment Standard

Under Fed.R.Civ.P. 56(c), summary judgment should be entered "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Unquestionably, in determining whether a genuine issue of material fact exists, the evidence is to be taken in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 1608-09, 26 L.Ed.2d 142 (1970). Nevertheless, the rule is also well established that the mere existence of some factual dispute will not frustrate an otherwise proper summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 2509, 91 L.Ed.2d 202 (1986). Thus, the "preliminary question for the judge [is] not whether there is literally no evidence, but whether there is any upon which a jury could properly proceed to find a verdict for the party producing it upon whom the onus of proof is imposed." Id. at 251, 106 S.Ct. at 2511 (quoting Improvement Co. v. Munson, 14 Wall. 442, 448, 20 L.Ed. 867 (1872)); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).

On these facts, both the Davises and the IRS have moved for summary judgment pursuant to Fed.R.Civ.P. 56(c). The fact that cross motions for summary judgment have been filed does not per se entitle the Court to dispense with the determination of whether questions of material fact exist. We must give no less careful scrutiny to the facts here than we would had only one litigant moved for summary judgment. See Lac Courte Oreilles Band of Lake Superior Chippewa Indians v. Voigt, 700 F.2d 341, 349 (7th Cir.), cert. denied, 464 U.S. 805, 104 S.Ct. 53, 78 L.Ed.2d 72 (1983). Having done so, we conclude that genuine issues of material fact remain, and hence this case must proceed to trial.

The Applicable Law

Both motions for summary judgment turn upon the sufficiency of the IRS's notice of tax lien filed in McLean County , Illinois . The applicable sections of the Internal Revenue Code will be set out here, at the outset, for clarity's sake.

To begin: as soon as the IRS assesses tax liability against any person, the amount due becomes a lien in favor of the United States upon any and all property, presently or future owned, real or personal, belonging to the person assessed. 26 U.S.C. §6321 (1982). This lien, however, is not valid against "any purchaser, holder of a security interest, mechanic's lienor, or judgment lien creditor" until a notice of the lien is filed in the appropriate place. Id. at §6323(a) . Hence, the IRS lien does not take priority over the delinquent taxpayer's other lienors until its notice of tax lien is filed in the proper form and with the proper authority. The requirements for the notice of lien are found in §6323(f) . For real property, the notice must be filed in the place designated by the state; in Illinois , that is the county within which the real property is located, here McLean County . The form of the notice of lien is to be determined by the Secretary of the IRS; the notice is valid regardless of any other provision of law regarding form or content of a lien notice. The Secretary of the IRS has promulgated rules pertaining to the proper form and content of the notice pursuant to §6323(f)(3) ; at 26 CFR §301.6323(f)-1(c) , the notice of federal tax lien is required to be filed on a "form 668, 'notice of federal tax lien under Internal Revenue laws.' " Further, "form 668" has been defined, at §301.6323(f)-1T(c)(2), as being a form which "must identify the taxpayer, the tax liability giving rise to the lien, and the date the assessment arose regardless of the method used to file the notice of federal tax lien." ³

Finally, one further portion of §6323(f) warrants discussion, and that is subsection (4), which provides that:

In the case of real property, if--(A) under the laws of the state in which the real property is located, a deed is not valid as against a purchaser of the property who (at the time of purchase) does not have actual notice or knowledge of the existence of such deed unless the fact of filing of such deed has been entered and recorded in a public index at the place of filing in such manner that a reasonable inspection of the index will reveal the existence of the deed, and (B) there is maintained (at the applicable office under paragraph (1)) an adequate system for the public indexing of Federal tax liens, then the notice of lien referred to in subsection (a) shall not be treated as meeting the filing requirements under paragraph (1) unless the fact of filing is entered and recorded in the index referred to in subparagraph (B) in such a manner that a reasonable inspection of the index will reveal the existence of the lien.

The Davises ' Motion

The Davises have seized upon §6323(f)(4) , set out above, as grounds for their motion for summary judgment. The Davises contend that §6323(f)(4) requires that in any state with a "notice" type of recording statute, and where a system of indexing of federal tax liens is available, then no tax lien is valid until a reasonable inspection of the lien index will reveal the existence of the lien. The Davises contend that when a taxpayer's name changes after a notice of tax lien is filed, and where the IRS has notice of the name change, the original tax lien filing is no longer "recorded in the index . . . in such a manner that a reasonable inspection of the index will reveal the existence of the lien," within the meaning of §6323(f)(4) .

This argument has several weaknesses, such as the fact that Illinois is not a "notice" jurisdiction, but rather has a recording act which has been construed as "race-notice." Ill.Rev.Stat. ch. 30, ¶29 (1989); Brookfield v. Goodrich, 32 Ill. 363 (1863); Simmons v. Stum, 101 Ill. 454, 456 (1882). The biggest problem, though, is that Plaintiffs totally misread §6323(f)(4) in making their argument. Far from applying to all jurisdictions with "notice" type recording acts, subsection 4 of §6323(f) only applies to those few jurisdictions in which the significant time for priority purposes is when a document is adequately indexed, as opposed to when it is adequately filed. ⁴

The very terms of §6323(f) make clear that the Davises ' reading is erroneous. Subsection (f)(1)(A)(i) establishes that the notice of lien must be filed in the place designated under state law where real property liens are to be filed. The Davises ' reading of subsection (f)(4) would make (f)(1)(A)(i) wholly redundant. Instead, subsection (f)(4) clearly, on its face, only applies to cases of real property where the state law makes indexing the time which establishes priority--the subsection only applies if, "under the laws of the state . . ., a deed is not valid as against a purchaser . . . who . . . does not have actual notice . . . of such deed unless . . . the fact of filing . . . has been entered and recorded in a public index . . . in such a manner that a reasonable inspection of the index will reveal the existence of the deed." This clearly does not establish a federal law of indexing, but instead only applies if state law already gives supremacy to the time of indexing rather than time of filing.

The legislative history of this section also belies the Davises ' reading; the Joint Committee on Taxation, in its General Explanation of the Revenue Act of 1978 (H.R. 13511, 95th Congress, P.L. 95-600) (emphasis added), noted that two conditions must first be met for this provision to apply.

First, State law must require public indexing of a deed to be valid against a purchaser of the property who does not have actual notice or knowledge. Thus, the Federal tax lien is not to be singled out for an indexing requirement under the applicable State law when other interests are not required to be indexed for protection against subsequent purchasers.

Next, the appropriate state office must have an indexing system adequate to handle indexing of federal tax liens. The committee concluded that

[w]here these conditions are satisfied, the priority of a tax lien against purchasers and other creditors will be determined by the reference to the time of indexing rather than the time of filing the notice of tax lien. Purchasers and creditors who acquire their interests in the property subject to a tax lien before the notice of tax lien has been indexed will be protected against a previously filed tax lien.

It is abundantly clear that §6323(f)(4) does not apply in all "notice" jurisdictions, but rather only in those jurisdictions where priority is determined as of the time of indexing. The Davises have not argued that in Illinois indexing is the determinative time for priority. In fact, Illinois law appears to make the significant moment that of filing, not indexing. See Village of Crotty v. Domm, 338 Ill. 228, 236-37, 170 N.E. 308 (1930), where the court stated, "where an instrument is duly filed for recording, the same is deemed recorded for all legal purposes from the date of such filing . . . . The purpose of recording it is to render it accessible that all may know its provisions. This condition exists from the time it is filed for record." Although Domm referred to the filing of an ordinance with the village clerk, the language employed and reasoning underlying the decision would seem to apply to recording of real property interests as well. Hence, the Davises ' argument is not well-taken.

