6321
After Aquired Property page2

Dissenting
Opinion
BROWN,
Circuit Judge, dissenting:
This
is a startling result. Laws of Texas which are designed to protect
innocent persons dealing in faith on the revelations of title records
are twisted to permit the great national sovereign to take property from
one who is the acknowledged owner of it to apply on the tax debts of
another, the former owner who--as the trial Court found and this Court
does not dispute--has transferred 1
the property. I do not believe that Congress ever intended any such
result. I do not think that a Court should lend its hand to anything so
demeaning to a sovereign. 2
The
Federal Statute creates a lien only "upon all property and rights
to property * * * belonging to such person [taxpayer]." 3
Unless there is property belonging to the taxpayer, the Government's
lien is nonexistent. The Texas Statute 4
which protects business creditors and those parting with consideration
on the faith of apparent record title speaks in terms of the persons
against whom the conveyance is not good, such as bona fide purchaser,
judgment creditors, etc. Unlike this, the Federal Statute speaks in
terms of the origin of the lien. The tax lien arises, the tax lien comes
into being, only as to property or rights to property belonging to the
taxpayer.
Clearly
this property did not belong to Taxpayer. It had no right to such
property. True, under
Texas
law a judgment creditor had a superior claim against the purchaser whose
deed was imperfect for late recordation. But one thing clear is that
Taxpayer here had no right in or to the property. 5
Not a single
Texas
case could possibly be dredged up which in even the most remote way
would suggest the faintest hope that Maxwell, the vendor-taxpayer, had
any rights, legal or equitable, against anyone--Creamer, the public, or
the Publican to get the property back or assert any interest in it.
And
yet it is this--ownership by the taxpayer--which gives rise to the lien
for the National Government. Congress has not said that this Nation has
a tax lien against any and all property once owned by a delinquent
taxpayer to the same extent as some innocent purchaser or judgment
creditor might have under local recordation statutes.
Once
Congress so declares, Courts must enforce it. But the morality of the
Government's taking property which the Court's opinion reflects was sold
to, paid for by, and in equitable conscience and law belonged to a
stranger, is so disturbing to me that before the heavy hand of the tax
gatherer falls, it is for Congress to speak clearly to declare that this
is the conscience of the country.
I
therefore respectfully dissent.
1
See, e.g., "The deed had inadvertently failed to
include certain real property * * *. The question is whether the federal
tax lien attaches to the property erroneously omitted from the *
* * deed. * * * By inadvertence the contract failed to list or
describe * * * the six lots of land * * *." (Emphasis supplied)
2
I am at a loss to understand why there is any question about
jurisdiction. United States v. Morrison, 5 Cir., 1957, [57-2 USTC
¶9801] 247 F. 2d 285. Under F. R. Civ. P. 54(c) the power of the Court
is not affected by the particular section of the code cited in the
complaint or the magic words used to describe the relief sought.
3
26 USCA §6321, note 6 Court's opinion.
4
Tex.
Civ. Stat. Ann. art. 6627.
5
Texas
' Article 6627, set out in the Court's opinion, does speak in terms of
conveyances being "void as to all creditors and subsequent
purchasers * * * unless * * * recorded * * *" But the concluding
portion of the section is positive that "as between the parties * *
*" the conveyance "shall be valid and binding."
Edna Kathleen Terry, as Trustee, etc.,
Plaintiff v.
United States of America
, Defendant-Appellant, Professional Technical Representatives Money
Purchase Plan, Defendant-Respondent
U.S.
Court of Appeal of the State of
Calif.
, 2nd Appellate Dist., Div. One, B117644, B119401, 1/21/99, Affirming an
unreported SuperCt. of Calif. decision
[Code
Secs. 6321 and 6323
]
Tax liens: Priority against third parties: Attachment of: After-acquired
property: Trust assets: Beneficial interest: Personal v. real property
interests: Equitable conversion: When conversion occurs.--A lender's
security interest in a delinquent taxpayer's residual interest in trust
property was accorded priority over earlier IRS tax liens. Under state (
California
) law, the tax liens, which were filed in the county where the taxpayer
resided, attached only to his personal property and to any real property
located in that county. Although the trust's remaining asset was real
property, the IRS did not file its liens in the county where the
property was located. The taxpayer's interest in the trust was equitably
converted to a personal property interest, however, since the trust had
to sell the real estate to distribute the residue to the beneficiaries.
