6321 Community Property page1

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Albert C. Reid, Plaintiff-Counter-Defendant-Appellant, Bodil Reid, Defendant-Appellant v. United States of America , et al., Defendants-Counter-Plaintiffs-Appellees

(CA-9), U.S. Court of Appeals, 9th Circuit, 01-35446, 3/21/2002, 31 Fed. Appx. 564

31 Fed. Appx. 564

2002 U.S. App. LEXIS 5087. Affirming a District Court decision, 2001-1 USTC ¶50,250 .

[Code Secs. 6321 and 7402 ]

Jurisdiction: District court: Lien for taxes, foreclosure of: Fraudulent conveyances: Amended complaint.--The district court had jurisdiction over a purported charitable organization to which married taxpayers fraudulently conveyed real property. Under state law, the transfer, which occurred after the IRS began collection efforts against the taxpayers, was voidable. As a result, the IRS was permitted to set aside the transfer and foreclose its tax liens against the property. The organization was not prejudiced by the IRS's amendment of its complaint naming it as a defendant because it had constructive notice and knowledge of the suit through the taxpayers.

[Code Secs. 6334 and 7433 ]

Civil damages: Unauthorized collection: Tax levies: Military retirement benefits.--Married taxpayers were properly denied an award of damages resulting from the IRS's allegedly unlawful and unauthorized collection of exempt income based on a levy against the husband's military pension. The funds were not exempt under Code Sec. 6334(a)(9) . During the period in question, neither the husband nor the wife was over age 65 and, thus, they were not entitled to an exemption from the levy. The mere fact that they were over age 65 at the time of the lawsuit was irrelevant.

Albert C. Reid, Bodil Reid, Indianola, Wash., pro se. Diane E. Tebelius, Assistant United States Attorney, W. Carl Hankla, Carol A. Barthel, Department of Justice, Washington, D.C. 20530, for U.S.

Before: CANBY, BEEZER and PAEZ, Circuit Judges. ^*

è Caution: This court has designated this opinion as NOT FOR PUBLICATION.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

MEMORANDUM ^**

Albert C. Reid and Bodil Reid appeal pro se the district court's summary judgment in favor of the United States in two consolidated district court cases relating to tax assessments against Albert Reid. We have jurisdiction pursuant to 28 U.S.C. §1291. We affirm.

After a de novo review, Balint v. Carson City, 180 F.3d 1047, 1050 (9th Cir. 1999) (en banc), we reject as unpersuasive the Reids' contentions that the district court's judgment is void and that the district court lacked jurisdiction over the Truth in Life Society. The district court also properly denied Albert Reid's motion for partial summary judgment in his action against the United States for unauthorized collection. See 26 U.S.C. §7433(a).

The district court did not abuse its discretion by denying the Reids' motion for reconsideration. See Sch. Dist. No. 1J v. ACandS, Inc., 5 F.3d 1255, 1263 (9th Cir. 1993).

We deny the Reids' motion for stay of the district court's judgment pending appeal.

AFFIRMED.

^* This panel unanimously finds this case suitable for decision without oral argument. See Fed. R. App. P. 34(a)(2).

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

 

 

 

Albert C. Reid, Plaintiff v. United States of America and C. Dudley, Defendants

U.S. District Court, West. Dist. Wash., at Tacoma, C98-5432, 1/31/2001

[Code Secs. 6321 and 7401 ]

Lien for taxes, foreclosure of: Fraudulent conveyance: Motion to amend complaint.--The transfer of certain real property by a married couple to a purported charitable society constituted a fraudulent conveyance because it was undertaken to hinder, delay or defraud creditors or other persons. Thus, under state ( Washington ) law, the transfer was voidable. It was made in anticipation of a pending suit, for inadequate consideration, and to an organization with no identified members other than the couple. Moreover, the transfer occurred after the government began collection efforts against the taxpayers. As a result, the government was permitted to avoid the transfer and foreclose its tax liens against the property. It's motion to amend the complaint in order to name the society as a defendant was granted. The society was not unduly prejudiced by that action because it had constructive notice and knowledge of the suit through its members, the taxpayers.

[Code Sec. 6323 ]

Tax assessments: Validity of:--The government's submission of Forms 4340, Certificate of Assessments and Payments, was sufficient to establish the validity of assessments against a taxpayer. His statement that the presumption of correctness accorded Forms 4340 did not apply in cases of unreported income was rejected. The assessments were based on the reports of entities that had paid wages or interest to the husband, and he produced no evidence to rebut his receipt of the reported amounts.

[Code Sec. 6321 ]

Tax liens: Community property: Tax liability.--Tax liens were effective to reach married taxpayers' property in circumstances where the husband failed to pay outstanding assessments. The properties at issue constituted marital property under state ( Washington ) law because the couple acquired them after marriage, and the husband's tax debts were presumed to be community debts since they were incurred after marriage.

[Code Secs. 6334 and 7433 ]

Levies: Property exempt from levy: Suits by taxpayers: Civil damages: IRS conduct: Unauthorized collection.--Married taxpayers were denied an award of damages resulting from the government's allegedly unlawful and unauthorized collection of exempt income based on a levy against the husband's military pension. The funds were not exempt from under Code Sec. 6334(a)(9) . During the period in question, neither the husband nor the wife was over age 65 and, thus, they were not entitled to an exemption from the levy. The mere fact that they were over age 65 at the time of the lawsuit was irrelevant. Moreover, the husband's allegation that the government negligently levied against his benefits was not supported by the evidence.

ORDER GRANTING THE UNITED STATES' MOTIONS TO AMEND COMPLAINT AND FOR SUMMARY JUDGMENT

BURGESS, District Judge:

This case is the result of the consolidation of two preexisting cases. In USA v. Reid, C99-5565, the United States brought suit to reduce outstanding tax assessments to judgment and to foreclose its tax liens on the property of Albert C. Reid and Bodil Reid In Albert C. Reid v. United Stares and C. Dudley, C98-5432, Mr. Reid brought suit against the United States for unlawful collection activities. The suits are now combined under the latter title and number and the court will refer to the parties by their roles in the titled suit. The court has jurisdiction over these actions pursuant to a number of statutory grants, 26 U.S.C. §§7402, 7403 and 28 U.S.C. §§1340, 1345.

Although the delinquent tax account is in the name of Mr. Reid, Mrs. Reid is a party to the suit by her status as his spouse and her community property interest in both the debts and the properties sought to satisfy such debts. The properties at issue here are the residence of the Reids, 22759 Jefferson Point Road, NE, Kingston, Washington, 98346 (the residence) and 3435 Longhorn Drive NW, Bremerton, Washington, 98312 (the lakefront property).

This matter comes before the court on cross motions for summary judgment and a motion by the United States to amend its complaint. Plaintiff, Albert C. Reid, moves for partial summary judgment asking the court to declare that the levy of Reid's military pension by the Internal Revenue Service (IRS) resulted in unlawful and unauthorized collection of exempt income. Plaintiff seeks to recover damages under 26 U.S.C. §7433.

Defendant United States seeks leave to amend its complaint to add the "Truth in Life Society" as a defendant and to set aside the transfer of the lakefront property to the society as fraudulent. The "Truth in Life Society" is the transferee the lakefront property previously owned by Albert and Bodil Reid. This transfer was completed without consideration in 1996, after the collection efforts of the United States began. Defendant also seeks summary judgment on its claims described above and dismissal of Mr. Reid's complaint.

1. Summary Judgment Standard

Rule 56 of the Federal Rules of Civil Procedure governs summary judgment. Summary judgment is appropriate when there is no genuine issue of material fact. Tzung v. State Farm Fire & Casualty Co. v. Martin, 872 F.2d 319, 320 (9th Cir. 1989). During the analysis of a summary judgment motion, the burden of proof will shift between the moving and defending parties. FRCP 56, Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548 (1986). Initially, the moving party bears the burden of coming forward and identifying "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any" which demonstrate the absence of a genuine issue of material fact. Id. At that point, the burden shifts to the non-moving party, who must go beyond the pleadings and designate "specific facts showing that there is a genuine issue for trial." Id.

2. The Plaintiff's Motion for Partial Summary Judgment

The Plaintiff's motion for partial summary judgment states that the issue for resolution is whether 26 U.S.C. §6334(a)(9) applies equally to retirement benefits and wages salary or income. He argues that if the court agrees with this premise, then the Defendant is liable for unauthorized collection of his retirement benefits. Plaintiff relies on Arford v. United States [92-1 USTC ¶50,229], 934 F.2d 229 (1991). However, Arford is distinguishable from the case at bar. In Arford, the plaintiffs sued the government for quiet title to and recovery of retirement pay seized as a result of an IRS levy served on the Retirement Pay Division of the Air Force. Id. at 231. The Court of Appeals held that the Arfords had the right to challenge the procedural aspects of the lien, but not the underlying merit of the tax assessments which lead to the lien. Id (emphasis added).

Here, plaintiff's procedural challenge goes to whether or not he was entitled to any exemptions from the levied amount. Plaintiff claims that his "married, filing jointly" tax status and the age of Plaintiff and his spouse being over 65 create exemptions. However, in its response, the Defendant submits a copy of a Health Benefits Registration Form, received in response to a subpoena from Office of Personnel Management which shows that both the Plaintiff and his wife were born in 1934.

Adding 65 years to 1934 results in a total of 1999. During the period of time in question for this lawsuit, Plaintiff and his wife would not have been entitled to an exemption for being 65 years old, since they were not that age. The fact that each of them is over the age of 65 currently is irrelevant to this lawsuit.

To succeed in a claim for damages under 26 U.S.C. §7433(a), the Plaintiff must demonstrate that his harm was a result of the reckless or intentional disregard of the Internal Revenue Code, or any regulations promulgated under it, by an officer or employee of the Internal Revenue Service. See 26 U.S.C. §7433(a) (1986). Plaintiff alleges that the IRS acted negligently in their levy of his retirement benefits, however, he does not support that allegation with any evidence, nor would simple negligence meet the standard required by the statute.

In response, the Defendant produces evidence of a variety of income sources to the Reids which the revenue officer in charge of collections on their account was aware of. See Declaration of Dana F. Pellman. Further, since levy exemptions are measured against total income, not each income source individually, there is not a clear showing that Mr. Reid would have been entitled to any exemption amount. See 26 CFR §301.6334-2 and -3.

Plaintiff bears the burden of proof on his motion for partial summary judgment, and the court must view the evidence presented in the light most favorable to the non-moving party. The United States has presented evidence, both documentary and testimonial, which tends to rebut the allegation that the collection actions of the IRS included any intentional or reckless disregard of the Internal Revenue Code or regulations promulgated thereunder. Therefore, the motion for partial summary judgment by Mr. Reid must be DENIED.

3. The Defendant's Motion to Amend Complaint

The United States seeks the leave of the court to amend their complaint to add the "Truth in Life Society" as a defendant. The "Truth in Life Society" is the beneficiary of the transfer of certain real property previously owned by Mr. and Mrs. Reid. The Reids transferred title of the lakefront property by quitclaim deed, for no consideration to the "Truth in Life Society" on November 4, 1996. The "Truth in Life Society" is headquartered at the Reids' residence. Mrs. Reid admitted during her deposition that she and her husband were members, but did not put forward any other information about the society. Mr. Reid refused to answer any questions about the society on Fifth Amendment grounds.

The United States discovered the transfer of the lakefront property during a title search of Kitsap County records completed after the deposing the Reids. The United States brings this action under 26 U.S.C. §7403 which is titled "Action to Enforce Lien of Subject Property to Payment of Tax." Subpart (b) of this section requires that "All persons having liens upon or claiming any interest in the property involved in such action shall be made parties thereto." Thus, the "Truth in Life Society" must be made a party since it is recorded as holding an interest in the lakefront property.

FRCP 15(a) slates that after a response to a pleading, the original pleading may only be amended by leave of court or written leave from the adverse party, further, that "leave shall be freely given when justice so requires." The Ninth Circuit interprets Rule 15(a) "with extreme liberality." DCD Programs v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). The Ninth Circuit reviews a decision granting leave to amend for abuse of discretion, in light of a policy which favors amendment. Plumeau v. School Dist. No. 40, 130 F.3d 432, 439 (9th Cir. 1997). Amendment is favored even when the motion will add causes of action or parties. Acri v. International Ass'n. Of Machinists, 781 F.2d 1393, 1398-99 (9th Cir.), cert. denied,-- U.S. --, 107 S.Ct. 73, 93 L.Ed.2d 29 (1989).

A motion to amend is evaluated according to four factors: bad faith, undue delay, prejudice, and futility. DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir. 1987). This amendment is not sought in bad faith (for example, to destroy jurisdiction in a diversity action as in Sorosky v. Burroughs Corp., 826 F.2d 794 (9th Cir. 1987)). In this case, the "Truth in Life Society" will not be unduly prejudiced because it has had constructive notice and knowledge of this suit through two of its members (Mr. and Mrs. Reid). This amendment is clearly not futile, as the society holds an interest in the property that the United States seeks to foreclose upon.

The Reid's primary argument against granting this motion is an allegation of unjust delay on the part of the United States . However, as noted in the United States ' motion, the Reids have not been forthcoming about the existence of the "Truth in Life Society" or their roles within the society, nor have they advanced any evidence to contradict the allegation that the society is merely an alter ego. The United States discovered that the "Truth in Life Society" held an interest in the lakefront property only a month before the motion to amend was filed--a month is not an undue delay.

The court reviewed the authority cited by the Reids in their opposition to this motion, however, each of those cases dealt with questions of joinder, which relates to a separate rule and standard under the rules of civil procedure.

In any event, the Ninth Circuit states that delay alone is not sufficient to justify a denial of motion to amend. DCD Programs, 826 F.2d at 187. In fact, some of the delay in this case results from the Reid's motion for an extension of time to reply to the United States ' motion to amend complaint and for summary judgment.

In light of the Reid's failure to timely disclose the existence of the "Truth in Life Society"; its interest in the lake front property which is a subject of this action and the United States timely effort to add the newly discovered evidence to the complaint, the motion to amend is GRANTED.

4. The Defendant's Motion for Summary Judgment

The United States asks for summary judgment on its claims: (1) to avoid the 1996 transfer of the lakefront property to the "Truth in Life Society" as fraudulent, to establish and foreclose its tax liens on the property; (2) to reduce tax assessments from 1987 and 1992 through 1995 to judgment; and (3) to foreclose tax liens against the real property of Albert Reid.

a. Transfer of Property

In 1996 the Reids transferred their interest in the lakefront property via a Quit Claim Deed to the "Truth in Life Society." The "Truth in Life Society" is headquartered at the same address as the Reids residence. This transfer was made for no consideration. The United States asks the court to set aside this transfer as fraudulent, under the Uniform Fraudulent Transfer Act (UFTA) as adopted by Washington State at RCW 19.40.011, et seq.

The UFTA, at section 19.40.041, provides in pertinent part:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) With actual intent to hinder, delay or defraud any creditor of the debtor.

A fraudulent transfer can be defined as "a transaction by means of which the owner of [real or personal] property has sought to place the [land or goods] beyond the reach of his or her creditors. . . ." Freitag v. McGhie, 113 Wn.2d 816, 821-22, 947 P.2d 1186 (1997). Under the UFTA, the burden of proof rests upon the party alleging the fraudulent transfer. Sedwick v. Gwinn, 73 Wn. App. 879, 885, 873 P.2d 528 (1994). Proof of actual intent to hinder, delay or defraud must be shown by clear and satisfactory proof. Clearwater v. Skyline Construction Co., Inc., 67 Wn. App. 305, 321, 835 P.2d 257 (1992), review denied, 121 Wn.2d 1005, 848 P.2d 1263 (1993). The burden is on the party alleging a fraudulent transfer, but the burden shifts to the defendant to prove good faith when the consideration for the transfer is shown to be grossly inadequate. Workman v. Bryce, 50 Wn.2d 185, 189, 310 P.2d 228(1957). Any transfer made by a debtor with the intent to delay or defraud a creditor is subject to being set aside. Rainier Nat'l Bank v. McCracken, 26 Wn.App. 498, 506, 615, 615 P.2d 469 (1980), review denied, 95 Wn. 2d 1005 (1981).