The Davises have cited two cases to support their reading of §6323(f)(4) , United States v. Clark, 81-1 USTC ¶9406 (S.D. Fla. 1981), and Fleet Mortgage Corp. v. U.S. Conglomerate, Inc., 166 Ill.App.3d 537, 519 N.E.2d 949 (1st Dist.), appeal denied, 122 Ill.2d 573, 125 Ill.Dec. 216, 530 N.E.2d 244 (1984). Neither case, however, persuades the Court. As Plaintiffs note, Clark is directly on point to the present case. There, Mrs. Clark was assessed back taxes, and a notice of tax lien was filed by the United States in 1973 listing her as Carolyn Sue Clark. In 1974 Carolyn divorced, and in 1975 she married Roger Harper and took his surname. The Internal Revenue Service received actual notice of Carolyn's remarriage and name change. Carolyn, as Carolyn Harper, acquired certain property in 1975, upon which a mortgage was taken in favor of Amerifirst Federal Savings & Loan Association as mortgagee. Hence, in Clark as here, the subsequent purchaser (in Clark, a mortgagee) gave value in reliance upon a record which did not indicate any adverse interests against the prior party. The notice of tax lien in Clark, as here, would not be discovered upon a reasonable inspection of the real property records because the notice was filed in the name of Clark, not Harper, whereas the property was purchased in the name of Harper and no notice of tax lien was ever filed in that name. The Clark case, as could be expected, concerned a dispute between the United States and Amerifirst over priority to the property; the court held in favor of Amerifirst upon the basis of §6323(f)(4) , stating:

The question here--whether the government is required to refile a Notice once it becomes aware of a name change--does not fit precisely within the holding of any reported decision. The language of the Internal Revenue Code, however, provides the answer. The government's filing of lien notices where there is an adequate state system of indexing real property, as there is here, must be done "in such a manner that a reasonable inspection of the index will reveal the existence of the lien." I.R.C. §6323(f)(4) (emphasis added).

Here, the remarriage of Carolyn Clark (of which the Internal Revenue Service received notice) resulted in a situation where there was no reasonable opportunity for a prudent person dealing with the delinquent taxpayer to ascertain the existence of a federal tax lien. A "reasonable inspection" would not reveal the lien. Thus, the government's lien is of no effect against the subsequent mortgagee because the Notice did not comply with I.R.C. §6323(f)(4) .

(citations omitted).

This Court declines to follow Clark because that case misconstrues §6323(f)(4) . Clark would require any and all notices of tax lien filing to be discoverable upon a reasonable inspection of the index; however, §6323(f)(4) , by its very terms, does not apply to all filing systems, but only those where the time of indexing is the significant time for purposes of priority. Perhaps Florida law, under which Clark was decided, so construes its recording act; the Illinois recording act, as above noted, does not. Therefore Clark is not persuasive.

The Fleet Mortgage case does not sway this Court, either. In the first place, to the extent Fleet Mortgage followed Clark it did so without analysis. Since this Court declines to follow Clark , we obviously decline to follow Fleet Mortgage as well. Furthermore, the Fleet Mortgage case turned at least in part upon the fact that the IRS knew of the taxpayer's name change, and at times used each of the various names used by the taxpayer, but never refiled its notice of tax lien. The Fleet Mortgage case was thus premised in part upon failure of the IRS to provide constructive notice of the tax lien, even though it was known by the IRS that the taxpayer used several different names. See Tony Thornton Auction Service, Inc. v. United States [86-1 USTC ¶9434 ], 791 F.2d 635, 639 (8th Cir.1986), cited in Fleet Mortgage, 519 N.E.2d at 954.

In sum, the Davises ' argument does not persuade, and therefore their motion for summary judgment on the basis of §6323(f)(4) of the Internal Revenue Code will be denied.

The IRS's Motion

The Internal Revenue Service's argument supporting granting summary judgment in its favor is straightforward. The IRS simply posits that no section of the Internal Revenue Code requires it to refile a notice of tax lien upon learning of a name change and concludes that the failure to refile does not effect a loss of priority, even in favor of an innocent purchaser who has no way of knowing of the tax lien, and even if the IRS had actual notice and knowledge of the taxpayer's name change. The IRS has some support for its position. In Pioneer National Title Insurance Co. v. United States [81-2 USTC ¶9482 ], 48 A.F.T.R.2d 81-5142 (D.N.J.1981) [1981 WL 1816], a case in some respects similar to this, the court rejected an argument that the IRS should be required to file and index federal tax liens under both the taxpayer's name and under any other name of which the IRS is aware that the taxpayer may have at one time purchased property. The Pioneer National Title court, noting that the Internal Revenue Code does not require any such filings, stated that "[i]f Congress had wished to impose upon the Internal Revenue Service the duty to locate a deed for every piece of real property owned by a delinquent taxpayer, determine the name under which it was acquired, and file a separate notice of tax lien for each such name, it would presumably have done so." Id. at 81-5145. Likewise, in United States v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871, 872-74 (9th Cir.1987), the court approved of the Pioneer National Title holding, noting that "[i]f Congress had intended to impose upon the IRS the duty to investigate what property is owned by a delinquent taxpayer, record the name under which it was acquired, and file a separate notice of tax lien for each such name, it could have done so." Id. at 874.

Notwithstanding the broad holdings of these two cases, both are factually dissimilar to the present case and for at least that reason do not warrant blind adherence. In Pioneer National Title a woman purchased property in her maiden name of Imbergamo; later, she married Caruso and changed her surname accordingly. Notices of tax liens were filed after her marriage in the name of Caruso. The Carusos then sold the property, still held in the name of Imbergamo, to one Banko; the deed was signed by "Lauralie I. Caruso, formerly Lauralie Imbergamo . . . and Joseph Caruso, her husband." Under such circumstances, the contention that the IRS should have filed its tax lien notice under both the names Imbergamo and Caruso is wholly meritless--a proper title search would have easily revealed the tax lien in the name of the Carusos, and since that name appeared upon the deed, Banko was in no way misled. Likewise, in Polk the IRS had filed a notice of tax lien against Roy Bruce Polk. Thereafter, a mortgagee lent Mr. Polk a sum of money, and took in exchange a note and a mortgage on Mr. Polk's property; Polk was known to the mortgagee, and signed the deed, mortgage and note, by the name "Bruce Polk." The mortgagee, in making his title search, looked only for the name "Bruce Polk," and therefore did not discover the IRS tax lien filed under the name of "Roy Bruce Polk." Again, the IRS had filed under the correct name, and the contention that it must also file under pseudonyms or nicknames has no merit.

Conversely, in the present case Plaintiffs allege that the IRS was aware that Renslow's name had changed to Rongey; Plaintiffs further allege that, in spite of this knowledge, the IRS did not amend its notice of tax lien to name Mrs. Rongey. As set out earlier, under such circumstances there was no way possible by which a title examiner could have found the tax lien which covered the property at 4 Chatsford Court . Furthermore, unlike Pioneer National Title and Polk, the subsequent purchasers here had no way of knowing of Rongey's earlier name. Hence, this situation is far different from those in Polk or Pioneer National Title.

The IRS maintains that the Internal Revenue Code does not require refiling its notice of tax lien in situations such as this, where a delinquent taxpayer has changed his or her name following the filing of the tax lien notice, even where the IRS has actual notice of the name change. To the contrary, the Court finds that the entire statutory scheme under which the IRS is granted the duty and authority to file notices of tax liens compels a finding of a duty to refile under such circumstances. The sine qua non of §6323 is notice to subsequent takers of the existence of the IRS lien.