However, such conversion did not occur until the closing date of the
property's sale. As a result, the tax lien did not attach to the
taxpayer's interest until after it was assigned to the lender.
Nora M.
Manella, United States Attorney, Loretta C. Argrett, Assistant Attorney
General, Edward M. Robbins, Jr., Thomas D. Coker, Randolph L. Hutter,
for defendant-appellant.
W. Montgomery
Jones, Jones and Jones, for defendant-respondent.
Caution:
This court has designated this opinion as NOT FOR PUBLICATION. Consult
the Rules of the Court before citing this case.
ORTEGA, Acting
P.J.: In June 1990, Nellie Whitaker Beasley created a revocable trust
into which she transferred both her real and personal property. Beasley,
the trust's sole income beneficiary during her lifetime, used the trust
as a will substitute to pass her assets to her beneficiaries upon her
death, when the trust was to terminate. Beasley died on January 27,
1994. This appeal concerns two competing claims to the interest of
Beasley's grandnephew, Marvin Stone, a residual beneficiary of 30
percent of the trust residue. The two claimants are the United States of
America (on behalf of the Internal Revenue Service), 1
which had assessed $2.8 million in tax liens against Stone for
delinquent federal taxes, penalties, and interest, and Professional
Technical Representatives Money Purchase Plan (Plan), to whom Stone had
assigned his interest in the trust residue as additional security for a
loan.
For the
reasons that follow, we affirm the trial court order awarding Stone's
remaining residual interest of $83,985.72 to the Plan. We direct the Los
Angeles County Treasurer, who is holding Stone's interpleaded share of
the residue, to transfer the funds to the Plan.
BACKGROUND
Before
Beasley's death, a conservatorship was established over Beasley and her
estate. (Conservatorship of the Person and Estate of Nellie Whitaker
Beasley (Super. Ct. L.A. County, 1991, No. BP000175).) The trust
instrument was amended to require the trustee to obtain court approval
before selling, distributing, or transferring any trust assets.
Following Beasley's death, the court exercised its continuing
jurisdiction and supervision over the trustee's disposition of the trust
assets in accordance with Beasley's testamentary intent as expressed in
the trust instrument.
When Beasley
died, the trust had personal property valued at about $380,000 and real
property in
Los Angeles
valued at about $400,000. 2
On September 1, 1994, the court entered an order confirming the sale of
the trust's real property in
Los Angeles
. (The escrow on that sale did not close, however, until March 21,
1996.)
In December
1994, the trustee made an initial distribution to the residual
beneficiaries, including Stone. Assets remaining to be distributed to
the residual beneficiaries included the anticipated proceeds from the
sale of the real property (which was in escrow) and about $100,000 in
personal property.
Stone
anticipated that following the close of escrow, he would receive a
second distribution of about $90,000. On August 4, 1995, Stone assigned
to the Plan his interest in the remaining residue. 3
The assignment served as additional security for a $140,000 loan to
third parties, John and Heather Bomarito. In return for his assignment,
Stone received a portion of the Bomaritos' loan proceeds. With Stone's
approval, the Plan's attorney instructed the trustee to send the
attorney Stone's second distribution check.
Unbeknownst to
the Plan, the IRS had assessed $2.8 million in tax liens against Stone.
In 1993 and 1994, the IRS had filed notices of federal tax lien in
Monterey
County
, where Stone resides. 4
The bulk of the tax liens were filed before Beasley's death and well
before Stone assigned his interest to the Plan in August 1995. In 1996,
the IRS served the trustee with a notice of levy against Stone's
interest in the trust. 5
Escrow closed
on the real property sale on March 21, 1996. After receiving the
proceeds from that sale, the trustee filed a final report asking the
court to approve her final distributions to the residual beneficiaries,
except for Stone. Faced with the two competing claims to Stone's
interest, the trustee interpleaded Stone's share of $83,985.72 by
depositing that sum with the Los Angeles County Treasurer.
The IRS
(through the
United States of America
) petitioned for an order establishing its right to the interpleaded
funds. (In re The Nellie W. Beasley Revocable Trust (Super. Ct. L.A.
County, 1997, BP014805).) The IRS contended it was entitled to priority
over the Plan, having recorded its tax liens in 1993 and 1994, well
before the Plan received Stone's assignment as additional security for
the loan. The Plan, on the other hand, contended the notices of lien
were recorded in the wrong county with regard to the trust's real
property in
Los Angeles
. The Plan asserted the notices of lien filed in
Monterey
County
did not establish the IRS' priority as to Stone's interest in the
Los Angeles
property.
