Real property Page6

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 (37) With respect to the Honolulu Tower condo, it is clear that the condo was first leased and then purchased by McKenzie through the TRC Alaska for the benefit of McKenzie. Several documents and payments made by McKenzie using his own checking account support the finding that McKenzie merely used the corporation as his agent for the purposes of securing an abode for himself.

(38) McKenzie's "management" of the Honolulu Tower condo in connection with his purchase and occupation of the Wailana condo again demonstrates the type of one-sided domination of the corporations by McKenzie which supports a finding of an identity of interest between McKenzie and the corporations. As a matter of law, the Court finds that for purposes of purchasing the Honolulu Tower condo, McKenzie was the alter ego of TRC Alaska.

(39) In light of the foregoing and in view of the tax obligations shirked by McKenzie, the Court finds that it would be unjust to allow the corporate fiction of TRC Alaska to stand in the way of the recovery of amounts due from Mc-Kenzie to the United States. Plaintiff has not challenged the validity of the Federal Tax Lien, but rather has contested the propriety of the application of the tax lien as against the corpo-ration. The Court finds that the tax lien is properly logged as against TRC Alaska's Hono-lulu Tower condo because with regard to the purchase and holding of that condominium, McKenzie was the alter ego of the corporation. To permit McKenzie to avoid the effect of the tax lien because of the corporate form of TRC Alaska would be to sanction fraud and injustice.

(40) Good cause appearing therefor, the Court HEREBY DENIES plaintiff Travelers Rent-A-Car of Alaska's motion for summary judgment.

(41) In its papers, the United States failed to mention the role that counterclaim defendant Robert C. Smith played in these events. In fact, no mention of Mr. Smith is made anywhere in defendant's papers. Accordingly, the Court makes no findings of fact or law with respect to counterclaim defendant Robert C. Smith.

(42) Good cause appearing therefor, the Court HEREBY GRANTS defendant United States ' motion for summary judgment as against plaintiff Travelers Rent-A-Car of Alaska and counterclaim defendant Bruce Arlen McKenzie.

(43) To the extent to which any Finding of Fact herein shall be found to be a Conclusion of Law, it shall be deemed a Conclusion of Law.

(44) To the extent to which any Conclusion of Law herein shall be deemed to be Finding of Fact, it shall be deemed a Finding of Fact.

IT IS SO ORDERED.

 

 

 

Maria Elisa Rodriguez, et al., Petitioners v. Escambrón Development Corp., et al., Respondents

(CA-1), U. S. Court of Appeals, 1st Circuit, No. 83-1439, 740 F2d 92, 8/1/84, Affirming and remanding unreported District Court decision

[Code Secs. 6321 and 6323]

Collection: Lien for taxes: Third party: Tax liens under state law: Priority.--Title to real estate, acquired by acquisitive prescription (usucapion), is subject to a federal tax lien which attached to the property while the right to take title was inchoate. Although state law, in this case Puerto Rican law, governs the existence and nature of property rights, including the vesting of title by acquisitive prescription, once these rights have been determined federal law governs the priority and extinguishment of federal tax liens. The Court held that the transfer of title to the plaintiffs did not subordinate the tax lien to plaintiffs' rights, because the plaintiffs' right to take title was inchoate when the tax lien was created. Federal law does not provide for subordination by use of the legal fiction of retroactive prescription. In addition, the court held the tax lien was not extinguished by the transfer of title to the plaintiffs since a valid federal tax lien cannot be extinguished merely by a transfer or conveyance of an interest in the property. The District Court's determination was affirmed and the case remanded for further proceedings.

David Rive Rivera, Calderon, Rosa-Silva & Vargas, for petitioners. Daniel F. Lopez-Romo, United States Attorney, Glenn L. Archer, Jr., Assistant Attorney General, Michael L. Paup, John J. McCarthy, Carlton D. Powell, Department of Justice, Washington, D. C. 20530, for respondents.

Before CAMPBELL, Chief Judge, WISDOM, ^* Senior Circuit Judge, and BREYER, Circuit Judge.

WISDOM, Senior Circuit Judge:

The question this appeal presents is whether a title, acquired by acquisitive prescription (adverse possession), is subject to a federal tax lien against the prior owners of the land. The district court held that under the law of Puerto Rico acquisitive prescription will not extinguish an existing nonpossessory interest in land; alternatively, the court held that such an extinguishment would conflict with federal law. The court concluded that the possessors' rights are subject to the tax lien. Rodriguez v. Escambrón Development Corp., 556 F. Supp. 703 (D. P. R. 1983). We affirm. The effect and extinguishment of a federal tax lien are matters of federal law. Under federal law, a federal tax lien continues to encumber land, even after the legal transfer of the land.

I.

In the words of the district court, this case began as "a relatively simple and brief" action to quiet title. The plaintiffs are the family of the late Jose Rivera Mulet. Rivera Mulet was the "Mayor-domo", or manager, of a 42-cuerda ¹ farm in Bayamón owned by Félix Benítez Rexach and his wife Lucienne d'Hotelle de Benítez Rexach. The plaintiffs allege that in 1945 Benítez Rexach "gave" Rivera Mulet 9.897 cuerdas of the farm to live on, and they have lived on that land in "uninterrupted adverse possession" ever since. Benítez Rexach was a well-known engineer and builder. He and his wife became embroiled in prolonged federal income tax litigation that eventually led to findings of deficiencies against them amounting to several million dollars. ² The United States assessed the deficiency at issue here in 1963. This assessment created a lien against the property of the taxpayers. ³ In 1964 the United States filed two civil actions for the purpose of foreclosing on the tax liens against various properties, including the Bayamón farm, belonging to Benítez Rexach, his wife, and various companies owned by them. The government also filed a notice of lis pendens. The court entered judgment for the United States in 1975 and 1977, and ordered foreclosure on the liens in March 1978.

In July 1978, the plaintiffs filed a complaint in the Superior Court of Puerto Rico against Escambrón Development, one of Benítez Rexach's companies, to quiet title to the 9.897 cuerdas on the ground of usucapion (acquisitive prescription) by possession for more than thirty years. ⁴ The United States intervened, asserting the tax liens, and removed the case to federal court. The plaintiffs and the United States both moved for summary judgment. The court denied the motions. The court held that the plaintiffs had not proved the elements of their claim for usucapion and that any rights the plaintiffs did establish would be subject to the federal tax liens. The plaintiffs then asked the district court to certify an interlocutory appeal under 28 U. S. C. §1292(b) (1982). The court certified the question as one of controlling importance, and this court granted permission to appeal. We assume, for the purposes of deciding the present appeal, that the plaintiffs have met the Civil Code's requirements for acquisitive prescription.

II.

The plaintiffs contend that, under the civil law of Puerto Rico , when they completed the thirty-year prescriptive period they acquired title to the land free of all encumbrances. They base this argument on the retroactive effect of completed prescription. As Planiol, one of the leading French commentators, explains this principle, "When prescription is completed, the possessor is deemed to be owner, not merely from the last day of the delay, but retroactively from the moment when the prescription began to run." M. Planiol & B. Ripert, Treatise on the Civil Law, vol. 1, pt. 2, no. 2708, at 599 (La. State Law Inst. trans. 1959). Planiol states that the consequences of the retroactivity doctrine are: to consolidate title in the possessor; to secure the possessor's right to fruits collected during the prescriptive period; to vest ownership in a possessor who marries during the prescriptive period, rather than in the marital community; and to validate interests in the land granted by the possessor during the prescriptive period. Id. at 599-600. In discussing this last effort, Planiol writes,

"Third parties who had acquired from the possessor real rights upon the immovable (servitudes, mortgages, etc.) during the duration of prescription, find them retroactively consolidated. It is just as if they had been granted by the true owner. . . ."

Id. at 600. Planiol does not discuss what happens to real rights created by or against the true owner during the prescriptive period. The plaintiffs interpret the principle of retroactivity to mean that those rights are eliminated. They argue that when the thirty years prescription was completed in 1975, the law made them owners of the farm after 1945, when they first took possession. Accordingly, they argue, the government's tax lien was ineffective because in 1963, when the lien arose, the plaintiffs "already" owned the farm.

Since 1979 the Mortgage Law of Puerto Rico has explicitly provided:

"Real rights limiting ownership which do not imply possession, acquired on someone else's right by a third party . . . shall not be affected by the out-of-registry usucapion of the right on which they exist."

30 L. P. R. A. §2357 (Supp. 1982).

Plaintiffs admit that this statute would prevent prescription of the lien now, but argue that the adoption of this statute in 1979 is strong evidence that, before 1979, nonpossessory liens were subject to usucapion. The district court rejected this argument after reviewing the opinions of a number of Spanish commentators, including Castán Tobeñas, Diez-Picazo, Roca Sastre, Puig Brutau, and Scaevola, all of whom agree that a nonpossessory real right is not susceptible to extinguishment by acquisitive prescription. 556 F. Supp. at 707-09. On appeal the plaintiffs contend that these commentators based their opinions on a 1944 amendment to the Spanish Civil Code that is substantially equivalent to the 1979 amendment to the Puerto Rico Mortgage Law quoted above. The plaintiffs therefore argue that the district court effectively based its decision on the present law of Puerto Rico rather than that in effect in 1975. They submit that the law of Puerto Rico before 1979, and of Spain before 1944, gave an adverse possessor ownership free of any interests granted by or asserted against the prior owner.

There is some authority to support the plaintiff's position. The plaintiffs cite the opinion of Guaroa Velázquez, a noted professor of law at the University of Puerto Rico , who wrote in 1937:

"Important point. The title created by prescription is retroactive to the day possession began. The possessor who has taken by use [usucapido] can, therefore, invoke his right against the third party beginning that day. If, therefore, during that time, a creditor of the true owner acquired against the latter a mortgage or a privilege and filed them, this right will not be against the possessor who has taken by use. On the other hand, the real rights granted by the simple possessor will be consolidated by virtue of usucapion."

Velázquez, Los Derechos Reales Principales 326 (1937) (our translation). Acquisitive prescription represents in part a civil law policy in favor of simple titles. As the court stated in Union Producing Co. v. Parkes, 40 F. Supp. 163 (W. D. La. 1940):

"In order to insure simple and unentailed or uninvolved titles to real estate, it is the policy of [the civil] law, that there should be no encumbrances which shall prevent the running of the two major periods of 10 and 30 years over which a complete and indefeasible title to all of the elements of ownership in land may be acquired. . . .

`Our laws are marked by the simplicity of the titles by which property is held, and are utterly opposed to the suspended and uncertain ownership incident to substitutions, or the system of entails of the Common law. * * *' Succession of McCan, 48 La. Ann. 145, at page 158, 19 So. 220, at page 221 [(1895)]."

40 F. Supp. at 166.

It would be possible to extract from these comments a civil law policy to give the possessor who has had the benefit of prescription a title free of encumbrances for which he is not responsible.

On the other hand, that the Spanish and Puerto Rican codes were amended explicitly to prevent prescription of non-possessory liens is by no means conclusive evidence that such liens were previously subject to prescription. Even before the 1979 amendments, article 35 of the Puerto Rico Mortgage Law of 1893 provided:

"Prescription which does not require a good title (justo titulo) shall not prejudice a third party if the possession on which it is to be based does not appear of record.

"Nor shall prescription which requires a good title prejudice a third person if such title is not recorded.

"In either case the time of the prescription shall begin to run from the date of the record.

"With regard to the legal owner of the real property or interest which is in the process of prescribing, the title shall be determined and the time computed in accordance with the provisions of the common law [i. e., the Civil Code]."

30 L. P. R. A. §60 (1967) (repealed 1979).

These provisions appear to protect from unregistered usucapion third parties whose rights do not imply possession, while allowing usucapion of the possessory rights of the true owner and others. See Brau del Toro, Apuntes para an Curso sobre el Estado del Derecho Inmobiliario Registral Puertor-riqueño bajo la Ley Hipotecaria de 1893, 48 Rev. Jur. U. P. R. 113, 359, 405-06 (1979); Martinez Irizarry, Los Principios Hipotecarios bajo la Nueva Legislación en Puerto Rico , 50 Rev. Jur. U. P. R. 195, 205 (1981). This construction accords with common sense: An adverse possessor's possession is not "adverse" to the owner of a nonpossessory interest. Because there is no apparent interference with the nonpossessory interest, the holder of that interest may never have any knowledge that the adverse possession exists.

Because of our usual deference to the local district judges of Puerto Rico on matters of Puerto Rican law, we are naturally inclined to affirm. Medina v. Chase Manhattan Bank, -- F. 2d --, -- [No. 83-1696 (1st Cir. June 26, 1984), slip op. at 8]; Gual Morales v. Hernandez Vega, 604 F. 2d 730, 732 (1st Cir. 1979); Diaz-Buxo v. Trias Monge, 593 F. 2d 153, 156-57 (1st Cir.), cert. denied, 444 U.S. 833, 100 S. Ct. 64, 62 L. Ed. 2d 42 (1979); Berrios Rivera v. British Ropes, Ltd., 575 F. 2d 966, 970 (1st Cir. 1978). The courts of Puerto Rico , however, could reach a different result from that reached by the district court in this case. Fortunately, we need not base our decision only on the district court's decision. Although an examination of Puerto Rican law is necessary for a complete understanding of the plaintiffs' arguments, this case is governed by federal, not Puerto Rican law. We therefore turn to a consideration of the federal issues, recognizing that Puerto Rican law provides the backdrop against which the federal law of tax lien priority and extinguishment must be determined.

III.

A federal tax lien is wholly a creature of federal law. It is one of the "formidable arsenal of collection tools" necessary "to ensure the prompt and certain enforcement of the tax laws in a system relying primarily on self-reporting". United States v. Rodgers [83-1 USTC ¶9374], 103 S. Ct. 2132, 2137, 76 L. Ed. 2d 236 (1983). Accordingly, the effects, priority, enforcement, and extinguishment of a tax lien are federal concerns. The Internal Revenue Code "creates no property rights but merely attaches consequences, federally defined, to rights created under state law". United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55, 78 S. Ct. 1054, 2 L. Ed 2d 1135 (1958). For this reason the court must first look to state law to ascertain the existence and nature of the property rights against which a tax lien has been asserted. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-14, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960). Once these rights have been determined, however, federal law governs whether these rights are "rights to property" to which a tax lien may attach. Bess, 357 U. S. at 56-57; Fidelity & Deposit Co. of Maryland v. New York City Housing Authority [57-1 USTC ¶9410], 241 F. 2d 142, 144-45 (2d Cir. 1957); Young, Priority of the Federal Tax Lien, 34 U. Chi. L. Rev. 723, 726-28 (1967). Once the tax lien attaches, the effects of that lien are also governed by federal law. Rodgers, 103 S. Ct. at 2137; Aquilino, 363 U. S. at 513-14. Congress or the courts may adopt state laws or procedures, but that choice is itself a matter of federal law. See United States v. Brosnan [60-2 USTC ¶9516], 363 U. S. 237, 80 S. Ct. 1108, 4 L. Ed. 2d 1192 (1960).

Federal law governs the priority of a tax lien against other rights to property. ⁵ United States v. Equitable life Assurance Society [66-1 USTC ¶9444], 384 U. S. 323, 328, 86 S. Ct. 1561, 16 L. Ed. 2d 593 (1966); Aquilino, 363 U. S. at 514; United States v. Acri [55-1 USTC ¶9138], 348 U. S. 211, 213, 75 S. Ct. 239, 99 L. Ed. 264 (1955); United States v. Security Trust and Savings Bank, 340 U. S. 47, 49-50, 71 S. Ct. 111, 95 L. Ed. 53 (1950). Congress has provided specific statutory rules for tax lien priorities as against most other liens. In some cases Congress has adopted state law; in others it has provided special protections. See 26 U. S. C. §6323 (1982). Where Congress has not prescribed a different rule, however, the basic rule of the federal common law is "first in time, first in right": the tax lien ⁶ is junior only to liens that attached to the asset and became choate before the tax lien arose. United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954); Rice Investment Co. v. United States [80-2 USTC ¶9654], 625 F. 2d 565, 572-73 (5th Cir. 1980). Whether an interest is sufficiently "choate" to prime a federal tax lien is a question of federal law. United States v. Pioneer American Insurance Co. [63-2 USTC ¶9532], 374 U. S. 84, 88-89, 83 S. Ct. 1651, 10 L. Ed. 2d 770 (1963); Acri, 348 U. S. at 213-14. ⁷

If the plaintiff's rights are treated as a lien in competition with the government's lien, the tax lien must prevail. It is beyond reasonable dispute that when the tax liens arose in 1963 the plaintiffs' rights were "inchoate". An interest is choate when "there is nothing more to be done to have a choate lien--when the identity of the lienor, the property subject to the lien, and the amount of the lien are established". Pioneer American, 374 U. S. at 89; New Britain, 347 U. S. at 84; see J. D. Court, Inc. v. United States [83-2 USTC ¶9454], 712 F. 2d 258, 261 (7th Cir. 1983), cert. denied, 104 S. Ct. 1708, 80 L. Ed. 2d 182 (1984). In 1963 the plaintiffs did not own the land: before their rights would be choate they had to maintain possession for another twelve years. ⁸ None of the requirements for a choate interest were satisfied until 1975.