The history of §6323 reflects this with pristine clarity. Under §6321 , the federal tax lien arises upon assessment of delinquent taxes. Prior to enactment of §6323 , this "secret lien" was good as against any and all subsequent takers, regardless of the impossibility of obtaining notice of the lien. Then the forerunner to §6323 was added; the accompanying house report indicates that the notice provision was included to accommodate business world realities. Later, the subsection was again amended to also protect bona fide pledgees and to except securities; the reason for this amendment, too, was the prior impossibility of providing notice of tax liens to subsequent purchasers. See generally United States v. Security Trust & Savings Bank, Executor [50-2 USTC ¶9492 ], 340 U.S. 47, 52-53, 71 S.Ct. 111, 114-15, 95 L.Ed. 53 (1950) (Jackson, J., concurring).

Still later, in 1978, Congress again amended §6323 by adding subsection (f)(4); the history of this section, set out above, shows that subsection (f)(4) was added to keep the federal tax lien in line with other recorded instruments in the state recording system, and once again the benchmark was the question of notice to subsequent purchasers. Under this statutory scheme, as illustrated by its history, it is clear that Congress intended the IRS notice of tax lien to serve as notice to subsequent purchasers wherever possible.

The IRS has been granted, by Congress, sole authority to decide what information to include in the notice of tax lien. The IRS has determined that the relevant information to be included is the delinquent taxpayer's name (now "identity," see 26 C.F.R. §301.6323(f)-1T(2)), and the taxpayer's place of residence. By failing to amend the notice to provide the taxpayer's new name, the IRS has failed to comply with its own regulation by failing to provide the taxpayer's "name" or "identity" as those terms are to be construed in light of §6323 . ⁵

Thus, this Court rejects the IRS's contention that there is no duty upon it under any circumstances to refile its notice of tax lien. To the contrary, this Court finds that, where the IRS has notice that a delinquent taxpayer has changed his or her name, and where the notice of tax lien was filed under the taxpayer's original name, the IRS is under an affirmative duty to refile the notice of tax lien to show the taxpayer's new name. In this way the underlying purposes of the notice provisions of the Internal Revenue Code will be furthered, while at the same time the IRS will not be under any undue admin istrative burden.

This holding, of course, raises several questions, as the IRS has been quick to point out. The Court, however, does not find that these questions paint such a gray landscape as the IRS contends. The IRS questions whether refiling would entitle it to retain priority--it seems clear that it would. Further, the IRS asks how soon after receiving "notice" of a name change would the United States be required to refile in order to maintain priority, and also wonders what would be sufficient notice of a taxpayer name change to invoke the refiling requirement. The Court recognizes that many questions remain. In answer to some of these, though, the standard will be one of reasonableness; this standard is easily applied and adopted by the courts, and easily complied with by admin istrative agencies. Therefore, after the IRS has received reasonable notice of a name change, it will have a reasonable amount of time within which to refile its notice of lien--the factfinder can resolve any disputes as to whether times are reasonable. Further, to the extent that the IRS is concerned that this admittedly vague standard may create admin istrative headaches, it should be pointed out that in the entire annals of reported tax decisions, only once has this situation before arisen--the Clark case discussed supra. It therefore appears highly unlikely that this will create any particularly onerous admin istrative difficulties. ⁶

The IRS's motion for summary judgment is therefore denied. Nor can the Court grant summary judgment in favor of Plaintiffs upon the basis that the IRS had notice of the name change but failed to refile. For one thing, as the IRS points out, the Davises rely upon an affidavit by Mrs. Rongey stating that she informed the IRS of her name change. Obviously Mrs. Rongey stands to profit from such an assertion, and so her credibility is not closed to question. Summary judgment cannot be granted where the credibility of a witness is in issue. Furthermore, based solely upon the submissions of the Plaintiffs, the Court cannot determine that, as a matter of law, the IRS had sufficient notice to invoke a requirement to refile. Hence, this case must be tried.

Ergo, for the above reasons, the cross motions for summary judgment filed in this case are both DENIED, and this case shall proceed to trial.

¹ At the outset, some of the quirks of the Illinois Land Trust should be noted to aid the reader in understanding the background of this case. The Illinois land Trust has been described as

an imaginative creation of 19th and early 20th century Illinois practitioners, abetted by the Illinois courts, to develop a useful title-holding vehicle while still avoiding the impact of the Statute of Uses. From the beginning the land trust's conceptual underpinning has been that the beneficiary has neither legal nor equitable title to the real estate. Instead the beneficiary's interest is a special kind of personal property: the right to the earnings, avails and proceeds of the real estate.

Old Orchard Bank & Trust Co. v. Rodriguez, 654 F.Supp. 108, 110 (N.D.Ill.l987) (citations and footnotes omitted). Other characteristics of the land trust include that the trustee holds both legal and equitable title, the trustee's only powers or duties are to follow the beneficiary's directions in dealing with the property, and the beneficiary retains full right to control, possess and manage the property. H. Kenoe, Kenoe on Land Trusts 1-7 (Illinois Institute for Continuing Legal Education 1981). One further critical aspect of the Illinois Land Trust, for our purposes, is that the only document filed of record is the deed showing the trustee's identity and the existence of the trust. The trust instrument itself remains unrecorded, and so the identity of the beneficiary remains undisclosed. Indeed, secrecy of ownership is one of the chief purposes for land trust use.

² Although the IRS tax lien is all-encompassing, because Gillian Renslow's interest in 4 Chatsford Court at the time the lien was filed was personal property only, the IRS's lien did not reach the real property itself, but rather only Gillian's personal property right to rents, profits and proceeds. Old Orchard Bank & Trust Co., 654 F.Supp. at 112. Of course, when in 1986 title to the property was again reposed in Gillian, the IRS lien automatically encompassed the after-acquired legal and equitable interests held by Gillian--but by this time Gillian had changed her name to Rongey, thus making it impossible to discover that the property was encumbered by the tax lien in the name of Renslow.

³ Although this latter definition was promulgated only after the facts giving rise to this case came about, it is still pertinent as showing the necessary elements of a notice of tax lien.

⁴ The majority of recording acts in the United States have been construed to establish priority of a claim to real property from the moment of filing, and not the moment of proper indexing. See O. Browder, Jr., R. Cunningham, J. Julin, and A. Smith, Basic Property Law at 916-17 (3d ed. 1979); R. Cunningham, W. Stoebuck and D. Whitman, The Law of Property at 798-99 (1984).

⁵ Assume that the IRS, in response to Congress' authorization to compose the notice of lien, had decided that the notice of lien did not have to include the taxpayer's name--instead, for instance, only the delinquent taxpayer's address and hair color were included. Can it be doubted that such a regulation would completely fail to achieve the Congressional intent? The reason it would fail is that such a regulation would not provide reasonable, practical notice of the taxpayer's identity, and this is so even though nowhere in §6323 is the IRS expressly required to provide such notice.

⁶ Indeed, one possible solution may be for the IRS to amend its regulation pertaining to the content of notices of tax liens. By including taxpayer identification numbers with the information contained in the notices, and by also establishing an indexing system based upon those numbers, much of the possible admin istrative burden might be easily avoided.

 

 

[87-1 USTC ¶9332] Federal Deposit Insurance Corporation, qua corporation, Plaintiff v. The United States of America, Internal Revenue Service, Global Industries, Inc., Joan Coffman, Georgia Ann Harmon, Trustee, Fidelity Equipment Leasing, Urban Industries, Inc. of Kentucky, Weslo, Inc., Merchants and Business Mens Mutual Insurance Co., Bituminous Casualty Co., Fireman's Fund Insurance Co., and Newark Insurance Co., Defendants

U.S. District Court, No. Dist. Ga. , Atlanta Div., C80-278A, 3/26/87 , 654 FSupp 794

[Code Sec. 6323 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Validity of lien: Notice: Refiling of notice.--The government was not required to refile notice of its tax lien against certain property where the property was the subject matter of an interpleader suit (to which the United States was a party) that had been commenced prior to the expiration of the refiling period. Because the government's lien was valid as of the time the notice was filed, it had priority over other liens against the property in question.

