6321
Bankruptcy page3
Rimco Acquisition Company, Plaintiff v. Wardell
Johnson, an individual, his heirs, and assigns, known and unknown,
Bessie J. Johnson, her heirs, and assigns, known and unknown, Goldman
Investments Company Profit Sharing Plan, a Michigan Corporation, the
United States of America-Internal Revenue Service, Occupants at 137
McLean, Highland Park, Michigan, and all other persons or entities who
may claim an interest in property commonly known as 137 McLean, Highland
Park, Michigan, Defendants
U.S.
District Court, East.
Dist.
Mich.
, So. Div., 98-CV-60379-AA, 8/5/99, 68 FSupp 2 d 793
[Code
Secs. 6321 and 6325
]
Tax lien: Quiet-title action: Stay: Bankruptcy proceeding of
parent.--The IRS's status as a federal tax lien holder on a property
was preserved following a nonjudicial tax sale because a company that
acquired an interest in the property did not prove that proper notice of
the sale was given to the government. The quiet title action brought by
the company was not stayed, pending the bankruptcy proceedings of the
company's parent company. There was no support for the subsidiary's
position that a bankruptcy filing by the parent automatically stayed
actions against the subsidiary.
[Code
Sec. 7425 ]
Tax lien: Notice not given: Tax sale: Lien not discharged.--The
IRS's status as a federal tax lien holder on a property was preserved
following a nonjudicial tax sale because a company that acquired an
interest in the property did not prove that proper notice of the sale
was given to the government. The company failed to respond to the IRS's
discovery requests and, as a result, was deemed to have admitted that
the IRS was never given proper notice of the sale. Therefore, the
federal tax lien on the property was not discharged.
ORDER GRANTING DEFENDANT UNITED STATES OF AMERICA'S MOTION FOR
SUMMARY JUDGMENT and ORDER OF REMAND
HACKETT, District Judge:
Before the court is an
action to quiet title to property located at 137 McLean,
Highland Park
,
Michigan
. Originally, this action was filed in Wayne County Circuit Court.
However, defendant
United States of America
(
United States
) removed the action to federal court pursuant to 28 U.S.C.A. §1444
(West 1994).
Defendant Wardell Johnson,
a holder of an interest in the property, failed to pay federal income
taxes for the years 1987 and 1988. As a result, the
United States
attached a lien on the property in the amount of $22,055.85, which
includes statutory interest. The
United States
' lien was recorded with the Wayne County Register of Deeds on December
21, 1995. However, the property was subjected to a tax sale resulting
from unpaid property taxes. The State of
Michigan
and ultimately, the City of
Highland Park
, obtained title to the property. Plaintiff purchased the property from
the City of
Highland Park
and initiated the instant action in an effort to quiet title to the
property. According to plaintiff, the
United States
' interest in the property was extinguished through the tax sale.
On April 1, 1999, the
United States
filed a motion for summary judgment. After failing to receive a timely
response to the motion, the court ordered plaintiff to show cause in
writing why summary judgment should not be granted in favor of the
United States
. On May 21, 1999, plaintiff filed a written response to the court's
order to show cause.
Defendant United States
argues that the property is still subject to its recorded federal tax
liens because no notice of the non-judicial sale was served upon the
United States pursuant to §7425 of the Internal Revenue Code. On
January 22, 1999, the
United States
served a Request for Admissions, Interrogatories and a Request for
Production upon plaintiff to determine whether the
United States
was properly given notice of the nonjudicial sale. To date, plaintiff
has failed to respond to the
United States
' discovery. As a result, the
United States
contends that plaintiff is deemed to have admitted that the
United States
was never given proper notice of the tax sale.
In response, plaintiff
informed the court that it is a wholly owned subsidiary of one of the
MCA/RIMCO debtors, 1
who filed voluntary petitions for relief under Chapter 11 of the United
States Code (the Bankruptcy code). Mortgage Corporation of America (MCA)
is the mortgagee of the property, securing a $45,000 indebtedness owed
by plaintiff. Because of the mortgage arrangement, plaintiff argues that
MCA has an interest in the property and that this interest is part of
MCA's bankruptcy estate. According to plaintiff, any grant of summary
judgment in favor of the
United States
would adversely affect the property interest of the bankruptcy estate of
MCA. Therefore, plaintiff requests that the court stay the case pursuant
to the automatic stay provisions of 11 U.S.C.A. §362(a)(3) (West 1993
& Supp. 1999).
In reply, defendant
United States
contends that the action is not subject to stay pursuant to 11 U.S.C.A.
§362(a)(3). According to the
United States
, the bankruptcy filing by a parent does not automatically stay actions
against a wholly owned subsidiary. Plaintiff has not filed for
bankruptcy relief. Instead, plaintiff is merely a wholly owned
subsidiary of one of the bankruptcy debtors. While plaintiff asserts
that the grant of summary judgment in favor of the
United States
would adversely affect MCA's mortgage interest, the MCA/RIMCO debtors
have not been named as a party in this action to quiet title. In fact,
defendant
United States
argues that the instant action could only improve the MCA/RIMCO debtors
relative priority as this case seeks to remove the
United States
' lien as a discharged lien. Furthermore, the
United States
contends that it is not attempting to foreclose its tax lien at this
time. It is not seeking to obtain possession of the property or to
exercise control over the property. Instead, the
United States
is merely attempting to maintain its status as a lien holder.
Standard
of Review
Federal Rule of Civil
Procedure 56(c) empowers the court to render summary judgment
"forthwith if the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, if
any, show that there is no genuine issue as to any material fact and
that the moving party is entitled to judgment as a matter of law." See
F.D.I.C. v. Alexander, 78 F.3d 1103, 1106 (6th Cir. 1996). The
Supreme Court has affirmed the court's use of summary judgment as an
integral part of the fair and efficient administration of justice. The
procedure is not a disfavored procedural shortcut. Celotex Corp. v.
Catrett, 477
U.S.
317, 327 (1986); see also Kutrom Corp. v. City of
Center Line
, 979 F.2d 1171, 1174 (6th Cir. 1992).
The standard for
determining whether summary judgment is appropriate is " 'whether
the evidence presents a sufficient disagreement to require submission to
a jury or whether it is so one-sided that one party must prevail as a
matter of law.' " Winningham v. North Am. Resources Corp.,
42 F.3d 981, 984 (6th Cir. 1994) (citing Booker v. Brown &
Williamson Tobacco Co. Inc., 879 F.2d 1304, 1310 (6th Cir. 1989)).
The evidence and all inferences therefrom must be construed in the light
most favorable to the non-moving party. Matsushita Elec. Indus. Co.,
Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Enertech
Elec., Inc. v. Mahoning County Comm'r, 85 F.3d 257, 259 (6th Cir.
1996); Wilson v. Stroh Co., Inc., 952 F.2d 942, 945 (6th Cir.
1992). "[T]he mere existence of some alleged factual dispute
between the parties will not defeat an otherwise properly supported
motion for summary judgment; the requirement is that there be no genuine
issue of material fact." Anderson v. Liberty Lobby, Inc.,
477
U.S.