The plaintiffs contend, however, that once prescription ran in 1975, Puerto Rican law made them owners of the property retroactively from 1945. They argue, therefore, that under Aquilino, the tax liens against the Benítez Rexaches cannot be enforced against their land because, as a matter of Puerto Rican law, the Benítez Rexaches had no property rights in the land in 1963.

This theory requires indulgence in a peculiar kind of double-think. Obviously, had the government enforced the lien in 1964 it could have done so, because the Benítez Rexaches owned the land. The same was true in 1965, and 1970, and 1974. But, according to the plaintiffs, in 1975 this historical reality vanished without a trace. Now we are asked to hold that the tax lien never attached because the Benítez Rexaches never owned the land. The Supreme Court has rejected efforts to apply "relation back" doctrine to subordinate a tax lien to a subsequently perfected state law lien. See Security Trust, 340 U. S. at 50; United States v. Waddill, Holland & Flinn, Inc. [45-1 USTC ¶9126], 326 U. S. 353, 356-60, 65 S. Ct. 304, 89 L. Ed. 294 (1945). ⁹ By statute Congress has permitted a variety of after-perfected liens to prevail over a tax lien. Congress has not done so here. If the plaintiffs' interpretation of Puerto Rican law is correct, the legal fiction of retroactive prescription may give their ownership rights priority over liens created under state law. But the priority of the tax lien is governed by federal law, and federal law makes no provision for a subordination by use of a legal fiction.

IV.

We next consider whether the plaintiffs' usucapion could extinguish the tax lien by extinguishing the property rights of the Benítez Rexaches. In United States v. Brosnan, [60-2 USTC ¶9516], 363 U. S. 237, 80 S. Ct. 1108, 4 L. Ed. 2d 1192 (1960), the Court held that although the divestiture of a tax lien is a matter of federal law, state law would be adopted except to the extent that Congress prescribed different rules. Congress has enacted specific rules that substantially supersede the federal common law of Brosnan, although the statutes, like Brosnan, adopt many state procedures. See, e.g., 26 U. S. C. §§ 6325, 7425 (1982). Both Brosnan and the relevant statutes are concerned with the power of the states to divest a junior tax lien. Although Congress has given some subsequent liens superpriority over federal liens, if the tax lien is properly filed and is senior under federal law it may not be extinguished by a state procedure enforcing a junior claim on the property, unless the United States consents. ¹⁰ See Berlin v. United States , 535 F. Supp. 298, 300-01 (E. D. N. Y. 1982); W. Plumb, Federal Tax Liens 285 (3d ed. 1972). Nevertheless, a tax lien, whether senior or junior to other liens, may be extinguished if the property itself is extinguished. "[T]he Government's lien under §6321 cannot extend beyond the property interests held by the delinquent taxpayer." Rodgers, 103 S. Ct. at 2141. Professor Bittker states,

"[T]he government's rights can rise no higher than those of the taxpayer to whom the property belongs; for example, the lien for a partner's unpaid income taxes attaches to his interest in the firm, not to the firm's assets. In the same vein, the lien arising from the unpaid taxes of a person who purchased property under a conditional sale or chattel mortgage agreement before the assessment was made attaches to the taxpayer's equity and is inferior to the seller's security interest. Moreover, the tax collector not only steps into the taxpayer's shoes but must go barefoot if the shoes wear out; thus, a state judgment terminating the taxpayer's rights to an asset also extinguishes the federal tax lien attached thereto."

4 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶111.5.4, at 111-102 (footnotes omitted).

Read literally, this principle might support an argument that the government's lien was extinguished at the same time as the Benítez Rexaches' ownership. The decisions that have followed this principle, however, are cases in which the taxpayer's interest subject to lien is a terminable interest: an option contract, ¹¹ a lease, ¹² or the buyer's forfeitable interest under an installment sales contract. ¹³ See W. Plumb, Federal Tax Liens 23 (3d ed. 1972). In these cases, the attached property right ceased to exist; accordingly, there was nothing left against which the government could assert its interest. In the present case, by contrast, the right to ownership of the 9.897 cuerdas at issue was never extinguished; rather, it passed from the owners to the plaintiffs. In Rodgers the Court, after referring to the Bittker commentary quoted above, added, "Of course, once a lien has attached to an interest in property, the lien cannot be extinguished (assuming proper filing and the like) simply by a transfer or conveyance of the interest". 103 S. Ct. at 2141 n. 16. The Court also held that the government may force the sale of property in which the taxpayer had an interest, even if the taxpayer has no current interest. 103 S. Ct. at 2142 n. 18. Similarly, in Bess the Court held that the taxpayer had a property interest in the cash surrender value of his life insurance; when he died, the government could assert a lien on the proceeds of the insurance, up to the cash surrender value, against the beneficiaries. 357 U. S. at 56-59. We conclude that, under the federal tax laws, the government's tax lien passed along with ownership of the attached land.

We AFFIRM the district court's holding that any rights of the plaintiffs in the Bayamón property are subject to the government's tax liens. We REMAND the case for further proceedings in accordance with this opinion.

^* Of the Fifth Circuit, sitting by designation.

¹ A cuerda is about the same as an acre.

² See United States v. Benitez Rexach, 185 F. Supp. 465 (D. P. R. 1960); United States v. Benitez Rexach, 200 F. Supp. 494 (D. P. R. 1961); United States v. Benitez Rexach, 41 F. D. R. 180 (D. P. R. 1966); Benitez Rexach v. United States, 390 F. 2d 631 (1st Cir.), cert. denied, 393 U. S. 833, 89 S. Ct. 103, 21 L. Ed. 2d 103 (1968); United States v. Benitez Rexach, 331 F. Supp. 524 (D. P. R. 1971), vacated and remanded, 482 F. 2d 10 (1st Cir.), cert. denied, 414 U. S. 1039, 94 S. Ct. 540, 38 L. Ed. 2d 330 (1973); on remand sub nom. United States v. d'Hotelle de Benitez Rexach, 411 F. Supp. 1288 (D. P. R.), rev'd and remanded, 558 F. 2d 37 (1st Cir. 1976). Lucienne d'Hotelle de Benitez Rexach died in 1968. Felix Benitez Rexach died in 1975. See 558 F. 2d at 40. Remnants of the tax litigation continue to turn up in the pages of the federal reporters. In addition to the present case, see United States v. Marin [81-2 USTC ¶9506], 651 F. 2d 24 (1st Cir. 1981); United States v. Marin, 720 F. 2d 229 (1st Cir. 1983) (per curiam); In re Penagaricano, 571 F. Supp. 232 (D. P. R. 1983).

³ The Internal Revenue Code provides,

"If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person."

26 U. S. C. §6321 (1982).

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

Id. §6322. A lien becomes "unenforceable by reason of lapse of time" upon expiration of the six-year statute of limitations for the collection of an assessment, id. §6502(a), but if the government brings suit within that time the period is extended, and a judgment in favor of the United States extends the life of the lien indefinitely. United States v. Overman [70-1 USTC ¶9342], F. 2d 1142, 1147-48 (9th Cir. 1970); W. Plumb, Federal Tax Liens 49-51 (3d ed. 1972).

⁴ "Ownership and other property rights in real property shall also prescribe by uninterrupted possession of the same thirty years without the necessity of title nor good faith and without distinction between present and absent persons . . .." 31 L. P. R. A. §5280 (1967).

⁵ The priority assigned to tax liens serves a number of important federal purposes: most significantly, to reinforce the sanctions and deterrents necessary to operate a tax system based on self-assessment, but also to ensure the government's right to revenue and to provide "ceremonial" affirmance of the individual duty to abide by the tax laws. See Babitt and Freiman, The Priority of Federal Tax Claims: Selected Problems and Theoretical Considerations, 24 Case W. Res. L. Rev. 521, 552 (1973).

⁶ For non-tax liens, where there is less need for a uniform federal rule of priority, the courts may use state laws even in the absence of congressional direction. See United States v. Kimbell Foods, Inc., 440 U. S. 715, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979); Chicago Title Ins. Co. v. Sherred Village Assocs., 708 F. 2d 804 (1st Cir. 1983); United States v. Deya, 369 F. Supp. 1113 (D. P. R. 1974). But "[t]he importance of securing adequate revenues to discharge national obligations justifies the extraordinary priority accorded federal tax liens through the choateness and first in time doctrines." Kimbell Foods, 440 U. S. at 734.

⁷ In 1966 Congress, responding to complaints that the court-developed rules of priority were incompatible with modern commercial practices, drastically curtailed the application of the doctrines of "first in time, first in right" and "choateness". Federal Tax Lien Act of 1966, Pub. L. No. 89-719, 80 Stat. 1125 (1966), codified in scattered sections of 26 U. S. C. (1982). "A major part of this act [was] designed to trim the government's power to collect tax claims, and to show a decent regard to the competing claims and interests of others who have had dealings with the taxpayer." Young, Priority of the Federal Tax Lien, 34 U. Chi. L. Rev. 723, 723 (1967). Some authors have expressed the view that Congress intended to do away with the "choatness" requirement altogether. See Newton & Stanford, Federal Lien Priority: The Corralling of That Phantom "Choateness", 44 Tex. B. J. 273, 275; Babitt & Freiman, note 5, at 537. The Tax Lien Act does not, however, provide for every type of lien, and choateness continues to be a consideration in tax lien cases. See J. D. Court, Inc. v. United States [83-2 USTC ¶9454], 712 F. 2d 258, 262-263 (7th Cir. 1983), cert. denied, 104 S. Ct. 1708, 80 L. Ed. 2d 182 (1984); Creedon; The Federal Tax Lien Act of 1966--An Historic Breakthrough, 4 Harv. J. on Legis. 161, 197 (1967); Plumb, Federal Liens and Priorities--Agenda for the Next Decade, 77 Yale L. J. 228, 232 & n. 32 (1967).

⁸ Cf. Calvit v. Mulhollan, 12 Rob. 258 ( La. 1845):

"[I]t cannot be pretended that the right to a part of the time necessary to prescribe, can be considered as a vested right. Such right is only vested when the prescription is completed; and until then, it may be destroyed by law, or by circumstances amounting to a suspension or interruption."

Id. at 270-71. See also Roussel v. Railways Realty Co., 9 Orleans App. 288, 132 La. 379, 394, 61 So. 833 (1912), aff'd 132 La. 379, 390-94, 61 So. 379, 413-14 (1913):

"[T]hose who are mere possessors, with prescription running in their favor, have no vested rights in the property . . .. The subsequent sale of the property to defendant [by the possessors] . . . gave to defendant only what its authors themselves then had, to-wit, only an inchoate, contingent, or expectant right to complete a title by prescription if not disturbed."

9 Orleans App. at 298-99, 132 La. at 398, 61 So. at 835.

⁹ Cf. United States v. Mitchell [71-1 USTC ¶9451], 403 U. S. 190, 91 S. Ct. 1763, 29 L. Ed. 2d 406 (1971). In Mitchell the Court rejected the argument that a wife could avoid tax liability for her half of community income by renouncing the community of gains, although under the Louisiana Civil Code this act exonerated her from the debts of the community. The Court held that once tax liability had attached it could not be avoided even though Louisiana gave the wife the "right to renounce the community and to place herself in the same position as if it had never existed", 403 U. S. at 203.

¹⁰ The plaintiffs suggest that the government could "easily" have averted the effects of usucapion by filing a lawsuit naming the possessors as defendants. Such a suit would have given the plaintiffs notice of the government's lien and would have interrupted prescription. 31 L. P. R. A. §5266 (1967). But the government is not required to give notice of its tax lien in any way other than the filing prescribed by statute. 26 U. S. C. §6326(f)(3) (1982); United States v. Union Central Life Ins. Co. [62-1 USTC ¶9103], 368 U. S. 291, 295-96, 82 S. Ct. 349, 7 L. Ed. 2d 294 (1961).

¹¹ Rev. Rul. 54-154, 1954-1 C. B. 277.

¹² Carolina Apartment Investors "A" v. United States [77-1 USTC ¶9262], 39 A. F. T. R. 2d ¶77-515, at 77-1045 (E. D. Cal. 1977).

¹³ Brookbank, Inc. v. Hubbard [83-2 USTC ¶9507], 712 F. 2d 399, 400-01 (9th Cir. 1983); Runkel v. United States [76-1 USTC ¶9152], 527 F. 2d 914, 917 (9th Cir. 1975).

 

 

 

United States of America , Plaintiff v. Louis D. Benn and Glendene B. Benn a/k/a Glendale Benn and a/k/a Nellie B. Benn, Defendants

U. S. District Court, So. Dist. Fla. , No. 72-920-Civ-WM, 1/12/73

[Code Secs. 6321 and 6323]

Lien for taxes: Action to foreclose and enforce: Dower rights: Florida : Contingent right.--Government's Judicial sale of husband's land for federal taxes extinguished the wife's inchoate dower.

Robert W. Rust, United States Attorney, Mervyn L. Ames, Assistant United States Attorney, Miami, Fla., for plaintiff. William B. Roman, 505 Pan American Bank Bldg., 150 S. E. Third Ave. , Miami , Fla. , for defendants.

Final Summary Judgment for Plaintiff

MEHRTENS, District Judge:

This is an action to foreclose and enforce federal tax liens against real property described in the complaint belonging to defendant, Louis D. Benn. These tax liens arose from a jeopardy income tax assessment made against defendant Louis D. Benn on October 2, 1958 for the year 1953 in the amount of $26,751.42 tax, $13,375.72 penalties, and $7,297.67 in interest and a jeopardy income tax assessment against Louis D. Benn on October 2, 1968 for the year 1955 in the amount of $552.00 tax, and $81.66 in interest.

On September 25, 1964 , a complaint was filed in the United States District Court for the Southern District of Florida seeking to reduce to judgment the above-described assessments. On November 26, 1968 , a judgment was entered in that action in the total amount of $72,833.32 plus six percent interest from the date of judgment and costs in the amount of $48.12. No part of said judgment has been paid.

Defendant Glendene B. Benn also known as Glendale Benn and also known as Nellie B. Benn (hereinafter called Glendene B. Benn), the wife of defendant Louis D. Benn, was named a defendant as a person who may claim an interest in the subject real property.

The answer of Louis D. Benn admits all the allegations in the complaint. No factual or other defense is raised by defendant Louis D. Benn.

Defendant Glendene B. Benn in her answer to the complaint asserts that she has an interest in the subject real property in this suit to the extent of her dower rights therein which dower rights are not affected by the assessment and levy against defendant Louis D. Benn.

[Dower]

While dower is of ancient origin and existed at common law, the right referred to as dower in Florida is a creature of Florida legislation and dower rights are controlled by statute. See Section 731.34 of the Florida Statutes Annotated. See also In Re Aron's Estate, 118 So. 2d 546 (1960), and Bowler v. Bowler, 159 Fla. 447, 31 So. 2d 751 (1947).

Dower is not a vested right, a privilege, or an immunity protected by the Constitution. Adams v. Adams , 2 So. 2d 855 (Supreme Ct. Fla. 1941). Before the husband's death the wife's right of dower is inchoate. Dal Brun v. City of West Palm Beach , Fla. , 227 So. 2d 347 (4th Dist. Ct. of App. 1969). In Gore v. General Properties Corporation, 6 So. 2d 837 (Supreme Ct. Fla. 1942), the court stated on page 839: "An inchoate right of dower does not constitute an estate, title or interest in lands." Thus an inchoate right of dower is merely a contingent and inchoate right not a perfected and choate interest entitled to priority over the perfected and choate tax lien. United States v. Security Tr. & Sav. Bank [50-2 USTC ¶9492], 340 U. S. 47 (1950), and United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81 (1954).

Recognizing the inchoate nature of the right of dower the Supreme Court of Florida in In Re Hester's Estate, 28 So. 2d 164, found that an execution by the husband's creditors against his property cut off the wife's right of dower. In considering this issue the court stated (p. 165):

"As pointed out, Hester lost ownership of the lands involved in this case by virtue of a judgment and sale long before his death, neither of which is assaulted. That judgment and sale divested him of all the title and right he had in lands and, being so, no dower right ever accrued in them in favor of his widow. Dower, being inchoate, was extinguished by the sale before it came into being. The sale bound the wife and representatives of the husband alike."

