Rent

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United States of America , Plaintiff-Appellee v. Redevelopment Agency of the City of Oakland , Defendant-Appellant

(CA-9), U.S. Court of Appeals, 9th Circuit, 95-17084, 4/8/97, Affirming a District Court decision, 95-2 USTC ¶50,496

[Code Secs. 6321 , 6323 , 6332 and 7403 ]

Action to enforce lien: Surrender of property: Levy and demand: Priority of lien: Deeds of trust: Assignment of rents: Absolute assignment v. security assignment: Appointment of receiver.--A municipal redevelopment agency that, as assignee of a mortgage on real property owned by a delinquent taxpayer, received rent monies collected before the property's foreclosure sale had to surrender those funds pursuant to an IRS levy. Under state ( California ) law, the assignment of rents could be perfected only after a receiver was appointed to collect the rents. Since the appointment of the receiver occurred after the IRS perfected its lien, the tax lien had priority. Thus, the agency took the funds subject to the tax lien and was liable for failure to honor the levy.

Murray S. Horwitz, Assistant Attorney General, Gary R. Allen, William S. Estabrook, Department of Justice, Washington, D.C. 20530, for plaintiff-appellee. Steven M. Morger, Wendel Rosen Black & Dean, 111 Broadway, Oakland , Calif. 94607 , for defendant-appellant.

Before: GOODWIN, LEAVY, and THOMAS, Circuit Judges.

 Caution: This court has designated this opinion as NOT FOR PUBLICATION. Consult the Rules of the Court before citing this case.

MEMORANDUM ^*

OVERVIEW

The United States brought this action under 26 U.S.C. §§6332 and 7403 to enforce a Notice of Levy served upon the Redevelopment Agency of the City of Oakland (the Agency). The district court granted summary judgment for the United States and the Agency timely appealed. We have jurisdiction under 28 U.S.C. §1291 and we affirm.

FACTS AND PRIOR PROCEEDINGS

This appeal arises from competing claims to rent monies between a holder of an assignment of rents (the Agency) and the government's tax lien. Raymond Castor (not party to this proceeding) owned certain real property in the City of Oakland which was leased to the city for a term of twenty years. On August 5, 1987, Castor mortgaged the property and gave an assignment of rents to the lender. On October 21, 1991, the Internal Revenue Service (IRS) imposed a federal tax lien on Raymond Castor for unpaid employment taxes. On December 9, 1991, the lender sought and obtained court appointment of a Receiver to collect the rents. The Agency then purchased the mortgage along with the assignment of rents. The Agency also purchased Castor's real property in a foreclosure sale on June 10, 1993, for less than the amount due on Castor's mortgage. The Receiver gave the Agency, as assignee of the mortgage, the rent monies collected before the foreclosure sale. On January 28, 1994, the IRS served a Notice of Levy on the Agency to collect these rent monies. The Agency refused to honor the levy.

On March 30, 1995, the United States brought this action to enforce the levy. The Agency filed a motion to dismiss or, alternatively, for summary judgment asserting that the Government was not entitled to the rents. The Government filed a cross-motion for summary judgment asserting that the Notice of Federal Tax Lien filed on October 21, 1991, primed the Agency's interest in the rents. On August 16, 1995, the district court granted the Government's motion for partial summary judgment. The district court found that the assignment of rents clause in the Deed of Trust was an assignment of rents for security purposes which was not perfected until December 9, 1991, the date the Receiver was appointed. Because the Government's notice of federal tax lien was filed on October 21, 1991, the Government had a priority interest in the rent monies. On October 16, 1995, the parties stipulated as to the amount of rent and for judgment. Judgment was entered on October 17, 1995. The Agency filed its timely appeal on October 24, 1995.

ANALYSIS

The United States argues for the first time on appeal that the Agency is liable under section 6332(d)(1) of the Internal Revenue Code for its failure to honor the Internal Revenue Service levy, without regard to whether the Agency's lien primed the Government's federal tax lien. Although this issue was not raised or ruled on in the district court, we may affirm on this basis if it is supported by the record. United States v. State of Washington, 969 F.2d 752, 755 (9th Cir. 1992), cert. denied, 507 U.S. 1051 (1993).