242, 247-48 (1986); see also Hartleip v. McNeilab, Inc., 83 F.3d
767, 774 (6th Cir. 1996).
If the movant establishes
by use of the material specified in Rule 56(c) that there is no genuine
issue of material fact and that it is entitled to judgment as a matter
of law, the opposing party must come forward with "specific facts
showing that there is a genuine issue for trial." First Nat'l
Bank v. Cities Serv. Co., 391
U.S.
253, 270 (1968); see also Adams v. Philip Morris, Inc., 67 F.3d
580, 583 (6th Cir. 1995). Mere allegations or denials in the
non-movant's pleadings will not meet this burden. Anderson, 477
U.S.
at 248. Further, the non-moving party cannot rest on its pleadings to
avoid summary judgment. It must support its claim with some probative
evidence. Kraft v. United States [93-1 USTC ¶50,278], 991 F.2d
292, 296 (6th Cir.), cert. denied, 510 U.S. 976 (1993).
Analysis
Congress established a lien
in favor of the
United States
upon all property and rights to property, whether real or personal,
belonging to any taxpayer who fails to pay federal taxes due. 26
U.S.C.A. §6321 (West 1989). See Fognini v. Hughes, No. 91-75359,
1993 WL 126410 at *1, 71 A.F.T.R. 2d 93-750, 93-1 U.S.T.C. ¶50,180
(E.D. Mich. Jan. 7, 1993). A federal tax lien arises at the time the IRS
assesses the tax delinquencies against a taxpayer and sends a notice and
demand for payment.
Id.
at §6322. Generally, once notice of the federal tax lien is properly
filed, it is entitled to priority over subsequent competing liens.
Id.
at §6323. "[A] federal tax lien attaches to the property itself,
not to the delinquent taxpayer's ownership interests in the
property." Fognini [93-1 USTC ¶50,180], No. 91-75359, 1993
WL 126410, at *2. When a federal tax lien is filed, it is state law
which determines whether the delinquent taxpayer has an interest in
property to which the federal lien may attach.
Id.
However, "[t]he transfer of property subsequent to the attachment
of the lien does not affect the lien, for 'it is of the very nature and
essence of a lien, that no matter into whose hands the property goes, it
passes cum onere [subject to the incumbrance]. . . .' "
Id.
(citing United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 57
(1958)).
26 U.S.C.A. §7425 (West
1989) outlines the manner in which a federal tax lien may be divested
under local law. §7425 provides in part:
(b) Other
sales.--Notwithstanding subsection (a) [covering judicial sales] a sale
of property on which the United States has or claims a lien, or a title
derived from enforcement of a lien, under the provisions of this title,
made pursuant to an instrument creating a lien on such property,
pursuant to a confession of judgment on the obligation secured by such
an instrument, or pursuant to a nonjudicial sale under a statutory lien
on such property--(1) shall, except as otherwise provided, be made
subject to and without disturbing such lien or title, if notice of such
lien was filed or such title recorded in the place provided by law for
such filing or recording more than 30 days before such sale and the
United States is not given notice of such sale in the manner prescribed
in subsection (c)(1);. . . .
Treasury
Regulation §301.7425-2(1) defines the term "non-judicial
sale" as including a state property tax sale. Fognini [93-1
USTC ¶50,180], No. 91-75359, 1993 WL 126410, at *2. Therefore, once a
federal tax lien is properly filed, the
United States
must be given notice of any nonjudicial sale, in this case the tax sale,
or the property remains subject to the federal lien. See Vereyken v.
Annie's Place, Inc., 964 F.2d 593, 596 (6th Cir. 1992); Baldwin
County Savings and Loan Ass'n v. I.R.S., 921 F.2d 1229, 1231 (11th
Cir. 1991); Security Pacific Mortgage Corp. v. Choate [90-1 USTC
¶50,143], 897 F.2d 1057, 1058 (10th Cir. 1990); Fognini
[93-1 USTC ¶50,180], No. 91-75359, 1993 WL 126410, at *2.
In the instant case, the
United States
' tax lien was recorded with the Wayne County Register of Deeds on
December 21, 1995. Plaintiff does not assert that it gave notice to the
United States
or the IRS of the tax sale (timely or otherwise). In fact, defendant
United States
' assertion that plaintiff failed to respond to its interrogatories and
requests for admissions went unchallenged. Because plaintiff failed to
respond to the
United States
' request for admissions served on January 22, 1999, the court finds
that plaintiff is deemed to have admitted that the
United States
was never given proper notice of the tax sale. Fed.R.Civ.P. 36(a); See
First Requests for Admission to RIMCO, ¶6, p. 3. Therefore, the
property remains subject to the
United States
' federal tax liens.
Although plaintiff requests
that this court stay the instant action pending the bankruptcy
proceedings of plaintiff's parent company, the court finds that
plaintiff's argument lacks merit. Plaintiff has not filed for bankruptcy
relief. Instead, plaintiff's parent company is currently a debtor in a
bankruptcy proceeding. Plaintiff has offered no support for its position
that a bankruptcy filing by a parent company automatically stays actions
against a wholly owned subsidiary. 11 U.S.C.A. §362(a)(3) provides for
an automatic stay against "any act to obtain possession of property
of the estate or of property from the estate or to exercise control over
property of the estate." The
United States
is not attempting to obtain possession of the property or to exercise
control over the property. Moreover, the
United States
is not requesting that the property be sold to satisfy its existing
federal tax lien at this time. Instead, the
United States
is seeking to preserve its status as a federal tax lien holder as a
result of plaintiff's lawsuit seeking to quiet title to 137 McLean,
Highland Park
,
Michigan
.
Furthermore, the
United
State
's federal tax lien was recorded with the Wayne County Register of Deeds
at the time MCA was granted a mortgagee interest in the property.
Plaintiff and MCA were on notice at the time of the tax sale of the
United States
' lien interest on the property. Therefore, the grant of summary
judgment would not adversely affect the property interest of MCA's
bankruptcy estate.
Conclusion
Because federal law
controls the discharge of a federal tax lien and plaintiff failed to
comply with the notice requirements of 26 U.S.C.A. §7425, the federal
tax lien filed against 137 McLean, Highland Park, Michigan, has not been
discharged and the United States' motion for summary judgment is hereby GRANTED.
In addition, the court no longer retains jurisdiction pursuant to 28
U.S.C.A. §1444, as the
United States
is no longer a party in the instant action. Therefore, the case is
hereby REMANDED for further proceedings in state court.
SO ORDERED.
1
MCA Financial Corporation, MCA Mortgage Corporation, Mortgage
Corporation of America, Inc., RIMCO Financial Corporation, RIMCO
Management Company, RIMCO Building Company, RIMCO Development Company,
Real Estate Solutions Group, RIMCO Realty and Mortgage, Mortgage
Corporation of America, Warehouse Lenders, Inc., and Property
Corporation of America.