The trial
court ruled in favor of the Plan. It concluded that the notices of tax
lien filed in Monterey County were "of no force and effect inasmuch
as the Claimant, UNITED STATES OF AMERICA, failed to record the lien in
the County of Los Angeles, where the principal assets were located,
pursuant to the provisions of 26 U.S.C. Section 6323(f)." The trial
court awarded the Plan all of the deposited funds. This appeal followed.
CONTENTIONS
ON APPEAL
(I) The IRS
contends its notices of tax lien attached to Stone's interest in the
trust's real property before the Plan's security interest arose. The IRS
asserts it is thus entitled to the whole of the interpleaded funds.
(II)
Alternatively, the IRS contends its notices of tax lien attached to
Stone's interest in the trust's personal property before the Plan's
security interest arose. The IRS asserts it is thus entitled to a
portion of the interpleaded funds.
DISCUSSION
I
Stone resided
in
Monterey
County
, but the trust's real property was located in
Los Angeles
County
. As a general rule, filing the notice of tax lien in
Monterey
County
would have had no effect with regard to the trust's property in
Los Angeles
County
. Both parties agree that, as a general rule in
California
, a tax lien notice recorded in one county has no effect with regard to
real property located in another county. The IRS states in its opening
brief. "Under I[nternal ]R[evenue ]C[ode] section 6323(f) and
applicable California law, the liens must be filed with the office of
the recorder for the county in which the real property is located (where
the [trust] assets involved are real property) or in which the Trust
beneficiary resides (where the [trust] assets involved are personal
property)."
The IRS
contends, however, that under the doctrine of equitable conversion,
Stone's interest in the trust's real property was converted, upon entry
of the order confirming sale, from a real property interest to a
personal property interest. Under the IRS' theory, the tax liens
attached to Stone's personal property interest in the
Los Angeles
property as of the date of the order confirming sale.
We will first
ascertain the nature of Stone's interest in the trust assets on the date
of Beasley's death. We begin by noting that in federal tax lien cases,
" 'Property' is a concept which draws its definition from state,
not federal, law. Aquilino v. United States [60-2 USTC ¶9538],
363 U.S. 509, 512-13 . . . (1960)." (Cavanaugh v. Cavanaugh
(B.R. Ct., N.D. Ill., E.D. 1993) 153 B.R. 224, 228.) Accordingly, we
took to
California
law to determine the nature of Stone's property interest in the trust
assets.
Under
California
law, when Beasley transferred her real property to the revocable trust,
she transferred legal title to the trustee. Beasley still retained,
however, her beneficial ownership of the real property as sole
beneficiary of the trust during her lifetime. This conclusion is
consistent with
California
real property tax law. When Beasley transferred her real property to the
revocable trust, that transfer did not constitute a change of ownership
to trigger a reassessment because the rights conferred to the residual
beneficiaries were entirely contingent during Beasley's lifetime. "
'If the trust is revocable it is excluded [from reassessment] because
the rights conferred are contingent. If the trustor is the sole
beneficiary during his lifetime, his retained interest is considered to
be "substantially equivalent in value" to the fee interest in
any real property covered by the trust. He is therefore the true owner
and the change in ownership does not occur until the property passes to
the remaindermen on the trustor's death.' " (Empire Properties
v. County of Los Angeles (1996) 44 Cal.App.4th 781, 788, quoting
January 1979 Report of the Task Force on Property Tax Administration
commissioned by the Legislature after passage of Proposition 13.)
When Beasley
died on January 27, 1994, the revocable trust became irrevocable and was
terminated under the express provisions of the trust instrument. (Empire
Properties v. County of Los Angeles, supra, 44 Cal.App.4th at pp.
786-787.) At that time, Stone acquired a present beneficial interest in
the trust's residual assets, including the trust's real property. The
question we face is whether Stone's beneficial interest in the trust's
real property is properly classified as a personal or a real property
interest.
Ordinarily,
because the asset at issue is real property, Stone's beneficial interest
would be classified under
California
law as a real property interest. The IRS contends that upon entry of the
order confirming sale, however, Stone's beneficial interest in the real
property was equitably converted into a personal property interest.