The UFTA lists a number of badges of fraud for the court's consideration in determining whether a debtor acted with actual intent to delay or defraud at RCW 19.40.041(b). The United States argues that the actual intent of the Reids to delay or defraud is demonstrated by a number of these badges, including: (1) transfer to an insider, (2) debtor retains possession or control after transfer, (3) transfer concealed, (4) prior to transfer, debtor subject forced collection action, (5) transfer occurred shortly before or after substantial debts were incurred, and (6) transfer made for no consideration.

In support of its contention, the United States submitted the following evidence. In her deposition, Mrs. Reid admitted that she and her husband were members of the "Truth in Life Society", but declined to name any other members or to describe the nature and purpose of the society. Mr. Reid refused to answer any questions about the society during his deposition on Fifth Amendment grounds. The Quit Claim Deed filed with the Kitsap County Auditor's office shows the society's address to be the same as the Reids residence. Mrs. Reid stated in her deposition that she and her husband owned the lakefront property, while the Answer to the United States ' complaint denies ownership. Mr. Reid was aware of the collection activities on his account prior to the date of the transfer, as evidenced by his letter to the Kitsap County Auditor dated June 8, 1995. The transfer was executed before Mr. Reid filed his tax returns for years 1992-1995. The Quit Claim Deed states that the transfer was made "without consideration".

The Reids have not put forward any evidence to counter the allegations or proof of the United States , even though the lack of consideration on this transfer was enough to shift the burden of proof to them. See Workman, supra. Therefore, the court finds that the transfer of the lakefront property was made with the intent to delay or defraud; that the United States may avoid this transfer as fraudulent and proceed to establish and foreclose its tax liens on the property.

b. Tax Assessments

The United States submits copies of Forms 4340 Certificates of Assessments and Payments. Generated under seal and signed by an authorized delegate of the Secretary of the Treasury, Forms 4340 are admissible in to evidence as self-authenticating official records of the United States carrying a presumption of correctness. Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531 (9th Cir. 1992), Rossi v. United States, 755 F.Supp. 314, 318 (D. Or. 1990).

Mr. Reid argues that the presumption of correctness does not apply in cases of unreported income. He relies primarily upon United States v. Janis [76-2 USTC ¶16,229], 428 U.S. 433, 96 S.Ct. 3021 (1976) and Weimerskirch v. Commissioner [79-1 USTC ¶9359], 596 F.2d 358 (9th Cir. 1979). In Janis, police acting on a warrant seized various records from the Plaintiff which contained the "gross volume" of his gambling activities for a 77 day period during which he had not filed a tax return. Janis, supra. The IRS used the seized information as the basis for a civil collection suit. Id. In spite of the fact that the warrant and seizure was eventually held to be invalid, the Supreme Court held that the IRS could use the evidence in a civil suit. Id. This is clearly distinguishable from the case at bar. Contrary to the manner that Mr. Reid presents it. Janis states that the assessment against the plaintiff was valid, even though it relied on improperly seized information.

In Weimerskirch, the plaintiff contested a tax assessment based on unreported income. Weimerskirch [79-1 USTC ¶9359], 596 F.2d 358 (9th Cir. 1979). The Commissioner based the assessment on information that plaintiff sold heroin, but failed to produce the evidence at trial which linked plaintiff with the sale of heroin, so the assessment was held to be invalid. Id. The situation in Weimerskirch is clearly distinguishable from this case. This is not a case of "illegal" unreported income. Here, the assessments were based on the reports of those entities who paid wages or interest to Mr. Reid. He disputes his status as an employee at any time relevant to the assessments in this case, however, he puts forward no evidence which rebuts his receipt of the reported amounts.

The United States ' submission of Forms 4340 is sufficient to establish the validity of the assessments against Mr. Reid. Therefore, Mr. Reid is liable for the assessed tax liabilities, statutory interest, penalties and additions, minus any credits as calculated by the United States as of the date of this order.

c. Foreclosure of Tax Liens

By statute, when a person refuses to pay a tax debt on demand, the amount due (plus penalties and costs as they accrue) becomes a lien upon all the person's property, 26 U.S.C. §6321. These tax liens arise when the assessment is made and continue until the liability is satisfied. 26 U.S.C. §6322. In this case, notice of the tax lien was recorded in the Kitsap County Auditor's office on October 2, 1992, in compliance with 26 U.S.C. §6323(f).

The United States has submitted proof of the assessments and outstanding tax debt of Albert C. Reid, in the Forms 4340. Mr. Reid has not paid these assessments after notice and demand, thus the statutory liens created at the time of assessment remain in effect. Mr. Reid has not submitted any evidence which creates a question of fact about the validity of these underlying assessments. See Arford, supra.

The two properties at issue here are marital community property under RCW 26.16.030 since the Reids acquired them after marriage. Mr. Reid's tax liabilities are presumed to be community debts since they were incurred after marriage. Beyers v. Moore , 45 Wash.2d 68, 70, 272 P.2d 626 (1954) The burden of proving otherwise rests on the community. Id. This presumption may only be overcome by clear and convincing evidence. Id. Where a husband had acquired federal tax debt before marriage, the United States could enforce its lien against his interest in community property. United States v. Overman [70-1 USTC ¶9342], 424 F.2d 1142 (1970). In this case, where the debt was acquired by the community, the community will be held liable. Mr. Reid has not submitted any evidence which controverts the liability of the community for these debts.

The district court is specifically vested with jurisdiction over actions to enforce the internal revenue laws, pursuant to 26 U.S.C. §7402. The court is further authorized to order a sale and distribution of the proceeds to the United States and other parties, according to the findings of the court. 26 U.S.C. §7403.

Therefore, the court finds that the community properties at issue here shall be sold to satisfy the tax debt of Albert C. Reid. The property shall be sold at auction by the U.S. Marshals Service, with proceeds distributed (1) to the U.S. Marshal for allowed costs of sale, (2) to Kitsap County for any real property tax or special assessment liens having priority on either of the properties under 26 U.S.C. §6323(b)(6),(3) to defendant GMAC Mortgage Corp. to satisfy the balance of the mortgage on the residence and (4) to the United States, to be applied to the unpaid tax liabilities of Albert C. Reid.

THEREFORE IT IS HEREBY ORDERED:

(1) The plaintiffs' motion for partial summary judgment (docket #32) is DENIED.

(2) The defendant's motion to amend its complaint (docket #35) is GRANTED.

(a) The complaint is deemed amended as of the date of the United States motion for summary judgment, without service to the "Truth in Life Society".

(3) The defendant's motion for summary judgment (docket #35) is GRANTED.

(a) The court finds that the transfer of the lakefront property was made with the intent to delay or defraud; that the United States may avoid this transfer as fraudulent and proceed to establish and foreclose its tax liens on the property.

(b) Mr. Reid is liable for the assessed tax liabilities, statutory interest, penalties and additions, minus any credits as calculated by the United States as of the date of this order.

(c) The court finds that the community properties at issue here shall be sold to satisfy the tax debt of Albert C. Reid. The property shall be sold at auction by the U.S. Marshals Service, with proceeds distributed to (1) the U.S. Marshal, (2) Kitsap County , (3)defendant GMAC Mortgage Corp and (4) the United States .

 

 

 

In re Mary C. Hegg, Debtor. Mary C. Hegg, Plaintiff v. United States of America , Defendant

U.S. Bankruptcy Court, Dist. Ida., 98-00873, 4/19/99, 239 BR 833, 239 BR 833

[Code Secs. 6321 , 6322 and 6871 ]

Lien for taxes: Real and personal property: Community property: Divorce: Bankruptcy.--

An ex-wife's residence in a community property state was subject to valid liens to satisfy tax debts of her ex-husband incurred during their marriage. Neither the subsequent transfer of the residence to her as a result of their divorce nor the tortious conduct by the husband affected the validity of the lien on the property, nor was it avoided by her Chapter 13 bankruptcy plan. In addition, liens on her personal property appeared to be fully secured, based on bankruptcy schedules listing the values placed on the property. Furthermore, an instrument purporting to convey a one-half interest in the residence to the IRS was void since it was executed solely by the husband and without the taxpayer's consent.

Les Bock, Dillion, Bosch, Daw & Bock, Boise , Idaho , for Plaintiff. Richard R. Ward, U.S. Department of Justice, Washington , D.C. , for Defendant.

MEMORANDUM OF DECISION

Background

PAPPAS, Chief Bankruotcy Judge:

In this adversary proceeding, Plaintiff Mary Hegg seeks a determination that certain federal tax liens do not attach to her residence or other assets. Pursuant to a procedural agreement reached during a pre-trial telephonic conference held on December 22, 1998, the parties filed a stipulation of material facts, cross-motions for summary judgment, and supporting briefs. The Court having now reviewed the submissions of the parties, renders the following decision.

Facts

In deciding this matter, the Court has relied solely upon the facts as stipulated in writing by the parties. Therefore, no purpose would be served by reciting those facts again here.

Applicable Law

Motions for summary judgment are governed by Rule 56 of the Federal Rules of Civil Procedure, made applicable here by F.R.B.P. 7056. Summary judgment is appropriate if, after viewing the evidence in the light most favorable to the non-moving party, there is no genuine issue of material fact remaining and the moving party is entitled to judgment as a matter of law. F.R.B.P. 7056; State Farm Mutual Auto Ins. Co. v. Davis , 7 F.3d 180, 182 (9th Cir. 1993); FSLIC v. Molinaro, 889 F.2d 899, 901 (9th Cir. 1989).

Discussion

The Court must resolve three issues in this action. First, the Court must determine whether the IRS holds a valid federal tax lien on Plaintiff's residence. Second, the Court must determine the status of the 1988 and 1989 federal tax liens on Plaintiff's personal property as described in her bankruptcy schedules. Finally, the Court must determine whether a purported conveyance of an interest in Plaintiff's residence to IRS is valid.

Under 26 U.S.C. §6321, the amount of any tax a person neglects or refuses to pay after demand constitutes a lien in favor of the United States upon all of the person's property. The lien arises as of the date of the assessment of the tax. 26 U.S.C. §6322. State law is determinative of the existence and nature of the property rights against which a tax lien has been asserted. See United States v. Glad (In re Glad), 66 B.R. 115, 118 (9th Cir. B.A.P. 1986). Once the federal tax lien attaches to a property right created under state law, the effects and consequences of the tax lien are governed by federal law. Id. Once the tax lien attaches to property, it cannot be extinguished by a subsequent transfer of the property. United States v. Donahue Industries, Inc. [90-2 USTC ¶50,343], 905 F.2d 1325, 1330 (9th Cir. 1990).

In this case, the IRS made an assessment for the 1991 tax on June 25, 1992. On that date, a federal tax lien was created and attached to all of David Hegg's property. Under Idaho law, because the residence in Boise had been acquired by Heggs during their marriage, the residence constituted community property on the date of assessment. Idaho Code §32-906. Since David Hegg owned a community property interest in the residence, the lien attached to that interest. The tax lien was not extinguished by the subsequent transfer of the residence to Plaintiff as her separate property as a result of the Heggs' divorce. Therefore, IRS holds a valid tax lien on the residence.

Plaintiff argues that under state law, however, the lien should not be deemed to attach to the community property interest in the house. While, as noted above, this analysis does not involve an application of state law, even were Idaho 's community property rules and case law applicable, Plaintiff is nonetheless incorrect in her position.

The general rule in Idaho is that community property can be reached by a creditor to satisfy the separate debts of each spouse. Bliss v. Bliss, 898 P.2d 1081, 1084 ( Idaho 1995); Gustin v. Byam, 240 P. 600, 603 (1925); Holt v. Empey, 178 P. 703, 704 (1919) (community property is liable for separate debts of husband). Plaintiff interprets the rule in Bliss to be that community assets cannot be used to satisfy a debt incurred as a result of the fraudulent conduct by one of the spouses. Plaintiff argues that the rule of Holt v. Empey is no longer good law. See Hansen v. Blevins, 367 P.2d 758, 762 (Idaho 1962) ("It is not necessary to a decision in this case to determine whether community property is liable in all cases for the payment of obligations incurred by the tort of the husband.") Admittedly, there may be some uncertainty surrounding this area of the law. See Comment, The Uncertainty of Community Property for the Tortious Liabilities of One of the Spouses: Where the Law is Uncertain, There is No Law, 30 Idaho L. Rev. 799 (1994). However, Holt v. Empey has never been expressly overruled by Idaho 's courts. Therefore, in the absence of clear instructions from the Idaho courts to the contrary, the precept that community property can be reached to satisfy a creditor's claim against one spouse for tortious conduct must be applied.

As a result, when the Heggs divorced in 1994, Plaintiff received the parties' community property interest in the residence already encumbered by the tax lien for the 1991 liability. While IRS subsequently granted Plaintiff a release from personal liability for the 1991 tax, it did not effect a release of the tax lien it had already acquired by virtue of David Hegg's prior ownership of the residence. Moreover, because the lien was not expressly avoided or otherwise restructured by Plaintiff's confirmed Chapter 13 plan, it continues unaffected by the bankruptcy and continues as a valid lien on the property. See Dewsnup v. Timm, 502 U.S. 410 (1992); Bisch v. United States , 159 B.R. 546, 549 (9th Cir. B.A.P. 1993). IRS is entitled to summary judgment declaring the 1991 tax lien valid and enforceable as against the residence.

The Court next turns to whether IRS has valid liens on Plaintiff's personal property. The tax assessments for tax years 1988 and 1989 were made against Mary Hegg on November 2, 1992, and on March 13, 1995. These assessments totaled $16,406.26 as evidenced by the amendment to the IRS proof of claim filed on April 7, 1998. The federal tax liens resulting from these assessments attach to any real or personal property owned by Hegg, including the $112,220 in personal property listed in her bankruptcy schedules. 26 U.S.C. §6321. While the 1991 tax lien exhausts any equity Plaintiff may have in the residence, based upon the values she placed upon these assets in her bankruptcy case, the 1988 and 1989 tax liens would appear to be fully secured by Plaintiff's personal property. The IRS is also entitled to summary judgment on this issue.

Plaintiff asserts that the any lien or interest in favor of IRS created by Mr. Hegg's execution and recording of an instrument on July 22, 1992, purporting to grant a one-half equity interest in the residence to IRS should be void ab initio under Idaho law. The Court agrees. Under Idaho law neither a husband or wife "may sell, convey or encumber the community real estate unless the other joins in executing the [instrument]." Idaho Code §32-912. The instrument in question was executed solely by David without Mary's consent or participation. The IRS does not assert any rights based on this instrument, but the purported conveyance constitutes a cloud on the title to the real estate and should be removed. Accordingly, summary judgment will be entered in Plaintiff's favor declaring that any interest or lien in favor of IRS arising from this purported conveyance to be void and of no force and effect.

Plaintiff argues that actions taken by IRS in connection with the bankruptcy case and confir mation of the Chapter 13 plan should effect the secured status with respect to the 1991 tax lien. The Court has reviewed the record in the bankruptcy action and finds that IRS did not release or waive its lien rights in any effective manner.

Plaintiff also invites the Court to fashion some equitable remedy in her favor under these unique circumstances. Initially, however, the Court does not find that IRS has engaged in any conduct upon which Plaintiff or her attorneys could reasonably rely to Plaintiff's detriment. The actions of the IRS are consistent, in the Court's opinion, with the statutory and other legal rights of the creditor.

In addition, "[w]hile endowing the court with general equitable powers, Section 105 does not authorize relief inconsistent with the provisions of the Bankruptcy Code." In re One Hundred Bldg. Corp., 97.2 I.B.C.R. 56, 58 (citing In re American Hardwoods, Inc., 885 F.2d 621, 625 (9th Cir. 1989) and In re Gurney, 192 B.R. 529, 537 (9th Cir. BAP 1996)). The results dictated here by the federal tax lien statutes are clear and absent an express provision in the Bankruptcy Code providing Plaintiff relief, it would be inappropriate for the Court to intervene.

Conclusion.