In re Ross Tudisco, Debtor. Ross Tudisco,
Plaintiff-Appellant v. United States of America, Dept. of Treasury,
Internal Revenue Service, Defendant-Appellee
(CA-2),
U.S. Court of Appeals, 2nd Circuit, 98-5075, 7/7/99, 183 F3d 133,
Affirming an unreported District Court decision
[Code
Sec. 6321 ]
Tax lien: Property subject to: Bankruptcy: Exempt property:
Pension.--A federal tax lien attached to pension payments that were
exempt from the delinquent taxpayer's bankruptcy estate.
[Code
Sec. 6871 ]
Bankruptcy: Discharge: Willful attempt to evade taxes.--An
individual's tax liabilities were not discharged in his Chapter 7
bankruptcy because they arose from his willful attempt to evade taxes.
Although the debtor was aware of his obligation to pay taxes, he failed
to file returns and he gave his employer a false affidavit intended to
establish his exemption from withholding. Ross Tudisco, pro se,
appellant. Varuni Nelson, Kevin P. Mulry, Assistant United States
Attorneys, Of Counsel, for Zachary W. Carter, United States Attorney,
Eastern District of New York, for defendant-appellee, United States of
America, Department of Treasury, Internal Revenue Service.
Before: CALABRESI and
PARKER, Circuit Judges, and TRAGER, Judge. *
CALABRESI, Circuit Judge:
Plaintiff-appellant Ross
Tudisco appeals from the judgment entered in the United States District
Court for the Eastern District of New York (Leonard D. Wexler, Judge)
affirming the final judgment of the United States Bankruptcy Court for
the Eastern District of New York (Francis G. Conrad, Judge). The
bankruptcy court had dismissed Tudisco's adversary proceeding against
the United States Department of Treasury, Internal Revenue Service
("IRS"). We affirm.
BACKGROUND
On January 3, 1996,
Tudisco's debts were discharged in a Chapter 7 bankruptcy action. This
case arises in the aftermath of that discharge, as Tudisco sought, in
two parallel Chapter 13 proceedings, to stave off tax collection efforts
by the IRS .
After the termination of
the Chapter 7 case, Tudisco initiated a Chapter 13 proceeding, in order
to develop a plan for adjusting his debts ("plan proceeding").
During the course of the plan proceeding, which came before Judge
Eisenberg, Tudisco filed an objection to a claim on his assets by the
IRS. He did so on two grounds: (1) that his tax liability for the years
1985 through 1991 had been discharged in his prior Chapter 7 bankruptcy
("dischargeability issue") and (2) that his only assets--his
pension--were exempt property and hence not subject to a tax lien
("lien issue"). After both parties had briefed these
questions, Tudisco began a separate Chapter 13 adversary proceeding
against the IRS before Judge Conrad. Tudisco's complaint in the
adversary proceeding raised the same two issues that he had asserted in
the plan proceeding.
Judge Eisenberg held a
hearing on October 28, 1997, and disposed of the lien but not the
dischargeability question. The entry for this date on the Bankruptcy
Court docket reads: "Court finds that all exempt property is
subject to a lien, all other issues are same as addressed in the
adversary proceeding pending before Judge Conrad, matters are adjourned
pending resolution of adversary, submit order on exemption." Not
surprisingly, in light of Judge Eisenberg's decision, the adversary
proceeding before Judge Conrad addressed only Tudisco's dischargeability
claim, and Judge Conrad's order of July 30, 1998, dismissing the
adversary proceeding, made explicit reference only to this issue.
Following Tudisco's timely
appeal of Judge Conrad's dismissal order, the district court considered
both the dischargeability and lien issues. It affirmed the bankruptcy
court's decision that Tudisco's tax debt was nondischargeable under 11
U.S.C. §523(a)(1)(C). The district court also held that it lacked
jurisdiction over the lien issue because (1) Judge Eisenberg's decision
"was not embodied in a separate written order or entered as a
judgment" and was therefore not a final, appealable order, and (2)
had it been a final order, appeal from it would have been untimely.
Federal Rule of Bankruptcy Procedure 8002(a) requires that a notice of
appeal be filed within ten days of a final order. The August 6, 1998,
notice of appeal was filed more than ten days after Judge Eisenberg's
October 28, 1997, order. In dicta, the district court went on to
note that the bankruptcy court had ruled correctly on the underlying
substantive issue, since, under 26 U.S.C. §6321 and 11 U.S.C. §522(c)(2)(B),
a debtor's exempt assets, including a pension, are subject to attachment
by an IRS lien.
DISCUSSION
A. STANDARD OF REVIEW
The district court's order
affirming the bankruptcy court is "subject to plenary review."
Shugrue v. Air Line Pilots Ass'n, Int'l (In re Ionosphere
Clubs, Inc.), 922 F.2d 984, 988 (2d Cir. 1990). This court
"review[s] conclusions of law de novo, and findings of fact
under a clearly erroneous standard."
Id.
B.
DISCHARGEABILITY ISSUE
A debtor who files
successfully under Chapter 7 of the Bankruptcy Code generally receives a
complete discharge from pre-petition debts. See 11 U.S.C. §727(b)
(1994). Certain debts are, however, excepted from discharge. See
11 U.S.C. §523 (1994). In particular, 11 U.S.C. §523(a)(1)(C) excepts
from discharge any tax debt "with respect to which the debtor made
a fraudulent return or willfully attempted in any manner to evade or
defeat such tax." The government invokes this exception and claims
that Tudisco's tax debt was not discharged in his prior Chapter 7
filing. The government does not argue that Tudisco filed a fraudulent
return, but contends instead that he willfully evaded taxes.
Although this court has yet
to interpret the willfulness exception under §523(a)(1)(C), we benefit
from the analysis of six other circuits. See United States v. Fegeley
(In re Fegeley) [97-2 USTC ¶50,544], 118 F.3d 979 (3d Cir.
1997); In re Birkenstock, 87 F.3d 947 (7th Cir. 1996); Dalton
v. Internal Revenue Service, 77 F.3d 1297 (10th Cir. 1996); Bruner
v. United States (In re Bruner) [95-2 USTC ¶50,356], 55 F.3d
195 (5th Cir. 1995); Haas v. Internal Revenue Service (In re
Haas) [95-1 USTC ¶50,200], 48 F.3d 1153 (11th Cir. 1995); Toti
v. United States (In re Toti) [94-1 USTC ¶50,235], 24 F.3d
806 (6th Cir. 1994). The interpretations given to this exception by the
other circuits, while not completely uniform, compare Haas [95-1
USTC ¶50,200], 48 F.3d at 1156, with Bruner [95-2 USTC ¶50,356],
55 F.3d at 200, see infra, all support the conclusion that the
exception bars discharge of Tudisco's tax debt.
The willfulness exception
consists of a conduct element (an attempt to evade or defeat taxes) and
a mens rea requirement (willfulness). See
Griffith
v.
United States
(In re Griffith), 174 F.3d.1222, 1224 (11th Cir. 1999); In
re Fegeley [97-2 USTC ¶50,544], 118 F.3d at 983; In re
Birkenstock, 87 F.3d at 951. We address each of these in turn.