In view of such holding it follows that a judicial sale by the United States , which is a judgment creditor herein, to foreclose its tax liens will divest Louis D. Benn of all the title and right he has in the property and no dower will ever accrue in it. The dower of Glendene B. Benn, being inchoate, will be extinguished before it ever comes into existence.

Reference is also made to condemnation of a husband's land and its effect on the wife's inchoate dower. In Dal Brun v. West Palm Beach , supra, the court stated on page 348:

"We affirm and hold that a wife's inchoate right of dower in her husband's lands, granted by Section 731.34 Florida Statutes, F.S.A., is cut off and extinguished when the lands are condemned under the right of eminent domain. A wife in such case has no interest in or right to any part of the compensation paid to the husband under the award of condemnation. This is in accord with the overwhelming weight of authority in the United States ."

Since the state's condemnation of the husband's land extinguishes the wife's inchoate dower then the federal government's judicial sale for federal taxes of the husband's land would also extinguish the wife's inchoate dower.

In Weitzner v. United States [62-2 USTC ¶9773], 309 F. 2d 45 (C. A. 5, 1962), it was held where property was in husband's name the wife and children of the husband taxpayer had no interest under the homestead provision of the Florida Constitution which would prevent foreclosure of a federal tax lien. The court held that the wife, in order to acquire the property or interest in it must, among other things, survive the husband. The court stated (p. 48): "As in the case of inchoate dower, that which the wife had during her husband's lifetime with respect to homestead ownership is remote, uncertain and a mere expectancy or possibility and not a vested property right, interest or title. It follows that the tax liens are valid and enforceable against the property claimed as homestead."

In addition to the fact that her right to dower is inchoate and contingent because it depends on her surviving her husband there is also another contingency and uncertainty and that is if, after her husband's death, she is not satisfied with the portion of the estate of her husband to which she is entitled under the law of descent and distribution or under the will of her husband, or both, she may then elect in the manner provided by law to take dower. If she does not timely elect to take dower in the manner provided by law then dower will never come into existence. Thus if either contingency does not take place dower will never vest and become choate.

The Court finding that there is no genuine issue as to any material fact and that the United States of America is entitled to a final summary judgment, it is

ORDERED, ADJUDGED and DECREED as follows:

1. That a final summary judgment in favor of the United States of America and against the defendants, Louis D. Benn and Glendene B. Benn a/k/a Glendale Benn and a/k/a Nellie B. Benn, be and the same is hereby entered.

2. That the United States of America has valid tax liens against Louis D. Benn in the sum of $72,833.33 plus interest from the date hereof.

3. That the tax liens arising by virtue of the assessments described in the complaint be enforced and foreclosed against the real property described in paragraph XIII of the complaint and that the said real property be ordered judicially sold and the proceeds of sale after payment of costs of the sale be applied in partial satisfaction of the tax liens of the United States of America.

4. That the United States of America do have and recover its costs against the defendants in this action.

Order Confirming Sale

THIS CAUSE came before the Court upon plaintiff's motion for confirmation of sale and it appearing to the Court that a Final Summary Judgment for Plaintiff was entered herein on October 30, 1972, wherein it was ordered that the real property described in said Final Summary Judgment be sold by the United States Marshal at public outcry; that on January 4, 1973, the said real property was sold by the United States Marshal in accordance with the aforesaid Final Summary Judgment to the highest and best bidder, Mr. Ron Baron, 6401 North Bay Road, Miami Beach, Florida, for $5,850.00, which sum has been delivered to the United States Marshal; it is therefore

ORDERED, ADJUDGED AND DECREED:

1. The sale of the real property described in the Final Summary Judgment for Plaintiff herein to Mr. Ron Baron is confirmed in all respects.

2. The United States Marshal shall issue forthwith a Marshal's Deed for the real property in question to Mr. Ron Baron.

3. This court retains jurisdiction of the cause and the parties for the purpose of making such further orders and decrees as this case requires.

 

 

 

United States of America, Appellant v. Gladys H. Griffin, individually, and Gladys H. Griffin and Karl D. Giffin, as executors of the Estate of Berlin Griffin, deceased, Appellees

Florida District Court of Appeal, Second District, Case No. 3987, 164 SO2d 883, 3/6/64

[1954 Code Sec. 6323]

Tax liens: Priority: Widow's dower interest.--A recorded tax lien was entitled to priority over a widow's dower right in the personal property of a deceased delinquent taxpayer. The widow's dower interest was inchoate until the death of the deceased taxpayer, since it was unknown, undefined and could be made nonexistent by the husband selling the personal property or, in fact, giving it away.

Harold C. Wilkenfeld, Department of Justice, Washington , D. C. 20530, for appellant. John R. Williams, Blank & Davis, 316 Pan-A Bldg., Coleman & Cook, 801 Harvey Bldg., West Palm Beach, Elwyn L. Middleton, Burns, Middleton, Rogers & Farrell, 201 The Armour Bldg., Palm Beach, Fla., for appellees.

ALLEN, Acting Chief Judge:

This appeal is from an order of the County Judge 's Court of Palm Beach County, in probate.

The appellant, United States of America , appeals that part of an order awarding Gladys H. Griffin, widow of the deceased, dower in the personal property of her deceased husband free and clear of her husband's debts.

Berlin Griffin died testate in West Palm Beach on March 2, 1961 . Prior to his death, he was indebted to the Federal Government for unpaid taxes for the years 1943 and 1944 in a sum approximating $584,241. The tax liabilities were assessed against him on October 2, 1959 , and notice of the tax lien was filed of record in Palm Beach County , Florida , on January 5, 1960 . Gladys H. Griffin, his widow, waived the provisions of the Will and petitioned the probate court for assignment of dower.

Fla. Stat. §731.34 (1961) provides:

"Whenever the widow of any decedent shall not be satisfied with the portion of the estate of her husband to which she is entitled under the law of descent and distribution or under the will of her husband, or both, she may elect in the manner provided by law to take dower, which dower shall be one-third part in fee simple of the real property which was owned by her husband at the time of his death or which he had before conveyed, whereof she had not relinquished her right of dower as provided by law, and one-third part absolutely of the personal property owned by her husband at the time of his death, and in all cases the widow's dower shall be free from liability for all debts of the decedent and all costs, charges and expenses of administration; provided, that nothing herein contained shall be construed as impairing the validity of the lien of any duly recorded mortgage or the lien of any person in possession of personal property. * * *"

Fla. Stat. §733.09 makes it the duty of the personal representatives to lay off and assign dower immediately after the widow has exercised her election to take dower. From an order in these proceedings, this appeal ensued.

The point on appeal is stated as follows:

"Is a widow's right to dower in her deceased husband's personal property subject to a federal income tax lien filed against decedent prior to his death?"

The appellant concedes that the lower court was correct in assigning the widow a dower interest in the real property, free from the debts of the decedent.

[Dower Rights]

The appellant contends that the recorded tax lien should have been accorded priority over the widow's dower right in the personal property of the deceased because the tax lien arose on the property at the time that the assessment was made. They further argue that dower right in personalty can be defeated by the husband during his lifetime by inter vivos gift, as opposed to those inchoate dower rights accorded to the wife as to any real property owned by the husband at his death or which had been owned by him during his lifetime and transferred without the signature of the wife.

In United States v. Weissman , Fla. App. 1961, 135 So. 2d 235, this court had occasion to hold that a federal income tax lien had priority over a landlord's lien against a tenant. The circuit court had entered a final decree holding that the landlord's lien was superior, except as to the one federal lien which had been filed prior to the lease. The result of this court's holding was that all three federal tax liens had priority over the landlord's lien for rent due, notwithstanding that only one notice of tax lien had been recorded before the date of the lease, since all assessment dates by the government were prior to the first default in the payment of rent.

In the Weissman case, Judge Smith, in writing the opinion of this court, stated:

"The liens of the federal government arose under the Internal Revenue Code of 1954, which provides, insofar as material to the question here, in Section 6321, 26 U. S. C. A. §6321, that, if any person liable to pay any tax neglects to pay the same, after demand, the amount shall be a lien in favor of the United States upon all property belonging to such person. Section 6322 provides that the lien imposed shall arise at the time the assessment is made and shall continue until the amount is satisfied. Section 6323(a) provides that the lien so imposed shall not be valid as against any mortgagee, pledgee, purchaser, or judgment creditor until notice thereof has been filed (in this instance in the Office of the Clerk of the Circuit Court of Palm Beach County, Florida).

". . . The lien of the United States for unpaid taxes, while a general lien in the sense that it attaches to all of the property of the delinquent taxpayer, nevertheless is a perfected lien at the time it arises, and where the federal tax lien and the competing statutory lien are of equal dignity, that is, where the competing statutory lien is a perfected lien in the sense that there is nothing more to be done to have a choate lien, when the identity of the lienor, the property subject to the lien, and the amount of the lien are established, priority is to be determined on the principle that, 'the first in time is the first in right.' United States v. City of New Britain [54-1 USTC ¶9191], 347 U. S. 81, 74 S. Ct. 367, 371, 98 L. Ed. 520. We must, therefore, look to the Federal statutes and decisions to determine this issue.

"* * *

". . . The Federal decisions further hold that a landlord's statutory lien for rent is inchoate and unperfected under the circumstances here at the time the federal tax liens arose, and the landlord's lein was not entitled to priority under the doctrine of first in time is first in right or under any doctrine of relation back. United States v. New Britain, supra, and United States v. Security Trust & Savings Bank, supra."

The United States Court of Appeals for the Ninth Circuit, in the case of Hoare v. United States of America [61-2 USTC ¶9681], 294 F. 2d 823 (1961), held that the holder of a chattel mortgage given by a tax debtor of the United States as security for the performance of a lease had priority by virtue of the protection provided by Section 6323(a), to the extent only of the arrearages existing when the tax lien attached.

A study of the various Federal cases shows that property interest or liens competing with the Federal tax liens, to have priority, must not be inchoate.

This court, in United States v. First Federal Savings & Loan Ass'n, Fla. App. 1963, 155 So. 2d 192, had a question involving the priority between the allowance of attorney's fees payable to the mortgagee, and a federal tax lien. The mortgage involved provided for the allowance of attorney's fees and there was no question but that the mortgage itself, accrued interest, etc., had priority under the federal statutes over the perfected federal tax lien, but attorney's fees were not definite, not choate, at the time the federal tax liens were assessed and perfected. In the opinion of the court, it was stated:

"In connection with an analogous situation, we have two cases in which a decision is reached which controls the one here. The cases are: United States v. Bond [60-2 USTC ¶9532], 279 F. 2d 837 (4th Cir., 1960), cert. denied 364 U. S. 895, 81 S. Ct. 220, 5 L. Ed. 189, and United States v. Christensen [59-2 USTC ¶9621], 269 F. 2d 624 (9th Cir., 1959). In the Bond case the question was whether a tax lien of the United States is prior in right to payments of real estate taxes made by the mortgagee under a prior recorded mortgage, the taxes having accrued and the payments having been made subsequent to the recordation of the notice of federal tax lien. In addition, there was a question of priority as between the federal tax lien and attorney's fees allowed by the lower court for payment to the mortgagee out of the proceeds of sale of the mortgaged property. The court said:

`For the same reasons, we must subordinate to priority of the federal tax liens the claim for an attorney fee paid by Perpetual in protection of the lien of its mortgage. The fee was incurred long after the attachment of the federal tax lien; and at the time of the execution of the mortgage and the creation of the debt secured thereby, the future existence or amount of such attorney fee was, at best, speculative and uncertain.'"

Subsequently we granted a rehearing in the above case and, after re-argument, adhered to our decision.

The United States Supreme Court, in United States v. Pioneer American Insurance Company [63-2 USTC ¶9532], 374 U. S. 84, 83 S. Ct. 1651, 10 L. Ed. 2d 770, held that since the amount of the lien for attorney's fees was undetermined and indefinite when the federal tax liens were filed, such amount remained inchoate. The Court, in the Pioneer case, said:

"But, it is said, the principal and interest of the mortgage were definite in amount, the attorney's fee later became certain by court order and if the tax lien were to prevail the preference of the mortgage given by §6323 will be frustrated since payment of the attorney's fee will reduce the net amount realized from the mortgage. Aside from the fact that the mortgagee here will experience no such reduction, this argument would subordinate federal tax liens to inchoate liens and in both United States v. New Britain, supra, and United States v. Buffalo Sav. Bank [63-1 USTC ¶9166], 371 U. S. 228, 9 L. ed. 2d 283, 83 S. Ct. 314, the Court denied priority to local tax liens which were imperfect when the federal tax lien was filed even though the former had priority over the mortgage and would reduce the recovery of the mortgagee."

Until the death of her husband, the wife's dower interest is unknown, undefined and could be made nonexistent by her husband selling the personal property or, in fact, giving the personal property away. It remains inchoate until his death. Since the wife's dower interest is inchoate, uncertain and remote, it does not constitute an estate or interest. See Smith v. Hines (1863) 10 Fla. 258; Moore v. Price (1929) 98 Fla. 276, 123 So. 768; and Neal v. McMullian (1929) 98 Fla. 549, 124 So. 29.

It has been held that a wife is not disqualified because of "interest" from being a witness in the court by the Dead Man's Statute. Farrington v. Richardson, 1943, 153 Fla. 907, 16 So. 2d 158. In that case, p. 161, the Court said:

"It is also suggested by appellee that Mrs. Farrington has a vested right of dower in her husband's estate, defeasible only by her prior death, and that consequently she is incompetent to testify because she is a person deriving an interest or title from a person interested in the event of the suit. See Sec. 90.05, Florida Statutes 1941, F. S. A.

"This contention is not tenable. The case before the court does not relate to real estate but to personal property. If successful, the plaintiff will recover a money judgment. If the judgment is ever satisfied the money received in satisfaction will belong to the husband alone. He may dispose of the judgment or the proceeds without the consent of the wife. No interest of the wife will attach either to the judgment or the fruits thereof during his lifetime, dower in personalty relating only to such personal property as the husband owns at the time of his death. Sec. 731.34, Florida Statutes 1941, F. S. A. The interest required to disqualify a witness under the proviso of the statute must be an interest present, certain, and vested; nor uncertain, remote, or contingent. The possibility that Mrs. Farrington may ever realize anything from a personal judgment procured by her husband depends upon whether the judgment, or any of its proceeds, remains in the husband at his demise. This interest is too uncertain, remote and contingent to serve as a basis for the disqualification of the witness, on the ground asserted."

In a recent United States Court of Appeals case, Weitzner v. United States [62-2 USTC ¶9773], 309 F. 2d 45 (5th Cir., 1962), it was held that the widow and children of a taxpayer had no interest under the homestead provisions of the Florida Constitution which would prevent foreclosure of a tax lien. The opinion of the court, which was written by a former practicing attorney of Florida , now a member of the United States Court of Appeals, Fifth Circuit, said:

"The wife, in order to acquire the property, or interest in it, must survive her husband, the husband and wife relationship must exist at the time of his death, and property must have been occupied at the time of his death by a family of which the husband was the head. The homestead was designed for the purpose of protecting the head of the family by securing to him a shelter for himself and the members of his family. Hill v. First National Bank, 79 Fla. 391, 84 So. 190, 20 A. L. R. 270. The rights of a wife to the benefit of this protection during her husband's lifetime are marital rights rather than property rights. As in the case of inchoate dower, that which the wife has during her husband's lifetime with respect to homestead ownership is remote, uncertain and a mere expectancy or possibility and not a vested property right, interest or title. It follows that the tax liens of the United States were and are valid and enforceable against the property claimed as homestead. The judgment of the district court is

"Affirmed."

[Judgment of Court]

We must reverse that part of the judgment awarding the widow dower in the deceased's personal property free from the debts of the decedent, which accorded the widow's dower priority over the appellant's tax liens.

Reversed.

SHANNON, Judge, and LEAVENGOOD, C. RICHARD, Associate Judge, Concur.

 

 

 

Walter Chandler, as Executor of the Estate of J. W. Pilley, Deceased, Complainant v. Marie F. Pilley, et al., Defendants

Probate Court, Shelby County, Tenn., No. 1837 R. D., 12/18/59

[1954 Code Sec. 6321]

Lien for taxes: Priority as to widow's dower and homestead rights: Redetermination of tax liability.--Where the government had perfected its lien for unpaid income taxes against the lands of a delinquent Tennessee taxpayer before his death, such lien had priority over his widow's right to dower in such lands assuming that she, under Tennessee law, could maintain a petition for dower without having made a formal dissent to her deceased husband's will. However, the government's lien was not superior to the widow's homestead right, which was guaranteed to her by the Tennessee constitution. Also, since the unpaid income taxes were properly assessed by the government, and the taxpayer failed to appeal from the assessment in the time provided by law, the court was not now required to take proof of the taxes and to redetermine the tax liability of the deceased taxpayer.