For the reasons set forth above, the IRS is entitled to summary judgment declaring the 1991 federal tax lien on Plaintiff's residence valid and enforceable since the residence was community property at the time of attachment of the lien. The IRS is also entitled to summary judgment validating the 1988 and 1989 tax liens. These liens are fully secured by Plaintiff's personal property. Finally, Plaintiff is entitled to judgment as a matter of law with respect to invalidating any interest allegedly created by or arising from the instrument executed by David Hegg on July 16, 1992 in favor of IRS. That purported transfer is void under Idaho law.

Counsel for the IRS shall submit an appropriate form of order and judgment for entry by the Court. Counsel for Plaintiff shall cooperate in approving the form of order.

 

 

 

Agents Pension Plan of Allstate Insurance Company, et al., Plaintiffs v. Michael Weeks, Minke Weeks and Commissioner of Internal Revenue, Defendants

U.S. District Court, No. Dist. Ill. , East. Div., 97 C 2708, 4/16/99

[Code Sec. 6321 ]

Tax liens: Property subject to tax liens: Community property: Pension plan: Profit-sharing plan: Priority of liens.--Tax liens filed by the IRS attached to an individual's undivided one-half interest in his qualified employee benefit plans since his community property interest in the benefit plans was valid at the time of the assessment of taxes. He did not lose his interest in the community property of the plans when he filed for divorce. Although the individual's ex-spouse claimed a prior interest in the plans' benefits, since the benefit plans were ERISA qualified plans, benefits could not be transferred to her until a Qualified Domestic Relations Order (QDRO) was entered by the court. The benefits plans were still vested in the taxpayer at the time the IRS attached its liens since the ex-spouse filed a QDRO after the IRS filed a notice of levy.

MEMORANDUM OPINION AND ORDER

COAR, District Judge:

Before this court are cross-motions for summary judgment filed by defendants Minke Weeks ("Minke") and the Commissioner of Internal Revenue ("IRS") on plaintiffs Agents Pension Plan of Allstate Insurance Company and the Savings and Profit Sharing Fund of Allstate Employees' action brought under the Employee Retirement Income Security Act, 29 U.S.C. §§1001, et seq. For the following reasons, Minke Weeks' motion is DENIED, and the IRS's motion is GRANTED.

Statement of Facts

This case is about who gets the money. In particular, who gets the money from two benefit plans that are in the name of Michael Weeks ("Michael"). Two parties want the money--the IRS and Minke Weeks, the ex-spouse of Michael. Minke and Michael Weeks were married on September 16, 1967 and separated on December 1, 1990. (Minke Weeks' 12(M) Stmt., ¶1). Michael was an employee of Allstate Insurance Company during the marriage and after his separation from Minke until his retirement on April 2, 1996. (IRS's 12(M) Stmt., ¶4). As a result of his employment, Michael is a Pension Plan Participant and has a benefit currently payable from the Plan in the lump sum amount of $129,843 (the Pension Plan Benefit). (IRS's 12(M) Stmt., ¶5). Michael also participated in a Profit Sharing Fund at Allstate and, as of February 28, 1997, had a currently payable benefit of $74,917.07 (the Profit Sharing Plan Benefit). (IRS's 12(M) Stmt., ¶10). Michael's interests in the Pension Plan and the Profit Sharing Fund are formally in his name only. (IRS's 12(M) Stmt., ¶¶5, 10). For simplicity, the Pension Plan Benefit and the Profit Sharing Plan benefit will be referred to collectively as the "benefit plans."

After 23 years of marriage, Michael and Minke Weeks filed for a separation in 1990 in the state of California . (Minke Weeks' 12(M) Stmt., ¶1). Their marriage was legally terminated on October 31, 1997. (Minke Weeks' 12(M) Stmt. of Facts, ¶2). During the litigation surrounding their divorce, Michael Weeks did not pay his federal income tax for the years 1991, 1992, and 1993. (IRS's 12(M) Stmt. of Facts, ¶¶13, 14, 17). In response, on June 8, 1992, March 27, 1995, and June 9, 1997, the IRS issued assessments against Michael Weeks in the amounts of $9,330.22, $125,465.81, and $34,015.44. (IRS's 12(M) Stmt. of Facts, ¶¶13, 17). The IRS filed a notice of federal tax lien against Michael Weeks on April 8, 1997 and December 4, 1997. (IRS's 12(M) Stmt. of Facts, ¶¶15, 18). On April 1, 1998, the IRS issued a notice of levy to Agents Pension Plan of Allstate Insurance Company and the Savings and Profit Sharing Fund of Allstate Employees (the sponsors of the benefits plans) to seek the payment of $47,600.53 for Michael Weeks' tax liabilities. ¹ (IRS's 12(M) Stmt. of Fact, ¶20; IRS's Ex. 5). Michael Weeks has stipulated that he owes the IRS $46,305.66, plus interest from and after April 8, 1998. (IRS's 12(M) Stmt., ¶19).

Meanwhile, back at the divorce proceedings, the California Superior Court entered a "Ruling on Submitted Matter" on October 29, 1997 to divide the marital property between Minke and Michael Weeks. (IRS's Ex. 6). The California Superior Court determined that the community's interest in the pension plan in question was 86.7 percent of its total, or $115,528, and awarded one-half of this amount, $57,764, each to Minke Weeks and Michael Weeks. (IRS's Ex. 6). The California Superior Court also determined that the community's interest in the profit sharing fund was $274,342, and awarded one-half of this amount, $137,171, each to Minke Weeks and Michael Weeks. (IRS's Ex. 6). In the same ruling, the California Superior Court directed Minke Weeks to draft a proposed Qualified Domestic Relations Order ("QDRO") with respect to the pension plan to reassign the awarded benefits payable to her. (IRS's Stmt. of Facts, ¶30; IRS's Ex. 6). The California Superior Court issued a QDRO with respect to both the pension plan and the profit sharing plan on April 9, 1998. (Minke Weeks' 12(N) Stmt. of Facts, ¶1).

As sponsors of the benefit plans, Agents Pension Plan of Allstate Insurance Company and the Savings and Profit Sharing Fund of Allstate Employees, filed an interpleader action in this court under the Employee Retirement Income Security Act, 29 U.S.C. §§1001, et seq. ("ERISA"). (Pls' Complaint, ¶1). In this proceeding, both Minke Weeks and the IRS claim prior right to the benefits payable to Michael under the benefit plans. Minke claims that under a community property regime as exists under California law, her rights in the property are prior and superior to the rights of the IRS. The IRS argues that its lien preceded any interest Minke may have in the disputed property, or alternatively, that her interest in Michael's undivided one-half interest in the disputed property was acquired cum onere.

Standard for Summary Judgment

Summary judgment is proper "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter if law." Fed.R.Civ.P. 56(c); Cox v. Acme Health Serv., Inc., 55 F.3d 1304, 1308 (7th Cir. 1995). A genuine issue of material fact exists for trial when, after viewing the record and all reasonable inferences drawn from it in a light most favorable to the non-movant, a reasonable jury could return a verdict for the non-movant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); Hedberg v. Indiana Bell Tel. Co., 47 F.3d 928, 931 (7th Cir. 1995). The party moving for summary judgment bears the initial burden of demonstrating that there is no genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Hedberg, 47 F.3d at 931. If this burden is met by the movant, the non-movant must then set forth specific facts to show that there is a genuine issue for trial. Fed.R.Civ.P. 56(e); Celotex, 477 U.S. at 324. While affidavits, depositions and interrogatories are acceptable evidence for the non-movant to present, these are not the exclusive forms of evidence that can be used in responding to summary judgment. Wright, Miller & Kane Federal Practice and Procedure: Civil 3d §2721. In deciding a motion for summary judgment, the court must read the facts in a light most favorable to the non-movant. Cuddington v. Northern Ind. Public Serv. Co., 33 F.3d 813, 815 (7th Cir. 1994). However, Rule 56(c) mandates the entry of summary judgment against a party "who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and in which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322. A scintilla of evidence in support of the non-movant's position is not sufficient to oppose successfully a summary judgment motion: "there must be evidence on which they jury could reasonably find for the [non-movant]." Anderson, 477 U.S. at 250.

Analysis

Both Minke Weeks and the IRS filed motions for summary judgment on the issue of who had rights to the benefits payable from the benefits plans in the name of Michael Weeks. A logical starting point for analysis is to determine what, if anything the IRS got by virtue if its lien on Michael's interest. Section 6321 of the Internal Revenue Code provides that the amount of a delinquent taxpayer's liability shall be a lien in favor of the United States upon all property and rights to property belonging to said person. 26 U.S.C. §6321. In United States v. Overman [70-1 USTC ¶9342], 424 F.2d 1142 (9th Cir 1970), the Ninth Circuit held that: (1) a spouse's interest in community property is "property" for purposes of Section 6321 and therefore subject to a federal tax lien; and (2) while Section 6321 incorporates state law for purposes of determining whether a taxpayer's interest to the status of property or an interest in property, state rules limiting which debts of a spouse are payable out of that property do not limit the reach of Section 6321.

In California, each spouse has an undivided one-half interest in community property. Cal.Civ.Code §§4800, 4353. Thus if Michael's interest in the benefit plans is community property, Michael and Minke each had an undivided one-half interest in that property at the time of the liens. At worst, the IRS acquired, by virtue of the liens, a lien on Michael's undivided half. But Minke takes a different view of the cases. She cites Monticelli v. United States, for the proposition that while a creditor of a spouse may obtain a lien on that spouse's interest in community property, the extent of the interest is a matter of state law. [89-2 USTC ¶9675], 1989 WL 162788 (D.Nev.). Further, Minke cites Aquilino v United States, for the proposition that when state law determines "whether and the extent the taxpayer had property or rights to property to which the tax lien could attach." [60-2 USTC ¶9538], 363 U.S. 509 (1960). In remanding these issues to the state court, the Supreme Court noted that the issue was unclear under state law and opined that it was "in the interest of all concerned to have these issues decided by the state courts . . ." [60-2 USTC ¶9538], 363 U.S. at 512-513. From these cases Minke concludes that the IRS cannot attach its lien until the California state court has decided the extent of Michael's interest in the community property. Implicit in Minke's argument is the notion that the concept of community property extends beyond the interest of the spouses in particular property that makes up the "community". Rather, Minke apparently believes that the essence of community property at the dissolution of the marriage involves a reconciliation or accounting for all community property and community debts with the result that any shortfall attributable to one of the spouses may be setoff against the other spouse's community or individual interest. Thus in Minke's view, there can never be an enforcement of a tax lien on account of a debt of one taxpayer against the community property until dissolution (absent consent of the non-debtor spouse).

The IRS disagrees. The IRS position is that Minke's macro view of "community" property may very well be accurate as to the obligations of the parties inter se, it has no application to its lien claim. It has long been held that once a federal tax lien attaches to a taxpayers state created interest, federal law determines the priority of competing liens against that interest. Aquilino at [60-2 USTC ¶9538], 363 U.S. at 513-514. In the IRS's view, if Michael's interest in the benefit plans is community property, he and Minke each hold an undivided one-half interest. If, in the divorce proceeding, it is determined that, as between them, some adjustment must be made, Minke would have a claim against Michael's interest(s) in individual and/or community property that the family court could reduce to a lien on separate property, but that lien would be subordinate to the prior tax lien under federal law. The IRS based its argument on In re Porter, where the district court in the Northern District of California found that even though a marriage is dissolved, a spouse has not lost his or her rights in the community property. [93-2 USTC ¶50,543], 1993 WL 106884 *5-6 (N.D.Cal.). In the present case, the IRS points to the ruling of the California Superior Court on October 31, 1997, which provided that the community had a property interest of 86.7 percent in the pension plan and a 100 percent interest in the profit sharing plan. (IRS's Ex. 6). Therefore, since the benefit plans were community property, Michael held an undivided one-half interest in that property, to which the federal lien could attach.

This court finds that the federal tax lien attached to Michael's interest in the benefits plans. The analysis in In re Porter supports this court's conclusion. In Porter, the court recognized that a debtor does not lose his property rights in the community property at the moment the marriage is dissolved, for community property is to be divided equally between the spouses after the marriage. 1993 WL 106884 at *5-6, citing Cal.Civ.Code §§4800, 4353. The court reasoned that, "[t]he fact that the [California state] Superior Court may have decided (or may at some future date decide) that the interests of justice require that the proceeds be given to [the ex-spouse] as her separate property does not mean that [the] debtor did not hold a property right in the proceeds of the sale at the time of . . . [the] tax assessment. He did." Id. at *5-6. Relying on Overman and Ackerman, the court then found that the federal tax lien attached to the undivided one-half interest of the delinquent taxpayer spouse. Id. at *7. In the present case, even though Michael Weeks filed for divorce, he did not lose his interest in the community property of the benefits plans. It does not matter that the California court had not yet divided the community property between Michael and Minke Weeks at the time of the assessment. The key point is that Michael had an undivided one-half interest in the community property at the time that the taxes were assessed, in 1992, 1995, and June 1997. The California Superior Court has even recognized that these benefit plans are community property. (IRS Ex. 6). Therefore, the criteria of Overman has been met, in that Michael has an interest in the benefit plans as community property and they are therefore subject to a federal tax lien. Overman [70-1 USTC ¶9342], 424 F.2d at 1142.

In response to the argument that the October 29, 1997 "Ruling on Submitted Matter" modified Michael's interest in the benefit plans, the IRS also notes that since the plans at issue are ERISA qualified plans, federal law is controlling for the purposes of transfers of interests in the plans. Boggs v. Boggs, 117 S.Ct. 1754, 1762 (1997); Herwitz v. Sher, 982 F.2d 778, 780 (2d Cir. 1992) (citations omitted). The only way in which benefits of an ERISA qualified plan may be transferred to a spouse or ex-spouse of a benefit holder is through a Qualified Domestic Relations Order ("QDRO"). Until a QDRO is entered by a court, the benefits are still vested in the benefit holder spouse. 29 U.S.C. §§1056(d)(3)(B)(ii); 1056(C); 1056(D).

Minke Weeks did not file a QDRO until April 8, 1998, well after the IRS attached its liens. ² Therefore, the benefit plans were still vested in Michael Weeks at the time the federal tax liens attached and the QDRO does not affect the attachment of these liens.

Conclusion

For the foregoing reasons, the Commissioner of Internal Revenue's motion for summary judgment is GRANTED and Minke Weeks' motion for summary judgment is DENIED. The IRS's tax liens attached to Michael Weeks' one-half interest in the benefits payable from the pension plan sponsored by Agents Pension Plan of Allstate Insurance Company and from the profit sharing plan sponsored by the Savings and Profit Sharing Fund of Allstate Employees. The IRS is entitled to $46,305.66 plus interest as provided by 26 U.S.C. §6621(a)(2) from and after April 8, 1998.

¹ In their briefs, the parties do not address the question of whether the IRS liens arose upon the dates of the assessments (June 8, 1992, March 27, 1995, and June 9, 1997), or the dates of the issuance of the Notices of federal tax liens (April 8, 1997 and December 4, 1997). Resolution of that issue only becomes important if Michael's interest in the benefit plans terminated prior to the fixing of the liens. For reasons addressed later, it did not.

² The plaintiffs filed a supplemental brief to this motion, stating that the domestic relations order filed by Minke Weeks and ordered by the California court does not meet the criteria of QDRO. (Pl's Mem. Regarding Dfts' Cross Motions for Summary Judgment, p. 2). Therefore, not only was the QDRO filed too late, it is unclear if it is in the proper form.

 

 

 

Susie J. Calmes, Plaintiff v. United States of America, Defendant

U.S. District Court, No. Dist. Tex., Dallas Div., Civ. 3:92-CV-2263-X, 5/21/96, 926 FSupp 582, 926 FSupp 582

[Code Secs. 7421 and 7426 ]

IRS levy: Wrongful: Community property: Premarital agreement: Future earnings.--The IRS was enjoined from executing or placing any levy upon the personal service income or separate property of a wife who executed a premarital agreement with her husband, an alleged tax debtor, providing that their respective property and their employment income earned during the marriage would remain separate property. Under state (Texas) law, the couple, when contemplating marriage, could partition or exchange their community property interests in future earnings. The IRS's contention that the premarital agreement only expressed a future intention to partition future earnings was rejected. The couple's agreement indicated their intent to exchange their community interests in earnings and income from separate property. The agreement had no language that required further future action to accomplish its purpose.

