6321 Community Property page2

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In re William H. Porter, Debtor

U.S. District Court, No. Dist. Calif. , C-92-4089 FMS, 4/5/93, Reversing and remanding an unreported Bankruptcy Court decision

[Code Sec. 6321 ]

Lien for taxes: Community property.--The IRS was allowed to satisfy a debtor's tax liability that arose upon the sale of the residence owned by the debtor and his former spouse from the sale proceeds. Since the sale occurred after the couple's divorce but before the division of their community property, the debtor had a property interest in the proceeds at the time of tax assessment pursuant to state ( California ) law. Therefore, the IRS could reach the proceeds to satisfy its lien. However, the IRS was only allowed to reach one-half of the proceeds of the sale that were paid into the estate as community property because the debtor had only a one-half interest in the community property.

Michael Fallon, 100 E. St., Santa Rosa , Calif. 95402 , for debtor. Bennett G. Young, LeBoeuf, Lamb, Leiby & MacRae, One Embarcadero Ctr., San Francisco, Calif. 94111, for trustee.

ORDER

SMITH, District Judge:

This is an appeal from an order of the U.S. Bankruptcy Court (Jaroslovsky, J.). Appellant is the United States ; appellee is Gretchen Porter, debtor's former spouse. The IRS sought to satisfy debtor William H. Porter's tax liability, owing on his share of the profit from the sale of the Porters' marital residence, from the proceeds of the sale. The sale occurred after divorce but before division of the community property. The bankruptcy court ruled that the IRS could not do so, following the State of California law that community property is not liable for post-dissolution debts of one spouse.

According to the government, the question presented is "[w]hether the bankruptcy court erred in ruling that the debtor's tax liability is not a community claim which may be satisfied with the proceeds from the sale of the marital residence?"

According to appellee, the question is whether "the community property of a divorced couple [is] subject to a post-dissolution claim against one spouse?"

BACKGROUND

Gretchen Porter and debtor William H. Porter married in 1969. Their marriage was dissolved by the California Superior Court for Santa Barbara County in November of 1989, but the court reserved jurisdiction to divide their community property later.

One of the pieces of community property was the family residence. The residence was sold in November, 1990. The bulk of the proceeds of sale were placed in a blocked trust account.

In January of 1991, Debtor both remarried and filed his 1990 Federal income tax return. The tax was assessed on January 8, 1991. His return claimed that he owed $188,000.00, primarily due to the sale of the residence.

On March 8, 1991, the Santa Barbara Superior Court issued an interim order awarding the custody of the proceeds from the sale of the marital residence to Gretchen Porter. This award of the community property to Gretchen Porter occurred after the tax assessment (as well as after the sale of the residence).

On March 29, 1991, debtor filed a chapter 7 bankruptcy petition in the Santa Rosa Division of the Bankruptcy Court.

On September 26, 1991, Gretchen Porter objected to the IRS's tax claim to the extent it was a claim against the community property. She asserted the claim was William Porter's separate obligation for which the community property was not liable.

The bankruptcy trustee sued Gretchen Porter for the proceeds of sale, and a compromise was reached on January 9, 1992 and approved by the bankruptcy court on February 14, 1992. The IRS did not object to the compromise; therefore, all parties are bound by it. Pursuant to that compromise, the proceeds were divided equally between Gretchen Porter and the trustee. The trustee's portion was deemed to be community property. The court assumes that, pursuant to the settlement, the portion retained by Gretchen Porter was deemed to be her separate property, free of any lien in favor of the IRS for taxes owed by debtor. While this is not stated by any party, it is implicit in the settlement agreement and arguments before this court.

The bankruptcy court held that the IRS claim is William Porter's separate obligation and cannot be satisfied out of the community property in the estate. The court stated:

There is no merit to the assertion of the IRS that it holds a community claim. A debt incurred after dissolution is not a community debt. In re McCoy, 111 B.R. 276 (9th Cir. BAP 1990). The IRS has advanced no reason why the same rule should not apply to a tax debt. All of the cases cited by the IRS concern tax debt incurred before dissolution. The IRS was not entitled to be paid from the proceeds when the residence was sold; there is no reason why a subsequent bankruptcy should create such a right.

DISCUSSION

The Government's Argument

It is agreed that the tax obligation is not a community debt, ¹ because it was not incurred during marriage. The government argues, however, that debtor's 1990 federal income tax liability is nonetheless a community claim as defined in the Bankruptcy Code. According to the government, that claim is provided by 11 U.S.C. §101(7) , which states:

"community claim" means claim [sic] that arose before the commencement of the case concerning the debtor for which property of the kind specified in section 541(a)(2) of this title is liable, whether or not there is any such property at the time of the commencement of the case.

According to 11 U.S.C. §541(a)(2) , property of the estate includes:

All interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is--

(A) under the sole, equal, or joint management and control of the debtor; or

(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such interest is so liable.

The government argues that these sections clearly show that a debt of the debtor alone can be a "community claim" if the debtor's community property is liable for the debt. ² That is a correct deduction.

The government then notes that whether a creditor holds a community claim is generally determined by reference to state law, insofar as state law normally governs which property can be reached to satisfy certain debts. In re Sweitzer, 111 B.R. 792 (Bankr. W.D. Wis., 1990). The government argues, however, that where the United States is the creditor with respect to a federal tax debt, federal law regarding collection rights always takes precedence over state laws relating to collection rights and remedies (citing United States v. Acri [55-1 USTC ¶9138 ], 348 U.S. 211, 99 L.Ed. 264, 75 S.Ct. 239 (1955) and United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51, 55-57, 2 L.Ed.2d 1135, 1140-41, 78 S.Ct. 1054 (1958) (once it has been determined that under state law a person holds property or rights to property, "state law is inoperative to prevent the attachment of liens created by federal statutes in favor of the United States.")).

The government argues that William Porter's interest in the proceeds of the sale of the marital residence is property to which the IRS may look to collect the 1990 federal income tax debt. It contends that upon assessment of the tax on January 8, 1991 and following demand for payment, a federal lien arose by operation of federal law to secure the amount of tax, interest, and additions to tax "upon all property and rights to property, whether real or personal" belonging to William Porter. 26 U.S.C. §6321 .

The government further argues that since William Porter had an equal community property interest in the residence sale proceeds, the federal tax lien attached to that interest. Bess [58-2 USTC ¶9595 ], 357 U.S. at 57. The state court's subsequent interlocutory order awarding Gretchen Porter custody of the proceeds did not negate the lien; rather, the lien merely followed the proceeds into Gretchen Porter's hands. Id. Restated, the turnover by Gretchen Porter of one-half of the residence sale proceeds to the estate as community property came with the federal tax lien still attached; therefore, the community property now held by the estate is property which may be used to satisfy the debtor's 1990 federal income tax claim. Thus, claims the government, the Bankruptcy Court erred in holding that the debtor's community property may not be used to pay claims for which community property is not liable under state law. ³

Section 541(a)(2) of the Bankruptcy Code provides that certain community property becomes property of the estate. Bankruptcy Code section 726(c) states that such property must be segregated from other property of the estate and may only be used to pay community claims. According to the government, the IRS's claim for 1990 federal income taxes is a community claim in that it may be collected from the debtor's community property, notwithstanding that it is not a "community debt" under California law.

State law cannot limit the property to which a federal tax creditor can reach. United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 204-05, 29 L.Ed.2d 406, 91 S.Ct. 1763 (1971) (state law that permitted divorced woman to exonerate herself from community debts if she renounced community gains could not result in exemption from the collection of federal income tax on community earnings where the liability for such tax had attached prior to such renunciation. Federal income tax liability depends on ownership and wife had an immediate vested ownership in half of the community income).

Since William Porter had a one-half interest in the proceeds from the sale of the marital residence both on the date the 1990 federal income tax was assessed and on the date the bankruptcy petition was filed, ⁴ the government argues that the residence sale proceeds which came into the estate are liable for that income tax obligation.

Gretchen Porter's Argument

Gretchen Porter argues that the community property is not subject to William Porter's post-dissolution tax obligation because (under California law) community property is (only) subject to a debt "incurred by either spouse before or during marriage. . . ." Cal. Civ. Code §5120.110. In re McCoy, 111 B.R. 276 (Bankr. 9th Cir. 1990) noted that community property is not subject to post-dissolution claims. Accord In re Chenich, 87 B.R. 101 (Bankr. 9th Cir. 1988). ⁵ Appellee argues, therefore, that only William Porter's separate property or his interest in the community property are subject to his post dissolution debts. In re Marriage of Schenck, 228 Cal.App. 3d 1474, 279 Cal.Rptr. 651 (3rd Dist. 1991). ⁶

Appellee concludes as follows:

The IRS concedes the tax obligation is not a community debt. The IRS argues the obligation is a community claim under the bankruptcy code. While difficult to follow the argument is:

* The proceeds from the sale were community property.

* William Porter had a one-half interest in the proceeds from the sale.

* His interest is subject to the IRS tax claim, therefore, the IRS has a community claim.