Under the doctrine of equitable conversion, "Where real property is
conveyed to a trustee with directions to sell in any event it will be
treated in equity as personal property. But where the property in kind
is, or may be, conveyed to the beneficiary no such equitable conversion
results." (Lynch v. Cunningham (1933) 131 Cal.App. 164,
173.)
Although the
trustee theoretically possessed discretion either to sell the real
property or convey it in kind, Beasley's gifts to the residual
beneficiaries were not so large as to afford the trustee the option of
giving any single beneficiary the real property in whole. Stone, with a
30-percent share of the residuary, received the largest gift of all. By
the time the real property was in escrow, Stone knew he was to receive
only an additional $90.000, less than half the value of the
Los Angeles
property. When Stone assigned his interest in the trust's remaining
assets, both he and the lender knew the real property was going to be
sold and Stone was to receive only a portion of the sale proceeds.
We agree with
the IRS that the trustee, by entering into a contract for sale and
obtaining an order confirming sale, had legally bound the trust to sell
the property. "[W]hen a binding agreement of sale is entered into
by the parties, an equitable conversion is worked; the purchaser becomes
the equitable owner of the land and the seller the owner of the purchase
price." (Vigli v. Davis (1947) 79 Cal.App.2d 237, 254; Lynch
v. Cunningham, supra, 131 Cal.App. at p. 173.)
That is not to
say, however, that the conversion occurred upon the date of the order
confirming sale. Prior decisions have held that the conversion occurs on
the closing date, whether or not the sale takes place. " 'The rule
of equitable conversion merely amounts to this, that where there is a
mandate to sell at a future time, equity, upon the principle of
regarding that done which ought to be done, will for certain purposes
and in aid of justice consider the conversion as effected at the time
when the sale ought to take place, whether the land be then really sold
or not.' " (Vigli v. Davis, supra, 79 Cal.App.2d at p. 255.)
The IRS would
have us advance the date of sale in this case to the date of the order
confirming sale. We see no reason to depart from the existing rule. If a
buyer defaults before the closing date, the court may vacate its order
confirming sale and direct the trustee to find another buyer. Although a
defaulting buyer would remain subject to liability for losses, including
consequential damages, caused by the default (Prob. Code. §§10350,
10351), the buyer would not be obligated to purchase the property. We
conclude, applying the usual rule, that the IRS' preexisting tax liens
immediately attached to Stone's personal property interest upon the date
escrow closed, March 21, 1996. 6
Before the IRS
liens could attach, however, Stone had assigned his interest to the Plan
on August 4, 1995. Accordingly, the IRS' liens are not entitled to
priority. "Under federal tax law, a contest between the federally
created tax lien and a competing lien is resolved by the first-in-time,
first-in-right rule. United States v. City of New Britain [54-1
USTC ¶9191], 347 U.S. 81, 85 . . . (1954)." (Cavanaugh v.
Cavanaugh, supra, 153 B.R. at p. 228.) This priority rule applies
"unless Congress has created a different priority rule to govern
the particular situation." (Petro Source Partners, Ltd. v. 3-B
Rattlesnake Refining (1990) Ltd., supra [93-1 USTC ¶70.029; 94-1
USTC ¶50,053], 827 F.Supp. at p. 1269.) There is no contention that a
special priority applies here.
We hold that
the federal tax liens are inferior to the Plan's previously acquired
assignment of Stone's interest in August 1995. Accordingly, the trial
court correctly awarded the interpleaded funds to the Plan.
II
The IRS
alternatively contends that it "is entitled to an award of
$55,010.65, or 65.5 percent, of the funds deposited with the Los Angeles
County Treasurer. This is because at the time of Beasley's death
$380,704.90, or 65.5 percent of the total Trust assets worth
$580,996.57, consisted of cash, stocks, and bonds, i.e., personal
property. This fact is reflected in the Trustee's Final Report--to
which no party filed an objection and which the Superior Court
approved--and nothing in the record contradicts it."
The trustee's
final report, however, was not filed until July 31, 1996, several months
after the escrow on the sale of real property had closed on March 21,
1996. The final report indicated that "a significant portion of the
residue of the Trust was distributed to the residuary
beneficiaries" pursuant to a court order entered on December 29,
1994. That order and the resulting initial distribution were made while
the real property transaction was still in escrow. Accordingly, the
initial distribution could not have been made with proceeds traceable to
the sale of the real property, and must necessarily have been made with
personal property assets. It thus follows that the IRS' reliance upon
the final report to show the ratio of real and personal property held by
the trust at the time of Beasley's death is misplaced. Even assuming
there was once a 65.5 to 34.5 percent ratio of real to personal property
assets when Beasley died, that ratio no longer existed when the
trustee's final report was filed, due to the initial distribution made
by the trustee while the real property transaction was in escrow.