[Code Sec. 6321 ]

IRS levy: Wrongful: Community property: Premarital agreement: Fraudulent conveyance.--A married couple's premarital agreement was not void as to the government under the state's (Texas) Uniform Fraudulent Transfers Act because it was not fraudulent and the couple did not enter into the agreement to hinder, delay or defraud a preexisting creditor. Although the wife's relationship to her husband, an alleged tax debtor, was as an "insider" under state law and the husband was threatened with suit by the IRS at the time the agreement was executed, there was no evidence that the husband had possession or control over half of his wife's income or property. The couple received a reasonably equivalent value in exchange for the interests they relinquished, and the agreement did not result in a transfer of substantially all of the husband's assets. Moreover, the agreement was not executed shortly after a substantial debt was incurred since, during some of the years the husband failed to pay taxes, he was married to another woman.

[Code Secs. 7402 and 7421 ]

IRS levy: Wrongful Injunctive relief: Irreparable harm.--The IRS was enjoined from executing or placing any levy upon the personal service income or separate property of a wife who executed a premarital agreement with her husband, an alleged tax debtor, providing that their respective property and their employment income earned during the marriage would remain separate property. The wife showed that irreparable harm would result if the government was allowed to levy her personal service income. Allowing the government to levy upon property to which it had no right would deprive the wife and her child of certain necessities of life and severely affect her ability to meet her obligations as they came due. Any harm to the government resulting from the injunction against a levy on the wife's separate property was minimal since it could continue to pursue the husband and his former spouse. Finally, the wife's declaratory action was dismissed because a declaratory judgment regarding a federal tax matter fails to state a claim for which relief could be granted.

Hugh E. Hackney, R. Larson Frisby, Tim M. Wheat, Fulbright & Jaworski, 2200 Ross Ave., Dallas, Tex. 75201, for plaintiff. Ralph F. Shilling, Jr., Department of Justice, Dallas, Tex. 75201, for defendant.

MEMORANDUM OPINION AND ORDER

KENDALL, District Judge:

This case is before the Court on several issues of law, there being no factual disputes between the parties. Having considered the briefing, the arguments of counsel and the applicable law, the Court determines that Plaintiff's declaratory judgment action must be DISMISSED with PREJUDICE. Plaintiff's motion for a permanent injunction against the United States' wrongful levy will be GRANTED.

Background

This is a tax suit arising from the United States' efforts to levy against plaintiff's husband's alleged community property interest in plaintiff's employment income. Jack Norton Calmes allegedly owes the United States $210,260.19 for tax deficiencies for the years 1984 through 1989.

On September 6, 1989, Plaintiff married Mr. Calmes. Just prior to the wedding ceremony, the couple executed a premarital agreement providing that their respective property would remain separate property after the marriage. The agreement also provided that employment income earned by either Mr. or Mrs. Calmes during their marriage would remain separate property. Specifically, the prenuptial agreement stated:

All personal service income earned by either Jack Calmes or Susan Bagwell during marriage shall be the separate property of Jack Calmes or Susan Bagwell, and all proceeds of, income earned from, and proceeds of, income earned from, and properties purchased with such separate income shall be the separate property of Jack Calmes or Susan Bagwell.

On October 14, 1992, the Internal Revenue Service served a notice of levy on Plaintiff's employer. The notice stated in pertinent part as follows:

By virtue of taxes assessed against Jack N. Calmes, it is intended that this levy will cover and attach to any funds due and owing to Susie J. Calmes, such funds being the community property of Jack N. Calmes and Susie J. Calmes. This levy attaches to Mr. Calmes' community property (50% of Mrs. Calmes' income).

The IRS agrees that Plaintiff does not owe them a penny; rather, it is her husband's debt, yet they seek to levy his alleged interest in her income.

I. Declaratory Judgment Action

Plaintiff filed suit seeking an injunction and a declaratory judgment that the IRS is not entitled to levy against Plaintiff's personal income to satisfy the alleged deficiency owed by her husband. Specifically, her suit is one for wrongful levy arising under 26 U.S.C. §7426 and for a declaratory judgment under 28 U.S.C. §2201 .

Plaintiff's action for declaratory judgment is immediately problematic. The operative statute states, in pertinent part, as follows:

In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than actions brought under section 7428 of the Internal Revenue Code of 1986 ... any court of the United States ... may declare the rights and other legal relations of any interested party seeking such declaration....

28 U.S.C. §2201(a). This case is clearly one "with respect to Federal taxes," and section 7428 addresses declaratory judgments concerning classification of tax-exempt organizations under 26 U.S.C. §501(c)(3) , an issue not present in the instant action. The Court wonders why anyone would bring a declaratory judgment action on facts such as those involved here. The question on this portion of plaintiff's suit becomes, not whether the declaratory judgment action is going away, but rather how it is going away.

Defendant complains that the Court does not have subject matter jurisdiction to entertain it, an assertion implicating Rule 12(b)(1), FED. R. CIV. P. The statute's language, though, suggests that the problem is not jurisdictional, but instead should be properly addressed under Rule 12(b)(6), FED. R. CIV. P., which involves a failure to state a claim upon which relief can be granted. The phrase "in a case of actual controversy within its jurisdiction" in section 2201 suggests that that statute does not itself confer jurisdiction; indeed, it presupposes that a court's jurisdiction exists. One court faced with the same issue determined that one bringing a declaratory judgment action regarding a federal tax matter failed to state a claim on which relief could be granted. Wells v. United States [90-1 USTC ¶60,019 ], 746 F. Supp. 1024, 1028 (D. Hawaii 1990). However, language in a Fifth Circuit opinion might support the proposition that the matter is jurisdictional, see McCarty v. United States [92-1 USTC ¶50,222 ], 929 F.2d 1085,1088 (5th Cir. 1991) (dictum), and one court has interpreted that language so. Smith v. Internal Revenue Service, No. 90-4818, 1991 WL 236657 at *1 (E.D. La. Oct. 29, 1991). The better reasoning appears to lie with the Wells court's analysis, coupled with the statute's plain meaning, however the issue appears to be metaphysical because regardless of the answer, plaintiff's declaratory judgment action must be dismissed.

II. Wrongful Levy Claim

The crux of this case contains a much different issue, one which the parties assert is of first impression, and it concerns the relation of Mr. and Mrs. Calmes' prenuptial agreement to Mr. Calmes' tax debt. Defendant presents two arguments in its effort to wrest Mrs. Calmes' employment income from her in payment of Mr. Calmes' premarital tax debt.

Initially, the United States asserts that the prenuptial agreement which the parties executed was ineffective in its attempt to characterize each party's personal service income as separate property. The Government's argument rests upon a strained interpretation of the phrase "shall be." As discussed further in this opinion, the United States' game of semantics is meritless under current Texas law.

Alternatively, the defendant asserts that even if the prenuptial agreement effectively characterized the Calmes' future personal service income as separate property, the characterization is void as to the United States, as it was entered into in an effort to hinder, delay or defraud the defendant, a preexisting creditor. ¹ In support of this argument, the United States relies upon the Texas Uniform Fraudulent Transfers Act (TUFTA) drawing an analogy between TUFTA's provisions and Article XVI's lack of intent to defraud requirement. Applying this analogy, the defendant attempts to show the Court seven so-called "badges of fraud" that brand the Calmes' prenuptial agreement as fraudulent. For the reasons discussed below, the United States' contention that the prenuptial agreement was a fraudulent transfer is also wholly without merit.

A. Did the Prenuptial Agreement Effectively Characterize Each Party's Personal Service Income as Separate Property?

Texas, due to its Mexican and Spanish law heritage, is a community property state. While the basic features of this system endure, over the years the details of Texas marital property law have been altered by constitutional amendments, legislative enactments and judicial decisions. See THOMAS M. FEATHERSTON, JR. and JULIE A. SPRINGER, Marital Property Law in Texas: The Past, Present and Future, 39 BAYLOR L. REV. 861, 862 (1987). In the past, neither married persons nor persons about to marry could by "mere agreement" convert the character of income or community property into separate property. Winger v. Pianka, 831 S.W.2d 853 (Tex. App.--Austin 1992, writ denied) (citations omitted). Subsequently, amendments to the Texas Constitution allowed spouses to partition then existing community property. TEXAS CONSTITUTION, art. XVI, §15 (1948, amended 1980). Spouses are also allowed to agree that all or part of their community property becomes the property of the surviving spouse. TEXAS CONSTITUTION, art. XVI, §15 (1987). Most importantly, the Texas Constitution has been amended to allow spouses and persons about to marry to partition or to exchange their interests in property then existing or to be acquired in the future. TEXAS CONSTITUTION, art. XVI, §15 (1980, amended 1987). Article XVI provides, in pertinent part:

[P]rovided that persons about to marry and spouses, without the intention to defraud pre-existing creditors, may by written instrument from time to time partition between themselves all or part of their property, then existing or to be acquired, or exchange between themselves the community interest of one spouse or future spouse in any property for the community interest of the other spouse or future spouse in other community property then existing or to be acquired, whereupon the portion or interest set aside to each spouse shall be and constitute a part of the separate property and estate of such spouse or future spouse; spouses also may from time to time, by written instrument, agree between themselves that the income or property from all or part of the separate property then owned or which thereafter might be acquired by only one of them, shall be the separate property of that spouse.... Id.

Initially, some question remained as to whether the definition of "property to be acquired" effectively encompassed future personal earnings thereby making this type of personality susceptible to premarital partition or exchange. However, recent judicial decisions and sections of the Texas Family Code ² have made the fact that personal earnings are subject to partition or exchange abundantly clear.

In Winger v. Pianka, the Austin Court of Appeals was presented with the issue of whether the amendment to Article 16, §15 allowed persons contemplating marriage to partition future earnings. 831 S.W.2d 853 (Tex. App.--Austin 1992, writ denied). In that opinion, after a thorough analysis of the amendment's text, the voters' intent and discussions concerning the amendment by the Texas Supreme Court, the Austin court held that the 1980 amendment to Article 16, §15 of the Texas Constitution clearly permits persons about to marry to partition or to exchange between themselves salaries and earnings to be acquired by the parties during their future marriage. Winger v. Pianka, 831 S.W.2d 853, 858 (Tex. App.--Austin 1992, writ denied).

Jack Calmes and Susan Bagwell Calmes executed their premarital agreement on September 6, 1989. Although the question of the applicability of the 1980 amendment was not clearly settled at the time of the agreement, Texas law has now established that parties contemplating marriage may partition their future earnings.

The defendant reluctantly concedes that in Texas, parties contemplating marriage may partition or exchange an interest in future earnings. However, the United States argues that in this case the attempted exchange was not effective and must be disallowed. The defendant bases its argument on the language of the clause purporting to exchange the future personal services income of the parties. The pertinent clause states, in part:

All personal service income earned by either Jack Calmes or Susan Bagwell during marriage shall be the separate property of Jack Calmes or Susan Bagwell, and all proceeds of, income earned from, and proceeds of, income earned from, and properties purchased with such separate income shall be the separate property of Jack Calmes or Susan Bagwell. (emphasis added).

The United States, through a strained interpretation of the phrase "shall be," attempts to argue that this phrase is insufficient to express a present intention to exchange the personal service income of each party. Instead, the defendant states that this phrase only expresses a future intention to partition future earnings. Under the United States' argument, since the Calmes' never executed an agreement which expressed a present intention to exchange their earnings, Mr. Calmes still possesses a half interest in the personal service income of Susan Bagwell Calmes and the United States is entitled to levy upon that property interest.

In order to ascertain whether Mr. Calmes has an interest or right to property which is subject to the IRS' attempts to levy on the property, the Court must look to state law. See United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 682 (1983). If the Court determines that a property interest does exist under state law, then the consequences that attach to those interests is a matter of federal law. Id. The argument put forth by the United States has been considered and rejected by the Texas Court of Appeals. In Dokmanovic v. Schwarz, the Houston Court of Appeals considered a phrase strikingly similar to the one present in the Calmes' premarital agreement. 880 S.W.2d 272 (Tex. App.--Houston [14th Dist.], no writ).

In that case, the Houston Court of Appeals analyzed a 1987 premarital agreement to determine whether it effectively exchanged the personal service income of the parties. The agreement contained the following pertinent clauses:

(d) Separate property increases, income, or proceeds ... shall remain the separate property of the owner of the separate property producing the increase, income, or proceeds.

*****

(f) All income of the separate property of each party shall be treated as the separate property of the party owning the separate property producing the income. All earnings for personal services of each party shall be treated as the separate property of the party earning the income.... [T]he parties declare that any future income from personal earnings shall be partitioned and set aside regularly, each party's earning to that party.

Dokmanovic, 880 S.W.2d at 273 (emphasis added).

The court analyzed Texas case law and found a willingness on the part of Texas courts to "validate the intent of the parties and to uphold premarital agreements against constitutional challenges unless the language of the agreement forecloses that choice." Id. at 275. Like the parties in Dokmanovic, the Calmes' agreement indicated the parties' intent to exchange their community interests in income from separate property and in earnings. The use of the phrase "shall be" does not affect the clear intent of the parties to exchange their community interests.

The United States cites Bradley v. Bradley in support of its contention that the phrase "shall be" in the Calmes' agreement did not reflect a present intention to partition the future personal service income of the parties. In its discussion, the Dolmanovic court, analyzed and expressly rejected Bradley's applicability to premarital clauses similar to the one included in the Calmes' agreement.

In Bradley v. Bradley, 725 S.W.2d 503 (Tex. App.--Corpus Christi 1987, no writ), the parties entered into a prenuptial agreement which provided that "on or before the 15th day of April of each year during the existence of this marriage, [the parties] will fairly and reasonably partition (and/or exchange) in writing all of the community estate of the parties on hand that will have accumulated since January 1 of the preceding year...." Id. at 504. The Bradley court found that this prenuptial agreement did not operate to partition and exchange the community property interests in the parties income from personal efforts. Id. Instead, the court found that the agreement merely contemplated a partition and exchange of community property interests in the future. Id.

The agreement in Bradley is clearly distinguishable from the Calmes/Bagwell prenuptial agreement. The only statement regarding recharacterization of community property to separate property in Bradley clearly contemplates future action to accomplish the recharacterization. In this case, the agreement has language that requires no future action to accomplish the exchange of the parties' property. The Calmes do not have to get together on the 15th of April every year and divvy up all the community property and/or income acquired in the previous year. The clause in question and the Calmes' agreement as a whole clearly evince a present intention to exchange the future service income of the parties. Accordingly, the Court holds that the prenuptial agreement in this case was valid as an exchange of income to be acquired by the parties during their future marriage. Furthermore, no partition was required where a valid exchange occurred. This Court will follow Texas law and validate the clear intent of the parties. The defendant will not be allowed to attack a valid premarital agreement on the strength of a strained interpretation of a single phrase in a multi-page document.

B. Was the premarital agreement executed with the intent to defraud a preexisting creditor?

The Untied States next argues that the prenuptial agreement is void as to the defendant, because the parties entered into the agreement in an attempt to hinder, delay or defraud the United States. The Texas Constitution provides:

that persons about to marry and spouses, without the intention to defraud pre-existing creditors, may by written instrument from time to time partition between themselves all or part of their property, then existing or to be acquired, or exchange between themselves the community interest of one spouse or future spouse in any property for the community interest of the other spouse or future spouse in other community property then existing or to be acquired....

TEXAS CONSTITUTION, art. XVI, §15 (1987).

At the present time, there exists no standard which defines what is required in order to show an intent to defraud a preexisting creditor under a premarital agreement. In order to craft some applicable standards, the Court agrees with the defendant that the most analogous set of rules is that set out in TUFTA. TUFTA applies to fraudulent conveyances. Here, as the defendant asserts, the premarital agreement effectively conveys and intended to convey interests in property and income. However, the Court disagrees with the defendant's assertion that the prenuptial agreement is clearly fraudulent. After an analysis of TUFTA, its applicable provisions and the "badges of fraud" presented by the defendant, the Court is of the opinion that the prenuptial agreement was not fraudulent and was entered into without an intent to defraud a preexisting creditor.