The flaw in this argument, according to appellee, is that "there has been no determination or finding that William Porter had a one-half or any interest in the proceeds of the sale. In fact, the Santa Barbara Superior Court found he had no interest in those funds. The bankruptcy court order reserved this issue for later determination."

Analysis

This case is controlled by Ninth Circuit precedent. The key cases are United States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142 (9th Cir. 1970) and In re Ackerman [70-1 USTC ¶9343 ], 424 F.2d 1148 (9th Cir. 1970). Overman concerned the creation and enforcement of federal tax liens levied on Washington community property to secure payment of a husband's premarital income tax liability. In 1954, the IRS levied deficiency assessments against the taxpayer for his income taxes for the years 1946 and 1947. The taxpayer married in 1948. The taxpayer failed to meet the deficiency demand, and a notice of federal tax lien was filed. The government sued the taxpayer to recover judgment for the tax liabilities and won. The government then brought the action in question to enforce the liens.

The Ninth Circuit affirmed the district court's decision that the government had a valid lien on the taxpayer's undivided one-half interest in the marital community, that the lien was enforceable against the community assets as to which foreclosure was sought, and that the government was not precluded from enforcing its lien by limitations or laches, res judicata, estoppel or waiver.

The appellate court reasoned as follows:

26 U.S.C. §6321 provides that the amount of delinquent tax liability becomes a lien against "all property and rights to property, whether real or personal, belonging to" the taxpayer. The Internal Revenue Code "incorporates state law for the limited purpose of ascertaining whether or not the taxpayer's interest is 'property' or 'rights to property.' " Overman [70-1 USTC ¶9342 ], 424 F.2d at 1144 (citing United States v. Bess [58-2 USTC ¶9595 ], 357 U.S. 51 (1958)). According to Overman:

If state law raises the taxpayer's interest to the status of property or rights to property, federal law will cause a lien to attach to that interest. We must thus turn to Washington law to determine whether the taxpayer's interest in the community property constitutes "property" or "rights to property" belonging to him. We believe that it does.

The court noted that in Washington , the marital community is essentially composed of all property acquired by spouses after marriage and that the interest of each spouse in the community is an intangible, equal, present, and vested right. [70-1 USTC ¶9342 ], 424 F.2d at 1144. The court concluded that the taxpayer's interests in the community property made it

appropriate to characterize that interest as "rights to property" for purposes of section 6321 . The interest gives the taxpayer present, vested, and substantial rights to the property of the community, and that interest has been described by both the Supreme Court of Washington and the Supreme Court of the United States as a "vested property right." No more is needed to identify the interest as one to which a federal tax lien can attach.

Overman [70-1 USTC ¶9342 ], 424 F.2d at 1145 (citations omitted).

The court continued in a passage that is most relevant to the case at bar. In the case at bar, the community property is in California and, under California law, community property is not liable for post-dissolution debts. The IRS debt is a post-dissolution debt. In Overman, the community property was in Washington and, under Washington law at the time, community property was not liable for premarital debts of the husband. The IRS debt in Overman was a premarital debt of the husband. Overman and the case at bar are analogous. The Overman court held that the state law did not control:

The taxpayer contends, however, that his interest in the community is made nonattachable by the Washington rule that the community is generally immune from liability for a husband's premarital debt. While admitting that a state rule of exemption is ineffective against a United States tax lien, the taxpayer argues that the Washington rule is more than that. He contends that the rule is one of property law, and creates a limitation on the extent and quality of his ownership rights under state law. Even assuming that his characterization of Washington law is correct, all that section 6321 requires is that the interest be "property" or "rights to property." It is of no statutory moment how extensive may be those rights under state law, or what restrictions exist on the enjoyment of those rights.

. . .

The attachment of a tax lien under section 6321 and the enforcement of the lien under section 7430 of the Code present different questions. From the conclusion that a lien attaches, the further conclusion that these particular liens may be foreclosed or otherwise enforced in a particular manner does not automatically follow.

We agree with the Government that the right of the United States to enforce its liens on Washington community property does not depend on Washington law regulating the rights of creditors generally. . . . [S]tate law regulating creditors' rights does not apply to the United States because the United States has not looked to state law to decide how to enforce federal tax liens and nothing in section 7403 , under which this action was brought, suggests that Congress intended to change that rule.

Overman [70-1 USTC ¶9342 ], 424 F.2d at 1145-46 (citations omitted).

The question then is whether, at the time the tax was assessed, William Porter retained an interest in the proceeds that can be characterized as "property" or "rights to property." In California , as in Washington , spouses enjoy present, equal, existing, and vested rights in community property during marriage. California Civil Code §5105 ; B.E. Witkin, 11 Summary of California Law §104 (9th Ed. 1990). At the time of the sale of the residence and assessment of tax, the Porters were no longer married. This does not mean, however, that the debtor lost his property rights in the community property at the moment of dissolution. It is the general rule that community property is to be divided equally after the marriage. See Cal. Civ. Code §§4800 and 4353.

Appellee argues that there has been no finding that debtor had a one-half or any interest in the proceeds of the sale and that, in fact, the Superior Court found that he had no interest in those funds. ⁷ The fact that the Superior Court may have decided (or may at some future date decide) that the interests of justice require that the proceeds be given to Gretchen Porter as her separate property does not mean that debtor did not hold a property right in the proceeds of sale at the time of sale or tax assessment. He did.

It is stipulated that the proceeds paid into the estate are community property. Overman teaches that the debtor's interest in community property is "property and rights to property" within the meaning of 26 U.S.C. §6321 and therefore the lien properly attached to those proceeds. Finally, Overman teaches that California law regarding creditor's rights cannot bar the enforcement of a federal tax lien "because the United States has not looked to state law to decide how to enforce federal tax liens. . . ." See also United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288, 1298 (9th Cir. 1983), cert. denied, 465 U.S. 1079 (1984) and Babb v. Schmidt [74-1 USTC ¶9476 ], 496 F.2d 957 (9th Cir. 1974) (discussing Overman and Ackerman).

At the time of the tax assessment, debtor therefore had a property interest in the proceeds and the IRS could reach the proceeds to satisfy its lien. The settlement deeming the portion of the proceeds paid into the estate to be community property confirms that the IRS has a community claim within the meaning of 11 U.S.C. §§101(7) and 541(a)(2)(B) that may be satisfied from the portion of the proceeds that has been paid into the estate.

In re Ackerman was a companion case to Overman. Ackerman also involved "the creation and enforcement of federal tax liens upon community property to pay a husband's antenuptial tax debts." Ackerman [70-1 USTC ¶9343 ], 424 F.2d at 1149. Leopold Ackerman and his wife Leslie divorced in 1961. Leopold then married Wilma; the IRS thereafter levied assessments against Leopold and Leslie for taxes owing for 1959. Leopold and Wilma filed for bankruptcy, and their community property was transferred to the bankruptcy trustee. The district court held, inter alia, that the government's tax lien attached to the whole of the community property. The Ninth Circuit reversed and remanded, stating:

As in Overman, the Government had a lien only on the taxpayer-husband's undivided one-half interest in the community; it had no lien on the wife's interest. And as we stated in Overman, the Government may not exceed the taxpayer's interest in enforcement of its lien. We must therefore delete the Government as a contestant to Wilma Ackerman's interest in the community and hold that the Government may not receive from its liens more than one half of the value of the community estate. There is, as yet, no final order of distribution of the assets of the bankrupts' estate, and we cannot therefore pass on the rights of the respective parties to particular assets in that estate.

Following Ackerman, the government in this case may not receive Gretchen Porter's one-half interest in the community property. In this case, however, it is stipulated that the portion of the proceeds that have been paid into the estate are community property. We can therefore pass on the rights of the respective parties to those proceeds. Debtor has an interest in one-half of those proceeds and the IRS may reach his entire one-half interest. The IRS may not reach Gretchen Porter's one-half interest.

CONCLUSION

The IRS may reach one-half of the proceeds of sale that have been paid into the estate as community property because the debtor has a one-half interest in community property. The IRS may not reach Gretchen Porter's one-half interest in those proceeds.

For the foregoing reasons, the bankruptcy court's order is REVERSED and REMANDED for further proceedings consistent with this opinion.

IT IS SO ORDERED.

¹ Cal. Civ. Code §5120.030 states: " 'Debt' means an obligation incurred by a married person before or during marriage, whether based on contract, tort, or otherwise."

² Section 541(a)(2)(A) is inapplicable since at the time of the commencement of the bankruptcy case the proceeds of sale were under the sole control of Gretchen Porter. Thus, the government must be relying on §541(a)(2)(B) .

³ The government implicitly argues that the Bankruptcy Court was wrong when it stated that the proceeds were not liable for the tax debt prior to debtor's filing his bankruptcy petition.