ORDER

MURPHY, District Judge:

This interpleader action is before the Court on defendant/claimant United States of America 's motion for summary judgment.

"Summary judgment is a lethal weapon, and courts must be mindful of its aims and targets and beware of overkill in its use." Brunswick Corp. v. Vineberg, 370 F.2d 605, 612 (5th Cir. 1967). Fed.R.Civ.P. 56(c) authorizes summary judgment when "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." The party seeking summary judgment bears the burden of demonstrating that no dispute as to any material fact exists.See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 26 L.Ed. 2d 142 (1970); Bingham, Ltd. v. United States , 724 F.2d 921, 924 (11th Cir. 1984). In assessing whether the movant has met this burden, the evidence and all factual inferences should be viewed in the light most favorable to the party opposing the motion. See Bradbury v. Wainwright, 718 F.2d 1538, 1543 (11th Cir. 1983). And in deciding a motion for summary judgment, it is no part of the court's function to decide issues of genuine material fact but solely to determine whether there is such an issue to be tried. See Anderson v. Liberty Lobby, Inc., -- U.S. --, 106 S.Ct. 2505, 91 L.Ed. 2d 202 (1986); Warrior Tombigbee Transportation Co. v. M/V Nan Fung, 695 F.2d 1194, 1196 (11th Cir. 1983). A District Court "can only grant summary judgment 'ifeverything in the record . . . demonstrates that no genuine issue of material fact exists.' " Tippens v. Celotex Corp., No. 84-8312, slip op. at 690 (11th Cir. Dec. 9. 1986) quoting Keiser v. Coliseum Properties, Inc., 614 F.2d 406, 410 (5th Cir. 1980) (emphasis in original).

On January 1, 1980 the interests of defendant Global Industries, Inc. in real property located at 267 Marietta Street, Atlanta, Georgia, were sold pursuant to provisions of a senior deed to secure debt, and after satisfaction of that debt, the sum of $360,788.83 remained as surplus proceeds and were interpleaded into this Court by the commencement of this action on February 19, 1980. The interpleading plaintiff, Federal Deposit Insurance Corporation, was dismissed by Order dated May 7, 1980 . The United States asserts priority over the fund of money on the basis that there is a RICO claim of forfeiture and that it has a 1978 notice of federal tax lien; whereas, no other remaining claimant has a lien perfected as early as 1978.

On August 10, 1978, the Internal Revenue Service filed a notice of a federal tax lien against Global Industries, Inc. with the Clerk of the Superior Court of Fulton County, Georgia, which reflected an assessment made by the United States Tax Court on August 9, 1978, that Global Industries, Inc. owed income taxes for the years 1971 through 1974, totaling more than ten million dollars. Defendant/claimant NCR Corporation did not record its judgment against Global Industries, Inc. until May 25, 1979 . Defendant/claimant Urban Industries claims a judgment lien against all interests of Michael G. Thevis. Although Urban Industries filed a lien claim in Fulton County, Georgia, as early as June 22, 1978, in subsequent proceedings between it and the United States it was determined that the judgment against Mr. Thevis was not perfected prior to 1981.See Urban Industries v. Thevis [82-1 USTC ¶9268 ], 670 F.2d 981 (11th Cir. 1982). By Order dated October 24, 1986 , the Court denied and dismissed defendant/claimant Joan Coffman's argument that she was entitled to the funds held by the Court. The Court subsequently denied Ms. Coffman's motion for a new trial and/or rehearing on March 3, 1987 .

The sole remaining issue in this case is that of the priority of liens against the subject funds. Footnote 1 of defendant/claimant United States ' motion for summary judgment states:

The United States has not made any determination of the priority of the tax lien as against the RICO forfeiture. The issue is entirely academic, inasmuch as the corporate income tax assessment is otherwise uncollectable. If awarded to the United States , the funds will be credited to the income tax of Global, by reason of sheer admin istrative convenience.

Given this footnote, and the discussion below, the Court finds that it is unnecessary to rule on the priority of the RICO forfeiture.

The Court finds that the United States ' claim to the fund is in an amount which is greater than the amount actually contained in the fund. NCR Corporation, however, argues that the tax lien held by the United States does not have priority because the requirements of 26 U.S.C. §6323 have not been met. ¹ Specifically, NCR Corporation cites 26 U.S.C. §6323(g)(3) for the proposition that for the United States to maintain its priority status, ² the notice of a tax lien must have been refiled during "the one-year period ending 30 days after the expiration of 6 years after the date of the assessment of the tax." NCR Corporation correctly points out that there is no evidence before the Court which would establish that the United States has refiled the notice of a tax lien. The Court, however, finds that it was not necessary for the United States to refile in order to maintain its priority because Treasury Regulation 26 C.F.R. §301.6323(g)-1 creates an exception to the refiling requirement for property "which is the subject matter of a suit to which the United States is a party, commenced prior to the expiration of the required refiling period." Clearly, this case falls within the above exception. This interpleader action was commenced on February 19, 1980 , less than two years after the United States filed the notice of tax lien. The United States holds the same priority status that it held on February 19, 1980 .

ACCORDINGLY, the United States of America 's motion for summary judgment is GRANTED.

¹ Defendant/claimants Urban Industries, Inc. of Kentucky, Weslo, Inc., Merchants and Business Mens Mutual Insurance Co., Bituminous Casualty Co., Fireman's Fund Insurance Co., and Newark Insurance Co., in opposition to the United States ' motion for summary judgment, adopt the position taken by NCR Corporation. Brief in opposition filed February 20, 1987 .

² NCR Corporation admits that the United States had priority in 1978 under the general rule of "first in time, first in right."

 

 

[86-1 USTC ¶9466] Dr. Bernard A. Mogilka, Plaintiff-Respondent, William Judge, Purchaser-Respondent v. Ralph J. Jeka and Ruth Jean Jeka, Defendants-Appellants and Cross-Respondents, Patrick T. Sheedy, as Personal Representative of the Estate of Nan Lowe and Bernice Degner, as Personal Representative of the Estate of Lucille Kaminski, Defendants and Cross-Appellants, United States of America Internal Revenue Service, Defendant and Cross-Respondent, State of Wisconsin Department of Revenue, Girard Bank, a foreign banking corporation, Edward Monday, Lawrence A. Czaplewski, Herbert A. Genthe, City of Milwaukee, County of Milwaukee, Village of Fox Point, Towne Realty, Inc., Christine Hofmeister, and Northwestern National Co., Defendants

Wisconsin Court of Appeals, District 1, 85-0912, 4/16/86

[Code Secs. 6321 , 6323 and 7403 ]

Lien for taxes: Creation of lien: Judicial sale: Priority of liens: Judgment creditor.--The IRS had first priority status to obtain surplus funds from a foreclosure sale; a former owner's homestead exemption and judgment liens followed the IRS's tax liens in priority. The judgment creditors could not "piggyback" their claim by assigning their liens to the foreclosure purchaser who used the judgment liens as partial payment to secure his bid. The judgment creditors were not allowed to supersede a senior lienholder in this manner because such an action would "circumvent the time-honored protective filing rule of 'first in time, first in right.' " Tax liens have the force of judgments; therefore, the IRS was not required to bring a foreclosure action or to intervene in the civil suit in order to maintain its position as a senior creditor. Although the IRS had not foreclosed or levied upon its liens within six years, the liens were not invalid or extinguished by operation of law because the IRS had properly refiled the liens.

Before MOSER, P.J., WEDEMEYER and SULLIVAN, JJ.