Most circuits have held
that a simple nonpayment of taxes does not satisfy §523(a)(1)(C)'s
conduct requirement. Thus, the Eleventh Circuit concluded that mere
knowledge of a tax debt, accompanied by nonpayment, could not render a
tax debt nondischargeable under the exception. See In re Haas
[95-1 USTC ¶50,200], 48 F.3d at 1156. As the In re Haas court
noted, "the defining characteristic of all debtors--honest and
dishonest, alike--[is] insufficient resources to honor all of [their]
obligations."
Id.
A broad reading of the exception--rendering nondischargeable any tax
debts, except those "discovered . . . in the course of . . .
bankruptcy proceedings," id. at 1155--would eviscerate the
basic "fresh start" policy of the Bankruptcy Code for the
"honest but unfortunate debtor." Id at 1156. The court
buttressed this conclusion by contrasting the language of the Chapter 7
exception with that of provisions of the Internal Revenue Code, which
penalize "attempts in any manner to evade or defeat any tax imposed
by this title or the payment thereof."
Id.
at 1156-57 (quoting 26 U.S.C. §7201 (1994) and also looking to language
of 26 U.S.C. §§6531(2), 6653, 6672 (1994)). "The omission of the
words 'or payment thereof,'" from the bankruptcy exception, the In
re Haas court concluded, "indicates that Congress did not
intend that a failure to pay taxes, without more, should result in the
nondischargeability of a debtor's tax liabilities in bankruptcy." In
re Haas [95-1 USTC ¶50,200], 48 F.3d at 1157. Other courts have
reached similar conclusions. See In re Fegeley [97-2 USTC ¶50,544],
118 F.3d at 983; In re Birkenstock, 87 F.3d at 951;
Dalton
, 77 F.3d at 1301.
In re Haas has,
however, received some criticism. See In re Bruner [95-2 USTC ¶50,356],
55 F.3d at 200. After disapproving of the In re Haas court's
analysis, insofar as it contrasted §523(a)(1)(C) with provisions of the
Internal Revenue Code, the Fifth Circuit in In re Bruner took the
position that the bankruptcy exception "surely encompasses both
acts of commission as well as culpable omissions."
Id.
In re Haas has also been criticized by a later panel in its own
circuit. See In re
Griffith
, 174 F.3d at 1225-27.
To the extent that In re
Haas and In re Bruner actually do conflict, we need not,
however, decide between them. Because Tudisco engaged in more than
"mere nonpayment," his conduct constitutes an attempt to evade
or defeat taxes under either standard. His failure to pay his taxes was
accompanied by a failure to file his tax returns, at least until 1992.
While he may not have transferred assets or created shell corporations, cf.
In re Birkenstock, 87 F.3d at 952 (finding the conduct element
satisfied based on a failure to pay, a failure to file, and the creation
of a shell trust); Bruner [95-2 USTC ¶50,356], 55 F.3d at 200
(finding the conduct element satisfied based on a failure to pay, a
failure to file, a resort to an "inordinate number of cash
transactions," and the creation of a "shell entity"),
Tudisco did submit a patently false affidavit to his employer. On its
face, the affidavit was clearly intended to establish Tudisco's
exemption from income tax withholding. Under the circumstances, we
conclude that the bankruptcy court's finding--that Tudisco attempted to
evade or defeat federal income taxes--is not clearly erroneous.
Similarly, the finding that
Tudisco "willfully" evaded taxes is not reversible. The mens
rea requirement of §523(a)(1)(C) mandates that the debtor's conduct be
undertaken "voluntarily, consciously or knowingly, and
intentionally."
Dalton
, 77 F.3d at 1302; see also In re Bruner [95-2 USTC ¶50,356], 55
F.3d at 197; In re Toti [94-1 USTC ¶50,235], 24 F.3d at 809.
Tudisco himself conceded
that he knew that he had to pay taxes. At his trial, he retracted this
statement and instead claimed that several years of research had led him
to believe that he was not obliged to pay taxes. When asked to identify
the sources that supported this conclusion, he responded with evasive
answers such as "books" or "people that I met, travelers
from different parts of the country," whose names he had long since
forgotten. Given these facts, the bankruptcy court could reasonably have
rejected his retraction.
There is sufficient
evidence to support the conclusion that Tudisco willfully sought to
evade his federal tax obligations. The district court therefore properly
affirmed the bankruptcy court's finding on this issue.
C.
LIEN ISSUE
The court below incorrectly
held that it lacked jurisdiction over the lien issue. But because we
find that Tudisco's claim fails on the merits, we affirm the district
court's decision upholding the bankruptcy court's dismissal of the
adversary proceeding.
1.
Jurisdiction
The district judge
concluded that jurisdiction did not exist under 28 U.S.C. §158(a)
because Judge Eisenberg's order on the lien issue in the plan proceeding
was not an appealable final order. The district court also noted that
the order was not final because it had not been reduced to writing. But
whether an order is final turns not on whether it was written or oral.
Rather, an order is final, and thus appealable, in the bankruptcy
context, if it "completely resolve[s] all of the issues pertaining
to a discrete claim, including issues as to proper relief." Official
Comm. of Subordinated Bondholders v. Integrated Resources, Inc. (In
re Integrated Resources, Inc.), 3 F.3d 49, 53 (2d Cir. 1993)
(emphasis omitted); see also LTV Steel Co. v. United Mine Workers
(In re Chateaugay Corp.), 922 F.2d 86, 90 (2d Cir. 1990) (stating
that a bankruptcy order is final for appeal purposes if it
"resolve[s] discrete disputes within the larger case . . .").
Had it been final, the court added, the appeal from it would not have
been timely under Federal Rule of Bankruptcy Procedure 8001, which
provides that a notice of appeal must be filed within ten days.
Judge Eisenberg's order was
in fact not final when issued and had not become final by the date of
Tudisco's appeal because the plan proceeding had not then concluded.
Perhaps as a result, Tudisco never appealed from it. While Tudisco could
have taken an interlocutory appeal of Judge Eisenberg's ruling pursuant
to 28 U.S.C. §158(a)(3) (authorizing appeal from interlocutory orders
of bankruptcy court "with leave" of the district court), he
was not required to do so. Cf. Sonnax Indus., Inc. v. Tri Component
Prods. Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280, 1283
n.1 (2d Cir. 1990) (noting that §158(a) "authorizes district
courts to hear appeals from interlocutory orders by discretionary
leave of the district court" (emphasis added)); see also Elliott
v. Four Seasons Properties (In re Frontier Properties, Inc.),
979 F.2d 1358, 1362-64 (9th Cir. 1992) (trustee did not waive an issue
by failing to bring an interlocutory appeal). Accordingly, we agree that
the district court lacked jurisdiction to review any part of the plan
proceeding.
The fact that the district
court lacked jurisdiction over Judge Eisenberg's order in the plan
proceeding, does not, however, mean that the district court lacked
jurisdiction over the lien issue. Tudisco's complaint in the adversary
proceeding raised both the dischargeability question and the lien issue.
In order for Judge Conrad to dismiss the case with prejudice--which he
did--he had to reach a decision on the merits of all the issues in
Tudisco's complaint. Cf. Fed. R. Civ. P. 41(b) (providing that an
involuntary dismissal "operates as an adjudication upon the
merits"). Therefore, a rejection of Tudisco's position on the lien
issue was necessarily, if only implicitly, a part of the final dismissal
order of the bankruptcy court. As a result, the district court had
jurisdiction pursuant to 28 U.S.C. §158(a), and we, in turn, have
jurisdiction under 28 U.S.C. §158(d) (giving the courts of appeals
jurisdiction over final decisions by district courts).