⁴ It is not clear that debtor did have a one-half interest in the proceeds of the sale at the time he filed for bankruptcy, because the Superior Court's interim order giving custody of the proceeds to Gretchen Porter came before the bankruptcy filing. The court is unaware what the Superior Court's order stated about the nature of the proceeds, because the Superior Court's order is not part of the record on appeal. Gretchen Porter's papers state both that the Superior Court has not yet determined whether debtor has any rights in the proceeds of the sale and also that the Superior Court has determined that the proceeds are Gretchen Porter's separate property. Ultimately, it is not relevant what the Superior Court order stated because that order was issued after the sale of the residence and the assessment of debtor's tax liability and the attachment of federal liens.

⁵ Those cases, however, did not pertain to debts owed to the federal government.

⁶ This argument makes it appear as if appellee agrees that debtor's one-half of the community property is available to the IRS; however, appellee argues that the Superior Court has not yet determined whether debtor has any community property interest in the proceeds of the sale of the residence and therefore the IRS cannot (at least yet) satisfy debtor's tax liability from the proceeds of the sale.

The government notes that Gretchen Porter has not challenged the validity of the IRS's claim that debtor owes taxes on the sale of the residence; rather, she argues only that the claim should not be satisfied out of community property. If the property were Gretchen Porter's separate property prior to the sale, presumably debtor would not owe any tax on the sale. Conversely, if debtor does owe taxes on the sale, then presumably he had a property interest in the residence at the time of sale.

⁷ Again, there is no evidence before the court of what the Superior Court did decide. Presumably, since appellee states the Superior Court's order was an "interim" order, the order did not make any final decision as to the spouses' respective rights in the proceeds. Whether it did, however, is irrelevant.

 

 

 

Alexander J. Jansen, Plaintiff v. United States of America , Defendant

U.S. District Court, Dist. Nev. , CV-S-90-253-RDF(RJJ), 1/28/92

[Code Sec. 6321 ]

Tax liens: Community property: Antenuptial agreement.--An antenuptial agreement between a taxpayer and her husband did not prevent the IRS from levying on the husband's wages. The taxpayer attempted to protect her husband's property from her premarital tax liability through the antenuptial agreement. However, under state ( Nevada ) law, the taxpayer acquired a one-half community property interest in her husband's wages. Further, the agreement failed to protect the wages from levy because, even if properly executed, it would have been ineffective against the United States .

FINDINGS OF FACT AND CONCLUSIONS OF LAW

MILES, Senior Judge:

This is an action filed under 26 U.S.C. §7426(a) for the return of property alleged to have been wrongfully levied by the United States for internal revenue taxes. The plaintiff, Alexander J. Jansen, contends that he is the sole owner of the property levied by the United States , although he is not the taxpayer who is liable for the taxes. The matter was tried before the court sitting without a jury on October 16, 1991. The case is now ready for decision.

FINDINGS OF FACT

Based upon the testimony and exhibits received at trial, and upon the stipulations of the parties, the court makes the following findings of fact as required by Fed.R.Civ. P. 52(a) ¹:

1. Plaintiff Alexander J. Jansen is an individual residing in Las Vegas , Nevada . Plaintiff works as a consultant for the McDonnell Douglas Corporation.

2. The defendant is the United States of America .

3. On June 22, 1987, plaintiff married Sharon K. Byrd, now known as Sharon K. Jansen.

4. Before her marriage to plaintiff, Sharon Jansen incurred federal income tax liabilities for the taxable years ended 1981, 1983, and 1984. These tax liabilities are the personal liabilities of Sharon K. Jansen, and their amount is not in dispute.

5. Before her marriage to plaintiff, Sharon K. Jansen consulted with an accountant, Joseph Smith, to determine whether plaintiff would be liable for her unpaid tax liability in the event of her marriage to him. Joseph Smith advised Sharon Jansen to enter into an antenuptial agreement in order to protect plaintiff's property from liability for her taxes.

6. Before his marriage to Sharon Jansen, plaintiff was generally aware that she had some tax problems, but he was not aware of the full extent of her unpaid tax liability, which was approximately $23,000 at the time of their marriage.

7. Plaintiff and Sharon K. Jansen did not execute an antenuptial agreement before their marriage.

8. Sharon Jansen was employed at the time of her marriage to plaintiff. However, shortly after her marriage she quit her job. She is presently studying to become a nurse.

9. On or about March 1, 1990, the Internal Revenue Service ("IRS") served the first of numerous levies upon the McDonnell Douglas Corporation for 50 percent of the net take home pay of the plaintiff. These levies were intended to satisfy the personal tax liabilities of Sharon K. Jansen. In all, the IRS levied a total of $29,294.12 from plaintiff's wages, to be credited to the tax liabilities of Sharon K. Jansen.

10. The IRS also levied on a joint bank account owned by plaintiff and Sharon K. Jansen, collecting a total of $485.30 from the account toward Sharon K. Jansen's tax liabilities. Plaintiff does not dispute the IRS' levy on this joint account.

CONCLUSIONS OF LAW

In accordance with Fed.R.Civ.P. 52(a), the court reaches the following conclusions of law ²:

A. The court has jurisdiction over this matter pursuant to 26 U.S.C. §7426(a) .

B. Venue is proper in this district.

C. Title 26, Section 6321 provides that if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount 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 or thereafter acquired during the life of the lien. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 268 (1945). The lien imposed by §6321 arises at the time the assessment is made and continues until the liability for the amount is satisfied or becomes unenforceable by reason of lapse of time. 26 U.S.C. §6322 .

D. Sharon Jansen incurred federal income tax liabilities for the taxable years ended 1981, 1983, and 1984. Thus, on the dates of assessment, federal tax liens arose in favor of the United States against all property and rights to property belonging to Sharon Jansen or thereafter acquired by her.

E. State law controls in determining the nature of the legal interest which a taxpayer has in property sought to be reached by a federal tax lien. Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13 (1960); United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288, 1298 (9th Cir. 1983). The question which must be answered in this case is whether the taxpayer, Sharon Jansen, had "property or rights to property" to which a federal tax lien could attach, in the form of a one-half interest in plaintiff's earnings.

D. Under Nevada law, all property acquired after marriage by either the husband or wife is community property, with certain stated exceptions. Nev. Rev. Stat. §123.220. While generally neither the separate property of a spouse nor his share of the community property is liable for the debts of the other spouse contracted before the marriage, Nev. Rev. Stat. §123.050, ³ Nevada law does not exempt a debtor's spouse's own share of the community property from collection for her liabilities incurred before the marriage.

E. Plaintiff has argued that Sharon Jansen did not acquire a community property interest in his earnings because the couple executed an antenuptial agreement. Nev. Rev. Stat. Section 123.220 provides as follows:

All property, other than that stated in NRS 123.130, acquired after marriage by either husband or wife, or both, is community property unless otherwise provided by:

1. An agreement in writing between the spouses, which is effective only as between them.

Thus, Nevada law recognizes such agreements provided they are executed with the requisite formalities. ⁴ However, such an agreement is specifically effective only as between the spouses, and not against third party creditors, except where the agreement has been properly recorded. See Nev. Rev. Stat. §§123.280, 123.290, 123.300.

The court has heard the testimony of plaintiff and has also reviewed the deposition testimony of Sharon Jansen. Both have testified that they executed an antenuptial agreement shortly before their marriage, on or about June 19, 1987. An unexecuted copy of the purported original was admitted at trial as Plaintiff's Exhibit No. 1. The court does not find plaintiff and Sharon Jansen's testimony that the original agreement was executed to be credible.

F. Even if such an agreement had been executed, however, it would not be effective against the United States . Sharon Jansen had a community property interest in one-half of her husband's earnings, pursuant to Nev. Rev. Stat. §123.220. This interest was subject to levy by the United States in satisfaction of Sharon Jansen's unpaid tax liability.

CONCLUSION

IT IS THEREFORE ORDERED that a judgment of no cause of action be entered. Defendant United States of America shall be awarded its costs of action.

IT IS SO ORDERED.

¹ Any findings of fact which contain conclusions of law shall be considered as such.

² Any conclusion of law containing findings of fact shall be considered as such.

³ But see Greear v. Greear, 303 F.2d 893 (9th Cir. 1962) (husband's earnings subsequent to his second marriage were subject to his contractual obligation to pay support to former wife and children).

⁴ An antenuptial, or premarital, agreement must be in writing and signed by both parties. Nev. Rev. Stat. §123A.040.

 

 

 

Karleen B. Medaris, Plaintiff-Appellee v. United States of America , Defendant-Appellant

(CA-5), U.S. Court of Appeals, 5th Circuit, 88-1826, 10/2/89, 884 F2d 832, Affirming an unreported District Court decision

[Code Secs. 6303 and 6321 ]

Lien for taxes: Levy and distraint: Community property: Notice.--A taxpayer was subject to a lien on one-half of her income in a community property state (Texas) to satisfy her spouse's tax liability, but she was not entitled to notice of the lien because she was not liable for the taxes. State law exemptions were not effective against the federal government and the IRS could attach the wife's income to the extent of her husband's interest in it. The IRS could also attach all of her husband's income because he had a property interest in his income under state law. No notice of the lien and levy was required to be given to the taxpayer because notice had been sent to her spouse, and she was not liable for the payment of taxes.