The IRS has
failed to demonstrate that the trial court's award of the whole of the
interpleaded funds to the Plan was erroneous. We rely on the familiar
rule that, " 'A judgment or order of the lower court is presumed
correct. All intendments and presumptions are indulged to support it
on matters as to which the record is silent, and error must be
affirmatively shown. . . .' [Citations.]" (Denham v. Superior
Court (1970) 2 Cal.3d 557, 564.)
DISPOSITION
We affirm the
order awarding the interpleaded funds to the Plan. We direct the county
treasurer to release the funds accordingly. The Plan is entitled to
costs on appeal.
We
concur:
VOGEL (Miriam A.), J.
DUNN, J. *
1
For the sake of convenience, all further references to the Internal
Revenue Service (IRS) are meant to include the appellant
United States
.
2
This initial $400,000 valuation was only an estimate by the trustee of
the property's value. According to the trustee's final report, the
$400,000 valuation was "arbitrarily placed on the property for
purposes of this Trust by [the trustee], without benefit of any
appraisal, at the time of the creation of this Trust in 1990."
Ultimately, the property was sold in 1996 for about $200,000. The
trustee's final report explained that the property value "declined
substantially because of the effects of both the general real estate
depression in Southern California as well as the civil unrest which
occurred in the area of
Los Angeles
County
in which the property was located." In her final report, the
trustee reported a loss (for accounting purposes) on the sale of
$199,708.33.
3
The trust instrument contained a spendthrift clause that prohibited the
beneficiaries from selling, assigning, pledging, mortgaging,
encumbering, alienating, or impairing all or any part of their interest
in the trust or in the trust's principal or income. The Plan argued
successfully below that the spendthrift clause was extinguished upon
Beasley's death, when the trust terminated. The IRS does not challenge
on appeal the trial court's ruling on this point. Accordingly, we will
not address it.
4
When a federal tax liability is assessed, a lien automatically attaches
as of the date of the assessment unless the liability is paid within the
allotted time. (26 U.S.C. §6321.) When a notice of federal tax lien is
filed, it gives "notice to the rest of the world that the IRS has a
tax lien against the taxpayer." (Petro Source Partners, Ltd. v.
3-B Rattlesnake Refining (1990) Ltd. (W.D. Tex. 1993) [93-1 USTC ¶70,029;
94-1 USTC ¶50,053], 827 F.Supp. 1265, 1268.) The notice of tax lien
does not affect the validity of the lien itself. It does, however,
affect the priority of the lien as against the claim of a third party
against the taxpayer's property. (Id. at pp. 1268-1269.)
5
The IRS does not, as a general rule, have to levy against the taxpayer's
property in order to perfect its liens. In most cases a tax lien is
perfected when the notice of federal tax lien is filed. (Petro Source
Partners, Ltd. v. 3-B Rattlesnake Refining (1990) Ltd., supra [93-1
USTC ¶70,029; 94-1 USTC ¶50,053], 827 F.Supp. at p. 1269.)
6
When notices of tax lien are filed, they attach and " 'continue[to
exist] until the taxpayer satisfies the debt, or the statute of
limitations runs.' Texas Commerce Bank[-
Fort Worth
, N.A. v.
United States
(5th Cir. 1990)] [90-1 USTC ¶50,155], 896 F.2d[ 152.] 161; 26
U.S.C. §6322." (Petro Source Partners, Ltd. v. 3-B Rattlesnake
Refining (1990) Ltd., supra [93-1 USTC ¶70,029; 94-1 USTC ¶50,053],
827 F.Supp. at p. 1268.)
*
Judge of the Municipal Court for the Long Beach Judicial District
assigned by the Chief Justice pursuant to article VI, section 6 of the
California Constitution.
In the Matter of Succession of Bernice
Addison Brumfield.
United States of America
, Petitioner v. Noel A. Brumfield, William Brumfield, Vincent Brumfield,
and Succession of Bernice Addison Brumfield, Respondents
U.S.