WEDEMEYER, Judge:

This appeal and cross-appeal arise from a trial court order confirming the foreclosure sale of the homestead of Ralph J. Jeka (Ralph) and his wife, Ruth Jean Jeka (Ruth). The Jekas appeal from those parts of the order denying Ruth's claim to a homestead exemption and granting a homestead exemption to Ralph despite his waiver. The estates of Nan Lowe and Lucille Kaminsky (the Estates) cross-appeal from those parts of the order providing first priority status to tax liens of the United States Internal Revenue Service (IRS) and denying William Judge (Judge), the successful bidder at the sheriff's sale, the right to use the Estates' judgments against Ralph as partial satisfaction of the bid price.

Because Ruth had standing to assert her homestead rights and did not waive these rights through inaction, and because Ralph properly waived his homestead exemption, we reverse the order and remand to the trial court with directions to determine the extent of Ruth's homestead exemption. Because the IRS tax liens were valid and enforceable, and because Judge had no statutory authority to use the Estates' judgments to pay part of the bid price, we affirm those parts of the trial court's order.

To facilitate an understanding of the issues presented in this appeal, a brief recitation of the procedural history is in order. Dr. Bernard A. Mogilka (Mogilka) commenced a mortgage foreclosure action against the Jekas. ¹ The real estate involved was the Jekas' residence and homestead. The Jekas did not contest the claim and a default judgment was entered against them. Because Mogilka's mortgage claim was only $42,575.53, Judge's successful bid of $69,942.67 at the foreclosure sale created a surplus. Mogilka moved to confirm the sheriff's sale and, contemporaneously, the IRS moved to obtain the surplus funds to satisfy its tax liens. The trial court scheduled a hearing for February 11, 1985 . The IRS, the Estates, and the Jekas filed claims for the surplus money. Ralph also made an oral claim for a homestead exemption at the February 11 hearing. One week later he filed a homestead claim for both Ruth and himself, but he alone signed it.

At the February 11 hearing Ralph asserted that Ruth, a joint owner, was not responsible for any of the tax liens or judgments on the property and that, consequently, she should receive one-half of the surplus sales proceeds. The trial court confirmed the sheriff's sale but declined to rule on the priority of claims and adjourned the case until February 27. The court requested that the parties be prepared to address Ralph's homestead exemption and Ruth's claim to any surplus funds. Subsequent to the February 11 hearing, the trial court signed an order confirming the sale and permitting Judge to pay the bid price in the form of cash and/or satisfaction of the judgments held by other judgment creditors in the foreclosure action, i.e., the Estates. On February 27, however, the trial court reversed itself as to the acceptable manner of payment and vacated the order confirming the sale. The trial court then adjourned the matter until April 1, 1985 , when it would address the applicability of the statutory homestead exemption to a tax lien, the timing of homestead claims in foreclosure proceedings, and whether Ruth's failure to appear had deprived her of standing to assert her homestead exemption. On March 4, 1985 , Ruth filed both a claim asserting her homestead rights and a notice of claim to surplus monies. In the same document, Ralph withdrew his claim to a homestead exemption.

After the April 1 hearing, the trial court entered an order that reconfirmed the foreclosure sale, vacated Judge's partial payment by satisfaction, granted a homestead exemption to Ralph, and denied standing to Ruth to claim a homestead exemption. The court further ordered that Ralph's $25,000 homestead exemption be disbursed to those entities holding tax liens against him and that any remaining surplus be placed in a trust account with the clerk of court.

THE JEKAS' HOMESTEAD CLAIM

On appeal, the Jekas claim that the trial court erred in ruling that Ruth did not have standing to claim a homestead exemption. In considering this issue, the trial court made the following findings:

On March 4, 1985 , a Notice of Claim to Surplus Monies and Consent allegedly bearing the signature of defendant Ruth J. Jeka was filed in this action.

Defendant Ruth J. Jeka has not appeared pro se or by an attorney at any hearing before the Court or in connection with the homestead exemption. In light of her failure to appear pro se or by an attorney at the hearings held in connection with this matter the Court cannot ascertain defendant Ruth J. Jeka's position concerning the homestead exemption, or even whether the signature on the above-referenced Notice is legitimate.

On the issue of Ruth's failure to appear, we initially note that allegations with respect to homestead rights "in law constitute a general appearance." Northwestern Securities Co. v. Nelson, 191 Wis. 580, 586, 211 N.W. 798, 800 (1927). Standing is a question of law which this court reviews independently. State v. Wisumierski, 106 Wis. 2d 722, 733, 317 N.W.2d 484, 489 (1982). Under Wisconsin's law of standing, we must determine whether the petitioner was injured in fact, and whether the interest allegedly injured is arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question. Moedern v. McGinnis, 70 Wis. 2d 1056, 1067, 236 N.W.2d 240, 245 (1975) (citation omitted).

Doubtless, denying Ruth a homestead interest in the surplus funds resulting from the sheriff's sale caused her injury in fact. As to whether her homestead claim is within a protected zone of interest, we first look to the relevant statutes. Section 815.20(1), Stats. (1981), ² provides in part:

An exempt homestead . . . shall be exempt from execution, from the lien of every judgment and from liability for the debts of [its] owner to the amount of $25,000, except mortgages, laborers', mechanics' and purchase money liens and taxes and except as otherwise provided. Such exemption shall not be impaired by . . . the sale [of the homestead] but shall extend to the proceeds derived from such sale to an amount not exceeding $25,000, while held, with the intention to procure another homestead therewith, for 2 years. Such exemption extends to land owned by husband and wife jointly or in common, and when they reside in the same household may be claimed by either or may be divided in any proportion between them, but in no event shall the exemption exceed $25,000 for such household. [Emphasis added.]

As for the disbursement of suplus monies derived from a foreclosure sale, sec. 846.162, Stats., states in part:

Disposition of surplus. If there shall be any surplus . . . any party to the action or any person not a party who had a lien on the mortgaged premises at the time of sale, may file with the clerk of court into which the surplus was paid, a notice stating that he is entitled to such surplus money or some part thereof, together with the nature and extent of his claim. [Emphasis added.]

It is well-settled that the public policy of this state strongly favors the liberal construction of the homestead statutes in favor of the debtor, and that homestead rights are preferred over the rights of creditors. Schwanz v. Teper, 66 Wis. 2d 157, 163, 223 N.W.2d 896, 899 (1974). The homestead exemption prevents a person from being deprived of the means to enjoy the necessary comforts of life. Reckner v. Reckner, 105 Wis. 2d 425, 429 n.7, 314 N.W.2d 159, 162 n.7 (Ct.App. 1981); see Wis. Const. art I, sec. 17.

Because it cannot be gainsaid that Ruth's interest was within the zone protected by the homestead statutes, she undeniably had standing to assert her homestead rights, and the trial court erred in arbitrarily rejecting her claim. ³ The real issue is whether Ruth waived her homestead exemption. See Reckner, 105 Wis. 2d at 435, 314 N.W.2d at 164-65. We therefore must determine whether Ruth brought her homestead claim in a timely manner. In Northwestern Securities Co., 191 Wis. at 584, 211 N.W. at 799-800, our supreme court upheld the claim of joint mortgage debtors who did not assert their homestead rights until after the confirmation of the sheriff's sale:

An adjudication in the judgment that the mortgaged property constituted the homestead of the mortgagors would definitely, under the provisions of the statutes, have stamped the proceeds as exempt, and would have precluded the application of any of these proceeds to the payment of general judgment creditors. In other words, the surplus would belong to the mortgage debtors. Therefore, after the sale, when the surplus was paid into court, the homestead rights, if any, or the rights to the proceeds, still remained open and undetermined.

In Lueptow v. Guptill, 56 Wis. 2d 396, 404, 202 N.W.2d 255, 260 (1972), the court reaffirmed the same liberal policy: "This court has long held that the right to the homestead exemption does not depend upon its formal exercise." Rather, there is a "strong public policy to protect the homestead exemption, even in the face of inaction." Anchor Savings & Loan Association v. Week, 62 Wis. 2d 169, 175, 213 N.W.2d 737, 739 (1974). Thus, the Anchor Savings court concluded that a mortgagor may assert his or her homestead right as late as the time the surplus is distributed. Id. at 176, 213 N.W.2d at 740; see sec. 846.162, Stats.