Karleen B. Medaris, 6808 Santiago, Fort Worth, Tex. 76133, pro se. William S. Rose, Jr., Assistant Attorney General, Gary R. Allen, Doris D. Coles, William S. Estabrook III, Department of Justice, Washington, D.C. 20530, for defendant-appellant.

Before GARZA, REAVLEY and POLITZ, Circuit Judges.

REAVLEY, Circuit Judge:

The Internal Revenue Service (IRS) appeals from an order of the district court limiting the income upon which a tax lien may be levied to one half of that earned by the delinquent taxpayer as well as one half of that earned by the delinquent taxpayer's spouse. We agree with the IRS and extend the lien to all of the taxpayer's income.

Appellee Karleen Medaris is married to Michael Medaris. Michael has not filed income tax returns since 1981. The IRS notified Michael, but not Karleen, of its intent to levy because of unpaid taxes. The IRS then proceeded to levy upon all of Michael's income and upon one half of Karleen's income. Karleen claims that the IRS has the authority to levy only upon one half of Michael's earnings because Texas community property law provides that she has a present vested interest in the other one half. Karleen also contends that the IRS did not provide her with notice and demand as required by the Internal Revenue Code. 26 U.S.C. §§6303(a) and 6331(d) . On the government's motion for summary judgment, the district court determined that one half of the earnings of both Karleen and Michael could he attached by the government to satisfy Michael's tax liability. In addition, the district court determined that Karleen was not entitled to notice under §§6303 and 6331 of the Code because she was not liable for the taxes.

The district court correctly held that one half of Karleen Medaris' earnings may be attached by the government. However, the district court erred in allowing the government to levy only upon one half of Michael Medaris' earnings.

1. Property Subject to Tax Lien

A lien for unpaid federal taxes attaches against "all property and rights to property . . . belonging to" the person liable for the taxes. 26 U.S.C. §6321 . This provision, which defines broadly the property subject to attachment by the government for unpaid taxes, indicates "that Congress meant to reach every interest in property that a taxpayer might have." United States v National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720, 105 S.Ct. 2919 2924, 86 L.Ed.2d 565 (1985). To determine the extent to which a taxpayer has an interest in property, state law is consulted. Id. at 722, 105 S.Ct. at 2925; Broday v. United States [72-1 USTC ¶9269 ], 455 F.2d 1097, 1099 (5th Cir.1972). Once the extent of a taxpayer's legal interest in property is determined by state law, "the tax consequences thenceforth are dictated by federal law." National Bank of Commerce, 472 U.S. at 722, 105 S.Ct. at 2925.

A. Karleen's Income

The district court correctly allowed the IRS to levy upon one half of Karleen's income to satisfy Michael's tax liability. Texas law provides that property acquired during marriage, other than by gift, devise, descent or personal injury recovery, is community property. Tex.Fam.Code Ann. §5.01 ( Vernon 1975). Each spouse has a one half interest in all community property. Broday, 455 F.2d at 1100-01. Michael, therefore, has a one half interest in Karleen's income.

There are limits to this interest however, which have been imposed by statute. Specifically, a spouse's earnings, which are characterized as "sole management community property," see Tex.Fam.Code Ann. §5.22(a)(1) ( Vernon 1975), are exempt from the other spouse's creditors. Id. §5.61(b)(2) ( Vernon Supp.1989). This provision appears to remove Karleen's income from the reach of Michael's creditors. The Supreme Court, however, in interpreting §6334(c) of the Internal Revenue Code ¹ has held that state law exemptions are not effective against the United States. United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190, 205, 91 S.Ct. 1763, 1771, 29 L.Ed.2d 406 (1971). Similarly, this court has held that where a married woman "has a vested interest in, and is the owner of, a half share of the community income" over which her husband has sole management and control, that one half interest may be seized to satisfy her tax liability despite state law to the contrary. Broday, 455 F.2d at 1100-01. Accordingly, because Michael has a one half interest in Karleen's income and because the exemption found in §5.61(b)(2) of the Texas Family Code is ineffective against the federal government, the IRS is able to attach Karleen's income to the extent of Michael's interest in it.

B. Michael's Income

We modify the order of the district court because it allows the IRS to attach only one half of Michael's earnings. In limiting the reach of the IRS, the district court relied heavily on two decisions of the Ninth Circuit, United States v. Overman [70-1 USTC ¶9342 ], 424 F.2d 1142 (9th Cir.1970), and In re Ackerman [70-1 USTC ¶9343 ], 424 F.2d 1148 (9th Cir.1970). These cases, construing Washington and Arizona community property law, are distinguishable from the present controversy and Texas law. In Overman and Ackerman, state law prevented premarital creditors of a husband from reaching any community property. Id. at 1150. Notwithstanding these state law provisions, the court concluded that the husbands had an undivided one half interest in the community property against which the government could assert its liens. The interest which the wives had in the community property, however, was not subject to the government's liens.

Two subsequent Ninth Circuit decisions, United States v. Stonehill [83-1 USTC ¶9285 ], 702 F.2d 1288 (9th Cir.1983), cert. denied, 465 U.S. 1079, 104 S.Ct. 1440, 79 L.Ed.2d 761 (1984), and Babb v. Schmidt [74-1 USTC ¶9476 ], 496 F.2d 957 (9th Cir. 1974), explain the limitations of Overman and Ackerman. In Stonehill, the court, construing Philippine law, allowed the government to attach all of the community property of married couples, including the wives' ² vested one half interest, to satisfy tax liabilities incurred by the husbands. The court distinguished Overman and Ackerman from the controversy before it.

Thus, Overman and Ackerman extended the reach of premarital tax liens to half of the community property even when state law insulated the community property from premarital creditors generally. In the present case, in contrast, Philippine law (article 161) permits the liens to reach all of the conjugal property. Nothing in Overman or Ackerman reduces the reach of the tax liens below what local law permits.

Stonehill, 702 F.2d at 1298. Overman and Ackerman, therefore, may not be viewed as reducing the reach of the government below what state law allows to creditors generally.

In Babb, the court, construing California community property law, allowed the government to levy upon the wife's "vested interest in her share of the community" to satisfy her husband's premarital tax liabilities. Id. at 958. The court rejected the wife's argument that Overman and Ackerman prevented the government from reaching her one half of the community estate. Id. at 958-59. The court indicated that state law "provides the basis for distinction." Id. at 958. While Washington and Arizona law immunize the wife's share of the community from the husband's premarital creditors, California law subjects the wife's share of the community to such claims.

Much like Philippine law in Stonehill and California law in Babb , Texas law provides that certain community property is subject to liabilities incurred by a spouse. See Tex.Fam.Code Ann. §5.61 (Vernon 1975 & Supp.1989). Specifically, under Texas law Michael's income is classified as community property; his interest in it is such that he has "sole management, control, and disposition" over it, id. §§5.22(a)(1), 5.01(b) ( Vernon 1975), and this sole management community property is "subject to the liabilities incurred by him . . . before or during marriage," id. §5.61(c). These sections of the Texas Family Code clearly establish that Michael has a property interest in his income and that this property is subject to all liabilities incurred by Michael.

The district court also concluded that the "state law identification of property that is subject to liabilities is irrelevant to a determination of property which is subject to a federal tax lien because federal law controls that determination." While we agree with this statement of the law, we fail to see how that statement prevents the government from attaching all of Michael's personal earnings. The Internal Revenue Code identifies that property upon which a lien may be imposed as "all property and rights to property . . . belonging to" any person who has failed to pay taxes that are due. 26 U.S.C. §6321 . Property that is exempt from levy by the government is identified in §6334 of the Code. No special exemption is provided for the earnings of a spouse in community property jurisdictions. Therefore, because Michael has a property interest in his income as determined by Texas law, the government may impose a lien on all of it pursuant to federal law. See Broday, 455 F.2d at 1101.

The IRS urges that the ability to enforce a federal tax lien should not be less than the ability of private creditors to collect on their debts. We agree. Placing the IRS in a position at least equal to that of private creditors is supported by Stonehill and Babb. Those cases hold that where state law (or foreign law, in the case of Stonehill ) makes all of the community property available to satisfy the private debts of either spouse, the federal government, too, is able to look to the delinquent taxpayer's entire property to satisfy his tax obligations. See Stonehill, 702 F.2d at 1298-99; Babb, 496 F.2d at 960.

2. Notice

We agree with the district court's decision that the IRS was not required to give Karleen Medaris notice under §§6303(a) and 6331(d) of the Internal Revenue Code. As the district court stated, "[t]hese provisions only require the Government to provide notice to the person 'liable' for the payment of taxes." Because Karleen Medaris is not liable for the taxes, notice to her was not necessary under §§6303(a) and 6331(d) of the Internal Revenue Code.

The judgment is modified to extend the IRS lien to all of Michael Medaris' earnings.

AFFIRMED AS MODIFIED.