Under 26 U.S.C. §6321, a lien arises when a taxpayer fails or refuses to pay his taxes after assessment, notice and demand. See §§6321 and 6322 (1992). The lien is against "all property and rights to property, whether real or personal, belonging . . . [to a delinquent taxpayer]." 26 U.S.C. §6321. State law determines whether a taxpayer's interest constitutes property. United States v. Hemmen [95-1 USTC ¶50,210], 51 F.3d 883, 887 (9th Cir. 1995). "The lien continues to attach to a taxpayer's property regardless of any subsequent transfer of the property." United States v. Donahue Indus., Inc. [90-2 USTC ¶50,343], 905 F.2d 1325, 1331 (9th Cir. 1990) (citations omitted).

If the tax remains unpaid, within ten days after notice and demand, the IRS may collect the tax by levy. 26 U.S.C. §6331. Levy may be made "upon all property and rights to property . . . belonging to [a taxpayer] or on which there is a [federal tax] lien. 26 U.S.C. §6331(a) (emphasis added). When a taxpayer's property is held by another, the IRS customarily serves a notice of levy upon that party, pursuant to 26 U.S.C. §6332(a). If the party refuses to surrender the property in response to the levy, he is personally liable to the government in an amount equal to the value of the property not surrendered. 26 U.S.C. §6332(d)(1).

There are two defenses for failure to comply with a tax levy: 1) the party is not in possession of the taxpayer's property, or 2) the property is subject to a prior judicial attachment or execution. United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 721-22 (1985); Hemmen [95-1 USTC ¶50,210], 51 F.3d at 887-88.

The Agency argues that it has the benefit of the first defense because, when it received the Notice of Levy on January 28, 1994, Castor no longer had any right to the rent monies. That is, the appointment of the Receiver on December 9, 1991, at the very latest, gave the mortgage lender the right to the rent to be applied to the debt.

For the reasons stated by the district court, we agree with the district court that the assignment of rents at issue in this appeal was not an absolute assignment, but an assignment of rents for security purposes. Therefore, the situation here is not distinguishable from that in Donahue. In Donahue, a bank loaned money to the taxpayer, taking as collateral a security interest in the taxpayer's accounts receivable. The IRS filed several tax lien notices against the taxpayer before the taxpayer defaulted on the bank loan. After default the bank collected the accounts receivable and applied them against the balance of the loan. The IRS then served a Notice of Levy on the bank to collect the monies from the accounts receivable. The bank argued that it had no property belonging to the taxpayer. We affirmed the district court's judgment enforcing the levy, stating: "the bank took the taxpayer's accounts receivable subject to the government's lien, which attached when the tax deficiencies were assessed. . . . We hold that the bank was required to honor the levy by surrendering the property demanded." [90-2 USTC ¶50,343], 905 F.2d at 1331.

Here, the Receiver was appointed after the government filed its lien notice. Thus, the Agency took the rent monies subject to the government's lien and, under Donahue, is liable under 26 U.S.C. §6332(d)(1) for failure to honor the levy.

CONCLUSION

The judgment of the district court is AFFIRMED.

^* This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3.

 

 

 

United States of America , Appellant, v. Utica, Chenango & Susquehanna Valley Railway Company, et al., Appellees.

(CA-2), United States Circuit Court of Appeals for the Second Circuit., No. 241. October Term, 1942. Argued April 7, 1943., 135 F2d 922, 05/07/43

Appeal by the plaintiff from an order of the District Court for the Southern District of New York.

Property subject to lien: Injunction to preserve asset pending action for recovery of tax.--Where taxpayer-lessor leased its corporate property for the duration of its charter in consideration of semi-annual payments by the lessee direct to its shareholders, the payments were properly enjoined pending a levy by the collector covering the lessor's unpaid income taxes for the years 1933-1941, inclusive, the absence of a judgment for the unpaid taxes being immaterial. United States v. Morris & Essex Railroad Company. 135 Fed. (2d) 711, 43-1 USTC ¶9432, followed.

Frank J. Dufficy, for the appellant. J. Theodore Cross, for the appellees.

Before L. HAND, SWAN and FRANK, Circuit Judges.

PER CURIAM:

This case is a companion to United States v. Morris & Essex Railroad Railroad Company, 135 Fed. (2d) 711 [43-1 USTC ¶9432], decided this day by us. For the reasons stated in our opinion in that case, this order must be reversed, and an injunction entered, pendente lite.

Order reversed; injunction to enter.

 

 

 

United States , Appellee, v. Morris & Essex Railroad Company, et al. Appellants

(CA-2), United States Circuit Court of Appeals for the Second Circuit, No. 240. October Term, 1942, 135 F2d 711, Argued April 6, 1943. Decided May 7, 1943, Cert. denied, 320 U. S. 754, 64 S. Ct. 61

Appeal by the defendants from an order of the District Court for the Southern District of New York.