In the instant case, the record reveals that both Ralph and Ruth were named parties in this foreclosure action, that both signed the mortgage document and note, and that both used the mortgaged premises as their homestead. Ruth did not assert her homestead rights until March 4, 1985 , after the sheriff's sale. The trial court, however, vacated its order confirming this sale on February 27, 1985 . It did not reconfirm the sale until the April 1, 1985 hearing. Thus, Ruth's assertion of her homestead rights, as well as Ralph's waiver of his homestead rights, were made in a timely manner. We therefore remand that part of the trial court's order assigning a homestead exemption to Ralph with directions that the trial court instead award the exemption to Ruth, then determine whether she has nonexempt liabilities pursuant to sec. 815.20(1), Stats. (1981). ⁴

USE OF JUDGMENT SATISFACTIONS

On cross-appeal, the Estates first claim that the trial court erred in deciding that Judge could not use the Estates' satisfactions of judgments against Ralph as part payment to secure Judge's bid. The Estates assigned these to Judge. They argue that his use of these assignments was permitted by sec. 846.16(2), Stats. That section states:

If the judgment creditor is the purchaser he may give his receipt to the sheriff or referee for any sum not exceeding his judgment and such receipt shall be deemed a down payment, but in every case the purchaser shall pay the cost of sale; and if the sum due the creditor is less than the purchase price, he shall pay the difference at the time of sale.

The Estates contend that Judge, as the assignee of their judgments, became a judgment creditor who could use the judgments to pay part of his bid price rather than tendering full payment in cash. We disagree.

The interpretation of a statute in relation to a set of undisputed facts is a question of law which this court may review without deference to the trial court. Manor v. Hanson, 123 Wis. 2d 524, 533, 368 N.W.2d 41, 45 (1985). We initially note that in this case the trial court changed its position on the applicability of sec. 846.16(2), Stats. It first allowed Judge to tender the Estates' judgment satisfactions, but then reversed itself with the following comments:

[I]n effect, allowing Mr. Judge to pay with the satisfaction of the estates is in fact circumventing the positions of the parties and the ultimate duty of this Court. It's a shortcut method of trying to give the estates . . . their money above and beyond the priorities, above and beyond the homestead exemption and any taxing. And the Court would find, as a matter of law, it's not . . . allowed pursuant to Section 846.16(2), . . . .

. . . .

I know what it reads, [Counsel for the Estates], but doesn't it really in effect usurp what this Court is doing here today--talking about homestead rights and talking about tax liens . . . . It's jumping your clients and that's what I am talking about.

Essentially, the Estates' interpretation of sec. 846.16(2), Stats., would permit a junior lienholder to "piggyback" its claim onto the purchaser's bid in order to supersede a senior lienholder. We agree with the trial court that this ploy would circumvent the time-honored protective filing rule of "first in time, first in right" in the liquidation of judgment creditor liens.

A plain reading of sec. 846.16, Stats., supports this conclusion. On any question of statutory construction, the initial inquiry is to the plain meaning of the statute. State Historical Society v. Village of Maple Bluff, 112 Wis. 2d 246, 252, 332 N.W.2d 792, 795 (1983). If the statute is unambiguous, resort to judicial rules of interpretation and contruction is not permitted, and the words of a statute must be given their obvious and intended meaning. Id. at 252-53, 332 N.W.2d at 795. Section 846.16 relates to the notice and report required in foreclosure sales. Subsection (2) clearly reads that if the judgment creditor, i.e., the creditor having the foreclosure judgment, is the successful bidder at the foreclosure sale, he or she may tender a receipt for any sum of money not exceeding the judgment as an acceptable down payment. In reviewing the record, we conclude that "the judgment creditor" in the context of this case is not the Estates, nor Judge, because neither is a foreclosure judgment creditor. Thus, sec. 846.16(2) does not apply to Judge's use of assignments from the Estates.

Our "plain meaning" approach is buttressed by the notes of the Advisory Committee on Pleading, Practice and Procedure. This committee drafted Rule 278.16(2), Stats., the identical predecessor of sec. 846.16(2), Stats. See 225 Wis. vi (1938). These notes indicate that the drafting committee recognized the fact that in nearly all foreclosure cases the purchaser is the foreclosure judgment creditor. Thus, the procedure outlined in subsection (2) was intended to avoid cases of practical hardship to those creditors. There is no indication that the drafting committee intended to include assignments to purchasers who were not judgment creditors. We therefore affirm the trial court's order vacating Judge's use of the Estates' judgment satisfactions.

VALIDITY OF THE IRS TAX LIENS

To bolster their argument for higher priority, and thereby enhance their claim to any surplus funds, the Estates contend that the federal tax liens are invalid because the IRS did not bid its liens nor seek their foreclosure. The Estates argue that the IRS, by merely answering the complaint, asserted no rights to collect the taxes. We reject this argument.

First, the Estates cite no authority requiring the IRS to cross-complain, counterclaim or reduce its lien to a judgment in order to establish the validity of its tax lien. Nor has our independent research found any appropriate authority to support this proposition. The validity and priority of a federal tax lien is governed by federal law. The power of Congress to levy taxes is supreme and is not subject to state legislation concerning the recording or registration of mortgages or liens. U.S. Const. art. I, sec. 8 and art. VI; see United States v. Snyder, 149 U.S. 210, 213-14 (1893). The federal income tax liens asserted here were perfected in 1979 under the authority of I.R.C. §6321 . As the United States Supreme Court explained, "[t]he priority of the federal tax lien provided by [I.R.C.] §6321 as against liens created under state law is governed by the common-law rule--'the first in time is the first in right.' " United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 87 (1963). Contrary to the normal procedure in an action at law, these tax liens have the force of a judgment. Bull v. United States [35-1 USTC ¶55], 295 U.S. 247, 260 (1935). They arise when the assessed tax is not paid when due. Id.

The Estates argue that Bull supports its position that the government must initiate legal proceedings to enforce and collect any taxes allegedly due. We read Bull differently. In Bull, an executor filed a claim in the United States Court of Claims to offset income tax owed by the amount of estate tax paid. The Supreme Court, applying the liberal provisions of pleading and practice utilized in the Court of Claims, allowed the estate a credit against the deficiency in income tax. In reviewing the broad scope of tax enforcement and the nature of a sovereign's rights to recover a just debt, the Court declared:

[T]he usual procedure for the recovery of debts is reversed in the field of taxation. Payment precedes defense, and the burden of proof, normally on the claimant, is shifted to the taxpayer. The assessment supersedes the pleading, proof and judgment necessary in an action at law, and has the force of such a judgment.

Id. We are aware of no authority that has modified or reversed this declaration.

The Estates next claim that 28 U.S.C. §2410(c) requires the IRS to foreclose a tax lien. We disagree because this provision is couched in permissive terms:

In any case where the debt owing the United States is due, the United States may ask, by way of affirmative relief, for the foreclosure ot its own lien and where property is sold to satisfy a first lien held by the United States, the United States may bid at the sale . . . . [Emphasis added.]

The United States , under I.R.C. §7403 , is authorized to enforce its own tax liens, but the authorizing language is similarly permissive. Finally, I.R.C. §7424 provides that "the United States may intervene in [a civil] action or suit to assert any lien." (Emphasis added.) Because these sections "are purely permissive in tenor," United States v. Brosnan [60-2 USTC ¶9516 ], 363 U.S. 237, 246 (1960), we reject the Estates' argument that these provisions require certain actions on the part of the IRS.