Chandler , Manire & Chandler, 901 Home Federal Building, Memphis , Tenn. , for Executor. R. G. Draper, F. C. Sewell, and Myron A. Halle, Commerce Title Building, Memphis, Tenn., for Marie F. Pilley. Edward N. Vaden, Assistant United States Attorney, Federal Building, Memphis, Tenn., for the United States.

Order Allowing Claims

POLK, Judge:

This cause came on to be heard on the petitions of Marie F. Pilley, widow of J. W. Pilley, deceased, for a year's support, homestead, dower, and her exempt property; the intervening petition and claim of the United States for delinquent Federal income taxes assessed against J. W. Pilley, deceased; the answer and exceptions of the executor, Walter Chandler, the oral and documentary evidence adduced in open court; the stipulation of Marie F. Pilley, the executor and the United States as to the net proceeds from the sale of realty of which J. W. Pilley died seized and possessed, the personalty on hand at said decedent's death, and the amount and effective date of the lien for taxes of the United States; the stipulation of the executor and the United States as to the amount of assessments theretofore made; the offer of proof tendered by the executor; and the entire record, from all of which it appears to the Court:

That the petition of Marie F. Pilley for a year's support and dower should be denied, but that her petition for homestead from the proceeds of the sale of real estate is well taken and should be sustained; and

That the petition and claim of the United States for delinquent taxes, with accrued interest, should be sustained, and the amount thereof due and owing as of October 15, 1959 is One Hundred Sixty Five Thousand, Four Hundred Forty Dollars and Fifty Three Cents ($165,440.53), represented by the principal sum of One Hundred Thirty Thousand, One Hundred Fifty Eight Dollars and Twenty One Cents ($130,158.21), plus accrued interest of Thirty Five Thousand, Two Hundred Eighty-Two Dollars and Thirty Two Cents ($35,282.32); and

That the Court neither sustained nor denied the petition of Marie F. Pilley for her exempt property, not having mentioned same in its opinion set forth below; and

That the Court has filed a written opinion in this cause, which is made a part hereof as follows:

"OPINION

This matter came on to be heard upon the petition of Marie F. Pilley, wife of the deceased, for a year's support, Homestead and Dower, and the claim of the United States for income taxes assessed against the deceased.

The Testator, J. W. Pilley, died on September 17, 1955, and his will dated August 13, 1955, leaving his estate to his wife, Marie F. Pilley, and appointing Walter Chandler as executor, was admitted to Probate on September 25, 1955. He had previously been married to Maxine R. Pilley, who died February 24, 1953, and on August 13, 1953 married the said Marie F. Pilley.

On November 26, 1956, the said executor filed a bill herein to sell all the real estate alleging that the claims against the estate aggregate approximately $248,000.00 and the personal assets are insufficient to pay debts of said estate as alleged in said bill. In said bill it is alleged that Marie F. Pilley did not dissent from the will of the said J. W. Pilley and that she has elected to take under the terms of the will. To said petition the said Marie F. Pilley filed an answer on April 1, 1957, in which she admits that she did not dissent from the will of J. W. Pilley, her husband.

The bill also alleges that all of the said real estate is subject to tax claims filed by the United States of America .

The real estate consisting of four parcels were sold at different times all pursuant to the decrees of the Court approved by the counsel, and all decrees provided that the liens of the United States against the said real estate should be removed from the real estate and transferred to the proceeds of the sales in the hands of the Clerk. From these sales there is now on hand in the Clerk's office $94,234.25 and in addition in the hands of the executor, assets of the value of approximately $30,000.00.

After these sales were consummated, on September 15, 1959, the said Marie F. Pilley filed a petition herein for a year's support, dower and homestead.

By stipulation of counsel, the United States assessed Federal income taxes against J. W. Pilley in the amount of $130,158.21, and interest thereon to October 15, 1959 amounted to $35,282.32, aggregating $165,440.53, as shown by claims filed by the Federal Government herein. This amount obviously exceeds all the assets remaining in the estate.

It is stipulated that the United States forwarded and the taxpayer, J. W. Pilley, received prior to his death the statutory ninety day letter of the proposed assessments; and after the expiration of the statutory period for the taxpayer to appear, said assessments were regularly and properly placed on the books of the government against the taxpayers, as well as the assessments against the estate of his deceased wife, Maxine R. Pilley, from whom he acquired part of said property as surviving tenant by the entirety, as is shown by certified copies of Notice of Lien file of record on June 6, 1955 in the Register's Office of Shelby County, Tennessee; and that the effective date of the lien of the Federal Government securing said income taxes is April 22, 1955. The time to appeal from said assessments has long since expired.

"WIDOW'S PETITION FOR YEAR'S SUPPORT

Under Section 30-802 the widow of an estate or of a widow who dissents from her husband's will is entitled to have a year's support set aside for herself and family; and Section 31-605(1) provides that if satisfactory provision is not made for her she may dissent from her husband's will, and she shall in writing signify her dissent in open Court to be entered on record within nine months after probate of the will. Having failed to dissent in writing within the nine months period in the manner provided by law, and there being no evidence that the executor misled her or that she did not know the condition of the estate, her petition for a year's support is denied.

"DOWER

But it is insisted that under paragraph (2) of said Section 31-605 the whole of the husband's property is taken for the payment of his debts; and without formal dissent, she may sue for dower; that she is not limited to the nine months period as in paragraph (1), and that she is entitled to benefits of dissent by operation of law.

Altho the answer filed by said widow and apparently signed by her to the petition of the executor to sell said real estate was filed more than a year and a half after the will was admitted to probate wherein she admitted that she did not dissent from the will, and altho her petition for dower was filed herein about four years after the will was admitted to the probate, and after all of said real estate had been sold, it is unnecessary in the opinion of the Court to consider further the effect, if any, of this inconsistency, and this delay in filing her petition for dower, for in the opinion of the Court if she can now maintain her petition for dower, for practical purposes it will avail her nothing. Under Section 31-601, if any person intestate leaving a widow, she is entitled to dower in one-third of all the lands of which her husband died seized and possessed or of which at death he was the equitable owner. At the time of said J. W. Pilley's death there was a lien on all of his property in favor of the United States Government for an amount in excess of the money now on hand from the sale of said real estate. Said lien was fixed prior to his death, and he died seized and possessed of said lands, subject to said tax liens. The said J. W. Pilley during his life time could sell or encumber his interest in said land without his wife's consent, and he did encumber said lands by failing to pay taxes due and owing the United States Government, and if she is entitled to the benefits of an informal dissent her right to dower in said lands would be subject and subordinate to the prior lien on said lands securing the payment of said taxes.

After the proof was heard on said petition of the widow and after the proof was heard on the Government's claim, the executor filed on November 12, 1959 what he terms an offer of proof, and on November 16, the day on which the Court had anticipated being prepared to decide the case if briefs had been filed in time, counsel for the executor in open Court stated that the executor had the right to show that the tax as determined by the Collector of Internal Revenue in the amount of $134,158.20 plus interest as stipulated was incorrect, and that in this Court he was entitled to require proof of said taxes and a redetermination of said assessment. The assessment was properly made in accordance with the provisions of the Federal Income Tax Statutes, and the regulation thereunder. The taxpayer failed to appeal from said assessment in the manner and time provided therein by law, and the time to appeal therefrom has expired; and this Court is not now required to redetermine the tax liability of the deceased taxpayer to the said Government. The said widow's petition for dower out of the proceeds of said lands is therefore denied.

" HOMESTEAD

The wife's rights to homestead is independent of the benefits she may have under the will, and no election is required. It is guaranteed by the constitution under Article 11-Section 11. And since her homestead right was vested prior to the fixing of the liens on the lands of her deceased husband, and she did not alienate same the tax lien of the Government cannot deprive her of her homestead interest; and she is entitled to homestead in $1,000.00 of the proceeds from the sale of said real estate.

The claim of the United States for income taxes in the amounts stipulated together with interest, is allowed, which is secured by said lien. Under 30-521 said claim is also a preferred claim, coming next after cost of administration.

SYLVANUS POLK JUDGE

12-3-59 "

IT IS, THEREFORE, ORDERED, ADJUDGED AND DECREED that the petition of Marie F. Pilley for a year's support and dower out of the proceeds of said sales is hereby denied; and the claim of Marie F. Pilley for homestead be and the same is hereby sustained; and the executor is authorized and directed to pay to the said Marie F. Pilley the sum of Six Hundred and Eight and 88/100 Dollars ($608.88) out of the proceeds of the sale of real estate in this cause, which sum is based upon the standard mortality table and is in full settlement of her homestead rights; and that no disposition is here made of the petition of Marie F. Pilley for her exempt property, the same being reserved for determination by further orders of the Court.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the petition and claim of the United States for delinquent taxes be and the same are hereby sustained in the amount of One Hundred and Sixty Five Thousand, Four Hundred Forty Dollars and Fifty-Three Cents ($165,440.53), represened by the principal sum of One Hundred Thirty One Thousand, Fifty Eight Dollars and Twenty-One Cents ($131,058.21) plus accrued interest of Thirty Five Thousand, Two Hundred Eighty Two Dollars and Thirty-Two Cents ($35,282.32) as of October 15, 1959; and the executor is authorized and directed to pay to the United States from the total funds of the estate so much of the said claim of the United States as remains in his hands after payment of costs of administration upon final settlement.

IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the costs of this cause are adjudged against the estate, and the executor be and he is hereby authorized to pay the same, for which execution may issue.

To all of the foregoing, save and except the sustaining of Marie F. Pilley's petition for homestead, the said Marie F. Pilley and Walter Chandler, executor, respectfully note their exception.

 

 

 

The First National Bank of Elkhorn, a banking corporation, Plaintiff v. Maurice A. White and Effie E. White, his wife, and the United States of America, Defendants

State of Wis., County Court, Walworth County, No. 14607, 3/20/58

Priority of liens: Dower v. tax lien: Husband still living.--A mortgage foreclosure against Wisconsin property of the taxpayer resulted in a surplus of funds. Taxpayer's wife claimed a dower interest in the surplus, and the Government claimed the entire amount under its lien for taxes. Held, under the Wisconsin statute the wife was not entitled to a dower interest in the proceeds because her husband was still living. Also, it appeared that the wife's claim was barred by nonresidence.

William H. Freytag, for plaintiff. John Byrnes, for defendant Effie White. Edward G. Minor, United States Attorney, Francis L. McElligott, Assistant United States Attorney, for United States.

LUCE, County Judge :

FACTS: On May 17, 1954, Maurice A. White and Effie E. White, his wife, executed and delivered to The First National Bank of Elkhorn for value received their promissory note in the sum of $20,000.00 together with a mortgage of even date on two parcels of real estate as security. The mortgaged property was owned by Maurice A. White. Subsequently, the mortgagors defaulted by failing to comply with certain conditions of the mortgage. The mortgagee then instituted a foreclosure proceeding wherein the United States was named a party defendant because a Notice of Federal Tax Lien had been filed on November 4, 1955, against Maurice A. White. At the time the proceeding was instituted the outstanding balance of the tax lien was $139,316.48.

Judgment of foreclosure was entered by the Court and the property was sold on December 21, 1957. After satisfaction of the debt owed the mortgagee and the expenses of sale a surplus of $15,518.55 from the sale remained. The United States claimed the entire surplus by virtue of the Federal Tax lien.

ISSUE: Did Effie E. White have a dower interest in the surplus proceeds from the sale?

HELD: As Effie E. White's husband was alive, she was not entitled to dower out of the surplus proceeds under Wisconsin statute.

Judgment of foreclosure was had in this court in the above entitled action on October 29, 1956. The principal defendants did not answer. The United States answered setting forth its tax lien against the defendant, Maurice A. White, in the sum of $139,316.48 which was held subsequent and subject to the lien of the mortgage. Sale of the mortgaged real estate was had pursuant to the foreclosure judgment on December 21, 1957. The sale was confirmed upon notice on January 20, 1958. The sale resulted in a surplus of $15,518.55. On January 28, 1958 Effie E. White, defendant, through her attorney, John J. Byrnes, filed her claim to share in the distribution of this surplus. Prior to the hearing on distribution February 24, 1958, she presented to the court on February 3, 1958 her verified petition signed by such attorney for one-third of such surplus based on her inchoate dower rights under the statute. At the time the matter was heard the husband, Maurice A. White, was living and still lives as far as the record discloses. Her petition recites that she and her husband now live in the City of Chicago , Cook County , Illinois .

The case of Share v. Trickle, 183 Wis. 1, relied upon by counsel for Effie E. White to support her claim of inchoate dower in the surplus after foreclosure sale is readily distinguishable from the instant case. In that case the question was as to whether on the sale of a farm where the wife insisted that as a prerequisite to her joining in the deed she receive a substantial portion of the proceeds, and such sum was paid to her for the relinquishment of her rights and her jointure, the transaction was a good ground of complaint by creditors of the husband. This court has no quarrel with the reasoning of the court in that case or in the just result obtained as a result of such reasoning.

We are not concerned here with what benefits she received from the proceeds of the mortgage as a condition precedent to her jointure. She was a party to the foreclosure, made no answer or appearance, and is bound by the judgment.

Our problem is whether or not her inchoate right of dower which is not an estate in land--it is not even a vested right, but a mere intangible, inchoate, contingent expectancy should be given priority over the tax lien of the United States against Maurice A. White, the living husband, under our statutes.

The statute in question, Sec. 233.06, W. R. S. seems to rule out any claim of a wife of a living husband as it specifically states "after the death of the husband" and refers to "such widow". Jones on Mortgages, Vol. 3, Sec. 2178 (1694), states of inchoate right of dower that

"In some cases the courts have gone so far as to protect the inchoate interest of the wife during coverture in the surplus arising from a mortgage sale, by permitting her, as against judgment creditors, to have one-third of the residue invested for her benefit, and kept invested during the joint lives of herself and her husband, and the interest paid to her during her own life, in case of her surviving her husband. But it would seem doubtful whether a court of equity in the exercise of its ordinary jurisdiction, has the power to enforce such a doctrine".

Scribner on Dower, P. 480, Sec. 30.

Particularly is this true when one considers that the framers of Sec. 233.06 Stats. must have had this very situation in mind otherwise they would have framed it differently. The statute further indicates that in Wisconsin to render her dowable the sale must be after the death of the husband. Here the sale has been had and confirmed while the husband is living.

Also it appears that her claim is barred by nonresidence under Sec. 233.02 Statutes.

The claim of Effie E. White to share in the surplus is denied with customary motion costs.

 

 

 

In re Theodore Barry and Jean D. Barry, Debtors; Larry E. Staats, Trustee in Bankruptcy for Jean D. Barry, Plaintiff v. Theodore Barry, et al., Defendants

U. S. Bankruptcy Court, So. Dist. Ohio , East. Div., Case No. 2-80-01739, 31 BR 683, 3/4/83

[Code Sec. 6321]

Lien for taxes: Priority: Bankruptcy: Fraudulent transfer avoided.--

The avoidance of a fraudulent transfer of real property did not affect the extent and priority of federal tax liens because the taxpayer-debtor had a pre-avoidance interest in the entire property as a tenant by the entirety at the time the notice of tax liens was filed and not, as argued by the trustee, a lesser interest. The liens attached to the entire property and were avoided only to the extent they were for pre-petition penalties. The IRS's secured status was modified by the provisions of the Bankruptcy Act, 11 USC §724(b), so that it had in effect an unsecured claim.

Daniel K. Friend, 398 So. Grant Ave. , Columbus , Ohio 43215 , for debtors-defendants. Larry E. Staats, 50 West Broad St. , Columbus , Ohio 43215 , for plaintiff. Albert R. Ritcher, Assistant United States Attorney, Columbus, Ohio 43215, Johnathan B. Forman, Department of Justice, Washington, D. C. 20530, for U. S.

Findings, Conclusions, and Order on Complaint to Vacate Transfer and Tax Liens

HERBERT, Bankruptcy Judge:

This matter is before the Court upon plaintiff's Complaint to Vacate Transfer and Tax Liens. Defendant United States of America , Internal Revenue Service (IRS) filed a Motion to Dismiss which was overruled by the Court of August 19, 1982. Answers were then filed by defendants Theodore Barry and IRS. Subsequent to hearing by the Court, post-trial briefs were filed by plaintiff and by IRS.