Gross income: Payments by lessee direct to shareholders: Property subject to lien.--Where taxpayer-lessor eased its corporate property for the duration of its charter in consideration of semi-annual dividend payments by the lessee direct to its shareholders, the dividends payments were properly enjoined pending a levy by the collector covering the lessor's unpaid income taxes for the years 1933-1941, inclusive, because, there being no doubt as to the validity of the tax, such payments, due to the continuation of lessor's corporate existence, constitute the sole source of lessor's income subject to distraint for taxes and that asset must be preserved pending action for recovery of the taxes. United States v. Warren Railroad Company, 127 Fed. (2d) 134, 42-1 USTC ¶9391, followed. Affirming District Court decision.

Frederick M. Schlater, for the Morris & Essex Railroad Company, et al. Edwin M. Slote, for the appellant Dryfus. Frank J. Dufficy, for the appellee.

Before L. HAND, SWAN and FRANK, Circuit Judges.

L. HAND, Circuit Judge:

This is an appeal from an order, enjoining the Delaware, Lackawanna & Western Railroad, from making any further payments to the shareholders of the Morris & Essex Railroad Company which fall due as rent under a lease of its railroad to the Lackawanna. The facts which are undisputed are as follows: In 1868 the Morris & Essex leased its property of every kind for the duration of its charter to the Lackawanna, in consideration of a semi-annual direct payment to the lessor's shareholders of "interest at the rate of seven per cent per annum, upon the par value of said stock." (To this there was later added a contingent payment of one per cent, later reduced to an absolute promise to pay three quarters of one per cent.) The lessee assumed all the debts of the lessor, and agreed to pay "all taxes and assessments * * * levied or assessed on any of the property hereby granted, leased, or demised, or on the business or any of the business, done on or with the said property, or on the income or profits of the said business"; it also granted a right of re-entry to the lessor for breach of the covenant just mentioned. Since the beginning of the lease, the lessee has regularly paid to the lessor's shareholders the amounts reserved, and has incorporated an express agreement to do so in their certificates. The only possible income of the lessor is the payments themselves and the lessee's further promise to pay any income taxes "on the income or profits of the said business." The Treasury assessed income taxes against the lessor for 1933-1941, inclusive, based upon the amount of both promises. Neither the lessor nor the lessee having paid these taxes, the United States brought this action against both, praying judgment that the lessee be restrained from paying any dividends to the shareholders until the collector can levy upon them, and that after such levy, the lessee pay all dividends to the plaintiff until all arrears of income taxes have been extinguished. Three shareholders have intervened in the suit in their separate interests. The plaintiff moved for a temporary injunction on the authority of our decision in United States v. Warren Railroad Company, 127 Fed. (2d) 134 [42-1 USTC ¶9391], which the judge held to be controlling; he also thought that the situation was also within United States v. Joliet & Chicago Railroad Co., 315 U. S. 44 [42-1 USTC ¶9222], and United States v. Long Island Drug Co., 115 Fed. (2d) 983 (C. C. A. 2) [41-1 USTC ¶9140]. The defendants then appealed.

It the lessor be regarded as a jural person separate from the shareholders, the order was clearly wrong. On that view the taxes levied against the lessor were not levied against the shareholders; and the property of the shareholders--their claims against the lessee--was their property and not the lessor's. It would be plainly unlawful for the lessor's creditor to seize property of the shareholders, who are not its debtors, to pay the lessor's debts. Moreover, if that be the right way to look at the lease, the lessor has never had any income to tax, for the only income which can be attributed to it is the dividends payable to the shareholders, and perhaps the promise to pay the income taxes themselves. On the other hand, if those payments can be imputed to the lessor as income so that an income tax can properly be imposed upon them, it must follow that they are available to satisfy the tax; for it would be absurd at once to hold that the dividends were the lessor's income for the purpose of assessing a tax against it, but were the shareholders' income for the purpose of collecting that very tax. We start therefore with the premise that, if the shareholders are to be identified with the lessor in one aspect, they must be in the other; and now it has been authoritatively decided that such guaranteed dividends, though payable directly to the shareholders, are income of the lessor and may be taxed as such. United States v. Joliet & Chicago Railroad Co., 315 U. S. 44 [42-1 USTC ¶9222]. The reason for this is clear. The shareholders did not disband as a group, or dissolve the corporation; they could not, for they needed it for the future. If they had done so, they would have become shareholders or creditors of the lessee which would not have served their purpose; the lessee might default, and they would then wish to retake their railroad, for whose operation a corporation would be essential. For these reasons they continued to use the corporate form, and they cannot retain the privilege without accepting the burdens, one of which is that any collective income shall bear a tax. Courts will not allow the fictitious personality of a corporation to be used as a means for avoiding public duties; and the form of this transaction cannot conceal the truth that payments to the corporation are for all practical purposes payments to its shareholders; and payments to its shareholders, payments to the corporation. It is true that the Treasury may take a taxpayer at his word, so to say; when that serves its purpose, it may treat his corporation as a different person from himself; but that is a rule which works only in the Treasury's own favor; it cannot be used to deplete the revenue. Higgins v. Smith, 308 U. S. 473 [40-1 USTC ¶9160].