¹ 26 U.S.C. §6334(c) provides:

Notwithstanding any other law of the United States . . . no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).

² The wives were not subject to United States income tax because they were neither citizens nor residents of the United States .

 

 

 

United States of America, Plaintiff v. Lucienne D'Hotelle de Benitez Rexach, et al., Defendants

U. S. District Court, Dist. P. R., Civil Number 531-64, 9/23/75

[Code Secs. 1, 6406 and 7422]

Liability for tax: Citizen v. non-citizen: Administrative review: Laches: Res adjudicata: Collateral estoppel:--The Supreme Court decision in Schneider v. Rusk, in which it was held that it was unconstitutional to void the U. S. citizenship of a naturalized citizen after three years' residence in the country of his birth, was not applied retroactively to the taxpayer for purposes of determining her income tax liability. As to other years, the doctrines of laches, res adjudicata and collateral estoppel did not apply to bar tax assessments where the government had made no false representations or inducements to the taxpayer and the merits of the case had never previously been adjudicated with respect to the particular taxpayer.

[Code Sec. 6321]

Lien for taxes: Community property: Liability of husband: Property claimed by husband.--The taxpayer's husband was liable for taxes on his wife's share of income he earned during the years at issue, but which he failed to distribute to his wife during her lifetime. The Court also held that the taxpayer's husband was liable for the value of a tax lien on property previously owned by the taxpayer, but which the husband was now claiming as his own.

Julio Morales-Sanchez, United States Attorney, San Juan , P. R., for plaintiff. Brown, Newsom & Cordova, GPO Box 2152 , San Juan , P. R., for defendants.

Opinion

TORRUELLA, District Judge:

This case is one more chapter in a series of prior actions before this Court involving attempts to recover income taxes allegedly due to the Government of the United States . ¹

This Court has jurisdiction over the subject matter of this controversy by virtue of Sections 7401, 7402 and 7403 of the Internal Revenue Code of 1954 and Section 1340 and 1345 of Title 28 of the United States Code.

Defendant Lucienne D'Hotelle de Benitez Rexach, hereinafter referred to as Lucienne, was born in France on January 15, 1909. She married Defendant Félix Benítez Rexach, hereinafter referred to as Benitez Rexach, in 1928. Thereafter Lucienne lived in Puerto Rico commencing in 1938 and became a naturalized citizen of the United States on December 7, 1942. As it appears from the finding of facts in the case of U. S. v. Benítez Rexach [60-2 USTC ¶9607], 185 F. Supp. 465, in 1944 Lucienne left for the Dominican Republic with her husband. From the facts in the above case we can infer that she resided in the Dominican Republic from 1944 to November 9, 1946 and then she travelled to France where she resided until May 20, 1952.

A United States passport was issued to Lucienne on November 10, 1947 by the American Embassy in Paris , France .

On February 11, 1952 Lucienne filed an application for another passport renewal at the United States Consulate in Nice , France . This request was denied and a Certificate of Loss of Nationality was issued and signed by the American Vice Consul in Nice on May 21, 1952. The Vice Consul determined that Lucienne being a naturalized citizen, she had violated Section 404, Chapter IV, of the Nationality Act of 1940 ² by living and residing in her domicile of origin for more than three years, and thus effectively loosing her citizenship as of November 9, 1949. This Certificate was approved by the Department of State on December 23, 1952. A notification of the loss of nationality was filed at the United States District Court for Puerto Rico on March 5, 1953. Lucienne's passport was taken at Nice, cancelled, and never returned to her.

Meanwhile, on January 2, 1952 a decree of privileged naturalization was issued in her favor by the Dominican Government, under the provisions of Dominican Republic Law Number 1633. ³ Thereafter on September 4, 1956 a Dominican diplomatic passport was issued in her name and Lucienne travelled extensively with this passport. On January 20, 1962 the Dominican Government cancelled her citizenship and on June 5, 1962 a French passport was issued to her.

On May 18, 1964 the case of Scheider v. Rusk ⁴ was decided by the Supreme Court of the United States. Therein, the Court held that Sec. 352(a)(1) ⁵ of the Immigration and Nationality Act of 1952 was unconstitutional since "living abroad, whether the citizen be naturalized or native born, is no badge of lack of allegiance and in no way evidences a voluntary renunciation of nationality and allegiance." It was stipulated by the parties in this case that from December 23, 1952 up to 1964 no steps were taken by Lucienne to contest her nationality or to affirm her renunciation thereof.

On August 13, 1964 a delegate of the Commissioner of Internal Revenue pursuant to Sec. 6861 of the Internal Revenue Code of 1954, appearing at 26 USC Sec. 6861(a), made a jeopardy assessment for the sum of $9,065,036.93 against Lucienne for calendar years 1944 through 1950, based on assessed tax deficiencies and interests to the date of assessment. ⁶ Notice and demand for payment was sent to Lucienne on August 13, 1964. On June 29, 1964 a similar assessment was made for the amount of $12,515,151.89 for fiscal year 1951 through 1958 and a delinquency penalty for 1951 and 1952. Notice and demand for payment were made to Lucienne on June 29, 1964. However, the parties stipulated that all delinquencies or other penalties referred to on the deficiencies were withdrawn.

It should be noted that the above tax assessment periods were based upon one half of the income that Defendant Benítez Rexach earned in the Dominican Republic during said periods and upon the contention that Lucienne had a vested interest over said one half of Defendant Benítez Rexach's income in the Dominican Republic under the community property law of the Dominican Republic. See U. S. v. Benítez Rexach, 185 F. Supp. 465, D. C. P. R., 1960. Said taxable income was derived from the employment of capital and services by Benítez Rexach in the Dominican Republic .

On January 12, 1965 the United States Department of State sent a letter to an attorney representing Lucienne in the matter of citizenship, informing her that her expatriation from November 9, 1949 was automatically voided due to Schneider v. Rusk, supra. Lucienne answered on January 29, 1965 stating that after her citizenship was revoked she had accepted the decision without protest and that thereafter she had never considered herself a citizen of the United States . She cited in said letter the case of U. S. v. Benitez Rexach [60-2 USTC ¶9607], 185 F. Supp. 465 D. C. P. R., 1960, as being dispositive of the question.

The complaint in this case was filed on November 12, 1964. Lucienne died on January 18, 1968.

The tax regulations of the United States generally provide that citizens of the United States ⁷ are liable to pay income tax even if they are not residents of the United States and own no assets or receive no income within the United States. ⁸ See 26 CFR 1.1-1(a)(b), P-H 1975 Fed. Taxes Sec. 3423; Cook v. Tait, 265 U. S. 47 (1924); U. S. v. Benítez Rexach [60-2 USTC ¶9607], 185 F. Supp. 465 (D. C. P. R. 1960). A citizen is defined by the regulations as a person born or naturalized in the United States and who is subject to its jurisdiction. Such a definition must be made under the Immigration and Naturalization Act of 1954. See P-H 1975 Fed. Taxes Sec. 3424.

Thus we must first look at the effect, if any, of Schneider v. Rusk, supra, upon Lucienne's citizenship. In this respect we must determine whether for the purpose of this case, Schneider should be applied retroactively in such manner as to result in the voiding of Lucienne's loss of citizenship and to make her responsible for the payment of the assessed taxes from November 9, 1949 onwards.

In the landmark decision of Linkletter v. Walker, 381 U. S. 618 (1965), the Supreme Court established the criteria for determining whether new constitutional rulings in both criminal and civil litigation should be applied prospectively or retrospectively. While deciding that the Constitution neither prohibits nor requires retroactive effect to its decisions, and that no distinction exists between civil and criminal cases, the Court set forth on Page 629 that:

"Once the premise is accepted that we are neither required to apply, nor prohibited from applying, a decision retrospectively, we must weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation." (Emphasis added).

In subsequent analysis of the Linkletter decision, the Circuit Court for the 9th Circuit in the case of Simpson v. United Oil Company of California, 411 F. 2d 897 (CA 9, 1969) expounded the principle that has since been followed in determining the retrospective effect of rulings in civil litigation. The Court states at Page 903, that:

"The major consideration [in civil cases] is--did a party to the present litigation rely on a rule of law which has now been changed so that it would be inequitable to apply the new rule to such party." ⁹

In other decisions the Supreme Court has indicated that a balancing of the equities must be conducted before a civil case may be applied retroactively. In the case of Chicot County Dist. v. Bank, 308 U. S. 371 (1940), the Court was confronted with determining whether having found that an Act if unconstitutional is by itself an automatic conclusion that said act was not a law, and that it was inoperative and conferred no rights or imposed no duties. The Court states in page 374 that:

"The actual existence of a statute prior to such a determination [of unconstitutionality] is an operative fact and may have consequences which cannot be justly ignored. The past cannot always be erased by a new judicial declaration.

These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified." ¹⁰ (Emphasis supplied.)

In another decision, Cipriano v. City of Houma , et al., 395 U. S. 701 (1969), the Court set forth in page 706 that:

"Where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the 'injustice or hardship' by a holding of non retroactivity." (Emphasis added). (Citations omitted).