Finally, the Estates argue that the IRS tax liens are invalid because they were extinguished by operation of law. The Estates argue that, contrary to I.R.C. §6502 , the IRS did not foreclose or levy upon its lien within six years. Under I.R.C. §6321 , if any person does not pay a required tax after demand, the amount due shall be a lien in favor of the United States upon all property belonging to that person. According to I.R.C. §6323(a) , this lien shall not be valid against any judgment lien creditor until notice has been filed pursuant to I.R.C. §6323(f) . I.R.C. §6323(g) requires refiling every six years to retain priority. Here, the federal tax liens were refiled on December 14, 1984 , well within the statutory requirement. Thus, the Estate's assertion of invalidity fails.

By the Court.--Order affirmed in part, reversed in part, and cause remanded with directions.

Recommended for publication in the official reports.

¹ Actually, this case concerns the second foreclosure action instituted against the Jekas' homestead. The first action was reviewed by this court in South Carolina Equipment, Inc. v. Sheedy, 120 Wis. 2d 119, 353 N.W.2d 63 (Ct.App. 1984).

² This statute was amended by 1983 Wis. Act 186, effective January 1, 1986 .

³ The trial court in its findings of fact stated that because Ruth failed to appear pro se or by counsel, it could not ascertain "whether the signature on the claim was hers." No challenge to the signature appears in the record. There is no evidence to support a finding that the signature was forged or unauthorized. The statutory presumption of validity, sec. 891.25 , Stats., was therefore not rebutted. Cf. Jax v. Jax, 73 Wis. 2d 572, 588-89, 243 N.W.2d 831, 840 (1976); see sec. 403.307(1), Stats. ("Unless specifically denied in the manner provided in s. 891.25 each signature on an instrument is admitted.") It appears that the trial court, under the guise of its discretionary power, accorded no weight to the signature on Ruth's claim. Because nothing in the record rebuts the presumed authenticity of Ruth's signature, we conclude that the trial court misused its discretion.

⁴ In remanding this issue to the trial court, we note that under the Schwanz rule a court cannot order exempt property held by the clerk of court. 66 Wis. 2d at 163, 223 N.W.2d at 899. Although it is true that the debtor mortgagors in both Schwanz and Reckner indicated that they intended to use at least some of their exempt proceeds to procure a new homestead, thus meeting the statutory directive of sec. 815.20(1), Stats. (1981), we cannot evade the explicit conclusion of the Schwanz court: "While the court may have done what it thought was the fairest way to handle the case, it was in error. The [homestead claimant] was entitled to the exemption and the court could not order it held by the clerk of court." Id. at 163, 223 N.W.2d at 900.

 

 

[61-1 USTC ¶9242] United States of America v. Code Products Corporation, et al.

U. S. District Court, East. Dist. Pa., Civil Action No. 23054, 11/7/60

[1954 Code Sec. 6321]

Lien: Chattel mortgage v. tax lien: Failure to refile as required by state law.--The court denied the petition of the holder of a chattel mortgage seeking a return of the mortgaged property against which the government had a tax lien. The mortgage was given on September 20, 1950 , and recorded the following day. Although the state law required refiling within 5 years to preserve the lien of a chattel mortgage, the petitioner did not refile until March 1957. Even though the statute requiring refiling may have been tolled by a bankruptcy proceeding against the mortgagor, sufficient time had elapsed after the return of title to the mortgagor by the bankruptcy court to destroy the lien of the chattel mortgage.

Walter E. Alessandroni, United States Attorney, and James J. Phelan, Jr., Assistant United States Attorney, 4042 United States Court House, Philadelphia 7, Pa., for plaintiff. William J. Hagan, Two Penn Center Plaza , Philadelphia 2, Pa. , for the Internal Revenue Service. Samuel Abramson, 620 Two Penn Center Plaza, Philadelphia 2, Pa. , for the petitioner. Walter Stein, 1220 Philadelphia Saving Fd. Bldg., Philadelphia 7, Pa. , for the receiver. William P. Thorn, 1901 Three Penn Center Plaza , Philadelphia 2, Pa. , for the 3rd party claimant.

Sur Petition for Return of Mortgaged Property

KIRKPATRICK, District Judge:

This is a petition by the chattel mortgagee of certain machinery for an order directing the return to him of the mortgaged property. It is opposed by the Government which has a claim against the debtor for taxes. The pertinent facts are as follows:

The chattel mortgage in question was given on September 20, 1950 , and recorded the next day. Later it was assigned to Herbert Scharf, the petitioner. In 1952 the mortgaged property was transferred to Code Products Corporation, subject to the mortgage. On June 20, 1955 , Code Products filed a petition for reorganization under Chapter X and a receiver was appointed. The petition was amended on September 12, 1955 , to seek relief under Chapter XI. Thereafter on January 3, 1956 , an arrangement was confirmed. The plan called for payment in full on an installment basis of the involved federal tax liabilities. The company defaulted in these payments. On August 6, 1957 , on the petition of the Government, an equity receiver was appointed.

In the meantime, on March 28, 1957 , the chattel mortgage in question was refiled for the first time since its original recordation. The law of Pennsylvania requires refiling within five years in order to preserve the lien of a chattel mortgage.

As part of the plan or arrangement as confirmed, an injunction was issued against the debtor forbidding it to transfer or encumber any property without the consent of the District Director of Internal Revenue. I do not regard such a provision as a retention of title in the trustee since, plainly, if the title were in him, no prohibition against the debtor's disposal or encumbrance of the property would have been needed. The title to the property, therefore, vested in accordance with 11 U. S. C. 110(i) and was, in effect, relinquished by the bankruptcy court, even though the conduct of the debtor in relation to it was restricted. The fact that the Court may have retained jurisdiction over the debtor as distinguished from title to his property does not affect the result. We are here concerned with the lien of a chattel mortgage on the property and not with a claim against the trustee or the debtor. The situation was, therefore, the same as that in the case of Natoli Appeal, 186 Pa. Super. 81, where it was held that the rule to the effect that the rights of a lienor are fixed as of the time of the filing of the petition in bankruptcy, thus rendering the refiling required by the Pennsylvania statute unnecessary, does not apply to property that has been released from the jurisdiction of that court. The Pennsylvania court held that failure to refile within the statutory period destroyed the lien asserted.

Even if we assume the law to be that the custody of the court over the property subject to the chattel mortgage tolled the period for refiling, the petitioner still cannot prevail since his refiling occurred more than 14 months after the court relinquished the title to the property to the debtor. As noted above, the chattel mortgagee had only three months left in which to file his mortgage in order to preserve it when the original petition under Chapter X was filed.

The prayer of the petition is denied.

 

 

[73-1 USTC ¶9241] United States of America , Plaintiff v. John Schuster et al., Defendants

U. S. District Court, No. Dist. Ohio , East. Div., No. C70-973, 11/28/72

[Code Sec. 6323]

Lien for taxes: Foreclosure: Real property: Contract purchaser's interest: Statute of limitations: Ohio law.--The Government possessed a valid lien and was entitled to foreclose on real property in the hands of purchasers from the delinquent taxpayers who had purchased the property on contract. The delinquent taxpayers had a valid, equitable interest in the transferred real estate under Ohio law to which the properly filed Government liens could attach. Since the liens were properly filed under Ohio law in the county recorder's office where the property was located, the purchasers of the property were held to have constructive notice of the liens at the time of purchase. Furthermore, the Government liens were not barred by the statute of limitations at the time the foreclosure suit was filed since the Government had properly refiled its liens within the six year limitations period.

Frederick Coleman, United States Attorney, Cleveland , Ohio , for plaintiff. James E. Hoffman, Jr., 1 Valley View Dr., Brookfield, Ohio, John K. Mahaney, Assistant Prosecutor, 160 High St., Warren, Ohio, for defendants.