2.
Merits
We must, therefore, reach
the merits of Tudisco's claim that the tax lien cannot reach his exempt
assets.
In the plan proceeding, the
IRS filed a proof of claim, indicating $179,001.81 as a secured debt.
Tudisco objected, arguing, inter alia, that this figure
represented his accumulated "retirement," and that his
retirement was an exempt asset.
Both Tudisco and the
government have assumed, but not demonstrated, that Tudisco's pension is
indeed exempt. See 11 U.S.C. §522(b) (authorizing certain
property to be exempted from the estate and thereby to escape
liquidation in satisfaction of creditors' claims). We need not decide
whether this is in fact the case. As the government correctly argues,
even if the pension is exempt, the tax lien nevertheless attaches.
Under 26 U.S.C. §6321, a
tax liability gives rise to a lien, which attaches to "all [of the
taxpayer's] property and rights to property." The Supreme Court has
given an expansive reading to this language, stating that it
"reveals on its face that Congress meant to reach every interest in
property that a taxpayer might have." United States v. National
Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985); see
also Bourque v. United States (In re Bourque) [97-2 USTC ¶50,630],
123 F.3d 705, 706 n.2 (2d Cir. 1997) (quoting 11 U.S.C. §522(c)(2)(B)
in discussing 26 U.S.C. §6321: " '[A] tax lien, notice of which is
properly filed,' is effective against exempt property . . . and may not
be avoided."). As a result, even if Tudisco's retirement funds are
exempt from the bankruptcy estate, they are nevertheless subject to a
tax lien.
CONCLUSION
In light of Tudisco's
acknowledged failure to pay his taxes, his failure to file his tax
returns until 1992, and his submission of false withholding statements
to his employer, the finding that he willfully sought to evade or defeat
payment of taxes was not clearly erroneous, and his tax liability was,
therefore, nondischargeable. Since, moreover, a properly filed tax lien
is effective even against property exempt from the bankruptcy estate,
the bankruptcy court was correct in dismissing Tudisco's adversary
proceeding. Accordingly, we AFFIRM the decision of the district
court upholding that dismissal.
*
The Honorable David G. Trager, Judge of the United States District Court
for the Eastern District of New York, sitting by designation.
In the Matter of John Davis Orr, Debtor. Internal
Revenue Service, Appellee v. John Davis Orr, Appellant
(CA-5),
U.S.
Court of Appeals, 5th Circuit, 98-40170, 7/12/99, 180 F3d 656, 180 F3d
656. Affirming an unreported District Court decision
[Code
Sec. 6321 ]
Liens: Delinquent taxpayer: Beneficiary: Spendthrift trust:
Distributions: Property subject to lien.--An IRS lien on a debtor's
income distributions from a spendthrift trust predated and survived the
bankruptcy because it attached to future distributions at the time of
its creation, rather than as of each distribution. The lien against
future distributions was valid since the equitable interest the taxpayer
had in the trust corpus and his legal entitlement to future income
distributions constituted property to which a lien could attach and
survive until the tax liability was satisfied.
Before SMITH, DEMOSS and
STEWART, Circuit Judges.
DEMOSS, Circuit Judge:
A spendthrift trust
beneficiary who extinguished personal federal tax liabilities through
bankruptcy now appeals the determination by the district court that
distributions from the trust are subject to a prebankruptcy federal tax
lien until the tax liability is satisfied. The district court's order
conclusively settles a discrete issue within the bankruptcy case, and is
appealable pursuant to 28 U.S.C. §158(d). We conclude that the federal
tax lien on Orr's income distributions from this
Texas
spendthrift trust attached to future distributions at the time of the
creation of the lien, and not as of the time each distribution was made.
The lien thus predates and survives the bankruptcy. The judgment below
is, therefore, affirmed.
I.
On April 24, 1965, Unis
Chapman Eichelberger executed a document entitled "Unis Chapman
Eichelberger Chapman Ranch Trusts" ("Trust Document").
Eichelberger's grandson, John Davis Orr, is the named principal
beneficiary of the Unis Chapman Eichelberger Chapman Ranch Trust I
("Trust"), described in the Trust Document. The Trust provides
that Orr, after reaching the age of thirty, shall receive "all of
the net income of the trust distributed annually or at more frequent
intervals." The Trust lasts for Orr's life and then terminates. Orr
has limited testamentary power over the distribution of the Trust's
property after his death, but if Orr does not exercise this power the
property is distributed to Orr's then-living descendants, and if no such
persons exist, to charity. The spendthrift provision reads as follows:
No trust assets or income
shall be liable for the debts of any beneficiary, nor subject to seizure
under any judicial writ or proceeding. No beneficiary shall have the
power to give, grant, sell, assign, transfer, mortgage, pledge,
encumber, or in any manner to anticipate or dispose of the interest in
the trust estate or its income or to dispose of the interest in the
trust estate or its income or to dispose of any trust property until it
has been actually delivered to him in accordance with the terms hereof,
except that the foregoing shall in no manner restrict the authority
otherwise granted to any trustee who is a beneficiary to distribute the
trust property as provided herein.
Despite the generous
provisions made for him by his grandmother, Orr has encountered
financial difficulties. He filed for bankruptcy relief under Chapter 7
on November 1, 1995, and received his discharge on May 21, 1996. He has
received no distributions from the Trust since filing for bankruptcy
relief. And, most pertinent to the present controversy, he had
previously run afoul of the Internal Revenue Service by failing to pay
income taxes.
Orr failed to file his
federal income tax returns for 1984 through 1991. After examination, the
IRS and Orr agreed to the amount of tax and signed a Form 4549-CG,
Income Tax Examination Changes, consenting to assessment and collection
on October 1, 1992. On October 26, 1992, the IRS assessed the taxes,
penalties, and interest reflecting the consent. Despite notice and
demand, Orr's federal income tax liabilities for the taxes assessed on
October 26, 1992 (to the date of the bankruptcy petition) were as
follows:
Year Amount
1984 ......................................................... $160,062.08
1985 ......................................................... 63,126.91
1986 ......................................................... 88,018.08
1987 ......................................................... 79,723.98
1988 ......................................................... 141,729.83
1989 ......................................................... 29,435.00
1990 ......................................................... 45,436.27
1991 ......................................................... 23,842.35
Notices of federal tax
liens were filed in the personal and real property records of
Nueces County
,
Texas
for the 1984 through 1991 income tax liabilities on January 11, 1993.
Orr also owed federal income taxes on the date of petition for 1992 in
the amount of $2.69. Notices of federal tax liens were filed in the
personal and real property records of
Nueces
County
for the 1992 income tax liability on December 28, 1993. At the times the
notices of federal tax liens were filed, Orr was a resident of
Nueces
County
.