District Court, Mid. Dist. La., Civ. 96-7508-B-M1, 9/30/98
[Code
Secs. 6321 and 6323
]
Tax liens: Validity: Attachment: After-acquired property: Inherited
property: Renunciation of bequest, consideration for: Constructive or
tacit acceptance.--A federal tax lien attached to two parcels of real
estate inherited by a delinquent taxpayer despite his valid renunciation
of the bequest. Under state (
Louisiana
) law, he was deemed to have actually accepted the properties. While
Louisiana
statutes provide that a valid renunciation will retroactively preclude a
transfer of ownership from a decedent to a renouncing heir, renunciation
of the heir's rights to a co-heir for a "price" can
nonetheless result in an irrevocable acceptance. The taxpayer's receipt
of a release from his co-heir for liabilities for inheritance taxes and
monetary claims was a valuable consideration, or "price," for
his renunciation. Thus, the taxpayer had an interest in the properties
that dated back to the decedent's death and to which the outstanding
federal tax liens attached despite his renunciation
Lyman Edgar
Thornton III,
Baton Rouge
,
La.
70801
, for plaintiff. Greg Gouner, 5515 S. Sherwood Forest Blvd., Baton
Rouge, La. 70816, John R. Rarick, Rarick & Brumfield, 9821 Royal
St., St. Francisville, La. 70775, Cherie Rarick Brumfield, 435 W.
Ardenwood Dr., Baton Rouge, La. 70806, David L. Guerry, Daniel D.
Holliday III, 8550 United Plaza Blvd., Baton Rouge, La. 70809, for
defendants.
RULING
POLOZOLA,
Chief District Judge:
This case
requires the Court to resolve important issues involving the rights of
the Internal Revenue Service ("IRS") against a taxpayer's
interest in the estate of his mother. There are now five motions pending
before the Court. 1
The Court has also questioned its subject matter jurisdiction. For
reasons which follow, the Court finds it does have subject matter
jurisdiction. The Court also finds that the tax lien of the IRS attached
to the properties of the taxpayer at the time of his mother's death.
Therefore, the
United States
is entitled to foreclose on the taxpayer's property interest and sell
the real estate at a judicial sale.
I.
Background
Noel A.
Brumfield owed income taxes for 1983 and 1984. The IRS assessed these
taxes on December 2, 1985 and February 6, 1993, respectively. Noel A.
Brumfield, his brother William Brumfield, his son Vincent Brumfield, and
the succession of his mother, Bernice Addison Brumfield, were named as
defendants in the federal foreclosure action filed by the
United States
in 1996. Later, the succession suit was removed from the Nineteenth
Judicial District Court for the Parish of East Baton Rouge and
consolidated with the federal suit.
The
United States
then filed a contempt action against Noel A. Brumfield regarding certain
properties, located in the
Cayman Islands
, in which Noel A. Brumfield possessed an interest. Noel A. Brumfield
was held in civil contempt of court on July 31, 1996 and has been in
custody since that time.
There is
little dispute in the underlying facts except for the validity of the
renunciation allegedly made by Noel A. Brumfield of his interest in his
mother's estate.
As previously
stated, the IRS assessed income taxes for 1983 and 1984 against Noel A.
Brumfield on December 2, 1985 and on February 6, 1993. The
United States
filed a Notice of Federal Tax Lien with respect to Noel A. Brumfield's
unpaid tax liabilities in East Baton Rouge Parish,
Louisiana
on July 19, 1993.
Despite notice
of the assessments and demand for payment, Noel A. Brumfield has refused
to pay the full amount of the assessments described above. As of July
19, 1993, Noel A. Brumfield remained indebted to the United States in an
amount exceeding $2.4 million, plus statutory additions according to
law. Additional unassessed interest and all statutory additions thereon
as provided by law continue to accrue on this liability, which exceeds
$3.5 million.
Bernice
Addison Brumfield died testate on November 8, 1995. On November 14,
1995, the state court ordered the olographic will of Bernice Addison
Brumfield to be executed according to law. The will of Bernice Addison
Brumfield granted to her son, William Louis Brumfield, everything which
she possessed "except the following two properties; the six and
one-half acres with improvements located at 11136 Julia Aubin Lane,
Baton Rouge, La. and the house and lot located at 10590 Toledo Bend,
Baton Rouge, La. which I leave and bequeath to my grandson Noel Vincent
Brumfield II with Noel Addison Brumfield usufruct." 2
Despite this
specific bequest and his right to a "forced portion" in the
assets of his mother's succession under
Louisiana
law, Noel A. Brumfield executed a document on July 15, 1996 which
purported to renounce his usufruct interest in the two subject
properties. On July 28, 1996, Noel A. Brumfield executed another
document which purported to renounce both his usufruct interest in the
two subject properties and his "forced portion" in the
succession's assets.