Memorandum Opinion and Order

CONTIE, District Judge:

This cause was brought on the complaint of the plaintiff, the answer of the defendants, and the evidence.

Plaintiff , United States of America , brought this action in an effort to foreclose federal tax liens against certain real property. Defendants John and Sophie Schuster deny any liability owing the Government in connection with the said real estate tax liens. Defendant Trumbull County , Ohio also claims to be a lienholder due to unpaid 1968 real estate taxes.

[Statement of Facts]

The following shall constitute this Court's findings of fact and conclusions of law pursuant to F. R. Civ. P. 52(a).

Temple and Edna McAllister (hereinafter taxpayers) purchased real estate under a land contract from Mr. George Gentithes and Mr. Pete Paidas on December 13, 1960, said contract being duly and properly recorded on December 20, 1960. On October 31, 1963 , taxpayers conveyed this property under another land contract to Champion Development Company, Inc., a corporation wholly owned by taxpayers. This transaction occurred without any consideration being paid and the deed of conveyance was not recorded.

On November 18, 1963 ; December 17, 1964 ; and October 27, 1965 , the Government filed and property recorded tax liens against the taxpayers in the total amount of $22,899.14. Believing the transfer by taxpayers to Champion Development Company, Inc., to be fraudulent, the Government made a jeopardy assessment against said company for transferee liability and prevailed in the tax court. Champion Dev. Co., Inc., [CCH Dec. 29,131(M)] T. C. Memo. 1968-201, 27 TCM 983 (1968).

In the interim and beginning after January 1964, taxpayers fell in arrears in their payments to Mr. Gentithes and Mr. Paidas. Finally, on April 4, 1967, Mr. Gentithes and Mr. Paidas declared the contract in default and gave taxpayers thirty days' notice as required under the land contract provisions.

Before the decision of the tax court in the Champion Dev. Co., Inc., case was rendered ( May 4, 1967 ) but after notice of default, taxpayers entered into an agreement with defendants John and Sophie Schuster for the sale of the real estate held by them. A warranty deed was signed by the taxpayers on May 17, 1967 , and recorded on May 23, 1967 , transferring the real estate to defendants. Mr. Gentithes and Mr. Paidas conveyed their interest in the property by warranty deed to the same defendants specifically excluding any warranty after December 13, 1960 . Thereafter defendants obtained a mortgage, which mortgage was properly recorded August 23, 1968 , in the amount of $50,000.00 from the Courtland Savings and Banking Company.

The federal tax liens filed November 18, 1963 ; December 17, 1964 ; and October 27, 1965 , were subsequently refiled and recorded on September 10, 1969 , and November 25, 1969 .

One of the taxpayers, Temple McAllister , died on April 2, 1968 . The remaining taxpayer executed a waiver under I. R. C. §6502(2), purporting to waive the statute of limitations. This suit was thereafter commenced on October 20, 1970 .

[Contract Purchaser's Interest]

The facts as outlined above present several basic issues to which this Court addresses itself. Before any tax liability could be incurred by the defendants, this Court must make a determination as to whether or not taxpayers Edna and Temple McAllister had any property interest to which the above-mentioned federal tax liens could attach. The Court finds that the taxpayers named in the instant action had a valid, equitable interest in the real estate in question. Under the laws of Ohio , "A contract for the sale of real estate where the vendee takes possession . . . gives to the vendee an equitable estate equal to the amount paid." Woloveck v. Schueler, 19 O. App. 210 (1922).

It is also clear that it is proper to apply Ohio law, rather than federal law, in determining the property interest of the taxpayer. See Acquilino v. United States, 363 U. S. 509 (1960); United States v. Durham Lbr. Co. [60-2 USTC ¶9539], 363 U. S. 522 (1960); Geisiuger v. East Ohio Gas Co., 27 O. O. 2d 31 (1963).

[Argument of Forfeiture]

Having thus determined that taxpayers did obtain a property interest in the real estate, the question then becomes whether or not the taxpayers, by falling in arrears of their payments, forfeited said interest, thus making it impossible for the federal government to attach any lien to the property. The Court finds that such a forfeiture did not occur. The land contract in question stated specifically in regards to default:

"In case default should be made by the parties of the second part . . . it shall and will be lawful for the parties of the first part, if they so elect, and only after giving thirty (30) days' notice in writing of such default and if such default has not then been paid to treat this contract as henceforth void. . . ." (Emphasis added.)

The language of the contract is clear and unequivocal. The evidence of the case indicates that although taxpayers fell in arrears of their payments, Mr. Gentithes and Mr. Paidas did not until April 4, 1967, declare the contract to be in default and thus to treat the contract as void. By this time the Government had properly filed and recorded all of their tax liens.

The Court notes that it was within the following thirty-day period after formal notice was given to the taxpayers, as provided by the land contract, that an agreement was reached between taxpayers, Mr. Gentithes and Mr. Paidas, and the defendants as to a sale of the land. The Court notes also that a warranty deed was signed by the taxpayers in turning over the property to defendants. The Court is of the opinion that had taxpayers forfeited all interests in the real estate in question, they would not have, nor could they have, signed a warranty deed purporting to transfer the property. Therefore, it is the conclusion of this Court that the taxpayers did have property interest to which the federal tax liens could attach, and that said federal tax liens, filed and recorded by the Government, attached to the property now owned by the defendants.

[Statute of Limitations]

Having made this determination, the Court next turns to the issue of the statute of limitations and its applicability to the case at bar. Both parties seem to agree that there is a six-year statute of limitations imposed by the Internal Revenue Code §6502, which reads:

"(a) Length of period.--Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--

(1) within 6 years after the assessment of the tax. . . ."

The Court agrees with the contention of the parties that there is a six-year statute of limitations. However, the evidence illustrates that the Government refiled these liens on September 10, 1969 , and November 25, 1969 . The Court takes notice of Section 6323 of the Internal Revenue Code, which section provides:

"(g) (3) Required refiling period.--In the case of any notice of lien, the term 'required refiling period' means--

(A) the one-year period ending 30 days after the expiration of 6 years after the date of the assessment of the tax. . . ."

The Court interprets this provision of the Internal Revenue Code as making mandatory the refiling of any lien from the period beginning with the fifth year, first month, up to and including the sixth year, first month. Taking this interpretation and applying it to the facts in the case at bar, the Court comes to the conclusion that both the refiled lien of September 10, 1969, and the refiled lien of November 25, 1969, were within the appropriate six-year statute of limitations. The Court, therefore, concludes that the liens filed and properly refiled against the property interest of taxpayers are valid.

[Constructive Notice of Liens]

This leaves but one remaining issue for the Court to consider, that being whether or not defendants in this action were aware or should have been aware of the tax liens attached to the real estate in question.

The Internal Revenue Code §6323 entitled, "Validity and priority against certain persons," states in regard to liens as follows:

"(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, holder of a security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

* * *

(f) Place for filing notice; form.--

(1) Place for filing.--The notice referred to in subsection (a) shall be filed--

(A) Under State laws.--

(i) Real property.--In the case of real property, in one office within the State (or the county, or other governmental subdivision) as designated by the laws of such State, in which the property subject to the lien is situated. . . ." (Emphasis added.)

Under Ohio Revised Code §317.09, the place for filing federal tax lien against real property is the county recorder's office where the real property is located. The facts of the instant case illustrate that the plaintiffs properly filed their liens in the county recorder's office in Trumbull County , Ohio . Therefore, this Court is of the opinion that defendants had constructive notice of monies due and owing the Government from taxpayers and that the property that the defendants received from taxpayers was encumbered.

The Court, therefore, comes to the conclusion that since the tax liens of the United States originally filed in 1963, 1964, and 1965 and subsequently refiled in 1969 are valid tax liens against defendants, defendants are, therefore, liable for the monies due from said liens. Costs assessed to defendants.

IT IS SO ORDERED.