Orr filed this adversary
action to determine the answer to one stipulated issue: "Whether
the Internal Revenue Service's Notices of Federal Tax Lien attached to
any interest of Debtor in the Unis Chapman Eichelberger Chapman Ranch
Trust I to secure the payment of Debtor's federal income tax liabilities
for 1984 through 1992?" The parties agree that Orr can be granted a
personal discharge from his federal tax liability for 1984 through 1991
pursuant to 11 U.S.C. §727, but not for his liability for 1992.
Furthermore, the parties stipulated that the federal tax liens attached
to Orr's property or interests in property in existence at the time of
his bankruptcy filing are not dischargeable as to the property to which
they attached. There is no stipulation as to whether the federal tax
liens attached or attaches to any of Orr's interest in the Trust or its
assets, or that Orr has or had an interest in the Trust or its assets.
Orr prevailed in the
bankruptcy court. The IRS appealed to the district court, which reversed
the bankruptcy court. Orr now appeals the judgment of the district
court.
II.
Counsel were instructed to
brief the question of "[w]hether the order from which appeal is
taken in the bankruptcy case is a final order for purposes of
appeal." The parties agree that this Court may properly exercise
its appellate jurisdiction, invoking the grant of jurisdiction in 28
U.S.C. §158(d). That statute provides that "[t]he courts of
appeals shall have jurisdiction of appeals from all final decisions,
judgments, orders, and decrees entered under subsections (a) and (b) of
this section." 28 U.S.C. §158(d). Subsection (a) provides for the
appellate jurisdiction of district courts over inter alia, "final
judgments, orders, and decrees of bankruptcy judges." (Subsection
(b), which is inapplicable in this case, pertains to the jurisdiction of
bankruptcy appellate panels.)
Orr prevailed on his motion
for summary judgment in the bankruptcy court, based on his contention
that the tax liens do not attach to his post-discharge income
distributions from the Trust. In the context of a bankruptcy proceeding,
this grant of summary judgment qualified as a "final order"
reviewable by the district court. This Court has explained:
A
[bankruptcy] case need not be appealed as a "single judicial
unit" at the end of the entire bankruptcy proceeding, but the order
must constitute a `final determination of the rights of the parties to
secure the relief they seek in this suit,'" or the order must
dispose of a discrete dispute within the larger bankruptcy case for the
order to be considered final.
Texas
Extrusion Corp. v. Lockheed Corp.
(In re Texas Extrusion Corp.), 844 F.2d 1142, 1155 (5th Cir.
1988) (internal citations omitted). There is, therefore, a lower
threshold for meeting the "final judgments, orders, and
decrees" appealability standard under 28 U.S.C. §158(a) than there
is for the textually similar "final decisions" appealability
standard under 28 U.S.C. §1291. In this case, the decision of the
bankruptcy court resolved all dispositive issues pertaining to the
discrete dispute concerning the post-discharge viability of
pre-discharge federal tax liens on Orr's interest in the Trust, and
therefore was ripe for appeal to the district court.
Likewise, the district
court's reversal of the bankruptcy court is reviewable by the court of
appeals pursuant to 28 U.S.C. §158(d). Review of "final decisions,
judgments, orders, and decrees" under §158(d) is more akin to
review of "final decisions" under §1291 in nonbankruptcy
appeals, whereby "[a] decision is final when it 'ends the
litigation on the merits and leaves nothing for the court to do but
execute the judgment.'" Briargrove Shopping Ctr. Joint Venture
v. Pilgrim Enters., Inc., 170 F.3d 536, 539 (5th Cir. 1999) (quoting
Askanase v. Livingwell, Inc., 981 F.2d 807, 810 (5th Cir. 1993)
(quoting Coopers & Lybrand v. Livesay, 437
U.S.
463, 467, 98
S. Ct.
2454 (1978))). But even under §158(d), "this court's determination
of whether an order is final (and therefore appealable) is more liberal
in the bankruptcy context" than under §1291. See Lentino v.
Cage (In re Lentino), No. 98-20626, 1999 WL 77140, at *2 (5th
Cir. Mar. 5, 1999) (summary calendar).
If this adversary
proceeding stood alone as an independent case, it would be appealable
even under the higher standard of §1291. Now that the district court
has overruled the bankruptcy court and ordered "that IRS' lien
shall attach to all income distributions made to Orr from the
spendthrift trust at issue," there is nothing left for the
bankruptcy court to do. Hence, the matter is sufficiently
"final" for appellate review.
III.
Orr is the beneficiary of a
spendthrift trust.
Texas
law has historically respected the validity of spendthrift trusts. See,
e.g., Caples v. Buell, 243 S.W. 1066 (Tex. Comm'n App. 1922); see
generally 72
Tex.
Jur. 3d Trusts §§37-42 (1990). The state specifically acknowledges the
validity of spendthrift trusts by statute. See
Tex.
Prop. Code Ann. §112.035 (
Vernon
1995).
The creation of a trust
involves the separation of legal and equitable ownership of property.
The trustee is the legal owner of the corpus of a spendthrift trust; the
beneficiary is the equitable owner. See, e.g., Burns v. Miller,
Hiersche, Martens & Hayward, P.C., 948 S.W.2d 317, 322 (Tex.
App.--Dallas 1997, writ denied).
The tax liens at issue in
this case were created pursuant to 26 U.S.C. §6321, which 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. "Stronger language could hardly have been selected
to reveal a purpose to assure the collection of taxes." Glass
City Bank v. United States [45-2 USTC ¶9449], 326 U.S. 265, 267, 66
S. Ct. 108, 110 (1945). "Congress meant to reach every interest in
property that a taxpayer might have." United States v. National
Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719, 105
S. Ct.
2919, 2924 (1985). The Supreme Court has construed the language of §6321
to mean that a tax lien attaches not only to property owned by the
debtor at the time the lien attaches, but also to after-acquired
property until the tax liability is satisfied. See Glass City Bank
[45-2 USTC ¶9449], 326
U.S.
at 267-69, 66
S. Ct.
at 110-11.
The interaction between
federal and state law in this area is an important facet of our
analysis. It is well-settled that in federal taxation cases, the
definition of underlying property interests is left to state law, but
the consequences that attach to those interests are determined by
reference to federal law. See United States v. Rodgers [83-1 USTC
¶9374], 461 U.S. 677, 683, 103 S. Ct. 2132, 2137 (1983); Aquilino v.
United States [60-2 USTC ¶9538], 363 U.S. 509, 513, 80
S. Ct.
1277, 1280 (1960). Thus, we look to state law to determine the character
of any property right Orr may have in future distributions from the
Trust, but federal law determines whether or not, and at what point in
time, a tax lien may attach to that property interest. See, e.g.,
United States v. Bess [58-2 USTC ¶9595], 357 U.S. 51, 55-57, 78
S. Ct.
1054, 1057-58 (1958).
A.