Plaintiff is trustee in the jointly filed Chapter 7 bankruptcy proceeding of Theodore and Jean Barry commenced on May 19, 1980. Pursuant to 11 U. S. C. §548(a)(2), plaintiff seeks to aviod a transfer of real property from defendant Jean Barry to Theodore Barry, which was made within one year of the order for relief and allegedly for less than reasonably equivalent value. Plaintiff also, pursuant to 11 U. S. C. §547, attempts to avoid an alleged preferential transfer to defenant Lorenz Equipment Co. (Lorenz), and requests an order avoiding IRS's statutory tax liens as preferential transfers. In the alternative, plaintiff asks the Court to determine the extent and priority of such tax liens in connection with the preservation of the avoided transfer pursuant to 11 U. S. C. §551. Plaintiff requests further that the Court determine the effect, if any, of 11 U. S. C. §724(b) upon the facts of this case.

Theodore Barry, although initially opposing the trustee's complaint, later withdrew his opposition to the allegations of a fraudulent transfer. With his agreement, an order was entered on December 15, 1982, granting judgment in favor of plaintiff against Theodore Barry, and vacating and setting aside the real estate transfer.

Lorenz failed to contest the trustee's allegation that it received a preferential transfer of property through the filing of a Certificate of Judgment within ninety (90) days prior to the bankruptcy filing on May 19, 1980. Pursuant to 11 U. S. C. §547, the Court's order of December 15, 1982 granted plaintiff a default judgment against Lorenz, and set aside and vacated Lorenz' Certificate of Judgment and resulting transfer.

IRS opposes plaintiff's attempts to set aside its tax liens as preferential transfers. It also resists the trustee's contention that 11 U. S. C. §551, by preserving the avoided transfer for the benefit of the estate, subordinates the IRS lien against that portion of the property involved in the avoided fraudulent transfer to the estate's interest. IRS argues that its filed tax liens have attached to the entire parcel of real estate and cannot be altered by the trustee's avoidance. Finally, the trustee asserts that the portion of IRS' claim which represents a penalty is not part of any lien and is avoidable pursuant to 11 U. S. C. §§ 724(a) and 726(a)(4).

The facts are uncontroverted. The real property, located at 606 Old Coach Road , Westerville , Ohio , serving as the debtors' residence, and subject to an undisputed first mortgage in favor of Chemical Mortgage Co., was owned in fee simple by Jean Barry prior to September 22, 1979. On that date she executed a deed transferring ownership of the property to herself and her husband as Tenants by the Entireties with Right of Survivorship. IRS filed its Notices of Tax Liens on April 7, 1980 and April 30, 1980. The tax liens arose out of unpaid obligations for various employer taxes dating from June 30, 1979 through December 31, 1979 for which each of the Barrys were responsible both individually and as partners in a business enterprise known as Blacktop Co. The tax amounts, taken from IRS' proof of claim and not controverted by the trustee, were $11,304.13 for the April 7, 1980 Notice of Tax Lien, and $283.71 for the April 30, 1980 Notice of Tax Lien. The proof of claim filed by IRS also included unsecured claims for income taxes for 1976, 1977, and 1978. Prepetition penalty amounts of $1,448.22 and $3,397.90 are shown for the employment and income taxes respectively.

The Court concludes that the IRS tax liens are not avoidable pursuant to 11 U. S. C. §547. Tax liens are statutory liens which arise under the provisions of 26 U. S. C. §6321 et seq. Although the fixing of some statutory liens can be avoided if all elements of preferential transfer are otherwise met, the explicit limitation on the trustee's avoiding power set out in 11 U. S. C. §547(c)(6) is controlling in this instance. Section 547(c)(6) states:

(c) The trustee may not avoid under this section a transfer--. . .

(6) that is the fixing of a statutory lien that is not avoidable under section 545 of this title. (Emphasis added).

11 U. S. C. §545, which sets out the types of statutory liens a trustee in bankruptcy may avoid, does not include a tax lien asserted by the United States government for which a Notice of Tax Lien has been properly filed before the bankruptcy estate is created. Therefore, to the extent the Notice of Tax Lien was properly filed, the statutory lien is not avoidable by the trustee pursuant to 11 U. S. C. §547(c)(6).

The trustee's contention that the lien for $1,448.22, disclosed as a pre-petition penalty, is avoidable pursuant to 11 U. S. C. §§ 724(a) and 726(a)(4) is, however, well taken. In fact, such assertion does not appear to be contested by IRS in its post-trial brief. Section 724(a) gives the trustee the power to avoid a lien based upon a claim for any pre-petition penalty, to the extent that such penalty is not compensation for actual pecuniary loss. IRS has not shown any reason why its lien should not be avoided to the extent of the $1,448.22 set out as a pre-petition penalty, and such relief is hereby granted in favor of the trustee.

The remaining issue herein is the extent and priority of the IRS lien as that lien is affected by the avoided transfer and by the operation of 11 U. S. C. §551. Plaintiff urges that the IRS lien is a lien only against Jean Barry's undivided one-half interest in the real estate existing at the time the Notice of Tax Lien was filed. IRS argues that its lien attached to Jean Barry's fee simple interest, which existed before the fraudulent transfer, and that the trustee's subsequent avoidance of the fraudulent transfer cannot alter the extent of that lien.

Section 551 of the United States Code states:

any transfer avoided under section . . . 548 . . . or 724(a) of this title, . . . is preserved for the benefit of the estate but only with respect to property of the estate.

The purpose of §551 is to allow a trustee in bankruptcy, upon avoidance of certain preferential or fraudulent transfers, to increase the assets of the bankruptcy estate. This basic practice existed under the nowrepealed Bankruptcy Act of 1898, and assures that a junior lienor shall not be able to improve its position because a trustee has successfully avoided a lien or a transfer. See, Moore v. Bay, 284 U. S. 4 (1931). In effect, the trustee is subrogated to the rights of the transferee in the avoided transfer or the lien creditor with the avoided lien. Egyptian Supply Co. v. Boyd, 117 F. 2d 608 (6th Cir. 1941). Although preservation of avoided liens and transfers is no longer discretionary with the Court under the provisions of the Bankruptcy Reform Act of 1978, but rather is provided for automatically by 11 U. S. C. §551, the effect of such preservation under the Bankruptcy Act of 1898 remains relevant.

At the time IRS filed its Notices of Tax Liens, those liens became perfected against bona fide purchasers of any real property "belonging to such person" against whom the liens were filed. See, 26 U. S. C. §6321. The extent of the taxpayer's interest in the real property on the date the tax liens were filed is determined by state law, and the liens can only attach to property and rights to property existing at the time the liens were perfected. Aquilino v. United States , 363 U. S. 509 (1960).

In the instant case, the real property was owned by Theodore and Jean Barry as tenants by the entirety when the Notices of Tax Liens were filed for tax obligations owed by both. The question which remains, therefore, is whether Jean Barry's interest as a tenant by the entirety extended to the entire property, or only to an undivided portion thereof. If the avoidance of the transfer expanded her interest from a portion to a fee, the IRS liens attached only to the smaller interest she had at the time the Notices of Tax Liens were filed, given the trustee's status as a bona fide purchaser of the property as of the date the petition in bankruptcy was filed. See, 11 U. S. C. §554(a)(3).

Creation of an estate by the entireties was codified in Ohio in 1972. The enabling statute (R. C. 5302.17) does not delineate the legal implications of this form of ownership. Under common law, such an estate meant that each of the tenants were seized of the whole, or entirety, and not of a share. C. Moynihan, Introduction to the Law of Real Property, §6 (1962); see, Lang v. Commissioner [3 USTC ¶1088], 289 U. S. 109 (1933). The only discovered case which construes the Ohio statute concludes that Ohio courts, were they to be faced with the question, would view ownership as tenants by the entirety as ownership of the whole by both spouses, with no divisible interest on behalf of one spouse. In re Thomas, 14 Bankr. 423 (Bankr. N. D. Ohio 1981).

Such an interpretation compels a finding that, despite avoidance of the transfer from Jean Barry to Jean and Theodore Barry, Jean Barry had an interest in the entire property at the time the IRS Notices of Tax Liens were filed. The taxes were obligations of both parties and the liens attached to both parties' interests in the entire property. Thus, although the subsequent avoidance of the transfer caused IRS to lose its secured status in Theodore Barry's estate, the transfer made no practical difference in IRS' rights against Jean Barry's interest as a tenant by the entirety, which interest was transformed into a sole interest in fee simple as a result of the avoidance. Despite the automatic preservation of the avoided transfer, Jean Barry's pre-avoidance interest by the entirety is subject to IRS' lien rights. Tennessee Machinery Co. Inc. v. Appalachian Energy Industries Inc. (In re Appalachian Energy Industries Inc.), 9 Bankr. Ct. Dec. 1162 (Bankr. M. D. Tenn. 1982).

A final issue for resolution in this cause concerns the effect of 11 U. S. C. §724(b) upon the facts at bar. That section provides:

(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 taxes, or proceeds of such property, shall be distributed--

(1) first, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is senior to such tax lien;

(2) second, to claims specified in sections 507(a)(1), 507(a)(2), 507(a)(3), 507(a)(4), and 507(a)(5) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien;

(3) third, to the holder of such tax lien, to any extent that such holder's allowed claim that is secured by such tax lien exceeds any amount distributed under paragraph (2) of this subsection;

(4) fourth, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is junior to such tax lien;

(5) fifth, to the holder of such tax lien, to the extent that such holder's allowed claim secured by such tax lien is not paid under paragraph (3) of this subsection; and

(6) sixth, to the estate.

As can be seen, these provisions work to deny IRS the benefits of a secured status for purposes of distribution to unsecured claimants in higher priority categories than tax claims. Thus, use of §724(b) impairs IRS' lien status in Jean Barry's estate by relegating the subject IRS tax claims to a sixth priority as determined under §507(a). These claims for which the Notices of Tax Liens were properly filed are, however, prior to all other claims in that §507(a)(6) class.

With these findings, the Court determines that IRS had a secured claim in this Chapter 7 proceeding by virtue of its properly filed Notices of Tax Liens. That claim, subject to a decrease of $1,448.22 pursuant to the trustee's powers under 11 U. S. C. §724(a), attached to Jean Barry's interest as a tenant by the entirety in the real estate located at 606 Old Coach Road, Westerville, Ohio, and became a secured claim to the extent of the creditor's interest in the estate's interest in the property. See 11 U. S. C. §506(a). The Court finds further that, although the value of the avoided transfer is preserved for the benefit of the estate pursuant to §551, the preserved value is subject to the prior first mortgage in favor of Chemical Mortgage Co. and to the prior lien status of IRS. Notwithstanding the foregoing, however, IRS' secured status has been modified by the provisions of §724(b) so that its formerly secured claim is now, in effect, an unsecured claim entitled to priority status pursuant to §507(a)(6), and prior to any other claims within that same priority class.

IT IS SO ORDERED.

 

 

 

United States of America , Plaintiff v. Howard M. Boos, et al., Defendants

U. S. District Court, No. Dist. Okla., No. 84-C-12-E, 7/24/85

[Code Sec. 6323]

Collection: Validity of lien: Purchaser: Tax liens under state law: Property rights: Oklahoma.--A federal tax lien properly attached to an individual's rights in residential real property which was being held in the name of a chapter of the Universal Life Church. The individual, who became an ordained minister of a chapter of the Universal Life Church , executed a document purporting to be a vow of poverty by which he attempted to make an irrevocable gift of all his possessions and income to such chapter. Pursuant to state law ( Oklahoma ), the court concluded that the individual had property or rights to property to which a tax lien could attach because the conveyance rendered the individual insolvent and a promise to provide for all of his worldly needs did not constitute fair consideration for such conveyance. Thus, the church was not a protected purchaser and the transfer of the real property was disregarded for the purpose of collection of federal tax.

Cary L. Jennings, Department of Justice, Dallas , Tex. 75242-0599 , for plaintiff. Robert A. Flynn, 1717 East 15th Street , Tulsa , Okla. 74104 , for defendants.

Order

ELLISON, District Judge:

NOW on this 23d day of July, 1985 comes on for hearing the above styled case and the Court, having heard the evidence presented by non-jury trial, considered the legal authorities submitted by briefs and having reviewed the arguments of counsel, enters the following Findings of Fact and Conclusions of Law:

Findings of Fact

1. This is a civil action brought by the Plaintiff, United States of America, to foreclose federal tax liens upon certain residential real property in Bixby, Tulsa County, Oklahoma (the "Bixby property") which is presently being held in the name of the Universal Life Church, Inc., Charter 35,772, and to reduce any remaining tax liabilities of the taxpayer, Howard M. Boos, to judgment.

2. The defendant, Howard M. Boos, resides at 11507 South 99th East Avenue , Bixby , Oklahoma 74003 , the "Bixby property." The legal description of said property is:

Lot Thirty-seven (37), Block Four (4), Southwood East, and addition to the Town of Bixby , Tulsa County , State of Oklahoma , according to the recorded plat thereof.

3. Howard M. Boos, a single man, executed a Real Estate Mortgage in favor of Citizens Security Bank & Trust Co., Bixby , Oklahoma on September 6, 1978 which was released on March 2, 1983 .

4. On September 5, 1979 Defendant Howard M. Boos assisted by Tom P. Rinkel and Defendant's two sons, Craig and Howard J. Boos, founded Chapter 35,772 of the Universal Life Church . Dr. Boos became an ordained "minister" of Universal Life Church , and established a branch of the church at his place of business at 18 N. Norwood , in the City of Tulsa, Oklahoma.

5. Defendant Howard M. Boos executed a document purporting to be a "vow of poverty" on September 2, 1979 by which Defendant attempted to make an irrevocable gift of all his possessions, real, personal and otherwise and all his income to the Universal Life Church, Inc., Chapter 35,772.

6. On June 20, 1980 Defendant Howard M. Boos executed a General Warranty Deed conveying the "Bixby property" to the Universal Life Church , Chapter 35,772.

7. Defendant Howard M. Boos continued to live at the "Bixby property" through September 11, 1984 .

8. Defendant Citizens Security Bank made no appearance in this case; Defendant John Cantrell, Tulsa County Treasurer, filed amended answer on September 10, 1984 stating that no ad valorem taxes are due and owing on the "Bixby property" and claiming no interest in the same and made no further appearance in the case; Defendant Universal Life Church, Inc., by and through counsel Peter R. Stromer, disclaimed any interest in the "Bixby property" and made no further appearance in the case; Defendant Howard M. Boos, appeared through counsel.

9. Federal income taxes for the years 1975-1979 were assessed by the Internal Revenue Service against Defendant Howard M. Boos as follows:

                        DATE

PERIOD              ASSEsSED              TAX        PENALT ies/Additions         Interest         Balance Due

1975 ......          
6-28-76
         $ 263.00                     $260.46           $ 1.05          $10,649.55

                     
8-16-79
         5,209.14                        4.00         1,136.62

                                                                   161.45

1976 ......          
7-11-77
           847.00                       31.63              .42            2,840.89

                     
2-05-80
           737.14                        4.00         1,180.72

                                                                   354.10

                                                                     4.00

1977 ......         
10-22-79
         3,735.00                      133.56           340.45            8,410.19

                                                                   933.75

                                                                   261.45

1978 ......         
10-29-79
         7,264.00                      253.31           335.26           13,224.90

                                                                   363.26

                                                                     4.00

1979 ......          
4-13-81
         3,309.00                      827.25           394.90            6,373.29

                                                                   115.81

                                                                     4.00

Accordingly, as of February 28, 1983 , these tax liabilities totaled approximately $41,498.82, plus statutory additions. To date, these liabilities remain unpaid.

10. Federal employment taxes for 1979 were assessed by the Internal Revenue Service against Defendant Howard M. Boos as follows:

                              DATE

PERIOD                    ASSEsSED             TAX        PENALT ies/Additions         Interest         Balance Due

2nd Qtr-1979

(941) ...........          
2-11-80
         $269.33                      $40.40           $ 9.05             $522.32

                                                                          5.39

                                                                          4.00

3rd Qtr-1979

(941) ...                  
4-07-80
          365.54                       18.28            13.53              641.11

                                                                          9.14

4th Qtr-1979

(941) ...........          
4-28-80
          444.35                        6.67            12.86              734.10

1979

(940) ...........          
4-14-80
          260.39                        3.91             6.33              430.20

Accordingly, as of February 28, 1983 , these tax liabilities totaled approximately $2,327.73, plus statutory additions. To date, these liabilities remain unpaid.

11. The Defendant Howard M. Boos has not filed a federal income tax return or employment tax return since tax year 1979.

12. These Findings of Fact, insofar as they may be deemd to be Conclusions of Law, are hereby incorporated into this Court's Conclusions of Law.

Conclusions of Law

1. This Court has jurisdiction over the subject matter of this action by virtue of 28 U. S. C., §§ 1340 and 1345 and §§ 7402 and 7403 of the Internal Revenue Code of 1954 (26 U. S. C.), and jurisdiction over the parties has been obtained through personal service of process or service by mail, pursuant to Rule 4, Federal Rules of Civil Procedure.