In the recent decision of Chevron Oil Co. v. Huson, 404 U. S. 97 (1971), the Supreme Court set forth in page 106 the standards to be taken into consideration when determining the issue of nonretroactivity by expressing that:

"In our cases dealing with the nonretroactivity question, we have generally considered three separate factors. First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, ¹¹ or by deciding an issue of first impression whose resolution was not clearly foreshadowed. ¹² Second, it has been stressed that 'we must . . . weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation. ¹³ Finally, we have weighed the inequity imposed by retroactive application, for '[w]here a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the 'injustice or hardship' by a holding of nonretroactivity." ¹⁴

The Court further emphasizes at page 108 that: "Yet, retroactive application of the Louisiana statute of limitations ¹⁵ to this case would deprive the respondent of any remedy whatsoever on the basis of a superseding legal doctrine that was quite unforeseeable." ¹⁶ (Emphasis added).

Finally, in Lemon v. Kurtzman, 411 U. S. 192 (1973), the Supreme Court again balanced the equities in deciding not to apply a decision retroactively in a civil case. The Court set forth in page 201 that:

"In equity, as nowhere else, courts eschew rigid absolutes and look to the practical realities and necessities inescapably involved in reconciling competing interests, notwithstanding that those interests have constitutional roots."

In resuming the above we can say, that the general principles that govern retroactivity should be applied on a case by case basis taking into consideration such factors as the reliance placed by the parties on the legislation in question, the balancing of the equities of the particular situation, and the foreseeability or lack thereof, that the legal doctrine or statute in question would be declared unconstitutional.

Measured against these standards we are of the opinion that the present circumstances do not merit the consequences that would follow from retroactive application of Schneider v. Rusk, supra, to Lucienne for purposes of determining her income tax liability. Most assuredly not only did she rely on the revocation of her citizenship as expressed to her by the United States Consul in Nice, as is demonstrated by her obtaining the passport of France thereafter, but in fact this very Court also relied on said action in making related findings in other Benitez Rexach cases previously cited herein. This reliance speaks for itself as regard any possible contention that Lucienne could have foreseen that the relevant section of the Nationality Act would be declared unconstitutional. Considering that it was, first of all, a presumably valid statute of Congress which placed Lucienne outside of the protection of the citizenship of the United States, and that secondly, it was the Executive Branch that proceeded to strip her of these important benefits, it would be tantamount to compounding these legal absurdities to have the Judiciary carry the fiction that the Constitution is always as interpreted by the Supreme Court to the logical but insensible conclusion propounded by the Government in this action. The equities against retroactive application of Schneider v. Rusk, supra, lay with Lucienne, and we so hold. ¹⁷

We thus conclude that for purposes of this case, Lucienne was not a citizen of United States after November 9, 1949, and thus not subject to taxation on her half of the income of Benitez Rexach earned outside of the jurisdiction of the United States .

We are not required to focus on the period encompassing 1944 through November 9, 1949, and in this respect, we must first deal with the applicability of the doctrines of laches, res judicata or collateral estoppel and the contention of Defendants that the prior suits involving various of the present Defendants bring these doctrines into play herein.

To begin with it is clear that in a non-equity case, ¹⁸ the United States is not subject to the defense of laches when it is suing to enforce public rights and while acting in its governmental capacity. U. S. v. Sumnerlin, 310 U. S. 414 (1940), U. S. v. Samson Management Corp., 64 F. R. D. 83 (ND, GA, 1974). In the present case the Government is enforcing such a public claim.

The doctrines of res judicata and collateral estoppel are related but different precepts.

Under the doctrine of res judicata a judgment on the merits in a prior suit involving the same parties or their privies bars a subsequent suit based upon the same cause of action. See Lawlor v. National Screen Service, 349 U. S. 322 (1955).

In the recent case of Sea Land Service, Inc. v. Gaudet, 414 U. S. 573 (1974), the Supreme Court defined the doctrine of res judicata as operating to bar:

. . . "repetitious suits involving the same cause of action. [The bar] rests upon considerations of economy of judicial time and public policy favoring the establishment of certainty in legal relations. The rule provides that when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound 'not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.' The judgment puts an end to the cause of action, which cannot again be brought into litigation between the parties upon any ground whatever, absent fraud, or some other factor invalidating the judgment." (Citations omitted).

The doctrine of collateral estoppel is applied in the following situation:

"[W]here the second action between the same parties is upon a different claim or demand, the judgment in the prior action operates as an estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or verdict was rendered. In all cases, therefore, where it is sought to apply the estoppel of a judgment rendered upon one cause of action to matters arising in a suit upon a different cause of action, the inquiry must always be as to the point or question actually litigated and determined in the original action, not what might have been thus litigated and determined. Only upon such matters is the judgment conclusive in another action." See Cream Top Creamery v. Dean Milk Co., 383 F. 2d 358 (CA 6, 1967).

The difference between the two doctrines was stated by the Supreme Court as follows:

"The basic distinction between the doctrines of res judicata and collateral estoppel, as those terms are used in this case, has frequently been emphasized. Thus, under the doctrine of res judicata, a judgment 'on the merits' in a prior suit involving the same parties or their privies bars a second suit based on the same cause of action. Under the doctrine of collateral estoppel, on the other hand, such a judgment precludes relitigation of issues actually litigated and determined in the prior suit regardless of whether it was based on the same cause of action as the second suit." See, Lawlor v. National Screen Service, 349 U. S. 322 (1955).

An analysis of the prior Benítez Rexach cases leads us to conclude that neither of these doctrines are applicable to the Government's cause of action for the collection of taxes during the period of 1944 through November, 1949.

In the case of United States v. Benitez Rexach [60-2 USTC ¶9607], 185 F. Supp. 465 (D. C. P. R. 1960) Lucienne was not included as a party. Benítez Rexach raised the question of her citizenship as a defense. The rights of Benítez Rexach were adjudicated and no cause of action was brought or litigated against Lucienne for the collection of taxes during the 1944 through 1949 period. In United States v. Benitez Rexach [62-1 USTC ¶9199], 200 F. Supp. 494 (D. C. P. R., 1961); United States v. Benitex Rexach, 41 F. R. D. 180 (D. C. P. R., 1966), and United States v. Benitez Rexach, Civil Number 67-64, Lucienne is included as a party with interest on the properties of Benítez Rexach. But again, no adjudication was made by the Court as to her tax responsibility for the above mentioned period.

There is thus no identity between the cause of action in this case and that of the other Benítez Rexach cases, nor has there been any adjudication on the merits, or otherwise, of Lucienne's tax responsibility for fiscal years 1944 through 1949. Therefore, neither res judicata nor collateral estoppel bar recovery for said period.

Defendants next allege that the Government is estopped from collecting from Lucienne during the fiscal years 1944-1949.

The doctrine of estoppel has been defined by the courts as ". . . where one party makes by its words or actions a false representation of fact and the other party reasonably relies on the misrepresentation and is prejudiced thereby." See Allied Steel Construction Co. v. Employers Casualty Co., 422 F. 2d 1369 (CA-10, 1970); Aetna Insurance Co. v. Glens Falls Insurance Co., 453 F. 2d 687 (CA-5, 1972).

The Courts have considered the following elements as necessary, for the doctrine of estoppel to be applicable:

(1) False representation or concealment of material facts.

(2) False representation made with knowledge of the facts.

(3) The party to whom it was made must have been ignorant of the truth of the matter.

(4) False representation made with interest or intention that the other party acts upon it.

See American Security and Trust Company v. Fletcher, 490 F. 2d 481 (CA-4, 1974) Cert. denied 419 U. S. 900 (1975); California State Board of Equalization v. Coast Radio Products, 228 F. 2d 520 (CA-9, 1955).

The doctrine of estoppel must be applied with great caution to the Government, although it is recognized that under the proper circumstances the Government may be estopped. See United States v. Gross, 451 F. 2d 1355 (CA-7, 1971); 2 Davis , Administrative Law Treatise, Secs. 1703 and 1704 (1958 and 1970 Supp.). The Court in the Gross case, states at page 1358 that:

"In most of those cases holding the government to be estopped the facts upon which the private party relied, to his detriment, were addressed or communicated directly to him by government officials."

However, the language in several other cases seems to restrict generally the application of estoppel to the Government. For example, in the case of Udall v. Oelschlaeger, 389 F. 2d 974 (C. A. D. C., 1968), the Court expressed at page 977 that the:

. . . "Government is never disabled from protecting the public interest by reason of the past mistakes of its agents."

Another case which follows this latter pattern is that of United States v. E. W. Savage & Son, Inc., 343 F. Supp. 123 (D. C. S. D. 1972) affirmed 475 F. 2d 305; wherein the Court states at page 126 that:

"The United States cannot be stopped by the acts of its agents even if grounds normally sufficient for estoppel in a suit between private parties are present."