The principle of the Glass
City Bank case (that a tax lien attaches to the debtor's after-acquired
property until the tax liability is satisfied) was long ago extended to
include the attachment of a tax lien to after-acquired distributions
from a spendthrift trust. See United States v. Dallas Nat'l Bank
[46-1 USTC ¶9117], 152 F.2d 582 (5th Cir. 1945) (hereinafter, Dallas
I), appeal after remand [47-2 USTC ¶9405], 164 F.2d 489 (5th
Cir. 1947), appeal after second remand [48-1 USTC ¶9242], 167
F.2d 468 (5th Cir. 1948) (hereinafter, Dallas III). The precise holding
of the
Dallas
opinions is the main bone of contention in the appeal of Orr's case,
which involves the added feature of an intervening bankruptcy. Orr's
filing for bankruptcy relief under Chapter 7 did not affect the validity
of any tax lien the IRS may have had prior to the filing. Ordinarily,
liens and other secured interests survive bankruptcy. See Farrey v.
Sanderfoot, 500 U.S. 291, 297, 111 S.Ct. 1825, 1829 (1991); see
also 11 U.S.C. §522(c)(2)(B) ("Unless the case is dismissed,
property exempted under this section is not liable during or after the
case for any debt of the debtor that arose before the commencement of
the case, except a tax lien, notice of which is properly
filed[.]"); Isom v. United States (In re Isom) [90-1
USTC ¶50,216], 901 F.2d 744, 745 (9th Cir. 1990) ("The liability
for the amount assessed remains legally enforceable even where the
underlying tax debt is discharged in the bankruptcy proceeding. A
discharge in bankruptcy prevents the I.R.S. from taking any action to
collect the debt as a personal liability of the debtor. [T]heir property
remains liable for a debt secured by a valid lien, including a tax
lien."). There is no discussion in 11 U.S.C. §541(c)(2) of liens,
tax or otherwise, that attach before bankruptcy discharge. Repeatedly,
courts have been willing to attach liens to post-discharge benefits
despite the "fresh start" policy of the bankruptcy scheme. See,
e.g., Connor v.
United States
(In re Connor) [94-2 USTC ¶50,296], 27 F.3d 365 (9th Cir.
1994); In re Wesche [96-1 USTC ¶50,265], 193 B.R. 76 (Bankr.
M.D. Fla. 1996). The IRS therefore has a valid tax lien against Orr's
interest in the Trust if that lien attached before Orr's personal
liabilities were extinguished in bankruptcy. The dispositive issue is,
therefore, the question of whether a federal tax lien in this situation
attaches to a spendthrift trust beneficiary's equitable interest in the
trust itself or to each individual distribution as it is paid to the
beneficiary. Both parties to this appeal claim support for their
respective positions in
Dallas
.
Dallas
involved a federal tax liability owed by Carolyn Maxwell, arising from
several stock transactions. Mrs. Maxwell was a resident of
England
, so the government sought to enforce the tax liability by imposing a
lien on her interest in a spendthrift trust, of which the Dallas
National Bank was trustee. As in the customary trust arrangement, the
trustee possessed legal title to the trust funds. Mrs. Maxwell received
monthly income payments from the trust. This Court concluded that the
government had a valid lien, and explained the result as follows:
Mrs.
Maxwell has no title to the corpus of any property other than the
profits after they have accrued and have been passed to her account and
made available to her by the Trustee. In other words, after "the
net revenues," amounting to approximately $54 per month, accrue, or
are set apart and become payable to her, such net revenues then belong
to her and are then subject to the lien of the Government for taxes, and
are available as an appropriate res in a proceeding in rem by the
Government to have a lien for delinquent taxes declared and enforced
against such revenues.
The
Government is entitled to a lien upon these monthly payments of net
revenue in the hands of the Trustee, by virtue of the law as stated in
26 U.S.C.A.Int.Rev.Code, §§3670 and 3671.
Under
the holding of [Glass City Bank], that the lien of the United States
attaches to after-acquired property, we think that such lien will
continue to be fastened on the monthly income from the trust as it
becomes payable to the taxpayer.
Dallas
I [46-1 USTC
¶9117], 152 F.2d at 585 (footnote omitted). In a following appeal
(Dallas III), Circuit Judge Edwin R. Holmes of
Yazoo City
,
Mississippi
, noted in a specially concurring opinion that:
The
taxpayer is the equitable owner for life of an undivided interest in
Texas realty, which under local law is not subject to seizure or sale
for ordinary debts incurred by the taxpayer; but this does not mean that
testamentary restraints against alienation should prevail against the
fastening of a lien for federal income taxes on the taxpayer's equitable
interest in the trust estate. We are, in fact, holding the contrary in
this case.
Dallas
III [48-1 USTC
¶9242], 167 F.2d at 469 (Holmes, J., specially concurring). Orr
emphasizes the language in Dallas I that "such lien will continue
to be fastened on the monthly income from the trust as it becomes
payable to the taxpayer," 152 F.2d at 585 (emphasis supplied), in
support of his contention that no valid lien would exist until he
actually received a distribution from the trust, and because through
bankruptcy he has discharged his personal liability for the tax, the
lien can no longer continue to attach to future distributions. See,
e.g., Connor [94-2 USTC ¶50,296], 27 F.3d at. The IRS emphasizes
the language in Dallas III indicating that the lien attaches to Orr's
"equitable interest in the trust estate," [48-1 USTC ¶9242],
167 F.2d at 469 (emphasis supplied), and therefore precedes and survives
Orr's bankruptcy.
The
Dallas
panels did not need to confront the question presented by Orr's case.
The trust distributions paid to Mrs. Maxwell fell into the category of
after-acquired property at the time she received them. There was no
bankruptcy, as there is in this case, to discharge the debtor's personal
liability for the taxes owed. As Mrs. Maxwell received each new
distribution from the trust, a new §6321 lien would fasten onto the
distribution so long as she owed the taxes. The law was settled in Glass
City Bank that such after-acquired property became subject to a
statutory federal tax lien on the debtor's "property," and
thus there was no need to decide whether the lien could have attached
earlier. The Dallas I opinion specifically invokes Glass City Bank to
justify its result. Thus, the opinion of Judge Holmes (which was not
joined by any other judge) that the tax lien validly attached to Mrs.
Maxwell's equitable interest in the trust was not necessary to the
decision in that case.
B.
The issue addressed by
Judge Holmes, specially concurring in the Dallas III appeal, is squarely
presented by Orr's case, because the only way the IRS can collect from
Orr's trust distributions is if the tax lien on future distributions
attached before Orr's personal liability was discharged through
bankruptcy. With the issue now squarely presented, fifty-one years
later, we conclude that the dictum announced by Judge Holmes was
correct.
Texas
law recognizes the validity of the Trust's spendthrift clause.
Texas
law acknowledges that a spendthrift trust beneficiary possesses an
equitable ownership interest in the trust corpus. And
Texas
law respects the Trust's bestowal upon Orr of a fully vested right to
receive distributions from the trust on at least an annual basis. These
interests constitute "property" or "rights to
property" under §6321, even though the beneficiary does not
possess total, exclusive, fee-simple ownership.
The broad scope of 26
U.S.C. §6321, encompasses "property" in this sense, as befits
that statute's purpose of tax collection, see United States v.