2. A prima facie case of tax liability was established by Plaintiff and Defendant offered no evidence to rebut the correctness of the tax assessments or Defendant's liability on the merits. G. M. Leasing Corp. v. United States [75-1 USTC ¶9142], 514 F. 2d 935, 941 (10th Cir. 1975), rev'd in pt on the other grounds, [77-1 USTC ¶9140] 429 U. S. 338 (1977).

3. The assessment of federal tax gives rise to a tax lien which attaches to all property or rights to property belonging to the taxpayer. 26 U. S. C. §6321.

4. This lien arises as of the date of the assessment. 26 U. S. C. §6322.

5. To determine whether the taxpayer has "property" or "rights to property" to which a tax lien has attached, state law much be applied. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958).

6. Title 24 O. S. 1981 §1041 provides that every conveyance of property which will render the person conveying the property insolvent is fraudulent as to creditors without regard to actual intent if no fair consideration is given for the conveyance.

7. The Plaintiff United States was an existing creditor by virtue of tax assessments at the time the "Bixby property" was conveyed. The Court finds that the conveyance rendered Defendant Howard M. Boos insolvent and that the promise to provide for all Defendant's worldly needs did not constitute fair consideration for the conveyance.

8. The transfer of "Bixby property" was a sham and is to be disregarded for the purpose of collection of federal tax. 24 O. S. 1981 §§ 101 et seq.

9. The Universal Life Church did not take the Bixby property as a protected "purchaser". See Internal Revenue Code §6323(h)(6).

10. There is such a unity of interest between Defendant Howard M. Boos and Chapter 35,772 that the separateness of the two is not discernable. Defendant Howard M. Boos runs, directs, controls and uses the assets purportedly transferred to the church such that his vow of poverty had no actual effect. Defendant's lifestyle was unchanged by the transfer of his assets in that he continues to exercise all rights of ownership. This Court therefore concludes that Chapter 35,772 of the Universal Life Church is the alter ego of Defendant Howard M. Boos. Loving Savior Church v. United States [83-1 USTC ¶9215], 556 F. Supp. 688 (D. S. D. 1983), aff'd, [84-1 USTC ¶9261] 728 F. 2d 1085 (8th Cir. 1984).

11. The Plaintiff United States of America is entitled to satisfy its tax liens in full against the "Bixby property" and judgment will be entered accordingly.

12. These Conclusions of Law, insofar as they may be deemed to be Findings of Fact are hereby incorporated into this Court's Findings of Fact.

It is so ORDERED.

Judgment

THIS action came on for hearing before the Court, Honorable James O. Ellison, District Judge, presiding, and the issues having been duly heard and a decision having been duly rendered,

IT IS ORDERED AND ADJUDGED that the Plaintiff recover judgment of the Defendant Howard M. Boos in the amount of $43,876.55 with interest thereon at the rate of 7.60% as provided by law and its costs of action, that federal tax liens at issue herein be declared in full force and effect as against Defendant Howard M. Boos' property and that said liens may be foreclosed and the proceeds of sale distributed according to law consistent with this Court's Findings of Fact and Conclusions of Law entered on the 23rd day of July, 1985. In the event that the sale of the subject property does not satisfy the tax indebtedness established herein, the Court orders a deficiency judgment to be entered accordingly. Plaintiff is awarded its costs of action.

IT IS FURTHER ORDERED that the Plaintiff take nothing from the Defendants Citizens Security Savings & Trust Company, John Cantrell, Tulsa County Treasurer and Universal Life Church and that this action be and is hereby dismissed as to Defendants Citizens Security Savings & Trust Company, John Cantrell and Universal Life Church .

 

 

United States of America , Appellee v. Isabelle R. Paurowski, Appellant

(CA-4), U. S. Court of Appeals, 4th Circuit, No. 72-1770, 475 F2d 1401, 5/1/73, Aff'g District Court, 72-1 USTC ¶9229

[Code Sec. 71]

Gross income: Alimony v. child support: Allocation in decree.--The entire amount the taxpayer received under a separation agreement was taxable alimony. The agreement did not apportion the payments between alimony and child support, but stated only that they were for her support and the support and maintenance of the children.

[Code Secs. 6532 and 7422(a)]

Deficiency suits: Defenses to: Overpayments: Refund claims: Effect of.--The court could not consider the taxpayer's defense that she had overpaid her taxes for 1966 through 1968. Such a claim was in the nature of a refund claim and was made less than six months after she had filed her actual refund claims for those years without the Commissioner having rendered a decision adverse to her in the interim. Nor could the court consider her defense that she overpaid her 1969 through 1971 taxes, because she had never filed a refund claim for those years.

Scott P. Carmpton, Assistant Attorney General Meyer Rothwacks, Leonard J. Henzke, Jr., Dennis M. Donohue, Department of Justice, Washington, D. C. 20530, for appellee. Bruce E. Lambert, 3461 N. Washington Blvd. , Arlington , Va. , for appellant.

Before HAYNSWORTH, Chief Judge, BOREMAN, Senior Circuit Judge and WINTER, Circuit Judge.

PER CURIAM:

Isabelle Paurowski appeals from the district court's [72-1 USTC ¶9229] judgment awarding the United States recovery against her in the sum of $2,785.18, foreclosing the United States ' tax lien claims against her residence, and ordering the United States Marshal to sell that property at public auction.

As grounds for reversal appellant contends that the district court erred (1) in classifying as alimony the payments which she received from her husband during the years 1962-1965 and (2) in failing to grant credit for overpayments of income tax reported on her 1966, 1967, 1969, 1970 and 1971 income tax returns.

[Alimony]

Pursuant to a separation agreement entered into by appellant and her husband on July 1, 1961, appellant received biweekly payments of $175 which the agreement stated were "for her support and maintenance and for the support and maintenance and education" of their two minor children. The agreement contained no language allocating the payments between wife and children. During the taxable years 1962 through 1965 appellant failed to report any part of these payments as gross income. Section 71(a)(2) of the Internal Revenue Code of 1954 provides that periodic payments made to a wife pursuant to a written separation agreement are indludible in the wife's gross income. Section 71(b) excepts from the operations of §71(a) "that part of any payment which the terms of the * * * agreement fix * * * as a sum which is payable for the support of minor children of the husband." In Commissioner v. Lester [61-1 USTC ¶9463], 366 U. S. 299 (1961), the Supreme Court construed the word fix to require that "the allocations to child support * * * be 'specifically designated' and not left to determination by inference or conjecture." 366 U. S. at 306. Absent a specific designation of the portion allocable to child support, the entire payment must be included in the wife's gross income. Because in the instant case the separation agreement did not specifically designate the portion to be used for child support, the district court properly held that the payments in their entirety were includible in the wife's gross income under §71(a)(2).

[Overpayments]

The government instituted this action in October of 1969. Thereafter, appellant filed a refund claim with the Internal Revenue Service contending that she was entitled to credit for alleged overpayments of tax for the years 1962 through 1968. In this action, appellant asserts that she is due a refund for the tax years 1966 through 1971, ¹ and that the district court erred in failing to grant her credit for the alleged overpayments. Nothing in the record before us indicates that appellant has filed any refund claims with the Internal Revenue Service for the tax years 1969 through 1971.

Section 7422(a) of the Internal Revenue Code of 1954 prohibits a suit for refund in the district court "until a claim for refund or credit has been duly filed with the Secretary or his delegate * * *." Additionally, section 6532 bars such a suit prior to the expiration of six months from the date of filing the refund claim unless the Secretary has rendered a decision adverse to the taxpayer before that six month period has elapsed, Lipsett v. United States [65-1 USTC ¶9424], 37 F. R. D. 549 (D. C. N. Y. 1965).

In this action, appellant cannot assert her refund claims as a set-off. To so allow would be contrary to sections 7422(a) and 6532. When the Government instituted this action, the rights of the parties were fixed; by asserting her refund claims here, appellant has sought judicial determination of the merits of her claims prior to filing such claims with the Internal Revenue Service. Moreover, section 6532 was not satisfied because the six month period had not elapsed, nor had any decision been rendered by the Secretary. Raising the refund claim as a defense and set-off to the present action is tantamount to bringing an action in the district court without meeting the requirements of sections 7422(a) and 6532.

Appellant's refund claims for the years 1966-1968 appear ripe for determination in the district court, in a separate action, should the Internal Revenue Service refuse to consider the merits of the claims, or if their decision is adverse to appellant. As to any refunds claimed due for the tax years 1969-1971, it does not appear that appellant has filed a refund claim with the Internal Revenue Service for those years. This, appellant must do prior to asserting her claim in another forum. Should appellant file a refund claim for those years which the Secretary denies, or takes no action within six months from the date of filing, appellant may then seek judicial resolution of her claim in the district court. Meanwhile, appellant may not frustrate the government's right to collect a deficiency found to be due.

Accordingly, we dispense with oral argument and affirm the judgment of the district court.

AFFIRMED.

¹ Appellant does not claim she is entitled to credit any refunds allegedly due for tax years 1962-1965. Apparently any claims based on those years have been either satisfied or barred by the limitations period set forth in section 6511 of the Code.

 

 

 

United States of America , Plaintiff v. Isabelle R. Paurowski, et al., Defendants

U. S. District Court, East. Dist. Va. , Alexandria Div., Civil Action No. 359-69-A, 1/18/72

[Code Secs. 61, 71, 214 and 6321]

Child care deduction: Married taxpayer: Support payments: Allocation: Lien for taxes: Tenants by the entireties.--The taxpayer's child care deduction was disallowed, since she was married during the period for which she claimed the deduction but did not file a joint return. Payments received by the taxpayer under the terms of a separation agreement were included in her income since no allocation to child support was possible. The deficiency resulting from the determinations of the Court could be satisfied from the proceeds of the sale of a residence held by the taxpayer and her husband as tenants by the entireties, since under Virginia law the taxpayer and her husband became tenants in common at the time of their divorce.

Martin V. B. Bosetter, Jr., United States Attorney, Alexandria , Va. , for plaintiff. L. Lawrence DeNicola, 201 N. Washington St., Alexandria, Va., Vincent Mocarski, 450 W. Broad St., Falls Church, Va., Isabelle R. Paurowski, 6418 Shady Lane, Falls Church, Va., for defendants.

Memorandum Opinion

LEWIS, District Judge:

The United States brought this suit against the defendant taxpayer to reduce to judgement certain tax assessments for the years 1962 through 1965, and to sell certain real property in which the defendant has an interest in order to collect its judgment.

The taxpayer's former husband, a judgment creditor, and the Prudential Insurance Company of America were made party defendants pursuant to 26 U. S. C. §7403, which requires the joining of all persons who have or may claim an interest in the property sought to be foreclosed.

The tax assessments were based on the defendant taxpayer's failure to include in her gross income moneys received pursuant to a separation agreement with her husband and by the disallowance of certain deductions, one of which was the child care deduction for 1962.

[Child Care]

Title, 26 U. S. C. §214(b)(2), provides that child care deductions in the case of a married woman shall not be allowed unless the taxpayer and his spouse file a joint return. The taxpayer here filed a separate return.

Subsection (5) of the foregoing statute considers a woman to be unmarried if (a) she is legally separated from her spouse under a decree of divorce or of separate maintenance at the close of the taxable year or (b) she has been deserted by her spouse, does not know his whereabouts and has applied to a court of competent jurisdiction to compel him to pay support.

The defendant taxpayer meets neither of these exceptions--Therefore she cannot claim the $600.00 child care deduction for the year 1962.

[Support Payments]

The payments received by defendant taxpayer from her former husband pursuant to the terms of their separation agreement are includable in her gross income because these payments are for the support of both the wife and child--There is no way to determine what amount is specifically set aside for child support and, therefore, 26 U. S. C. §71(b), upon which the defendant taxpayer relies, has no application. See C. I. R. v. Lester [61-1 USTC ¶9463], 366 U. S. 299 (1961); West v. United States [69-2 USTC ¶9549], 413 F. 2d 294 (4th Cir. 1969).

In view of the increased income of the defendant taxpayer occasioned by including the amount received from her former husband under the separation agreement, the recomputation of the allowable medical deduction is correct.

As to the various other disallowed deductions, the taxpayer has failed to prove that such expenses were in fact incurred or, if they were, what authority allows their deduction. The burden of proving the assessments erroneous is on the taxpayer--and this she has failed to do. See United States v. Hardy [62-1 USTC ¶9286], 299 F. 2d 600 (4th Cir. 1962).

Therefore, the Court finds the following amounts are owed by the defendant taxpayer for the years in question:

1962           $ 334.38, plus interest and lien fee

1963             768.18, plus interest and lien fee

1964           1,045.26, plus interest and lien fee

1965             637.36, plus interest and lien fee

[Property Foreclosed]

The real property sought so be foreclosed in this proceeding is located at 6418 Shady Lane , Falls Church , Virginia . It was deeded to the defendant taxpayer and her former spouse as tenants by the entirety--The defendant taxpayer obtained a final divorce in 1966. The Virginia Code §20-111, automatically makes tenants by the entirety tenants in common upon the entry of a final decree of divorce--Therefore, the defendant taxpayer now has an interest in the property in question and the whole may be sold to collect the taxes found to be due. See 26 U. S. C. §7403(c), which allows all claims to be determined and satisfied from the proceeds of such sale at public action. See Washington v. United States [68-2 USTC ¶15,864], 402 F. 2d 3 (4th Cir. 1968).

The costs of the sale, the prior lien of the Prudential Insurance Company of America, the Bowles judgment and the properly ascertained value of the former husband's interest will be first satisfied from the sale proceeds--then the unpaid federal taxes--with the balance, if any, to be paid to the defendant taxpayer.

The Court will delay ordering that the property be sold at public auction for a period of thirty days from the date hereof to permit the defendant taxpayer to make other arrangements to pay the federal tax lien in full, if she be so advised.

Counsel for the Government should forthwith prepare an appropriate order in accordance with this memorandum opinion, submit the same to the defendant taxpayer for approval as to form, and then to the Court for entry.

The Clerk will send a copy of this memorandum opinion to the defendant taxpayer and to all counsel of record.

0

 

 

United States of America , Plaintiff v. Benny Mosolowitz, Shirley Mosolowitz, et al., Defendants

U. S. District Court, Dist. Conn., Civil No. 9717, 269 FSupp 12, 4/3/67

[1954 Code Secs. 6321 and 7403]

Tax liens: Jointly owned property: Sale of entire property.--The Connecticut residential real estate jointly owned by the taxpayer husband and his non-taxpayer wife could be sold in satisfaction of the federal tax lien upon property of the delinquent taxpayer husband. Government's motion for summary judgment was granted.

Charlotte P. Faircloth, Tax Division, Department of Justice, Washington, D. C. 20530, Jon O. Newman, United States Attorney, John F. Mulcahy, Jr., Assistant United States Attorney, Hartford, Conn., for plaintiff. Sonia Goldstein, Arthur S. Sachs, Howard A. Jacobs, Sachs, Giaimo & Sachs, 207 Orange St., New Haven, Conn., for Benny and Shirley Mosolowitz; Frank E. Callahan, Curtis H. Barnette, Irving H. Perlmutter, Wiggin & Dana, 205 Church St., New Haven, Conn., for S. Sodel and Metropolitan Life Ins. Co.; Robert W. Carangelo, 152 Temple St., New Haven, Conn., for Tax Collector for Hamden, defendants.

Memorandum of Decision on Government's Motion for Summary Judgment Question Presented

TIMBERS, Chief Judge:

The government's motion for summary judgment, pursuant to Rule 56, Fed. R. Civ. P., in this action to enforce a federal tax lien and to subject property belonging to the taxpayer to such lien pursuant to the tax lien enforcement statute, ¹ presents chiefly the question whether certain Connecticut residential real estate jointly owned and occupied by the taxpayer husband and his non-taxpayer wife may be sold in satisfaction of a federal tax lien upon property of the taxpayer husband.

The Court holds that such jointly owned property of the taxpayer and his wife may be sold in satisfaction of the federal tax lien upon property of the taxpayer husband.

Facts

The material facts necessary to a determination of the instant motion by the government for summary judgment are not in dispute. ²

Benny Mosolowitz (the taxpayer) resides with his wife, Shirley, at 247 Fairview Avenue , Hamden , Connecticut . They purchased this property February 14, 1948 and have lived there ever since. A mortgage, recorded October 29, 1947, which was on this property at the time they purchased it, was assumed by Benny and Shirley Mosolowitz; such mortgage, now in amount of $1,721.50, is held by the Metropolitan Life Insurance Company; and the government concedes the superiority of this mortgage lien to the federal tax lien on the property. ³ The only other lien on this property is that of the Town of Hamden resulting from a real estate tax assessment October 1, 1961; the Town of Hamden concedes that its tax lien is inferior to the federal tax lien.