The First Circuit Court seems to follow this restrictive pattern in the case of Peignand v. Immigration and Naturalization Service, 440 F. 2d 757 (CA-1, 1971), where the Court states at page 761:

"The doctrine of estoppel, assuming it can operate at all against the Government, is not applicable here. The respondent did not lead petitioner to any course of action which he would not otherwise have taken, or [lead] him to change his situation in any way, whether to his detriment or otherwise." (Emphasis added).

Defendants heavily rely on the following allegations to support their contention that estoppel applies to the Government in the present case.

(1) The Commissioner is attempting to correct the mistake of interpretation under the law of the Dominican Republic or foreign law. ¹⁹

(2) The Commissioner arbitrarily abused his powers.

(3) Twenty years have passed from the time the alleged taxes were due and it would be unreasonable to collect them now.

Although Defendants cite the case of Schuster v. C. I. R. [62-2 USTC ¶12,121] 312 F. 2d 311 (CA-9, 1962), this case mainly supports a contrary conclusion to that favoring their position. We find that the Court states, at page 317:

"We recognize the force of the proposition that estoppel should be applied against the Government with utmost caution and restraint, for it is not a happy occasion when the Government's hands, performing duties on behalf of the public, are tied by the acts and conduct of particular individuals. Estoppel has been applied against the Commissioner in limited situations, but they have usually arisen where the Commissioner's act involved matters of a purely administrative mature. Indeed the tendency against Government estoppel is particularly strong where the official's conduct involves questions of essentially legislative significance, as where he conveys a false impression of the laws of the country. Obviously, Congress's legislative authority should not be readily subordinated to the action of a wayward or unknowledgeable administrative official. Accordingly, the general proposition has been that the estoppel doctrine is inapplicable to prevent the Commissioner from correcting a mistake of law."

"But we regard this proposition as one of general application, not as embracing the concept that the Commissioner might always correct a legal mistake regardless of the injustice which will result. It is conceivable that a person might sustain such a profound and unconscionable injury in reliance on the Commissioner's action as to require, in accordance with any sense of justice and fair play, that the Commissioner not be allowed to inflict the injury. It is to be emphasized that such situations must necessarily be rare, for the policy in favor of an efficient collection of the public revenue outweights the policy of the estoppel doctrine in its usual and customary context." (Citations omitted).

The application of the estoppel doctrine to tax cases has been analyzed in the case of In Re Petition of La Voie, 349 F. Supp. 68, at page 74, (D. C. St. Thom., 1972), wherein the Court states that:

"Estoppel is invoked frequently and with little success in tax cases, where the taxpayer seeks to hold the Internal Revenue Service to an early ruling. However, in most cases a reversal of opinion does not seem unjust; the taxpayer is simply called upon for sums which should have been paid all along. And where the taxpayer has changed his location or procedures in reliance on the earlier ruling, it may still be argued that the public interest in maintenance of the fisc overbears the individual interests involved."

A similar interpretation on the applicability of estoppel is found in the case of Simmons v. United States [71-2 USTC ¶9583], 334 F. Supp. 853 (DC WD Ten. 1971), wherein the Court set forth at page 853 that:

"It is generally held that the United States of America is not estopped except by authority of statute. At best, it may be said for Plaintiff that equitable estoppel against the sovereign will be invoked only under very exceptional circumstances." (Citations omitted).

Based on the foregoing it is our opinion that estoppel is not applicable to the present situation. From the record it appears that no false representation or inducement were made to the Defendants. In fact any interpretation as to the Dominican Law was introduced initially by Rexach Benítez as a defense in the case of U. S. v. Benítez Rexach [60-2 USTC ¶9607], 185 F. Supp. 465. Thus, Defendants were not led into error by any of Plaintiffs' actions as regard the 1944-1949 period.

The computation of Lucienne's tax liability for the fiscal years 1944-1949 is to be effectuated pursuant to the formula stipulated by the parties and which is on file.

We must now discuss other consequences of this tax liability.

Not only did the income earned by the Defendant Benítez Rexach in the Dominican Republic give rise to his business properties in that country, but the income which he earned in the Dominican Republic was reinvested, among other things, in the Escambron Development Company which holds title to the Normandie Hotel which is situated in Puerto Rico . Said property is subject to Lucienne's property rights. Defendant Benítez Rexach has admitted that he did not turn over to Lucienne the one half vested community property interest in the income he earned in the Dominican Republic , but rather he only furnished her adequate support and retained her vested one-half community property interest. Since the tax liabilities alleged herein are computed as a percentage of Lucienne's vested one half community property interest in her husband's income, her said one half vested interest as retained by Benitez Rexach is necessarily greater than the tax liabilities computed on said one half vested interest.

When Lucienne died on January 18, 1968, Defendant María Benítez Rexach de Andreu as the executrix of her estate, was named as a Defendant in this suit. By terms of the will left by Lucienne all her estate was left to the Defendant Benítez Rexach.

Lucienne D'Hotelle de Benítez Rexach died holding legal title to a certain tract of real property situated in Bayamón, Puerto Rico in which Benítez Rexach also claims a one-half interest.

As the administrator of the conjugal community Benítez Rexach was authorized to retain and administer all the property of the said conjugal community, including the vested one-half community property interest of Lucienne in the income Benítez Rexach earned in the Dominican Republic during the years 1944 through 1949, inclusive. 31 LPRA Sec. 3671; Pérez v. Hawayeck, 69 P. R. R. 46 (1948). This is particularly so since as previously stated Benítez Rexach has admitted that he retained possession of the vested one-half community property interest of Lucienne in the income he earned in the Dominican Republic during the years 1944 through 1958, providing her only with support.

The federal income tax assessments which were made against Lucienne on August 13, 1964, for the years 1944 through 1949, inclusive, are secured by tax liens which arose on the dates of the assessments, and which tax liens encumber all property and rights to property of Lucienne, including her rights to the vested one-half community property interests in the said income of her husband, which community property interests have at all times relevant hereto been held by Benítez Rexach. See Section 6321 of the Internal Revenue Code of 1954, appearing at 26 USCA 6321. Accordingly, the Defendant Benítez Rexach, as the holder of property on which the United States claims tax liens, is liable to the United States for the amount due on said tax liens or for the amount or value of the property so held by him and encumbered by the said tax liens, whichever amount is the lesser.

Upon the death of Lucienne, Benítez Rexach as the administrator of the said conjugal community, was accountable for her vested one-half community property interest to the estate of Lucienne, which estate is being administered here in Puerto Rico . See 31 LPRA Secs. 3621, 3681, 3692, 3694 and 3697. However, the said vested one-half community property interest in Benítez Rexach's income earned in the Dominican Republic during the years 1944 through 1949 has not been turned over to the estate of Lucienne, but rather has been retained by him under claims of her last will and testament being probated in Puerto Rico , which leaves all her estate to him. Such a retention by Defendant Benítez Rexach renders him liable to the United States as a transferee at law, 31 LPRA Sec. 3498; United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958); Commissioner v. Stearn [58-2 USTC ¶9594], 357 U. S. 39 (1958); and further he is liable to the United States for a tortious conversion of its tax liens in that he is holding property as his own which is subject to the federal tax liens securing the tax liabilities assessed against Lucienne. United States v. Allen [62-2 USTC ¶9704], 207 F. Supp. 545 (D. C. E. D. Wash., 1962); Nomellini Construction Co. v. United States [71-2 USTC ¶9510], 328 F. Supp. 1281 (DC ED Cal. 1971); United States v. Matthews, 244 F. 2d 626 (CA 9, 1957); George Adams & Frederick Co. v. South Omaha National Bank, 123 Fed. 641 (CA 8, 1903); United States v. Pete Brown Enterprises, Inc., 328 F. Supp. 600 (DC ND Miss., 1971); Exeter Company v. Holland Corp., 23 P. 2d 864 (1933); American State Bank v. Sullivan, 134 Wash. 300, 235 P. 2d 815. The Defendant Benítez Rexach's said liability as a transferee and for tortious conversion of lien is for the amount of said liabilities of Lucienne or the amount of the transferred and converted property, whichever amount is the lesser.

The United States is entitled to a judgment against María Benítez Rexach de Andreu as executrix of the estate of Lucienne for the amount of income taxes due from Lucienne for the years 1944 through 1949, computed according to the formula agreed upon by the parties in the stipulation previously referred to herein. Furthermore, the United States is entitled to a judgment against the Defendant Benítez Rexach both in his individual capacity because of his liability as a transferee of property subject to federal tax liens and on account of his tortious conversion of federal tax liens, and in his capacity as the administrator of the aforesaid conjugal community it that he failed to pay the aforesaid federal tax liabilities which were a debt of the aforesaid conjugal community. Since the aforesaid tax liabilities were computed as a percentage of Lucienne's vested one-half community property interest in the income earned by her husband in the Dominican Republic during the years 1944 through 1949, the aforesaid tax liabilities are necessarily less than the amount of her community property interest which are subject to the federal tax liens and which have been improperly retained by the Defendant Benítez Rexach. Therefore, the judgment to be entered against Defendant Benítez Rexach both in his individual capacity for tortious conversion and as a transferee, and in his capacity as administrator of the said conjugal community is to be in the lesser amount of the tax liabilities due from Lucienne computed according to the formula agreed upon by the parties. The United States is also entitled to a judgment against the Defendant Benítez Rexach as he is holding property which belongs to the estate of Lucienne, to wit, Lucienne's vested one-half community property interest in the income earned by her husband, Benítez Rexach, in the Dominican Republic during the years 1944 through 1949, and which community property interest is subject to the tax liens outstanding against the decedent, Lucienne. Since, as aforesaid, the said tax liens secure liabilities which are lesser in amount than the value of said one-half community property interests, the United States is entitled to a judgment against Benítez Rexach in the amount of the tax liabilities due from Lucienne computed according to the formula agreed upon by the parties in the stipulation.