National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20,
105
S. Ct.
2919, 2923-24 (1985). Courts have routinely concluded that §6321 tax
liens attach to other types of equitable interests. See, e.g.,
Southern Bank v. IRS [85-2 USTC ¶9670], 770 F.2d 1001, 1003,
1009-10 (11th Cir. 1985) (equitable right of redemption); Runkel v.
United States [76-1 USTC ¶9152], 527 F.2d 914, 916 (9th Cir. 1975)
(equitable interest in real property); United States v. Johansson
[71-2 USTC ¶9602], 447 F.2d 702, 705 (5th Cir. 1971) (equitable lien); United
States v. Klimek [97-1 USTC ¶50,281], 952 F. Supp. 1100, 1112 (E.D.
Pa. 1997) (equitable ownership of real property); Bank of Lyons v.
Cavanaugh (In re Cavanaugh), 153 B.R. 224, 228 (Bankr. N.D.
Ill. 1993) (equitable interest in a land trust). 1
Moreover, the attachment of
the lien in this case is not at odds with the
Texas
policy of respecting the wishes of the creator of a spendthrift trust by
enforcing the trust's anti-alienation provisions. The wishes of the
creator of the spendthrift trust are to ensure a stream of income for
the beneficiary by preventing the beneficiary from leveraging present
purchasing power out of future payments. The state may (and
Texas
does) think it advisable to respect the wishes of the creator of the
trust by enforcing the spendthrift term. Creditors in
Texas
are on notice of the unenforceability of any loan agreement with a trust
beneficiary that purports to grant an interest in future distributions
from a spendthrift trust. The risk of default is thereby placed on the
shoulders of creditors who rely on the spendthrift trustee's income
stream.
The government does not
stand in the shoes of an ordinary creditor seeking to attach
distributions from a spendthrift trust. Consistent with the imperative
nature of tax collection, §6321 gives the government an advantage over
ordinary creditors in collection matters. Moreover, the rationale for
shifting the risk of default to creditors, who ought to examine the
terms of a trust before agreeing to accept the right to future
distributions as collateral, does not apply to the government, which
imposes the income tax unilaterally and without reference to spendthrift
protections. The wishes of the creator of a spendthrift trust cannot
overcome the government's need to collect tax and a spendthrift trust
beneficiary's duty to pay tax. It does not make sense to permit the
spendthrift trust to be a vehicle for tax immunity.
Though not dispositive of
the meaning of "property and rights to property" under §6321,
we further note that
Texas
law supports the classification of Orr's interest in the Trust as
"property." In determining the ordinary meaning of the term
"property" for the purposes of statutory construction, the
Supreme Court of Texas has characterized it as extending to "every
species of valuable right and interest." State v. Public Util.
Comm'n, 883 S.W.2d 190, 200 (
Tex.
1994) (citing Womack v. Womack, 141
Tex.
299, 172 S.W.2d 307, 308 (1943)); cf. Tex. Prop. Code Ann. §111.004(12)
(
Vernon
1995) (for purposes of the Trust Code: `Property' means any type of
property, whether real, tangible or intangible, legal, or equitable. The
term also includes choses in action, claims, and contract rights,
including a contractual right to receive death benefits as designated
beneficiary under a policy of insurance, contract, employees' trust,
retirement account, or other arrangement.").
We are aware of authority
suggesting that "[i]n enforcing §6321, appellate courts have
interpreted 'property' or 'rights to property' to mean state-law rights
or interests that have pecuniary value and are transferable." Drye
Family 1995 Trust v. United States [98-2 USTC ¶50,651], 152 F.3d
892, 895 (8th Cir. 1998) (citing United States v. Stonehill [96-1
USTC ¶50,318], 83 F.3d 1156, 1159-60 (9th Cir. 1996); In re Kimura
[92-2 USTC ¶50,397], 969 F.2d 806, 811 (9th Cir. 1992); In re
Terwilliger's Catering Plus, Inc. [90-2 USTC ¶50,460], 911 F.2d
1168, 1171-72 (6th Cir. 1990); 21 West Lancaster Corp. v. Main Line
Restaurant, Inc. [86-2 USTC ¶9516], 790 F.2d 354, 357-58 (3d Cir.
1986); Southern Bank v. IRS [85-2 USTC ¶9670], 770 F.2d 1001,
1005 (11th Cir. 1985)), cert. granted on other grounds, 119 S. Ct. 1453
(1999). We think this test takes an unnecessarily narrow view of the
scope of §6321. In particular, we know of no controlling authority
which compels the conclusion that transferability is a necessary
incident of "property and rights to property" under the
statute. Indeed, a persuasive scholarly treatment of the question comes
to the opposite conclusion. See Note, Property Subject to the
Federal Tax Lien, 77 Harv. L. Rev. 1485, 1485-87 (1964).
The terms "property
and rights to property" have no statutory definition. This Court
has noted in the past that in crafting the tax lien statute,
"Congress did not attempt to define the commercial cosmos. Rather,
it was perfectly willing to let contemporary transactions be analyzed to
determine whether or nor the delinquent taxpayer had any part of a
bundle of rights of commercial value, to which the tax lien would then
attach." Randall v. H. Nakashima & Co. [76-2 USTC ¶9770],
Ltd., 542 F.2d 270, 278 (5th Cir. 1976). And it bears repeating that the
Supreme Court has held that "Congress meant to reach every interest
in property that a taxpayer might have." National Bank of
Commerce [85-2 USTC ¶9482], 472
U.S.
at 719, 105
S. Ct.
at 2924. Each case requires individual consideration, and we conclude
that despite the nontransferability of a spendthrift trust beneficiary's
interest in the trust, Orr's interest still possesses sufficient
characteristics of "property" or "rights to
property" to fall within the scope of §6321.
With reference to
Texas
law, we conclude that at the time the liens were filed, Orr possessed
equitable and legal rights to future income distributions from the
Trust. With reference to federal law, we conclude that those rights
constituted "property" or "rights to property"
subject to attachment pursuant to §6321. Because the federal tax lien
attached to Orr's rights to future payments at the time of the filing of
the lien, Orr's subsequent bankruptcy does not affect the validity of
the lien against Orr's equitable ownership of the Trust and legal right
to receive income distributions from the Trust. The tax lien is
therefore valid against future income distributions.
IV.
In sum, we conclude that we
may exercise appellate jurisdiction in this case. The subject matter of
the appeal is a discrete issue within a larger bankruptcy case, which
was presented in the context of an adversary action between the parties.
The order of the district court settled the sole issue in contention.
Jurisdiction is proper under 28 U.S.C. §158(d).
Furthermore, the IRS has a
valid lien against future income distributions to Orr from the Trust.
Under state law, Orr possesses an equitable interest in the trust corpus
and legal entitlement to future income distributions from that trust.
These interests constitute "property" or "rights to
property" to which a 26 U.S.C. §6321 tax lien may attach.
AFFIRMED.
1
Texas Commerce Bank Nat'l Ass'n v. United States, 908 F. Supp.
453 (S.D. Tex. 1995), relied upon by Orr, is not to the contrary. Texas
Commerce Bank involved an attempt by the IRS to levy upon the interest
of Ellanor Ann Fondren in a trust in which payments to her were left to
the sole discretion of the trustee until the year 2002. The c