The state
court had previously granted a judgment of possession to the legatees
for all of the succession property except for the two parcels which are
the subject of the petition by the
United States
to foreclose, thus leaving the disposition of these two properties as
the only matter pending in the succession. The
United States
then intervened in the state court succession case as a creditor of Noel
A. Brumfield. Thereafter, the
United States
filed a petition in state court to foreclose the tax liens on the
usufruct interest of Noel A. Brumfield in the
Aubin Lane
and Toledo Bend properties. The succession action was removed to federal
court. Thereafter, this Court denied defendant's motion to remand. The
case is now before the Court on the pending motions.
In its motion
for summary judgment and motion for default judgement, the United States
seeks an order "determining that the tax liens of the United States
encumbered, as of November 8, 1995, Noel Brumfield's interests in the
assets of the Succession and specifically in the two parcels of property
bequeathed to him under his mother's will." 3
The United States also seeks an order allowing it to foreclose its tax
liens on Noel A. Brumfield's interest in the succession through a
judicial sale.
II.
Subject Matter Jurisdiction
This Court
clearly has subject matter jurisdiction under 28 U.S.C. §1331 to
determine whether or not the government has a lien on Noel A.
Brumfield's "forced portion" and his usufructs over the two
pieces of real estate. 4
The Court also has subject matter jurisdiction over the underlying
issues of the validity and effect of the purported renunciations
executed by Noel A. Brumfield. The basis for the government's
foreclosure suit is 26 U.S.C. §6321, which provides for a lien on the
property of the delinquent taxpayer.
The more
difficult question regarding jurisdiction is whether this Court can
exercise jurisdiction over the property and whether it can subsequently
order its transfer in accordance with the Court's decision finding that
the government has an enforceable lien on the property. This issue
implicates the "probate exception" cases cited by the
Brumfields in their prior memoranda. 5
Noel A. Brumfield's forced portion and the proceeds from the sale of the
properties, until adjudicated by the state court handling the
succession, remain property of the succession. 6
The probate exception cases hold that a federal court has no
jurisdiction to probate a will or administer an estate. However, a
federal court may exercise its jurisdiction to adjudicate rights in
estate property provided its judgment does not interfere with the state
court's possession of the property or its probate proceedings, except
for the state court's obligation to accord full faith and credit to the
federal court's judgment regarding the lien. 7
While the
government may obtain a judgment from this Court recognizing the
validity of its lien on the property, this Court may not order the
transfer of the property nor exercise control over the property because
either action would constitute an exercise of control over property
under probate. Therefore, this Court's jurisdiction is limited to
declaring the validity or invalidity of the government's lien and
leaving the
United States
to assert this Court's judgment as res judicata in the state court
succession proceedings.
Thus, the
proper course for this Court seems to be an order transferring the sales
proceeds from the registry of this Court to the registry of the state
court handling the succession. The prevailing party could then assert
this Court's judgment regarding the validity of the government's lien in
the ongoing probate proceedings in state court. Whether it is really
necessary to transfer the proceeds to the state court is unclear since
the government has no objections to this Court's jurisdiction over the
proceeds and since the Brumfields requested, via motion, that the
proceeds be deposited into the registry of this Court. To avoid a
problem, the Court will schedule a separate hearing to determine which
court should distribute the proceeds from the sale.
III.
The Validity of the Government's Tax Lien
As noted
earlier, there are five pending motions before the Court. These pending
motions can be resolved by the Court's ruling on the issue of whether or
not the
United States
has a valid tax lien on Noel A. Brumfield's property interest in the
succession.
The resolution
of this issue requires an analysis of both
Louisiana
succession law and federal law. It is the ownership of the succession
property which the Court is concerned with on these motions. Ownership
is transmitted at the moment of death to the heirs and legatees. 8
Thus, Noel A. Brumfield acquired the forced portion and the two
usufructs on November 8, 1995, the date of Bernice Brumfield's death.