The only contested issue in the case arises from the government's claim that it is entitled to enforce its federal tax lien upon property of the taxpayer husband against this Fairview Avenue property which is jointly owned and occupied by the taxpayer and his wife, and that the property may be sold in satisfaction of the federal tax lien. ⁴

In a proceeding brought by the taxpayer in the Tax Court of the United States for redetermination of his federal income tax liabilities for the years in question, a stipulation of settlement was entered into between counsel for the taxpayer and counsel for the IRS on January 31, 1958 by the terms of which it was agreed that deficiencies were due from the taxpayer for unpaid income taxes, penalties and interest for the years 1946, 1947 and 1948. ⁵ Pursuant to this stipulation, a decision was entered accordingly by the Tax Court on March 4, 1958. ⁶

Within 60 days thereafter, on April 11, 1958, the District Director assessed against the taxpayer for the years in question unpaid income taxes, penalties and interest to that date totaling $8,877.89. ⁷ Notice of these assessments was given and demand for payment was made upon the taxpayer on May 15, 1958, but he has refused to pay. A lien in favor of the government thereupon attached to all property and rights to property, whether real or personal, of the taxpayer. ⁸ Between June 3, 1958 and January 24, 1962, notices of the tax liens resulting from these assessments were filed with the Secretary of the State in Hartford, the Town Clerks in Hamden and New Haven and the Guilford Savings Bank in Guilford.

The Government commenced the instant action March 25, 1963 to enforce its tax lien and to subject property of the taxpayer to such lien. Jurisdiction is founded on 26 U. S. C. §§ 7401, 7402(a), 7403(a)-(c) (1964) and 28 U. S. C. §§ 1340, 1345 (1964).

Determination of Taxpayer's Interest in the Property

Resolution of the legal issues raised by the government's motion for summary judgment turns upon a determination of the nature of the legal interest of the taxpayer in the Fairview Avenue property and the legal for levying execution upon that interest.

The starting point is Chief Justice Warren's holding in Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-513 (1960):

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.' Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82."

The warranty deed pursuant to which the taxpayer and his wife (under the names of Benjamin Moslow and Shirley Moslow) jointly purchased the Fairview Avenue property on February 14, 1948 reads in pertinent part as follows: ⁹

". . . do give, grant, bargain, sell and confirm unto the said Benjamin Moslow and Shirley Moslow, and unto the survivor of them, and unto such survivors, heirs and assigns forever, . . ."

Under Connecticut law, this is known as a "survivorship deed." It is "generally utilized in this state whenever realty is placed in the name of husband and wife. This type of deed creates an estate sui generis. It sets up in each grantee an interest in the land, provides for the termination of the interest of the grantee first dying, and, upon his or her death, vests the entire fee in the survivor. The effect of the deed is not unlike one which creates a life estate in each grantee with remainder over contingent upon survivorship. No vital end is to be served, therefore, by giving a label to [one grantee's] interest, such as, for example, that of joint tenancy with an express right of survivorship annexed, or a tenancy in common with a similar annexed right." Hughes v. Fairfield Lumber & Supply Co., 143 Conn. 427, 429-430, 123 A. 2d 195, 196-197 (1956).

The Connecticut legislature in 1959 enacted Conn. Gen. Stat. §47-14a which provides in pertinent part as follows:

"A conveyance of real estate or any interest therein by deed . . . to two or more natural persons, . . . in such form that the conveyance runs unto the grantees . . ., whether as joint tenants or as tenants in common, and unto the survivor of them, or unto the survivor and survivors of them, and unto the last survivor's heirs and assigns, . . . shall be deemed to create a joint tenancy in fee simple with right of survivorship added and the tenants holding under any such conveyance shall be known as joint tenants. . . ." (Emphasis added)

This Court accordingly holds, applying Connecticut law, that the deed under which the taxpayer and his wife purchased the Fairview Avenue property created in them a joint tenancy in fee simple with right of survivorship added and that they hold such property as joint tenants.

Determination of Right to Levy Execution on Taxpayer's Interest in the Property

Having determined, by looking to state law, the nature of the legal interest of the taxpayer in the Fairview Avenue property (a joint tenancy with right of survivorship), the Court must look to federal law to determine the government's right to and means of enforcement of its federal tax lien against the taxpayer's interest in the property. Aquilino v. United States, supra at 512-514; United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55-57 (1958); United States v. Healey [60-2 USTC ¶9744], 283 F. 2d 422, 428 (8 Cir. 1960).

The federal tax lien enforcement statute governs: ¹⁰

"SEC. 7403. ACTION TO ENFORCE LIEN OR TO SUBJECT PROPERTY TO PAYMENT OF TAX.

(a) Filing.--In any case where there has been a refusal or neglect to pay any tax, or to discharge any liability in respect thereof, whether or not levy has been made, the Attorney General or his delegate, at the request of the Secretary or his delegate, may direct a civil action to be filed in a district court of the United States to enforce the lien of the United States under this title with respect to such tax or liability or to subject any property, of whatever nature, of the delinquent, or in which he has any right, title or interest, to the payment of such tax or liability.

(b) Parties.--All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto.

(c) Adjudication and Decree.--The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States therein is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States. * * *."

This statute, by its broad terms, clearly authorizes this Court, once it has determined under state law that the taxpayer has a right or interest in the property in question, to subject such property to the government's tax lien, to order a sale of such property and to provide for appropriate distribution of the proceeds of such sale in accordance with the interests of the parties. The Court must bear in mind "the fundamental principle that liens for federal taxes are entirely statutory and the provisions for their collection are to be strictly followed according to federal law." United States v. Healsley, supra at 428.

In affirming a District Court's order authorizing the sale of real property in which the taxpayer had a joint tenancy interest, the Court of Appeals for the Seventh Circuit construed Section 7403 in United States v. Trilling [64-1 USTC ¶9292], 328 F. 2d 699, 702-703 (7 Cir. 1964), as follows: ¹¹

"Appellant's final contention is that 26 U. S. C. A. §7403 does not empower the District Court to order a sale of the entire property, including appellant's admitted joint tenancy interest, or to charge appellant's interest with any of the fees, costs or expenses incident to the sale . . . in §7403 Congress has expressly authorized the district court to subject 'any property' in which the delinquent taxpayer 'has any right, title, or interest' to the payment of 'such tax or liability'; has required that 'all persons' claiming any interest 'in the property involved' be made parties to the proceeding; and has empowered the court to order a sale 'of such property' and direct distribution of the proceeds of such sale according to the 'interests of the parties and of the United States'. The express language of the statute negates any design or intent on the part of Congress to limit the reach of the statute to the 'interest' of the taxpayer as distinguished from the 'property' in which he has such 'interest'. This being so we are of the view that a proper recognition of the teachings of Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 and United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 78 S. Ct. 1054, 2 L. Ed. 2d 1135, requires the conclusion that once the state law has been applied to ascertain the taxpayer's state-created property interests--to govern the determination of whether the taxpayer has 'property' or an 'interest in property' to which the lien attaches--we enter the province of federal law in subjecting the property involved to the discharge of the tax liability. As Mr. Chief Justice Warren had occasion to observe in Aquilino (363 U. S. 509 at 514, 80 S. Ct. 1277 at 1280-1281, 4 L. Ed. 2d 1365): 'This approach strikes a proper balance between the legitimate and traditional interest which the State has in creating and defining the property interest of its citizens, and the necessity for a uniform administration of the federal revenue statutes'."

Section 7403(c), in authorizing the Court to decree a sale of property in which an interest of the United States by virtue of a tax lien has been established, is so clear that judicial construction of the statute by way of justification of such a sale seems superfluous. Counsel for the parties here nevertheless have addressed policy arguments to the Court in support of their respective positions. To the extent that it is within the competence of the Court to assess the policy behind such a statute so clear on its face, the policy of Congress is plain: to assure collection of taxes due the United States by enforcing tax liens upon property of a delinquent taxpayer or in which he has any right, title or interest. To that paramount interest of the United States , the interests of others, including the delinquent taxpayer and his wife, in property against which the tax lien is to be enforced obviously must yield.

As between partitioning this property in kind and selling the whole property with a division of the proceeds in accordance with the interests of the parties, the latter obviously will better promote the interests of all concerned. Sale of the taxpayer's one-half interest alone would be economically unsound; if there were a market at all for it, the net proceeds would be substantially less than the value of his proportionate share of a sale of the whole property. Being residential property presently occupied by the taxpayer husband and his wife, even if a buyer of the taxpayer's one-half interest could be found, the hardship on both present occupants and the unrealistic social conditions that would ensue require no dilation.

The Court orders a sale of the whole Fairview Avenue property and a distribution of the proceeds of such sale in accordance with the interests of the parties. ¹²

The Court having determined, by looking to state law, the nature of the taxpayer's legal interest in the property, and having determined, by looking to federal law, the government's right to and means of enforcement of its federal tax lien against the taxpayer's interest in the property, the Court has decided all that it is required to decide. There remains only for the Court to direct the provisions to be included in the judgment.

Before doing so, however, it may be appropriate to note, by way of dictum, that even if state law were to determine the government's right to and means of enforcement of its federal tax lien (which the taxpayer urges but the Court declines to hold), the result under Connecticut law would be the same as under federal law. The Connecticut statutes provide that, upon the complaint of any person interested, any court having equitable jurisdiction may "order partition of any real estate held in joint tenancy" ¹³ or may "order the sale of any estate, real or personal, owned by two or more persons, when, in the opinion of the court, a sale will better promote the interests of the owners." ¹⁴ The Connecticut Supreme Court has squarely held that the estate of a joint tenant in real property, even when accompanied by a right of survivorship, is subject to levy and execution. New Haven Trolley & Bus Employees Credit Union v. Hill, 145 Conn. 332, 336-337, 142 A. 2d 730, 732-733 (1956). ¹⁵ Clearly, moreover, under Connecticut law the joint tenancy interest of defendant Benny Mosolowitz in the Fairview Avenue property gives him the right to sue either to partition or sell the property. ¹⁶ Since the government's lien has attached to all property, and rights to property, of the taxpayer, ¹⁷ the government is a "person interested" within the purview of the Connecticut statutes providing for partition or sale. ¹⁸ In determining whether partition or sale would better serve the interests of the parties, including the government, the same considerations would be weighed ¹⁹ as have been taken into account by the Court in applying Section 7403(c). See pp. 10-11 [83,894], supra. For the reasons there set forth, the Court would conclude, if it were to apply Connecticut law to determine the consequences and means of enforcing the government's federal tax lien against the taxpayer's interest in the property, that the Fairview Avenue property should be sold and the proceeds of such sale should be distributed in accordance with the interests of the parties. Hence, whether under federal or state law, the result would be the same.

Conclusion

For the reasons stated above, there being no genuine issue as to any material fact and the government being entitled to judgment as a matter of law, the government's motion for summary judgment is granted and defendant Shirley Mosolowitz' cross-motion for summary judgment is denied.

The Clerk accordingly is directed to enter judgment based upon the following:

(1) That defendant Benny Mosolowitz is indebted to plaintiff for unpaid income taxes, penalties and interest for the years 1946, 1947 and 1948 as assessed April 11, 1958, which to that date totalled $8,877.89, plus accrued interest; said unpaid assessments, plus lien fees, totalled $11,695.71 as of October 18, 1965; and interest has accrued at the daily rate of $1.03 from October 18, 1965 to the date of the judgment herein.

(2) That plaintiff has valid and subsisting liens upon all property, interests in property and rights to property, real and personal, of defendant Benny Mosolowitz, including the Vernon Street and Fairview Avenue properties more particularly described in paragraphs XI and XIV of the complaint herein, in the amount of defendant Benny Mosolowitz' indebtedness to plaintiff as set forth in paragraph (1) above.

(3) That said liens of plaintiff on said property of defendant shall be foreclosed by sales of such property in accordance with the practice of this Court, the proceeds of such sales to be distributed according to the following priorities:

(a) With respect to the Vernon Street property (Complaint, paragraph XI)--

(i) Payment of mortgage lien of Shirley Sodel.

(ii) Payment of plaintiff's federl tax lien to the extent of defendant Benny Mosolowitz' indebtedness to plaintiff as set forth in paragraph (1) above.

(iii) Payment of balance, if any, to said defendant Benny Mosolowitz.

(b) With respect to the Fairview Avenue property (Complaint, paragraph XIV)--

(i) Payment of mortgage lien of the Metropolitan Life Insurance Company.

(ii) Payment of plaintiff's federal tax lien to the extent of defendant Benny Mosolowitz' indebtedness to plaintiff as set forth in paragraph (1) above and to the extent of his one-half interest in the property.

(iii) Payment to defendant Shirley Mosolowitz of an amount equivalent to the amount paid to plaintiff in satisfaction of its federal tax lien against defendant Benny Mosolowitz as provided in immediately preceding paragraph.

(iv) Payment of balance, if any, equally to defendants Benny Mosolowitz and Shirley Mosolowitz.

(4) That plaintiff shall have judgment against defendant Benny Mosolowitz individually for such portion of said defendant's indebtedness to plaintiff set forth in paragraph (1) above as remains unsatisfied after foreclosure of plaintiff's liens on said defendant's property, interests in property and rights to property, including the foreclosure sales of the Vernon Street and Fairview Avenue properties as hereinabove provided.

The foregoing constitute the Court's findings of fact and conclusions of law pursuant to Rule 52, Fed. R. Civ. P.

The Court wishes to acknowledge its special appreciation for the extraordinarily able presentations, both in the oral arguments and in the briefs, by two highly competent Portias of the Bar-- Charlotte P. Faircloth for the government and Sonia Goldstein for the taxpayer and his wife.

¹ Int. Rev. Code of 1954, §7403, 26 U. S. C. §7403 (1964).

² Defendant Shirley Mosolowitz' cross-motion for summary judgment in her favor is denied in view of the Court's grant of the government's motion.

³ Int. Rev. Code of 1939, §3672, 26 U. S. C. §3672 (1952) [now Int. Rev. Code of 1954, §6323, 26 U. S. C. §6323 (1964)].

⁴ Taxpayer is the sole owner of another parcel of real estate located at 46 Vernon Street , New Haven , Connecticut ; his wife has no interest in this property. The taxpayer inherited this property from his father, Samuel Mosolowitz, who died November 4, 1959. The father had acquired it by devise under the will of the taxpayer's mother, Lena Mosolowitz, who had purchased it in 1941. When the taxpayer acquired this property, it was encumbered by a $2,000 mortgage, then and now held by the taxpayer's sister, Shirley Sodel; the government concedes the superiority of this mortgage lien to the federal tax lien on this property. The taxpayer being the sole owner of this Vernon Street property, it is undisputed that the government is entitled to enforce its federal tax lien against this property and that the property may be sold in satisfaction of such lien.

⁵ Int. Rev. Code of 1939, §§ 272(b), 293(b), 26 U. S. C. §§ 272(b), 293(b) 1952) [now Int. Rev. Code of 1954, §§ 6215(a), 6653(b), 26 U. S. C. §§ 6215(a), 6653(b) (1964)].

⁶ The decision of the Tax Court is res judicata in this action to recover taxes for the same years and is not open to attack in this Court. United States v. International Building Co. [53-1 USTC ¶9366], 345 U. S. 502, 506 (1953); Commissioner v. Sunnen [48-1 USTC ¶9230], 333 U. S. 591, 597-598 (1948); United States v. Brown [64-1 USTC ¶9246], 225 F. Supp. 414 (E. D. Pa. 1964); United States v. Leary [63-1 USTC ¶9480], 228 F. Supp. 467, 469-470 (D. Conn. 1963), aff'd per curiam, [64-1 USTC ¶9338], 330 F. 2d 497 (2 Cir. 1964).

⁷ An uncontroverted affidavit of debt, sworn to October 18, 1965, by Terrence P. McGovern, Chief, Office Branch, District Director of Internal Revenue for Connecticut, submitted by the government in support of the instant motion, discloses that as of October 18, 1965 the taxpayer's unpaid assessments for the years 1946, 1947 and 1948, plus lien fees, totalled $11,695.71 and that interest is accruing at the daily rate of $1.03.

⁸ Int. Rev. Code of 1939, §3670, 26 U. S. C. §3670 (1952) [now Int. Rev. Code of 1954, §6321, 26 U. S. C. §6321 (1964)].

⁹ The deed was recorded February 25, 1948 in Volume 256, page 516, of the Land Records of the Town of Hamden .

¹⁰ Int. Rev. Code of 1954, §7403, 26 U. S. C. §7403 (1964).

¹¹ The taxpayer in the instant case vigorously urges upon the Court the contrary view of Folsom v. United States [62-2 USTC ¶9648], 306 F. 2d 361 (5 Cir. 1962). This Court declines to follow Folsom, believing that it incorrectly applied Section 7403.