Section 24.005(a)(1) provides that a transfer of property is fraudulent if the transaction was actually entered into with an intent to hinder, delay or defraud any creditor of the debtor. ³ Direct proof of actual intent is an impossibility; no one can crawl inside another's mind in order to determine what that person was thinking at a particular point in time. Consequently, the Court must look to a number of circumstantial factors in order to determine the likely intent of the parties. ⁴ These circumstantial factors or the "badges of fraud" are the foundation of sand upon which the defendant builds its fraudulent intent argument. The Court will discuss each of the defendant's points in turn and then discuss some of the intangible factors which counsel against a finding of fraudulent intent on the part of the Calmes.

The United States first asserts that Susan Bagwell Calmes was, at the time of the agreement, and is now an insider. TUFTA defines an insider as "a relative of the debtor or of a general partner of the debtor. ⁵" A relative is defined as "an individual related by consanguinity within the third degree as determined by the common law, a spouse, or an individual related to a spouse within the third degree as so determined, and includes an individual in an adoptive relationship within the third degree. ⁶" The TUFTA definition of an insider is not intended to limit an insider to the four listed subjects. See Browning Interests v. Allison, 955 F.2d 1008 (5th Cir. 1992). In the Fifth Circuit, the test for determining whether a individual is an insider depends upon two factors: (1) the closeness of the relationship between the debtor and the transferee; and (2) whether the transaction between the transferee and the debtor was at arm's length. Id. at 1010. The determination of insider status is normally a mixed question of fact and law. Id. at 1011.

The relationship between Susan Bagwell Calmes and Jack Calmes was clearly a close one, as shown by their intent to marry. The question of whether the premarital agreement was an arms-length transaction also counsels toward a finding of insider status. The relationship of the parties was such that each could have influenced the other in financial decisions.

Accordingly, although at the time of the agreement, Susan Bagwell Calmes did not come within the strict definition of an insider, the Court finds that Ms. Calmes is an individual covered by the spirit of the meaning of "insider." See id. (holding that debtor's ex-wife was an insider for purposes of UFTA). However, simply transferring an interest to an insider will not establish an intent to defraud.

The defendant next asserts that by virtue of the fact that the Calmes' live together as man and wife and Mrs. Calmes pays the expenses incurred in relation to the house and other necessities of life, that Mr. Calmes' has retained possession or control of his interest in the personal income of Mrs. Calmes. Beyond the assertion that Mrs. Calmes pays the bills, the defendant adduces no evidence that Mr. Calmes' has possession or control over half of Mrs. Calmes' income. There is no proof that Jack Calmes is a signatory on Mrs. Calmes' checking account(s) or savings account(s). There is no evidence that Mr. Calmes' confiscates his wife's check every payday, cashes it and spends it as he will. The Court notes that the house in which the couple resides is Susan Calmes' separate property. Mrs. Calmes is responsible for the mortgage, upkeep, insurance and utilities associated with that structure whether Mr. Calmes' is living in the house or not. Beyond these factual considerations, under Texas law, the personal income of one party to the marriage is characterized as sole management community property, absent a recharacterization of it to separate property. ⁷ Since Mr. Calmes is not entitled to possession or control of his community one-half interest in the personal earnings of Susan Calmes even without a premarital agreement, the Court fails to see how Mr. Calmes can retain possession or control over property which Texas law specifically characterizes as under Mrs. Calmes' sole management, control and disposition. The Court finds that Mr. Calmes does not retain control or possession over the interest he exchanged.

Another badge of fraud which the defendant asserts is present in this case is the fact that Jack Calmes was threatened with suit by the IRS. The Court finds that this factor is present. The defendant has submitted affidavits which state that the IRS was taking collection action against Mr. Calmes. The Calmes' agreement, by its terms recognized Mr. Calmes' preexisting tax liabilities. Additionally, the agreement recognized Mr. Calmes' intent to declare bankruptcy. According to the defendant, Mr. Calmes' insolvent state is another "badge of fraud." These factors may certainly be considered by the Court, but their presence or absence will not necessitate a finding or rejection of the Calmes' intent to defraud.

Defendant asserts that Mr. Calmes did not receive a reasonably equivalent value in exchange for the transfer of his interest in Mrs. Calmes' wages. The Court simply cannot agree with this assertion. The Court only wishes that it had the ability to foresee the future as the IRS does, for in this one bald assertion, the defendant has relegated Mr. Calmes to a life as a wastrel and an unemployed debtor. The Court refuses to subscribe to the doom and gloom prophecy of the defendant. Simply because Mr. Calmes is bankrupt or unemployed now, does not mean that he is confined to that sorry lot for life. Yet, Susan Calmes has relinquished her rights to his future earnings for the duration of the marriage.

The parties gave up equally valuable rights. The defendant makes much of the history of events showing that Mrs. Calmes has a great earning potential and Mr. Calmes has not. However, on the day the agreement was signed, neither party knew of the other's future earning potential. Presumably, they took each other for richer or poorer, for better or worse. Mrs. Calmes could have lost her job a day after the honeymoon and Mr. Calmes could have won the lottery. ⁸ Either way the premarital agreement would have foreclosed the possibility of one party asserting an interest in the other's separate property. In addition, the Calmes' relinquished their respective rights in the other's real property, proceeds from separate property, income from investments, life insurance, etc. The Court finds that clearly each party received a reasonably equivalent value in exchange for the interests relinquished.

Neither can the Court agree with the suggestion that Mr. Calmes' exchange of his community interest in Mrs. Calmes' personal earnings was his sole and only asset. The defendant asserts that by agreeing that Susan Calmes' income would be her separate property, Jack Calmes transferred substantially all of his assets. The agreement specifically refers to the substantial estate that Jack Calmes had accumulated prior to the marriage. These assets included a house and its contents, among other items. Additionally, due to the premarital agreement, Jack Calmes never acquired any interest in Susan Calmes' personal income. The Court fails to see how an interest which was never acquired can be considered an asset of the debtor. Susan Calmes could have refused to marry Jack Calmes without the premarital agreement and as a result his alleged asset in Susan's income would never have been created. The premarital agreement did not result in a transfer of substantially all of Jack Calmes' assets.

Finally, the United States asserts that the final badge of fraud exists in the fact that the premarital agreement and its transfers occurred shortly after a substantial debt was incurred. This is simply not the law. Jack Calmes allegedly owes taxes for the years 1984-1989. The debt to the IRS was incurred when Jack Calmes did not pay the owed taxes in 1984 and in each succeeding year after that. See Roland v. United States [88-1 USTC ¶9219 ], 838 F.2d 1400, 1043 (5th Cir. 1988). Taxes become due and payable on April 15th of the year immediately following the preceding year. The Court notes with interest that during some of the years the tax liability was incurred, Mr. Calmes was married to another woman. Mr. Calmes' tax debt was not incurred when a deficiency was assessed and noticed against him, it was incurred when he failed to pay the taxes in the first place. However, the defendant cannot show that Jack Calmes began divesting himself of all his interest in property beginning in 1984 and continuing into the present. Instead, the defendant points to a negotiated agreement entered into between two consenting adults reflecting an interest to marry not for the property rights that are attached to that institution in the state of Texas, but for companionship, love and respect. The agreement clearly reflects the parties' interest to remove money matters as a possible bone of contention during the marriage. It is a simple statement of "what's mine is mine and what's yours is yours," not as the IRS asserts a devious, evil scheme to deprive the IRS of its ability to swoop down and take half of Susan Calmes', an individual who the IRS acknowledges owes nothing, hard-earned money.

Beyond these supposed badges of fraud allegedly present, the defendant asserts that the Calmes entered this agreement with the full knowledge that the IRS was entitled to levy on Susan Calmes' sole management community property. The defendant bases this assertion on the existence of a Fifth Circuit case.

In Medaris v. United States [89-2 USTC ¶9565 ], 884 F.2d 832 (5th Cir. 1989), the Court of Appeals held that Texas' exemption of a spouse's sole management community property from preexisting creditors did not act to prevent the IRS from levying on the taxpayer's interest in those funds. The Defendant asserts that the existence of this case is proof of the Calmes' actual intent to defraud. This assertion is absurd. The Medaris case was decided on October 2, 1989, nearly a month after the Calmes signed the premarital agreement and married. Absent a showing of clairvoyance, the Court will not infer an evil intent on the part of persons entering an ordinary premarital agreement based upon case precedent which was not in existence at the time.

III. Injunctive Relief

Unlike a preliminary injunction, which is intended to preserve the status quo pending resolution of the issues, normally a permanent or final injunction is to be granted only after a right thereto has been established at a full trial on the merits. University of Texas v. Camenisch, 451 U.S. 390, 396 (1981); Shanks v. City of Dallas, 752 F.2d 1092 (5th Cir. 1985); 11 C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE, §2941 (1973). Permanent injunctive relief is proper when the plaintiff will suffer irreparable harm and there does not exist an adequate remedy at law. Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982). However, the court may grant a permanent injunction without a trial on the merits if there are no material issues of fact and the issues of law have been correctly resolved. Clark v. Cohen, 613 F.Supp. 684, 690 (E.D. Pa.1985) aff'd 794 F.2d 79 (1986), (citing Standard Oil Co. v. Lopeno Gas Co., 240 F.2d 504, 509-10 (5th Cir. 1957). The parties have stipulated that no issues of material fact are in dispute between the parties which require any additional hearing or trial.

The standard for a permanent injunction is "essentially the same" as for a preliminary injunction, in that the plaintiff must show the existence of a substantial threat of irreparable harm, that outweighs any harm the relief would accord to the defendants, that there is no adequate remedy at law, and that granting the injunction will not disserve the public interest. United States v. The Rainbow Family, 695 F.Supp. 314 (E.D. Tex. 1988) (citing Beacon Theaters, Inc. v. Westover, 359 U.S. 500, 506-07 (1959), Mississippi Power & Light v. United Gas Pipe Line Co., 760 F.2d 618, 621 (5th Cir. 1985), Tubwell v. Griffith, 742 F.2d 250, 251 (5th Cir.1984)); see also Roho, Inc. v. Marquis, 902 F.2d 356, 358 (5th Cir. 1990); Allied Mktg. Group, Inc. v. CDL Mktg., Inc., 878 F.2d 806, 809 (5th Cir. 1989). All four of these elements are mixed questions of law and fact. Blue Bell Bio-Medical v. Cin-Bad, Inc., 864 F.2d 1253, 1256 (5th Cir. 1989). To justify a permanent injunction, however, the plaintiff must demonstrate actual success on the merits, rather than a likelihood of success. Amoco Production Co. v. Village of Gambell, Alaska, 480 U.S. 531, 546 n. 12 (1987). It is within the court's sound discretion to decide whether to exercise equity jurisdiction and grant permanent injunctive relief. Lemon v. Kurtzman, 411 U.S. 192, 200-01, 93 S.Ct. 1463, 1469-70, 36 L.Ed.2d 151 (1973). "Injunctive relief is an extraordinary and drastic remedy, not to be granted routinely, but only when the movant, by a clear showing, carries the burden of persuasion." Holland America Insurance Co. v. Succession of Roy, 777 F.2d 992, 997 (5th Cir.1985). Speculative injury is not sufficient, for "there must be more than a mere possibility or fear that the injury will occur." Connecticut v. Massachusetts, 282 U.S. 660, 674 (1931); Holland, 777 F.2d at 997. If warranted, permanent injunctive relief is a "flexible" remedy, "to be molded to the necessities of a particular case." Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 62 (1975); Hecht Co. v. Bowes, 321 U.S. 321, 329 (1944). A district court's determination of injunctive relief will be reversed only if the court abuses its discretion. United States v. Marine Shale Processors, -- F.3d --, 1996 WL 185815 (5th Cir. April 18, 1996); Peaches Entertainment Corp. v. Entertainment Repertoire Assoc., 62 F.3d 690, 693 (5th Cir. 1995); Blue Bell Bio-Medical, 864 F.2d at 1256. In the abuse of discretion analysis, the court's fact findings will be overturned only if clearly erroneous. Peaches Entertainment Corp. v. Entertainment Repertoire Assoc., 62 F.3d 690, 693 (5th Cir. 1995); Blue Bell Bio-Medical, 864 F.2d at 1256; Apple Barrel Prod., Inc. v. Beard, 730 F.2d 384, 386 (5th Cir. 1984).

For the reasons discussed in the preceding sections, the Court finds that Calmes has succeeded on the merits of her wrongful levy claim. The premarital agreement effectively exchanged the community interests in the personal service income between the parties. Therefore, under Texas law, Jack N. Calmes never had, and does not now have, a community property interest in half of Susan Calmes personal service income. Additionally, the premarital agreement was not a fraudulent transfer which the United States may set aside by virtue of its status as a preexisting creditor.

Calmes has shown that irreparable harm would result if the United States were allowed to levy on her personal service income. The factors to be considered by the Court on an issue of injunctive relief are not isolated criteria, but discrete parts of a single continuum. The degree of harm necessary decreases when the plaintiff demonstrates success on the merits. Susan Calmes has substantial separate real property assets for which she is responsible. Susan Calmes is also responsible for books, tuition, and living expenses which her daughter incurs while she is enrolled in college. Allowing the United States to levy upon property to which it has no right would deprive Susan Calmes and her daughter of certain necessities of life and severely impinge upon her ability to meet her obligations as they come due.

Any harm to the United States resulting from the injunction against a levy on Calmes' separate property is minimal. The IRS may continue to pursue Mr. Calmes. Simply because he is bankrupt and unemployed now, does not mean that he will always be so. The IRS is an institution whose sheer mass and momentum will allow it to exert an ever-present force in Jack N. Calmes' life. The Court is confident that the IRS can and will outlast Mr. Calmes. Additionally, since Mr. Calmes was married to another woman during the time period that some of the tax liability was incurred, the IRS is free to pursue that former spouse to recoup some of the community tax liability.

Finally, the public policy concerns rest solely on the side of granting the injunction. In a time in history where our leaders lace their rhetoric with homages to the family and the value of marriage, the fact that the government would engage in this type of full frontal assault on the institution of marriage is particularly offensive. Counsel for the IRS freely admits that if the Calmes had chosen to live together instead of exchanging vows before their families and God, the IRS could attach none of Susan Calmes' income, regardless of whether she paid every single penny of any living expenses incurred by Jack Calmes. However, because the couple did not choose to "shack up" and "live in sin" Susan Calmes has been harried and harassed by an agency often criticized for its excesses and overreaching.

The Court believes that this is a classic example of the right hand not knowing (or caring) what the left hand is doing. The President and Congress extol the virtues of marriage and the family, debate per-child tax credits and laud the demise of the marriage-penalty present in the tax code, while the agency itself attempts to have its Texas community property cake and eat it too. The IRS cannot pick and choose among the tenets of community property law. Texas community property law creates a joint community estate which the IRS can reach for tax liabilities; however, the same law allows a couple to keep their estates separate and enjoy the convenience of separate property by simply executing a valid premarital agreement.

The social and cultural forces of our time already place a great strain on the stability of the family and the institution of marriage. The IRS, with the force, resources and staying power of the federal government, does not need to join the fray.

Conclusion

The permanent injunction shall issue. The Internal Revenue Service, its agents and employees ARE ENJOINED from executing or placing any levy upon the personal service income of Susan Bagwell Calmes. The defendant is FURTHER ENJOINED from attempting to levy on any other property which is the separate property of the plaintiff.

The plaintiff's declaratory judgment action is DISMISSED with PREJUDICE.

Costs of Court shall be borne by the defendant.

The Clerk of the Court is ORDERED to close this case and to provide all parties with notice of its closure.

SO ORDERED.

¹ The Texas Constitution, article XVI, §15 (1987) specifically provides that premarital agreements must be entered into without the intention to defraud preexisting creditors. However, neither of the parties nor the Court has been able to locate a Texas case, or any other case, which interprets the operative phrase, "without an intent to defraud preexisting creditors."

² See TEX. FAM. CODE §5.41 (1995).