The
United States
' tax lien, which was filed against Noel A. Brumfield pursuant to 26
U.S.C. §6321, arose at the time of its assessments of Noel A.
Brumfield's deficiencies on December 2, 1985 and February 6, 1993. 9
This tax lien attached to "all property and rights to
property" belonging to Noel A. Brumfield, whether owned at the time
of the assessments or subsequently acquired. 10
The Court must look to state law to determine whether and when Noel
owned "property" or "rights to property." 11
As noted
above, it is clear that Noel A. Brumfield acquired the right to his
forced portion and to the usufructs at the moment Bernice Brumfield died
on November 8, 1995. Since Noel acquired "rights to property"
on November 8, 1995, the conclusion would seem to be that the
United States
' tax lien attached to the property on the same date and is effective as
of the date of the assessments. 12
However,
Louisiana Civil Code article 946, which was cited by the Brumfields in
their prior memoranda, complicates the Court's resolution of the issue
and is at the crux of the dispute between the parties. Article 946
provides that while Noel A. Brumfield is said to acquire the right to
his forced portion and to the usufructs at the time of Bernice
Brumfield's death, such right is "in suspense" until he
decides whether to accept or renounce the part of the
succession that has fallen to him.
The article
further provides that if Noel A. Brumfield accepts his part of the
succession, he is deemed to have succeeded to such part from the moment
of Bernice Brumfield's death. However, if he renounces such part, he is
considered as never having received it. The Court cannot overlook
the retroactive nature of this code article.
Louisiana
law provides that no one may be compelled to accept a succession and
that one may accept or renounce a succession. 13
The
Brumfields, relying on this retroactive language and on the Fifth
Circuit's recent decision in Leggett v. United States, 14
argue that the July 28, 1996 renunciation by Noel A. Brumfield of his
rights to the property was valid. Thus, the Brumfields argue that under
article 946, it must be that Noel A. Brumfield never succeeded to the
property. Accordingly, the Brumfields argue that since Noel is deemed to
never have had any rights in the property, the government's tax liens
could not attach to the property.
In Leggett,
the Fifth Circuit was confronted with a similar fact scenario in which a
delinquent taxpayer renounced her succession rights in an alleged
attempt to prevent the government's tax lien from attaching to her
rights. Applying
Texas
succession law containing a retroactivity provision similar to
Louisiana
's article 946 and an immediate vesting provision similar to
Louisiana
articles 940 and 1626, the Fifth Circuit attempted to determine whether
the taxpayer ever had a property interest in the succession property to
which the government's lien could attach. The court noted the contradiction
between the two provisions of
Texas
law which on the one hand provided that the heir was vested with a
property right from the moment of death, while on the other hand
provided that the renouncing heir never had a property interest at all. 15
There is a similar contradiction between article 946 and articles 940
and 1626 of the Louisiana Civil Code.
The Fifth
Circuit noted two ways to resolve this apparent contradiction: the
"transfer theory" and the "acceptance-rejection
theory". 16
The court then examined
Texas
succession law and noted that under
Texas
law, like
Louisiana
law, the heir had the right to accept or reject the succession. 17
The court then concluded that the
Texas
courts have followed the "acceptance-rejection theory". 18
Based on this analysis, the Fifth Circuit concluded that the taxpayer
had not accepted the bequest but rather had executed a valid
renunciation and, accordingly, the taxpayer never had a property right
to which the tax lien could attach. 19
The
United States
argues, based on the language of article 946, that its tax lien against
Noel A. Brumfield attached at the time of Bernice Brumfield's death and,
thus, federal law controls thereafter. It further argues that since
federal law controls once the lien attached to the property, state law
(namely, Noel's renunciation and the retroactivity provision under
article 946) could not defeat the attachment of the lien. The United
States relies on United States v. Comparato, 20,
which cites the Supreme Court's decisions in United States v. Rodgers
21
and United States v. Bess. 22
The
New York
successions provisions noted in the Comparato opinion are also
similar to
Louisiana
's provisions. 23
The Fifth
Circuit in Leggett distinguished Comparato, noting that
New York
law was at issue and that the
New York
courts had held heirs to have a property interest in the right to accept
or reject the inheritance to which the federal tax lien attached. 24
Therefore,
New York
law follows the so-called "transfer theory". 25
Thus, the delinquent taxpayers in Comparato could not destroy the
property right by renouncing the underlying succession.