¹² Int. Rev. Code of 1954, §7403, 26 U. S. C. §7403 (1964); United States v. Trilling [64-1 USTC ¶9292], 328 F. 2d 699, 702-703 (7 Cir. 1964); United States v. Borcia [58-1 USTC ¶9119], (S. D. Cal. 1958); United States v. Beggerly [52-1 USTC ¶9304], (S. D. Cal. 1952).

¹³ Conn. Gen. Stat. §52-495 (1958).

¹⁴ Conn. Gen. Stat. §52-500 (1958).

¹⁵ In the New Haven Trolley & Bus Employees Credit Union case, the Connecticut Supreme Court stated (145 Conn. 332, 336-337):

"It is the fundamental policy of our law, and always has been, that all the property of a person, unless by law exempt, shall be liable for the payment of any money judgment rendered against him. Remington v. Cady, 10 Conn. 44, 47; Murphy v. Dantowitz, 142 Conn. 320, 327, 114 A. 2d 194; Cum. Sup. 1955, §3194d. It would be strange indeed if in Connecticut, where joint tenancies are not presumed and where they do not, in and of themselves, have the incident of survivorship, the simple expedient of an express provision for survivorship could confer a complete exemption of the interest of each joint tenant, however valuable, from attachment or execution for the satisfaction of his individual debts. We reject such a rule, and hold that where, by express terms in the granting instrument, a joint tenancy is created together with the right of survivorship, the estate thus created is no less subject to attachment and execution than an ordinary common-law joint tenancy with an incidental or implied right of survivorship. Such an estate is subject to destruction by the severance resulting from the levy of a proper execution. Hughes v. Fairfield Lumber & Supply Co., 143 Conn. 427, 431, 123 A. 2d 195; see General Statutes §7095.

"It is true that the attachment itself does not operate as a severance. It was for this reason that we held that in a cotenancy with right of survivorship the death of a cotenant, after an attachment of his interest but before judgment, extinguished his interest and thus the 'estate' held by the attachment under §3194d of the 1955 Cumulative Supplement. Hughes v. Fairfield Lumber & Supply Co., supra, 430. Here, both the defendant and the sole other joint tenant, his wife, are still alive. Therefore it is unnecessary for us to determine at exactly what stage of the proceedings the severance occurred. It certainly took place, subject to being vacated by the exercise of the right of redemption, not later than the rendition of the judgment of foreclosure of the lien. That is as far as we are required to go by the facts of this case." (Emphasis added)

¹⁶ Conn. Gen. Stat. §§ 52-495, 52-500 (1958); Connor v. Connor, 25 Conn. Supp. 119 (Super. Ct. 1964); cf. McCrohan v. McCrohan, 17 Conn. Supp. 207, 211 (Super. Ct. 1951).

¹⁷ Int. Rev. Code of 1939, §3670, 26 U. S. C. §3670 (1952) [now Int. Rev. Code of 1954, §6321, 26 U. S. C. §6321 (1964)].

¹⁸ Conn. Gen. Stat. §§ 52-495, 52-500 (1958).

¹⁹ Gaer Bros., Inc. v. Mott, 147 Conn. 411, 161 A. 2d 782 (1960); Johnson v. Olmsted, 49 Conn. 509 (1882); Connor v. Connor, supra note 16.

 

 

 

United States of America v. Lonnie Marion Ragsdale, Bessie Ragsdale, Libio J. Barsotti, Genevieve Barsotti, Louis J. Barsotti, Gloria Jean Barsotti

U. S. District Court, West Dist. Tenn. , West. Div., Civil Action No. 4177, 6/29/62

[1954 Code Secs. 6321 and 6331]

Collection of taxes: Levy and distraint: Promissory note: Property held by entireties: State law.--Under Tennessee law a promissory note owned by the taxpayer husband and his wife was held by them as tenants by the entirety and may be sold to satisfy their joint liability. The taxpayers' right to the debt represented by the note, even though payable in installments, was fixed and as such may be sold. Further, it is not necessary to include the trustee under the deed of trust which secures the note as a party since the foreclosure merely involves the sale of the note and not the deed of trust. Under Tennessee law the balance remaining from the sale of the note after settling the joint tax liability of the husband and wife maintains the characteristic of a tenancy by the entirety. The husband's interest may be sold to satisfy his individual debt, and the purchaser becomes the owner of the husband's right of survivorship. Consequently, the Government was entitled to the husband's right of survivorship in the balance to be held by the Clerk of the Court pending the death of either spouse.

Thomas L. Robinson, United States District Attorney, Edward N. Vaden, Assistant United States Attorney, Memphis, Tenn., for plaintiff. Hubert A. McBride, 800 Commerce Title Bldg., Memphis 3, Tenn. , for defendant.

Memorandum Decision

BROWN, District Judge:

This is an action filed by the United States to reduce to judgment income tax deficiencies of two of the defendants and to foreclose income tax liens on certain property of those defendants. The trial was had before the Court without a jury, and this memorandum decision has been prepared and filed in lieu of findings of fact and conclusions of law.

It appears that the defendant taxpayers, Lonnie M. and Bessie Ragsdale, are husband and wife and are residents of Memphis , Tennessee . It further appears that income tax deficiencies were assessed against them jointly for the years 1943 and 1954 and that deficiencies were assessed against Mr. Ragsdale individually for the years 1945, 1946 and 1947. These deficiencies were assessed pursuant to stipulations entered in the Tax Court, where the taxes for all said years except 1954 were in litigation, and pursuant to a waiver of restrictions on assessment and collection (Treasury Form 870) as to the year 1954. Notice of tax liens were duly filed in 1958 and 1959. The correctness of the assessments as set out in the Government's complaint is not contested by defendant taxpayers.

On April 20, 1959, the Government collected the sum of $2,390.21 as a result of a levy on a bank account of Mr. Ragsdale and credited this amount against his individual tax liability for the year 1945. It is his contention that this amount should have been credited against the joint liability for the year 1943, the earliest year as to which he was liable for a deficiency, because he so directed. The answer to this contention, without determining whether a taxpayer may so control the application of a payment, is that there is nothing in the record to indicate that, at the time the collection was made, Mr. Ragsdale directed or even requested that it be applied against the joint liability for the year 1943. Defendants offered no proof whatsoever at the trial, and the testimony of a Revenue Agent, who was the sole witness, and the exhibits and stipulations do not indicate that Mr. Ragsdale so directed the application of the payment. Therefore, the Court finds and holds that the Government was entitled to apply, as it did apply, the amount collected to the individual liability of Mr. Ragsdale for the year 1945.

The more difficult issues result from the effort of the Government to foreclose its tax liens on certain property of defendant taxpayers. It appears that in 1954, they sold a parcel of real estate located in Memphis to defendants Libio J. Barsotti and Louis J. Barsotti who executed a promissory note payable in installments, to defendant taxpayers. This note was secured by a deed of trust covering the real estate, and was executed by the defendants Barsotti and their wives, the wives also being defendants in this action. It is this promissory note that the Government seeks to have sold in satisfaction of its tax liens. A levy has heretofore been had by the Government, which has been served on the defendants Barsotti, who thereafter have made the installment payments to the Government. Moreover, on the Government's motion, defendant taxpayers have been required to deliver possession of this note to the Clerk of this Court.

There is no question but that the Government has a lien on this note by virtue of Sec. 6321 et seq. of the Internal Revenue Code of 1954 and that in a proper case this Court may order foreclosure of a tax lien. (Int. Rev. Code of 1954, §7403.)

The first contention of defendant taxpayers is that the Government cannot foreclose this lien in this action because the trustee under the deed of trust which secures the note was not made a party to this action. This contention seems to be based on the notion that the foreclosure herein sought involves a foreclosure of the deed of trust. Of course, it does not involve a foreclosure of the deed of trust; the foreclosure of these tax liens simply involves a sale of this note owned by defendant taxpayers which note is secured by the deed of trust.

The next contention of defendant taxpayers is that the note cannot be sold in foreclosure of the tax liens because it is payable in installments. While this contention might be valid with respect to claims of taxpayers which are contingent and not yet in existence, where, as here, the debt is owed to taxpayers but payment thereof is merely deferred, there seems to be no reason why the debt, represented by the note, cannot be sold. The Government is not seeking acceleration of the installments; it is seeking only to sell the installment note.

The next controversy has to do with whether the promissory note is owned by the defendant taxpayers as tenants by the entirety and if so, what are the rights of the Government as to foreclosure on this note.

The Government and taxpayers agree that these questions must be answered by Tennessee law. U. S. v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958). Moore v. Glotzbach [61-1 USTC ¶9185], 188 F. Supp. 267 (E. D. Va. 1960). Pilip v. U. S. [60-2 USTC ¶9696], 186 F. Supp. 397 (D. Alaska 1960). The Government also concedes that personalty may, under Tennessee law, be held by a husband and wife as tenants by the entirety. Oliphant v. McAmis, 197 Tenn. 367, 273 S. W. 2d 151 (1954). It contends, however, that as the promissory note does not provide that taxpayers shall hold as tenants by the entirety and as no proof was offered that they intended so to own the note, it cannot be inferred that they intended to do so, citing the Oliphant case, supra. The Oliphant case actually holds that even where the instrument conveying title to personalty shows only the name of the husband, it may be proved by surrounding circumstances as well as statements of the husband that he intended to hold as a tenant by the entirety and such a tenancy thereby established. This case also holds that a joint bank account in the name of a husband and wife is held by the entirety. The rule likewise seems to be that husband and wife hold by the entirety where they are both named in the instrument even though, as here, they are not described therein as husband and wife. 26 Am. Jur., Husband and Wife §68. It therefore appears, and the Court so finds and holds, that the promissory note is owned by defendant taxpayers as tenants by the entirety.

The next question is whether the Government has the right to require the sale of the interest of both defendant taxpayers in the note to satisfy their joint tax liability. Defendant taxpayers insist that the Government does not have the right, without citing authority or advancing a reason for this conclusion. It seems that the interest of both spouses as tenants by the entirety may be sold to satisfy their joint liability. Newson v. Shackleford, 163 Tenn. 358, 361, 43 S. W. 2d 384 (1931). Moore v. Cary , 138 Tenn. 332, 343, 197 S. W. 1093 (1917). Whittaker v. Kavanagh [51-2 USTC ¶9393], 100 F. Supp. 918 (E. D. Mich. 1951). Pilip v. U. S., supra. 26 Am. Jur., Husband and Wife §86.

The remaining question has to do with the disposition of the balance of the proceeds of the sale after satisfying the joint tax liability of Mr. and Mrs. Ragsdale. In answering this question, we must first determine whether the proceeds of the sale will be held by them as tenants by the entirety. While there seems to be no Tennessee authority, the general rule seems to be that proceeds of a foreclosure sale of property held by the entirety maintain the characteristics of a tenancy by the entirety. Annot., 64 A. L. R. 2d 8, 60.

It is the position of the Government, nevertheless, that at least some part of the balance of the proceeds can forthwith be applied against Mr. Ragsdale's individual tax liability, while defendant taxpayers contend that this balance must be turned over to them as tenants by the entirety.

Under Tennessee law a husband's interest in property held by the entirety can be sold to satisfy his individual debt, and the pourchaser becomes the owner of the husband's right of survivorship. Cole Mfg. Co. v. Collier, 95 Tenn. 115, 31 S. W. 1000 (1895). Sloan v. Sloan, 182 Tenn. 162, 184 S. W. 2d 391 (1945). Gemignani v. Partee, 42 Tenn. App. 358, 302 S. W. 2d 821 (1956). It would therefore seem that, after the sale of the note and the application of the proceeds first to the joint liability, the Government will be the owner of Mr. Ragsdale's right of survivorship in the balance. To enforce and protect this right of the Government, this balance should and will be held by the Clerk of this Court pending the death of Mr. or Mrs. Ragsdale. See 41 C. J. S., Husband & Wife §34 and Annot., 64 A. L. R. 2d 8, 60. If Mr. Ragsdale survives, the Government will be entitled to the entire fund to the extent necessary to satisfy his invididual liability, which was assessed for the years 1945, 1946 and 1947, together with interest. If he does not survive, the Government will not be entitled to any part of this balance. In the meantime, the Clerk is authorized but not directed to invest the fund in Government bonds. As to the income derived from such an investment, the Cole Mfg. Co. case, supra, by dicta, indicates that the Government might not be currently and from time to time entitled to any part thereof as it accrues and is received by the Clerk, but there is respectable authority to the contrary. See 26 Am. Jur., Husband and Wife §85. In any event, if the Clerk does invest the fund as herein authorized, he is directed to pay over one-half of the income to the Government as it is received in payment of Mr. Ragsdale's individual tax liability. The other one-half of such income should, of course, be distributed to Mrs. Ragsdale

An order will be prepared and entered consistent with this Memorandum Decision.

 

 

 

United States of America , Plaintiff v. Ann M. Borcia, etc., et al., Defendants

U. S. District Court, So. Dist. Calif. , Cent. Div., No. 322-57 Y Civ., 10/16/57

[1939 Code Secs. 3670 and 3672--similar to 1954 Code Secs. 6321 and 6323]

Lien for taxes: Wife's tax liability: Sale of residential property owned by husband and wife as joint tenants.--The Commissioner assessed against taxpayer Ann Richardson, also known as Mrs. John Borcia, social security, income, and cabaret taxes and interest thereon, in the amount of about $200,000 for the years 1946 and 1947, filing lien for such unpaid taxes in 1948 and 1951. The taxpayer and her husband own a one-family residence in Los Angeles , in joint tenancy. Since it would be impractical, inequitable and unfeasible to sell only the interest of taxpayer in the property, the sale of the entire property is ordered in order to satisfy the lien. The proceeds of the sale are to be applied, first, to the payment of expenses of the sale, second, to a $1,300 balance on a deed of trust against the property, third, the remaining proceeds to be divided into two equal parts representing the taxpayer's interest and that of her husband, respectively, fourth, the amount representing taxpayer's interest to be applied to the tax lien, and fifth, any balance in the interest of the taxpayer to be applied toward payment of her city and county taxes, and any remainder to be paid to her. City and county taxes of $354 are also to be paid from the husband's portion of the sales proceeds.

Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Robert H. Wyshak, Assistant United States Attorney, 808 Federal Building, Los Angeles 12, Calif., for plaintiff. A. J. Weiss, for Ann M. Borcia and John P. Borcia, George R. Pfeiffer, for Security-First National Bank of Los Angeles and Lincoln Savings and Loan Association, Harold W. Kennedy, County Counsel, by Robert A. Von Esch, Jr., Deputy County Counsel, for the County of Los Angeles and City of Los Angeles.

Findings of Fact, Conclusions of Law and Decree and Order of Sale

YANKWICH, Chief Judge:

The above-entitled matter came on for trial on the 27th day of September, 1957, pursuant to stipulation, before the Honorable Leon R. Yankwich, Chief Judge, sitting without a jury, Laughlin E. Waters, United States Attorney, Edward R. McHale, Assistant United States Attorney, Chief, Tax Division, Robert H. Wyshak, Assistant United States Attorney, appearing as attorneys for plaintiff; A. J. Weiss appearing as attorney for defendants Ann M. Borcia and John P. Borcia; George R. Pfeiffer appearing as attorney for defendant Security-First National Bank of Los Angeles, a corporation, and Lincoln Savings and Loan Association, a corporation; Harold W. Kennedy, County Counsel, by Robert A. Von Esch, Jr., Deputy County Counsel, appearing for the County of Los Angeles and the City of Los Angeles; the defendants Calor E. Weber, Daniel D. Benedett, and the State of California having disclaimed; dismissals having been entered as to the defendants Lohman Bros., a corporation, Rowland L. Lohman, Kathryn L. Lohman, J. T. Lohman, Jill Cole, Geraldine D. Breer, and Title Insurance and Trust Company, a corporation, as executor under the will of Louis C. Breer, Dec'd., doing business as Lohman Bros.; defaults having been entered against Leonard Earnest, Roselle Earnest, Ed Groves, Louis Glasser and Irving G. Glasser, doing business as Glasser Bros.; B. F. McManus, individually and doing business as Mutual Credit Bureau, they having been regularly served with process, and having failed to appear and answer the complaint; and evidence having been introduced, and the Court after considering said evidence and the stipulations of the parties in open court makes its findings of fact and conclusions of law as follows:

Findings of Fact

I The plaintiff United States of America , defendant County of Los Angeles and the defendant City of Los Angeles are corporations sovereign and bodies politic.

II The defendant Security-First National Bank of Los Angeles is a national banking association and the defendant Lincoln Savings and Loan Association is a California corporation, both of which have their principal places of business in Los Angeles , California .