³ §24.005 Transfers Fraudulent as to Present and Future Creditors

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or within a reasonable time after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; TEX. BUS. & COM. CODE §24.005(a)(1) (1995).

⁴ §24.005. Transfers Fraudulent as to Present and Future Creditors

(b) In determining actual intent under Subsection (a)(1) of this section, consideration may be given, among other factors, to whether:

(1) the transfer or obligation was to an insider;

(2) the debtor retained possession or control of the property transferred after the transfer;

(3) the transfer or obligation was concealed;

(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5) the transfer was of substantially all the debtor's assets;

(6) the debtor absconded;

(7) the debtor removed or concealed assets;

(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

TEX. BUS. & COM. CODE §24.005(b)(1)-(11) (1995).

⁵ (7) "Insider" includes:

(A) if the debtor is an individual:

(i) a relative of the debtor or of a general partner of the debtor; TEX. BUS. & COM. CODE §24.002(7)(A)(i) (1995.)

⁶ TEX. BUS. & COM. CODE §24.002(11) (1995).

⁷ §5.22 Community Property; General Rules

(a) During marriage, each spouse has the sole management, control, and disposition of the community property that lie or she would have owned if single, including but not limited to:

(1) personal earnings;

(2) revenues from separate property;

(3) recoveries for personal injuries; and

(4) the increase and mutations of, and the revenue from, all property subject to his or her sole management, control and disposition.

TEX. FAM. CODE §5.22 (1995).

⁸ Presumably, had be done so we would not be here today. For instead of pursuing an innocent spouse, the IRS could pursue the true debtor for its money.

 

 

 

Napa Valley Bank, Plaintiff v. Woodrow Morgan, et al., Defendants

U.S. District Court, East. Dist. Calif., Civ. S-90-1355 MLS JFM, 9/15/94

[Code Sec. 6321 ]

Lien for taxes: Community property: Property transferred to third parties.--The IRS was entitled to funds originally deposited in a bank by a delinquent taxpayer because the IRS's claim to the funds by virtue of two tax liens was superior to the claims of the taxpayer's daughter, who claimed to have received the funds by a gift from the taxpayer, and the taxpayer's former wife, who claimed a portion of the funds under state (California) community property law. Under state law, the entire account, which was opened prior to the couple's legal separation, was available to satisfy the husband's premarital tax liability. The first tax lien was procedurally valid as of its assessment date, which was earlier in time than the wife's community property claim or the daughter's claim based on a gift. The second tax lien also had priority over the other claims. The daughter had no interest in the funds in excess of those attached by the first lien because the father lacked the requisite intent to make a gift and was merely attempting to shield the funds from his ex-wife. Additionally, under state law, the wife's interest in the excess funds was subordinate to the IRS's second lien because the underlying tax debt arose during the marriage.

MEMORANDUM OF DECISION

(Findings of Fact and Conclusions of Law Included)

SCHWARTZ, District Judge:

This is an interpleader action brought by plaintiff, Napa Valley Bank, as a neutral stakeholder against parties who dispute the ownership of a certificate of deposit account. Four defendants continue to assert an interest in the funds: (1) the United States, by virtue of two federal tax liens that allegedly attached to all property of defendant Woodrow Morgan; (2) Woodrow Morgan, who does not assert a personal interest in the funds, but rather the vicarious interest of his daughter, Portia Morgan; (3) Portia Morgan, by virtue of an alleged completed gift of the funds from her father; and (4) Mary Lou Morgan, Woodrow Morgan's ex-wife, pursuant to California's community property laws.

Trial by the court commenced on June 6, 1994 and was submitted for decision, after close of the evidence, on June 8, 1994. Having heard and considered all of the admissible evidence, arguments, and written submissions, the court now renders its decision in favor of the United States.

I. Undisputed Factual and Procedural Background.

Other than the ultimate factual questions, the only pertinent probative facts in this case are undisputed. On October 9, 1990, plaintiff filed its complaint in interpleader in Solano County Superior Court to avoid potential multiple liability regarding certain disputed funds. Woodrow Morgan, Mary Lou Morgan, Portia Morgan, and the United States ¹ are named as the defendants who potentially assert claims to the funds. On October 30, 1990, defendant United States removed the action to this court pursuant to 28 U.S.C. §1444 . ²

The res is a Napa Valley Bank certificate of deposit account with a face value of $25,000 and a current value in excess of $30,000 ³ maintained by Woodrow Morgan with power of attorney ⁴ in favor of Portia Morgan (hereafter "funds" or "account"). On April 17, 1990, the Solano County Superior Court issued an order in connection with Mary Lou Morgan's pending marriage dissolution proceeding against Woodrow Morgan expressly restraining him, his agents, representatives, and assigns from transferring, encumbering, hypothecating or concealing the account money. See Solano Cty. Sup'r Ct. Injunctive Order, case no. 106122, at pp. 3-4. Plaintiff subsequently received from the United States a notice of levy on the account as well as a final demand for payment. See Gov't Exs. B and B-1. Confronted with an injunctive order prohibiting transfer of the funds on the one hand, ⁵ and a government levy demanding transfer of the funds on the other, plaintiff filed this interpleader action seeking a judicial determination of respective entitlements to the funds.

On December 26, 1990, plaintiff moved for an order discharging it from liability and dismissing it from the action. The court issued an order granting plaintiff's motion on May 27, 1992, deeming the account to be properly interpleaded, and authorizing transfer of the account to the Clerk of the United States District Court. Plaintiff subsequently deposited a check with the Clerk of the court in the amount of $31,939.98, ⁶ and the account was then closed. Thus, Napa Valley Bank is no longer a party to this action and has no further interest in its disposition.

Accordingly, this action proceeded to trial with the familiar interpleader alignment of having no active plaintiff and instead four ⁷ active defendants asserting claims to the disputed funds. Therefore, each defendant/claimant will be treated as a plaintiff, each having the burden of proving by a preponderance of the evidence his or her or its entitlement to the funds.

II. Parties' Contentions.

A. Woodrow Morgan and Portia Morgan.

Defendant Woodrow Morgan, proceeding in propria persona, asserts no independent claim to the interpleaded funds. Rather, he maintains an interest in the account on behalf of, add identical to, his daughter, defendant Portia Morgan, who also is proceeding in propria persona. Both maintain that there was no bank account owned by Woodrow Morgan to which either a tax lien or levy could attach because he had previously made an outright gift of the account to Portia Morgan. Thus, while defendant Woodrow Morgan concedes his tax liabilities, he contends that the government had no right to seize the specific asset at issue in this case because he no longer owned it when the liens were perfected. ⁸ In other words, defendant assert that although the account was held of record in Woodrow Morgan's name alone, its true owner was Portia Morgan ⁹ at the time the government's tax liens arose. Because the claims of defendants Woodrow Morgan and Portia Morgan are united, they will be analyzed together.

B. Mary Lou Morgan.

Defendant Mary Lou Morgan is also proceeding in propria persona, and her claim to the interpleaded funds arises out of California's community property laws. This claim is essentially twofold in nature. First, she argues that, assuming defendant Woodrow Morgan made a valid gift of the funds to his daughter before the effective date of the tax liens, thereby vesting ownership of the account in Portia Morgan, he had no legal right to make that gift because the account was community property. Accordingly, she contends the gift is either void in its entirety or effective only as to Woodrow Morgan's one-half community property interest. Second, Mary Lou Morgan argues in the alternative that if the gift was invalid, or if it occurred after the tax liens arose, this would vest ownership in the United States only as to defendant Woodrow Morgan's one-half community property interest. Thus, Mary Lou Morgan asserts a community property interest in the account, and argues that that interest could neither be given away by Woodrow Morgan nor seized by the United States to satisfy its tax liens.

C. The United States.

Finally, defendant United States asserts ownership of the disputed funds by virtue of two federal tax liens for combined tax liabilities exceeding $242,000 which were allegedly perfected prior to all other claims to the account. Specifically, the government contends that its first lien arose pursuant to section 6321 of the Internal Revenue Code of 1986, 26 U.S.C. §6321 (hereafter "26 U.S.C. §6321 " or "section 6321 ") on May 14, 1979 for calendar years 1972 and 1974 ("1979 lien"). According to the government, the 1979 lien exhausts, or will soon exhaust, the disputed account. To the extent that it does not exhaust the account, the government asserts that a subsequent lien, perfected on February 5, 1990 ("1990 lien"), does exhaust it.

III. Applicable Law and Legal Analysis.

In this case, the only disputed issue is the priority of ownership to the interpleaded funds. ¹⁰ The basic rule in reconciling the claims of competing lienors ¹¹ is "the first in time is the first in right." United States v. City of New Britain, Conn. [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954); see also In re Stone, 6 F.3d 581, 584 (9th Cir. 1993) (same). The crucial inquiry, therefore, is upon which date each conflicting claim to the funds came into existence or became valid.

Defendants Woodrow Morgan and Portia Morgan argue that Portia Morgan is the rightful owner of the account because Woodrow Morgan made a gift of the funds to her on either November 9, 1989 or May 14, 1990. ¹² Defendant Mary Lou Morgan does not specify a date upon which her claim to the funds arose. Rather, she simply asserts a community property interest in the funds. However, since the community comes into existence at marriage, her claim materialized, at the earliest, on November 4, 1984, the date of her marriage to Woodrow Morgan. See generally Cal. Civ. Code §5110. Finally, defendant United States contends that the 1979 lien reflecting assessments for tax years 1972 and 1974 arose on May 14, 1979. Thus, Woodrow Morgan's and Portia Morgan's joint claim to the funds arose, at the earliest, on November 9, 1989; Mary Lou Morgan's claim arose on November 4, 1984; and the United States' claim arose on May 14, 1979. If the government has established by a preponderance of the evidence that the 1979 lien exists and is enforceable, ¹³ it is superior to all competing claims because it was "first in time[,] . . . first in right." United States v. City of New Britain, Conn. [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954).

The government asserts its 1979 lien under 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.

The "threshold question" in all cases where the government asserts a tax lien under 26 U.S.C. §6321 "is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach." Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512 (1960); see also Babb v. Schmidt [74-1 USTC ¶9476 ], 496 F.2d 957, 958 (9th Cir. 1974) (same). Therefore, the initial inquiry is whether the disputed funds constitute taxpayer Woodrow Morgan's "property" or "rights to property" within the meaning of section 6321 . It is well-established that state law controls this determination because section 6321 "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 (1958). Thus, the court looks first to California law to ascertain the nature of Woodrow Morgan's legal interest in the interpleaded account before it can verify the procedural validity of the tax lien and ultimately determine relative entitlements to that account.

A. Nature of the Disputed Funds.

The issue presented here is whether the interpleaded account constituted the exclusive property of Woodrow Morgan or rather the community property of both Woodrow Morgan and Mary Lou Morgan, and, if the latter, whether the community nature of the funds affects the enforceability of a tax lien asserted against these funds. In California, there is a presumption that all property acquired during marriage is community property. See Cal. Civ. Code §5110 (West 1983). ¹⁴ To rebut the presumption, the separate property proponent must submit sufficient evidence tracing the source of the funds used in its acquisition. Mason v. Mason, 186 Cal. App. 2d 209, 212 (1960). That is, the "burden is on the party asserting the separate character of the property." Id. at 213.

In the instant case, the community property presumption clearly applies to the disputed funds. Defendant Mary Lou Morgan testified that she and Woodrow Morgan were married on November 4, 1984 and that she filed in the Solano County Superior Court her petition for legal separation on September 15, 1989. ¹⁵ The interpleaded account was opened at plaintiff Napa Valley Bank on June 13, 1989, prior to their separation and during their marriage. Furthermore, Mary Lou Morgan testified categorically that the funds comprising the account are community property because they represent earnings from Woodrow Morgan's tax preparation business in 1988 and/or 1989 while she was working with him in connection with that business. This testimony was uncontroverted; neither Portia Morgan nor Woodrow Morgan disputed the community property contention, nor did they submit any evidence to rebut the community property presumption. ¹⁶ In fact, Woodrow Morgan testified that he did not know whether the account consisted of community funds because he could not identify the source of those funds.

Accordingly, the court concludes that defendants Woodrow Morgan and Mary Lou Morgan each have a state-created one-half community property interest in the account. ¹⁷ Therefore, Woodrow Morgan has property or "rights to property" in his community property interest in the account that is available to satisfy the 1979 lien, and the court must next determine whether Mary Lou Morgan's community property share of that account is similarly available to satisfy the 1979 lien.

In California, a wife's community interest can be reached to satisfy the husband's premarital tax debts. Babb v. Schmidt [74-1 USTC ¶9476 ], 496 F.2d 957, 959 (9th Cir. 1974). California Civil Code §5120.110(a) ¹⁸ specifically addresses the liability of community property for one spouse's debts, and provides:

Except as otherwise expressly provided by statute, the community property is liable for a debt incurred by either spouse before or during marriage, regardless which spouse has the management and control of the property and regardless whether one or both spouses are parties to the debt or to a judgment for the debt.

Pursuant to this statute, "all community property is liable for debts of either spouse incurred before or during marriage." In re Soderling, 998 F.2d 730, 733 (9th Cir. 1993) (emphasis added). The availability of community property to satisfy premarital debts reflects California's longstanding "policy of protecting the husband's creditors [which] outweighs the policy of protecting family income even from premarital creditors of the husband. Community property is therefore available to such creditors." Weinberg v. Weinberg, 67 Cal. 2d 557, 562 (1967).

The Ninth Circuit has specifically held that because California law makes the wife's share of the community property available to the husband's creditors for premarital obligations, it has "by the same rule implicitly given the husband rights in that property sufficient to meet the requirements of 26 U.S.C. §6321 ." Babb v. Schmidt [74-1 USTC ¶9476 ], 496 F.2d 957, 960 (9th Cir. 1974); see also United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288, 1299 (9th Cir. 1983), cert. denied, 465 U.S. 1079 (1984) (relying on Babb to find sufficient property interest in community assets to support federal tax liens). In Babb, the court addressed a case strikingly similar to the instant case and, applying California law, held that community bank accounts were available to satisfy the husband's premarital tax debts. The court held that a lien "reaches a California wife's community one-half interest where the lien is for taxes owed by the husband before the marriage." Babb [74-1 USTC ¶9476 ], 496 F.2d at 958.

However, California Civil Code §5120.110(b) ¹⁹ provides the following statutory exception to the liability of community property:

The earnings of a married person during marriage are not liable for a debt incurred by the person's spouse before marriage. After the earnings of the married person are paid, they remain not liable so long as they are held in a deposit account in which the person's spouse has no right of withdrawal and are uncommingled with other community property, except property insignificant in amount.

This statutory exception protects a deposit account only where the nondebtor spouse has an account into which only her earnings ²⁰ are deposited, and the debtor spouse has no right to withdraw funds from the account. 11 Witkin, Summ. of Calif. Law §152 (9th Ed. 1990) (quoting Law Revision Commission Comment to §5120.110(b)). When the account is commingled, or when the debtor spouse has access to the account, the exception does not apply. Id.

In this case, the statutory exception of former Civil Code §5120.110(b) does not shield Mary Lou Morgan's earnings that may comprise part of the account because they were not kept in a separate account from which Woodrow Morgan had no rights of withdrawal. Indeed, Mary Lou Morgan testified at trial that she and Woodrow Morgan had a joint checking and savings account at Napa Valley Bank, and that to the best of her knowledge all deposits were made to that account. She further testified that she had no knowledge of any other accounts to which deposits were made. Thus, her earnings are not protected under the statutory exception, and her interest is available to satisfy Woodrow Morgan's premarital tax obligations.

Accordingly, both Woodrow Morgan's and Mary Lou Morgan's shares of the community property comprising the disputed account constitute "property" or "rights to property" of taxpayer Woodrow Morgan within the meaning of 26 U.S.C. §6321 and the entire account is therefore liable for the premarital tax debts of Woodrow Morgan.