The tax being valid and collectable from the payments as property of the lessor, it only remains to consider whether the action is a proper means procedurally for that purpose. In United States v. Warren Railroad Co., supra (127 Fed. (2d) 134 [42-1 USTC ¶9391]), we said, pages 137, 138, as we had already said in United States v. Long Island Drug Co., 115 Fed. (2d) 983, 986 [41-1 USTC ¶9140], that §3710 of Title 26, U. S. Code, covered such an action. That necessarily involved a holding that the action was for a "penalty" imposed for the failure of a person holding property, or "rights to property," on which a collector had distrained, to "surrender any of such property or rights." In each case this was not necessary to the result; and when in United States v. Metropolitan Life Insurance Company, 130 Fed. (2d) 149 [42-2 USTC ¶9609], the point was inescapably presented, we held the precise opposite after full deliberation. What we said in United States v. Warren Railroad Company, supra (127 Fed. (2d) 134 [42-1 USTC ¶9391]), was however only a dictum, because, as we also said, page 139, "the above procedure is the counterpart of a judgment creditors' suit in which it is not required that execution be issued and returned unsatisfied." That is to say, the creditor (the Treasury) is seeking to apply to the payment of its claim a debt which a third person (the lessee) owes to the debtor (the lessor). It will at once be retorted that this action cannot be treated as a creditor's suit because the plaintiff has never got judgment on the tax against the lessor, and because obviously it has not levied execution. But although ordinarily both these are conditions to such a suit (Smith v. Railroad Co., 99 U. S. 398, 401), they are not invariably so. It is enough for example to toll the first that the debtor acknowledges the debt (Scott v. Neely, 140 U. S. 106, 113; Talley v. Curtain, 54 Fed. Rep. 43 (C. C. A. 4); Haich v. Morosco Holding Co., 50 Fed. (2d) 138 (C. C. A. 2) [2 USTC ¶739]); and to toll the second that the debtor is insolvent (Case v. Beauregard, 101 U. S. 688; Motlow v. Southern Holding and Securities Corp., 95 Fed. (2d) 721, 723 (C. C. A. 8)). Although the lessor disputes the debt and is not insolvent, other circumstances supply the place of these, as well as of judgment and execution. In the first place the tax is not like an ordinary claim; the plaintiff need not wait for judgment in order to levy execution; it can distrain ten days after notice and demand. §3690, Title 26, U. S. Code. And if it can distrain and sell without any judgment, not only the lessor's chattels, but this very chose in action, the assessment is itself the equivalent of a judgment for purposes of collection. Therefore, any protection to the debtor by requiring judgment as a preliminary would be out of place here; for certainly there is no reason to protect it as to this form of property when it would enjoy no such protection as to any others, or even as to the sale of this. Furthermore, at least as to the tax upon the payments to shareholders, there is no doubt about the validity of the tax anyway. Nor should the second condition--execution as an evidence of exhausting legal remedies--be required. The lessee has no other property on which to distrain; and, although the plaintiff might distrain upon the chose in action and sell it, that is not an adequate remedy; it would be excessively wasteful to both the plaintiff and the lessor. We do not forget that in Scott v. Neely, supra, 113 (140 U. S. 106) it was said that "there must be, in addition to such acknowledged or established debt, an interest in the property or a lien thereon created by contract or by some distinct legal proceeding." With all deference we should hesitate today before imposing such a condition upon a creditor's suit, if it ever existed. Be that as it may, a lien will in any event be created upon the cause of action at bar upon "notice and demand" for payment of the tax. §3670, Title 26, U. S. Code. The path being therefore cleared for an action by the plaintiff as substitute obligee of the lessor's right of action against the lessee, the tax can be recovered in full, and to that end the asset must be preserved meanwhile.

Judgment affirmed.