B. Procedural Validity of the 1979 Lien.

Having determined that under California law defendant Woodrow Morgan has "property" or "rights to property" in the account to which the government's tax liens may attach, the court next examines the procedural validity of the 1979 lien to establish whether it reaches the particular property at issue in this case. A tax 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." 26 U.S.C. §6322 (1989); see also United States v. Pioneer Am. Ins. Co. [63-2 USTC ¶9532 ], 374 U.S. 84, 88 (1963) (noting that tax lien arises when tax is assessed). In other words, a taxpayer's failure to pay after notice and demand for payment ²¹ within a specified period of time creates a lien in favor of the government relating back to the assessment date. 26 U.S.C. §§6321 , 6322 . Moreover, as discussed supra, the tax lien attaches to all "property" and "rights to property" of the taxpayer, including property acquired after the lien arises. See 26 U.S.C. §6321 ; United States v. McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. 1526, 1530 (1993) ("[T]he filing of notice renders the federal tax lien extant for 'first in time' priority purposes regardless of whether it has yet attached to identifiable property."); see also Seaboard Sur. Co. v. United States [62-2 USTC ¶9653 ], 306 F.2d 855, 859 (9th Cir. 1962) (noting that liens arising under 26 U.S.C. §6321 "attach to all after-acquired property of the taxpayer.").

In the instant case, the government argues that the 1979 lien was perfected by operation of law under 26 U.S.C. §6321 by the concurrence of three events: (1) the filing of a formal assessment, on May 14, 1979, of unpaid and overdue taxes for calendar years 1972 and 1974; (2) notice of the assessment and demand for payment upon defendant Woodrow Morgan on that same day; and (3) failure by defendant Woodrow Morgan to pay by the specified deadline. In support of this contention, the government submitted the relevant Internal Revenue Service "Form 4340, Certificate of Assessments and Payments, for Woodrow Foyosa Morgan" for tax years 1972 and 1974, ²² which is considered "highly probative" and "sufficient, in the absence of contrary evidence, to establish that the notices and assessments were properly made." United States v. Zolla [84-1 USTC ¶9175 ], 724 F.2d 808, 810 (9th Cir.), cert. denied, 469 U.S. 830 (1984); see also United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1018 (11th Cir.), cert. denied, 493 U.S. 975 (1989) (noting that certificate of assessments and payments is presumptive proof of valid assessment). Thus, a "presumption of correctness attaches to the assessment(s)," and the burden shifts to the taxpayer, Woodrow Morgan, to rebut the presumption. United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288, 1293-94 (9th Cir. 1983).

However, Woodrow Morgan did not challenge any aspect of the tax assessment. ²³ To the contrary, he conceded his tax liabilities. ²⁴ Thus, he has failed to rebut the presumption of correctness established by the Certificate of Assessments and Payments, and the "district court may properly rely on the[se] forms to conclude that valid assessments were made." Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 737-38 (10th Cir. 1992). Accordingly, the court concludes that a valid assessment was made on May 14, 1979, thus giving rise to a perfected lien that attached to all "property" or "rights to property" of Woodrow Morgan within the meaning of 26 U.S.C. §6321 . ²⁵

Once a valid assessment has been made, the taxes owed under that assessment may be collected either by levy ²⁶ or by court proceeding, but such actions must occur within the statutory limitations period, which, as of the May 14, 1979 assessment date, was six years. 26 U.S.C. §6502 (1989). ²⁷ Thus, the statutory limitations period would have expired by its own terms on May 14, 1985. See 26 U.S.C. §6502(a)(1) (1989). However, on June 28, 1984, Woodrow Morgan signed an Internal Revenue Service Form 900, which extended the statutory period for collecting the 1972 and 1974 taxes from May 14, 1985 until December 31, 1990. ²⁸ See Gov't Ex. A-2; 26 U.S.C. §6502(a)(2) . Therefore, pursuant to 26 U.S.C. §6502(a)(2) , the government then had to and including December 31, 1990 in which to collect, either by levy or court proceeding, the taxes assessed against Woodrow Morgan, in accordance with which it timely levied on the disputed account on June 4, 1990. ²⁹ See Gov't Ex. B.

In light of the foregoing, the government's tax lien is presumed valid and timely collected. For priority purposes, it relates back to the May 14, 1979 assessment date, ³⁰ which is earlier in time than the claim of defendant Mary Lou Morgan and the joint claim of defendants Woodrow Morgan and Portia Morgan. ³¹ Thus, the court concludes that defendant United States has established by a preponderance of the evidence its prior entitlement to the funds by virtue of the 1979 lien.

c. Disposition of the Remaining Funds if the Disputed Account Is Not Exhausted.

Assuming the 1979 lien and attendant levy do not exhaust the disputed account, the court must ascertain which date each conflicting claim to the remaining funds came into existence or became valid. ³² As discussed above, the basic rule in reconciling the various claims to any remaining funds is "the first in time is the first in right." United States v. City of New Britain, Conn. [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954).

1. The United States' Claim.

The United States asserts priority to the remaining funds by virtue of a second lien that came into existence at assessment on February 5, 1990 ("1990 lien"). This lien reflects tax return preparer penalties exceeding $233,000 for calendar years 1985 and 1986. ³³ See Gov't Ex. A. Like the 1979 lien, the government asserts its 1990 lien pursuant to 26 U.S.C. §6321 . ³⁴ As discussed above, a tax lien imposed by section 6321 arises at the time of assessment after notice to the taxpayer, a demand for payment, and a failure to pay. 26 U.S.C. §§6321 , 6322 .

The government submitted the Internal Revenue Service Form 4340, Certificate of Assessments and Payments for 1985 ³⁵ which, as discussed in Part III.B., supra is "highly probative" and "sufficient, in the absence of contrary evidence, to establish that notices and assessments were properly made." ³⁶ United States v. Zolla [84-1 USTC ¶9175 ], 724 F.2d 808, 810 (9th Cir. 1984). Thus, the assessment is presumptively valid and the burden is upon Woodrow Morgan to rebut the presumption. United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288, 1293-94 (9th Cir. 1983). Woodrow Morgan did not challenge any aspect of the tax assessment, and has therefore failed to discharge his burden. Accordingly, the court may properly rely upon the assessment, and concludes that a valid lien arose in favor of the government on the date of assessment, February 5, 1990.

2. The Claim of Woodrow Morgan and Portia Morgan.

Defendants Woodrow Morgan and Portia Morgan jointly argue that they are entitled to the remaining funds by virtue of a gift from Woodrow Morgan to Portia Morgan. Initially, both defendants testified that the gift was made on May 14, 1990, which is later in time, and therefore inferior to, the government's February 5, 1990 lien. ³⁷ However, Portia Morgan also submitted a letter dated November 9, 1989 that she received from Woodrow Morgan, in which he says in part:

As of this writing, you are the owner of the funds as a gift from Dad. You will now have the money to see Dr. Hoskins for your eye problem. . . . You will receive ASAP a more formal document: Declaration of Gift or some such title, when I have the time to put it together.

See PMM Ex. C. Portia Morgan argued at trial that this letter represents a written affirmation of Woodrow Morgan's intent to make a valid gift of the funds to her as of November 9, 1989--which is earlier in time, and thus superior to, the 1990 tax lien. Accordingly, the court must determine whether Woodrow Morgan in fact made a valid, completed gift of the funds to his daughter on or before November 9, 1989.

California law ³⁸ defines a gift as "a transfer of personal property, made voluntarily, and without consideration." Cal. Civ. Code §1146 (West 1982). The two basic elements of a gift of personal property are: (1) the intention of the donor to make a voluntary transfer to the donee; and (2) actual or constructive delivery by the donor to the donee or someone on his behalf. ³⁹ Berl v. Rosenberg, 169 Cal. App. 2d 125, 130 (1959). The burden of establishing the requisite elements and thereby proving a valid gift is on the proponent of the gift, which is ordinarily the donee. Blonde v. Estate of Jenkins, 131 Cal. App. 2d 682, 686 (1955); 35 Cal. Jur. 3d (Rev), Part 1, Gifts, §36 .

The intent element of a gift requires an intention on the part of the donor to transfer a present interest to the donee. Hart v. Ketchum, 121 C. 426, 428 (1898). The ascertainment of donative intent is a question of fact to be determined by the trial court from all the evidence and circumstances of the transaction. Matson v. Jones, 272 Cal. App. 2d 826, 829 (1969). In the instant case, the evidence adduced at trial clearly demonstrates that Woodrow Morgan, the purported donor, lacked the requisite intent to make a gift to his daughter.

First, the letter dated November 9, 1989 by which Woodrow Morgan purports to have made a valid gift of the funds suggests that he was merely attempting to shield assets from his wife, Mary Lou Morgan. Indeed, early in the letter Woodrow Morgan impresses upon Portia Morgan the need for maintaining "strict confidence" in "all of these and other more or less legal type actions" because "there is no need for MLB [aka Mary Lou Morgan] to know the origin of certain documents." See PMM Ex. C. These statements evidence his intent not to make a valid gift to his daughter, but rather to divest himself of title to his assets after Mary Lou Morgan filed her petition for legal separation on September 15, 1989.

Second, Portia Morgan submitted another letter from her father dated June 10, 1990, in which he says in part: "The CD becomes due on 6-13-90. Take the funds and deposit them in your account at B of A. . . . Leave the funds there until I can decide what can be done via the Veteran[s] Administration." See PMM Ex. A. These directive statements indicate that Woodrow Morgan either forgot about his letter of November 9, 1989 or, more likely, that he never intended to transfer ownership of the account to Portia Morgan. Rather, this evidence tends to establish that he simply wanted his daughter to keep the funds in her own account to shield them from Mary Lou Morgan.

Third, Woodrow Morgan added a power of attorney to the disputed account in favor of his daughter in June of 1990, which was wholly unnecessary if she was the effective donee of the account as of November 9, 1989. See Gov't Exs. C-1 and C-2; see also PMM Ex. F (document dated July 10, 1990 written by Woodrow Morgan purportedly establishing power of attorney in Portia Morgan as to all his personal property). Indeed, Woodrow Morgan mentions no gift in a pleading filed with the court in December of 1991, more than two years after the purported gift of the funds. See Gov't Ex. L. Rather, he urges the court to release the funds to Portia Morgan "who holds a verified and legal power of attorney on [his] behalf" because he "sorely needed" the money. See Gov't Ex. L.

Finally, Mary Wiest, former custodian of records at plaintiff Napa Valley Bank, testified that Woodrow Morgan never indicated to the bank that he had made a gift of the account to his daughter, nor did he follow bank procedures for transferring ownership of the account. According to Ms. Wiest, bank policy dictates that if Woodrow Morgan wanted to make a gift of the account, the account would have to be closed out and then reopened in his daughter's name alone. Therefore, as far as the bank was concerned, Portia Morgan held only a power of attorney over the account, while Woodrow Morgan remained its actual owner.

In light of the foregoing evidence, ⁴⁰ the court is not convinced by a preponderance of the evidence that Woodrow Morgan had a present intent to give the funds to his daughter. Rather, it is more likely that he considered himself to be the owner of the funds, with Portia Morgan holding at most a power of attorney to effectuate his further instructions. Because he lacked the requisite intent to make a gift, Woodrow Morgan remained the true owner of the funds. ⁴¹

Even assuming arguendo that Woodrow Morgan did have the requisite donative intent, he never "delivered" the funds within the meaning of California law. The delivery element requires that the donor immediately and completely surrender all dominion and control over the article; if the donor retains dominion and control, the gift is incomplete and only an unexecuted and unenforceable promise to make a future gift exists. ⁴² Beebe v. Coffin, 153 Cal. 174, 177 (1908); Rolinson v. Rolinson, 132 Cal. App. 2d 387, 390 (1955). Additionally, the cases have uniformly held that where a would-be donor opens a joint bank account and grants rights of withdrawal to the would-be donee, but fails to deliver possession of the bank books to the would-be donee or to otherwise prevent himself from accessing account funds, there is no surrender of dominion and control, and therefore no completed gift. Williams v. Savings Bank of Santa Rose, 33 Cal. App. 655, 657 (1917); Drinkhouse v. German Savings and Loan Soc., 17 Cal. App. 162, 168 (1911).

Here, Woodrow Morgan opened the account and granted rights of withdrawal to his daughter, yet he neither (1) delivered possession of the bank books, nor (2) prevented himself from accessing the account funds. As to the former, Woodrow Morgan has not contended that he delivered the bank books to his daughter. Rather, he has asserted throughout this litigation that he drafted a "Declaration of Gift" and delivered possession to his daughter, although he has not offered such a document in evidence. Indeed, he conceded both at trial and in a pleading filed with the court on August 13, 1992 that the gift was never effectively delivered to Portia Morgan. ⁴³ Moreover, Woodrow Morgan never contacted Napa Valley Bank to notify it of the purported gift.

As to the latter, Woodrow Morgan did not preclude himself from accessing the account funds, which is further evidence of an ineffective delivery as well as his lack of donative intent. Indeed, the "question of intention to give is often inextricably connected with the question of transfer and delivery." 35 Cal. Jur. 3d (Rev), Part 1, Gifts, §15 . As discussed above, Woodrow Morgan asserted control over the funds even as late as 1991, when he urged the court to disburse the funds to his daughter, for his own use. See Gov't Ex. L. He also sought to control the funds by directing his daughter to take the funds and deposit them in her account. See PMM Ex. A. Each of these events occurred subsequent to any purported gift, and thus Woodrow Morgan clearly did not surrender dominion and control over the disputed funds.

In light of the foregoing, Woodrow Morgan and Portia Morgan have failed to establish by a preponderance of the evidence that they are entitled to the funds by virtue of a valid gift prior to the attachment of the government's 1990 lien. ⁴⁴ Therefore, Woodrow Morgan is the owner of the remaining funds and thus has "property" within the meaning of 26 U.S.C. §6321 that is available to satisfy the 1990 lien. Woodrow Morgan's interest in the funds yields to the government's lien, while Portia Morgan never had any ownership interest in the funds. Thus, the only remaining claim competing with the government's 1990 lien is that of Mary Lou Morgan.

3. Mary Lou Morgan's Claim.

Defendant Mary Lou Morgan asserts priority to the remaining funds by virtue of her community property interest in the disputed account. As discussed in Part II.B., her claim to the remaining funds is twofold. First, she argues that if Woodrow Morgan actually made a valid gift of the funds to his daughter before the effective date of the tax liens, he had no legal right to make that gift because the account was community property. California Civil Code §5125 provides that a "spouse may not make a gift of community personal property . . . without the written consent of the other spouse." See Cal. Civ. Code §5125(b) (West 1983) (now found in California Family Code §1100(b) (West 1994)). The court need not address the merits of this contention in light of its determination that no valid gift of community property occurred.

Second, Mary Lou Morgan argues in the alternative that her community property interest in the remaining funds is not available to satisfy Woodrow Morgan's tax liabilities. On the contrary, as discussed in Part III.A., supra, a wife's community property interest is "liable for debts of either spouse incurred before or during marriage." In re Soderling, 998 F.2d 730, 733 (9th Cir. 1993) (emphasis added). In this context, a "debt" is "an obligation incurred by a married person before or during marriage, whether based on contract, tort, or otherwise." Cal. Civ. Code §5120.030 (West Supp. 1993). ⁴⁵ A debt, other than one involving a tort or contract, is incurred "at the time the obligation arises." Cal. Civ. Code §5120.040 (West Supp. 1993). ⁴⁶

In the instant case, the 1990 lien reflects liabilities arising out of calendar year 1985. See Gov't Ex. A. Therefore, although these liabilities were not assessed until 1990, the underlying obligation arose in 1985, which was during the marriage of Woodrow Morgan and Mary Lou Morgan. Consequently, Mary Lou Morgan's community property is available to satisfy her husband's debts incurred during marriage.

4. Ownership of the Remaining Funds.

By reason of the foregoing, the court concludes that: (1) the government's claim to the remaining funds arose on February 5, 1990, and is therefore earlier in time than all other claims to the funds; (2) Portia Morgan has no interest in the remaining funds because they were never validly given to her; (3) Woodrow Morgan is the owner of the funds, and thus has "property" within the meaning of 26 U.S.C. §6321 that is available to satisfy the 1990 lien; and (4) Mary Lou Morgan's community property interest arose on November 4, 1984, but that interest yields in its entirety to the 1990 lien. ⁴⁷

IV. Conclusion.

By reason of the applicable law set forth above, as applied to the foregoing facts, the court finds and concludes that defendant United States has established by a preponderance of the evidence its entitlement to the entire interpleaded account

1. The court has subject matter jurisdiction over this action pursuant to 28 U.S.C. §1444 .

2. Defendant United States has proven by a preponderance of the evidence its entitlement to the interpleaded funds by virtue of two tax liens perfected on May 14, 1979 and February 5, 1990, respectively, pursuant to 26 U.S.C. §6321 .

3. Judgment shall be entered in favor of the United States and against defendants Woodrow Morgan, Portia Morgan, and Mary Lou Morgan, awarding the entire account to the United States.

4. The account shall be applied first to the tax lien that arose on May 14, 1979 (the "1979 lien").

5. In the event the account is not exhausted after fully satisfying the May 14, 1979 lien, any remaining funds shall be applied to satisfy the February 5, 1990 tax lien (the "1990 lien").

IT IS SO ORDERED.

¹ The United States may be named as a party in an interpleader action pursuant to 28 U.S.C. §2410(a)(5), which provides in pertinent part that:

the United States may be named a party in any civil action or suit in any district court, or in any State court having jurisdiction of the subject matter--. . . (5) of interpleader or in the nature of interpleader with respect to, real or personal property on which the United States has or claims a mortgage or other lien.

See 28 U.S.C. §2410(a)(5) (Supp. 1994).

² This section provides that "[a]ny action brought under section 2410 of this title against the United States in any State court may be removed by the United States to the district court of the United States for the district and division in which the action is pending." 28 U.S.C. §1444 (1994).

³ As of May 31, 1994, the account contained $32,895.93. See Gov't Post-Trial Br., filed June 16, 1994, at 3:1-2.

⁴ Although the account was opened on June 13, 1989, the power of attorney was not added to the account until June 4, 1990. See Gov't Exs. C-1 and C-2.

⁵ Plaintiff Napa Valley Bank apparently considered itself restrained by this injunction even though it was not specifically named in the order.

⁶ This was the value of the account on January 26, 1993, the date of its deposit into court.

⁷ While there are technically four adverse claimants in this action, there are actually only three because, as discussed infra, the claims of defendants Woodrow Morgan and Portia Morgan are united.

⁸ Defendant Woodrow Morgan additionally argues that the Internal Revenue Service is contractually indebted to him in an amount exceeding the aggregate amount of his tax liabilities, and therefore the interpleaded funds must not be awarded to the United States. The court declines to reach this argument on the ground that it has no jurisdiction in this case to determine the contractual obligations of the United States. This is an interpleader action, limited to the sole issue of determining respective entitlements to the disputed account.

⁹ Defendant Portia Morgan acknowledged at trial that her power of attorney gives her no ownership interest in the account. Rather, her claim to the funds rests exclusively on the argument that an ownership interest materialized when defendant Woodrow Morgan made a valid gift of the account to her.

¹⁰ That is, none of the adverse claimants has challenged the substantive validity of the federal tax liens, but rather only the priority of those liens relative to the claims of the other defendants. Nor would it have been proper for any of the claimants to do so. In an action against the United States brought under 28 U.S.C. §2410, a taxpayer cannot challenge "the existence or extent of substantive tax liability." Guthrie v. Sawyer [92-2 USTC ¶50,391 ], 970 F.2d 733, 736 (10th Cir. 1992).

¹¹ In the instant case, there are competing claimants to the funds rather than competing lienors. However, for purposes of the following analysis, the terms are interchangeable.

¹² This discrepancy will be discussed in Part III.C.2., infra.

¹³ As discussed in footnote 10, supra, the substantive validity of the tax liens is not an issue in this case. However, to determine the government's interest in the funds, the court must satisfy itself that the tax liens are procedurally valid and enforceable, which is consistent with the United States' waiver of sovereign immunity under 28 U.S.C. §2410. McMillen v. United States Dep't of the Treasury, 960 F.2d 187, 189 (1st Cir. 1991) ("Section 2410's waiver of sovereign immunity [is limited] to cases where the taxpayer contests only the procedural validity of the lien.").

¹⁴ This statute was repealed effective January 1, 1994, but was operative during the relevant time period of this case. The pertinent portion of Civil Code §5110 provided that "all real property situated in this state and all personal property wherever situated acquired during the marriage by a married person while domiciled in this state . . . is community property." Cal. Civ. Code §5110 (West 1983). California's community property presumption now appears at California Family Code §760 (West 1994).

¹⁵ Mary Lou Morgan then filed an action for dissolution on or about November 15, 1993.

¹⁶ Moreover, defendant United States affirmatively argues that the funds were community property. See Gov't Post-Trial Br., filed June 16, 1994, at 5:2-19.

¹⁷ California Civil Code §5105 defines the respective interests of a husband and wife in community property as "present, existing and equal." Effective January 1, 1994, this section now appears at California Family Code §751 (1994).

¹⁸ This section continues the substance of former California Civil Code §5116 , which was repealed effective January 1, 1985, just two months after Woodrow Morgan and Mary Lou Morgan were married. Civil Code §5116 provided that "[t]he property of the community is liable for the contracts of either spouse which are made after marriage and prior to or on or after January 1, 1975." California Civil Code §5120.110(a) became operative January 1, 1985, and remained in effect throughout all relevant times in this case, including all but the first two months of the marriage of Woodrow Morgan and Mary Lou Morgan (1984 to legal separation in 1989) and the opening of the disputed account (1989). Effective January 1, 1994, Civil Code §5120.110(a) was repealed, but is continued without substantive change in California Family Code §910 (West 1994).

¹⁹ This section continues the substance of a portion of former Civil Code §5120, which provided that "[n]either the separate property of a spouse nor the earnings of the spouse after marriage is liable for the debts of the other spouse contracted before the marriage." Cal. Civ. Code §5120 (repealed effective January 1, 1985). Effective January 1, 1994, California Civil Code §5120.110(b) was repealed, but is continued without substantive change in California Family Code §911 (West 1994)

²⁰ Or her separate property or property of a third person.

²¹ Specifically, the government has 60 days after the assessment date within which to "give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof." 26 U.S.C. §6303(a) (1989). Upon receipt of the notice and demand, the taxpayer shall pay "at the place and time stated in such notice the amount of any tax (including any interest, additional amounts, additions to tax, and assessable penalties) stated in such notice and demand." 26 U.S.C. §6155(a) (1989).

²² See Gov't Ex. A-1.

²³ Specifically, he did not assert that the government failed to send him timely notice or demand for payment. The Certificate of Assessments and Payments indicates that three delinquency notices were sent to Woodrow Morgan on May 14, 1979, June 18, 1979, and on July 16, 1979. See Gov't Ex. A-1. Moreover, Dean Prodromos, Special Procedures Advisor for the Internal Revenue Service, testified that a demand for payment accompanied the delinquency notices. In the absence of contrary evidence, the court presumes that the foregoing is correct, and that notice and demand for payment were made in accordance with 26 U.S.C. §6303(a) . See United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1019 (11th Cir. 1989) (holding that because taxpayer failed to argue that no notice was sent, court could rely on Certificate of Assessments and Payments indicating that notice was sent); United States v. Lorson Elec. Co., Inc. [73-1 USTC ¶9449 ], 480 F.2d 554, 555-56 (2d Cir. 1973) (holding that notice and demand for payment are "inextricably coupled" and if Certificate of Assessments shows that notice was sent, court can infer that demand also sent).

²⁴ Woodrow Morgan did argue, without support, that his 1972 and 1974 tax liabilities had been discharged by a 1985 determination of uncollectibility. However, even assuming this is true, Dean Prodromos explained at trial that when a Revenue Officer assigned to collect an account determines that extracting payment would cause undue hardship on the taxpayer, he or she may deem the account uncollectible. The tax liabilities are not exonerated by such a determination, but rather the account may be regenerated if the taxpayer's later tax returns indicate an ability to pay. United States v. McClain, 1989 U.S. Dist. LEXIS 6125 (N.D. Ill. 1989) at ^*7 (holding that determination of uncollectibility does not bear on taxpayer's obligation to pay). Therefore, Woodrow Morgan's argument is without merit.

²⁵ As discussed in Part III.A., supra, the disputed account constituted Woodrow Morgan's "property" or "rights to property" within the meaning of §6321 . Moreover, the lien attaches to all property, including that acquired subsequent to the date of the lien. United States v. McDermott [93-1 USTC ¶50,164 ], 113 S.Ct. 1526, 1530 (1993). Therefore, the 1979 lien attached to the account even though the account did not come into existence until it was opened on June 13, 1989.

²⁶ A levy is authorized by 26 U.S.C. §6331(a) , which provides in relevant part:

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax . . . by levy upon all property and rights to property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

²⁷ Although this section has since been amended, see footnote 29 infra, the relevant text of former §6502 provided:

Where the assessment of any tax imposed by this title has been made within the period of limitation properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only if the levy is made or the proceeding begun--(1) within 6 years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Secretary and the taxpayer before the expiration of such 6-year period . . . . The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.

26 U.S.C. §6502(a) (1989).

²⁸ Meanwhile, on November 5, 1990, Congress enacted the Omnibus Budget Reconciliation Act of 1990. See Pub. L. No. 101-508, 104 Stat. 1388-458 (1990) (codified as amended at 26 U.S.C. §6502(a) (Supp. 1994)) ("1990 Act"). Section 11317 of that Act amended the six-year statute of limitations for collection of assessed taxes under 26 U.S.C. §6502 and replaced it with a ten-year limitations period. The amendment applies to:

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

See 1990 Act 11317(c); 26 U.S.C. §6502 . Because the consensual extension signed by Woodrow Morgan had not expired as of November 5, 1990, the effective date of the 1990 Act, the ten-year statute of limitations retroactively applies to the instant case. 1990 Act 11713(c)(2). Therefore, the government had up to and including May 14, 1989, rather than May 14, 1985, to collect the taxes owed under the 1979 lien. However, the question whether the six-year or ten-year limitations period governs this case is purely academic because Woodrow Morgan executed the extension in 1984, prior to the running of either six or ten years.

²⁹ The effect of the levy was twofold. First, it stopped the running of the ten-year collection statute. 26 U.S.C. §6502(a) (Supp. 1994). Second, it froze the account to prevent it from being dissipated. United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 721 (1985). However, as discussed supra, it is the date of the assessment, not of the levy, that is critical for determining relative priorities to the funds because a lien arises on the date of assessment. 26 U.S.C. §6322 . The court thus rejects defendant Woodrow Morgan's contention that he could make a valid transfer of the funds to Portia Morgan at any point prior to actual levy on the account. The lien arose at assessment, thus encumbering all property owned by Woodrow Morgan, including the bank account, regardless of when the account was levied upon.

³⁰ See 26 U.S.C. §6322 .

³¹ The result is the same regardless of whether any gift of the funds occurred on November 9, 1989, or on May 14, 1990. That is, the 1979 lien attached prior to both dates. Even if Woodrow Morgan made a completed, valid gift of the account to Portia Morgan on either of these dates, she took the gift subject to the government's lien because "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958). Furthermore, even if Portia Morgan had no knowledge of the lien and no constructive or other notice thereof, the lien is still valid as to her because she is not within the class of protected creditors enumerated in 26 U.S.C. §6323 (Supp. 1994).

³² However, the ensuing discussion may affect as little as $280. According to the government, the current combined balance due and payable on the 1979 lien for tax liabilities, plus accrued interest, is $32,616.09. See Gov't Post-Trial Br., filed June 16, 1994, at 2:23-25. That balance will allegedly accrue interest at a rate of 8% during the next quarter while the interpleaded account, containing $32,895.93 as of May 31, 1994, will likely earn an interest rate less than 8%. Id. at 3:1-2, fn.2. Thus, while the account as of May 1994 exceeded the 1973 and 1974 combined tax liabilities by approximately $280, the tax liabilities may soon exceed the account.

³³ However, Dean Prodromos, testifying on behalf of the government, explained at trial that on May 13, 1991, the government received approximately $91,000 from the redemption of Woodrow Morgan's real property, and that this sum was applied to, and fully satisfied, the 1986 tax liabilities. Therefore, the court will look only to the 1985 liabilities (in excess of $166,000) in determining relative entitlements to any remaining funds in the disputed account.

³⁴ The 1990 lien is governed by the ten-year limitations period. See footnote 29, supra; 1990 Act §11317(c)(2); 26 U.S.C. 6502(a)(1) (Supp. 1994). The government thus has to and including February 5, 2000 within which to collect the taxes, either by levy or by court proceeding. 26 U.S.C. §6502 (Supp. 1994).

³⁵ See Gov't Ex. A.

³⁶ The form shows that a "Notice of Balance Due" was sent to Woodrow Morgan on February 5, 1990, the date of the assessment. See Gov't Ex. A.

³⁷ In other words, the 1990 lien attached to all property belonging to Woodrow Morgan as of the date of the assessment, February 5, 1990. Thus, assuming arguendo that Woodrow Morgan made a valid gift of his property to Portia Morgan on May 14, 1990, she took the gift subject to the lien because "[t]he transfer of property subsequent to the attachment of the lien does not affect the lien." United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 57 (1958).

³⁸ As discussed in Parts III. and III.A., supra, the characterization of the underlying property interests in the remaining funds is controlled by state law. United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55 (1958).

³⁹ A valid gift additionally requires a competent donor, acceptance of the gift by the donee, and a lack of consideration for the gift. Turnbull v. Thomsen, 171 Cal. App. 2d 779, 783-84 (1959). In the instant case, the proof of these elements has not been challenged and therefore the court need not address them.

⁴⁰ Mary Lou Morgan additionally argues that there was no valid gift because of Portia Morgan's testimony at a hearing in Mary Lou Morgan's marriage dissolution action, which took place on October 6, 1989 in the Solano County Superior Court. See Gov't Ex. K. At that hearing, the court addressed Mary Lou Morgan's motion to have Portia Morgan joined in the action on the theory that assets had been transferred to her by Woodrow Morgan. The court ultimately denied the motion for joinder, but, according to Mary Lou Morgan's trial testimony, Portia Morgan testified at the hearing that she had never received any property of any sort from her father. While it is true that this statement clearly contradicts Portia Morgan's present contention that she did in fact receive a gift of property from her father, the hearing occurred one month prior to the purported gift. Thus, it is possible that as of the October 6, 1989 hearing, Portia Morgan had not received any property from her father. Therefore, the court is not persuaded by this additional evidence that no gift occurred on November 9, 1989.

⁴¹ As further evidence against a valid gift, Woodrow Morgan himself admitted at trial that he filed no gift tax return as required under 26 U.S.C. §2501 et seq. for calendar year 1989, the year he purportedly made the gift to his daughter.

⁴² Delivery may be actual, constructive, or symbolic. 35 Cal. Jur. 3d (Rev), Part 1, Gifts, §23 .

⁴³ According to Woodrow Morgan, he mailed the "Declaration of Gift" to his daughter, but that letter was "intercepted" by prison officials and forwarded to Mary Lou Morgan. See Gov't Ex. J. However less than one month before Woodrow Morgan filed this pleading with the court, he wrote a letter to Portia Morgan in which he references the purported gift declaration and asserts: "I am sure (I recollect, it seems), that you received it." See PMM Ex. B at page 1.

⁴⁴ In view of this determination, the court need not address the government's alternative argument that a gift of the funds from Woodrow Morgan to his daughter was a fraudulent conveyance and should for that reason be set aside. Gov't Post-Trial Br., filed June 16, 1994, at 9:16-27, 10:1-2.

⁴⁵ This statute became operative on January 1, 1985 and is now continued without change in California Family Code §902 (West 1994).

⁴⁶ This section became operative January 1, 1985 and is continued without change in California Family Code §903 (West 1994).

⁴⁷ Because the court has determined that Mary Lou Morgan has no claim to the interpleaded funds, it need not address Woodrow Morgan's incomprehensible argument that Mary Lou Morgan waived her claim to the funds when the United States Attorney moved to have the interpleader funds transferred to this court. WFM Post-Trial Closing Stmt., filed July 5, 1994, at 1:16-26.