The United States may foreclose its tax liens which secure the tax liabilities due from Lucienne for the years 1944 through 1949, against the real property described in the complaint herein titled in the name of Lucienne and situated in Bayamón, Puerto Rico, and also its liens against the stock of the Escambrón Development Company which owns the Normandie Hotel.

Judgment shall be entered in accordance with this Opinion.

It is so Ordered.

¹ See United States v. Benitez Rexach, et al. [60-2 USTC ¶9607], 185 F. Supp. 465 (D. C. P. R. 1960); United States v. Benitez Rexach, et al. [62-1 USTC ¶9199], 200 F. Supp. 494 (D. C. P. R. 1961); United States v. Benitez Rexach, 41 F. R. D. 180 (D. C. P. R. 1966); United States v. Benitez Rexach, Civil Number 67-64.

² Sec. 404 of the Nationality Act of 1940, 8 USC 8101 et seq. provided in substance that a naturalized citizen would forfeit his citizenship if he resided in his domicile of origin for 3 years. See U. S. v. Karahalias, 205 F. 2d 331 (CA 2, 1953). Sec. 404 was repealed and this area was covered similarly by Sec. 1484(a) of the Immigration and Nationality Act of 1952. See 8 USCA Sec. 804, Historical Note, Page 44.

³ Lucienne became a Dominican citizen under the provisions of Chapter IV of the above mentioned law, which allowed the President of the Republic to invest or confer by decree Dominican citizenship upon those aliens who deserved such an investiture without the usual requirements of Dominican Law.

⁴ 377 U. S. 163 (1964).

⁵ See footnote 2, this section is similar to Section 404 of the Nationality Act of 1940 under which Lucienne lost her citizenship. Thus, it follows that the constitutional rule expressed in Schneider is also applicable to any loss of nationality under Section 352.

⁶ Under 26 USC Sec. 6861 such an assessment may be made if the collection of taxes would be jeopardized by delay. We are not here concerned with a statute of limitations situation by reason of the fact that Lucienne never filed tax returns. See 26 USC 6501(c)(3).

⁷ In case of non-resident aliens or corporations the tax is essentially in rem or in other words against the income earned in or received from sources within the United States . Resident aliens are taxed the same as citizens of the United States . See 26 CFR 1.1-1(a); 26 USCA 871(b) and 877(B); Mertens, Law of Federal Income Taxation, Volume 1, Chapter 1, Sec. 1.06, Page 12 (1974). However, we do not have these factual situations in this case.

⁸ Except for the exclusion found in 26 USCA Sec. 933, which is not at issue according to the stipulation signed by the parties in this case.

⁹ It should be noted that the above decision was reversed as to the application of the "equity rule" to the petitioner in that case. See Simpson v. Union Oil Co., 396 U. S. 13 (1969). However, no alteration was made by the Supreme Court with respect to the interpretation of the Court of Appeals as to the application of the Linkletter case to civil litigation. To the contrary, the Supreme Court seems to adopt said interpretation by reserving ". . . the question whether, when all the facts are known, there may be any equities that would warrant only prospective application . . ."

¹⁰ In the case of Hanover Shoe Inc. v. United Shoe Mach., 392 U. S. 481 (1968), in page 496 the Court confronts the same issue before us without making an adjudication of it, to wit: "The theory of the Court of Appeals seems to have been that when a party has significantly relied upon a clear and established doctrine, and the retrospective application of a newly declared doctrine would upset that justifiable reliance to his substantial injury, consideration of justice and fairness require that the new rule apply prospectively only."

¹¹ Hanover Shoe Inc. v. United Shoe Machinery Corp., 392 U. S. 481, 496 (1968).

¹² Allen v. State Board of Election, 393 U. S. 544, 572 (1969).

¹³ Linkletter v. Walker , supra.

¹⁴ Cipriano v. City of Houma , 395 U. S. 701, 706 (1968).

¹⁵ Although this case deals with the retroactivity of a statute, not of a court decision, the rule set forth seems to apply to both situations.

¹⁶ See also, Jordan v. Weaver, 472 F. 2d 985 (CA 7, 1973), reversed on other grounds; Nelson v. Schmidt, 373 F. Supp. 705 (W. D. Wis., 1973).

¹⁷ We might add that even were Schneider to apply, the facts of this case strongly indicate a voluntary renunciation by Lucienne to her American citizenship after being notified of her loss of nationality in 1952. When her Dominican citizenship was revoked in 1962, she was issued a French passport, her citizenship of birth, and used the said citizenship until her death 12 years later.

¹⁸ In equitable cases the doctrine of laches may apply as against the United States . Holmberg v. Armbrecht, 327 U. S. 392 (1946).

¹⁹ As we understand this allegation, Defendants are raising the fact that in the initial Benitez Rexach case, 185 F. Supp. 465, the Government argued against the theory that Lucienne under the Dominican Republic Law had a one half vested interest on Benitez Rexach's earnings in the Dominican Republic and thus Benitez Rexach could only be taxed on his half of the earnings. In this case the government is resting its case on the conclusion reached by the Court in 185 F. Supp. 465 as to the fact that Lucienne had such a vested interest and since the theory of the Government is that she never lost her citizenship, she must be taxed for such vested interest. It is Defendants' allegation that Plaintiff is estopped from taking such a position since they initially opposed it.

 

 

 

United States of America, Plaintiff-Appellee v. Harry S. Stonehill, Individually and as Trustee of the Lourdes Blanco Stonehill Children's Trust, The Elizabeth Anne Stonehill Trust, and The Susan J. Stonehill Trust, et al., Defendants-Appellants, Trammell, Rand, Nathan & Lincoln, a Partnership; and Pacita Carrion Brooks, Intervenors-Appellants

(CA-9), U. S. Court of Appeals, 9th Circuit, Nos. Ca 80-4590, 80-4598, 80-4599, 80-6062, 702 F2d 1288, 4/8/83. Affirming and reversing District Court, 76-2 USTC ¶9647 and 81-1 USTC ¶9370

[Code Secs. 6321 and 7403]

Lien for taxes: Foreclosure: Nonresident alien spouses: Community property: Philippine law.--Conjugal (community) property, including that held in the names of the taxpayers' nonresident alien wives, was subject to tax liens arising from deficiencies assessed on the husbands' half of the community income; the liens could be foreclosed against all of the conjugal property. Under Philippine law the conjugal property, including the wives' share, was liable for debts of the husbands, including the taxes, that were incurred to benefit the community

[Code Sec. 6323]

Lien for taxes: Priority of: Lien for attorney's fees.--Federal tax liens had priority over any interest the taxpayers' attorneys had in the property subject to the tax liens. Deeds of trust executed by the taxpayers to satisfy legal fees conveyed no interest and were not superior to the government's liens because they violated a court order that prohibited the taxpayers from encumbering the property. Also no equitable lien for attorney's fees arose under operation of California law. The judgment as to other third parties' claims was reversed and remanded for determination of their respective rights in the taxpayers' property since the trial court's decision did not expressly consider their claims.

[Code Secs. 61 and 446]

Gross income: IRS's determination: Presumption of correctness: Reconstruction of income: Net worth method: Opening net worth.--The IRS's assessments were entitled to the presumption of correctness because evidence was introduced that the taxpayers received unreported income from foreign businesses. The assessments were not arbitrary or erroneous even though they were adjusted as the result of two errors. The fact that a bribe paid on behalf of their company to obtain a license should have been treated as a business investment in determining their opening net worth did not demonstrate a pattern of pervasive arbitrariness that would destroy the presumption for the entire assessment. Likewise the assessments were not tainted by the fact that the IRS initially failed to reduce the taxpayers' income by applying the Philippine community property law. The use of the net worth method to reconstruct the taxpayers' income was proper since the taxpayers' records were incomplete and did not reflect millions of dollars deposited in Swiss bank accounts. No substantial unfairness resulted from the failure of the government to introduce the net worth computations into evidence because the computations were set forth in the deficiency notices received by the taxpayers.

Michael L. Paup, Kristina E. Harrigan, Carleton D. Powell, Department of Justice, Washington, D. C. 20530, for plaintiff-appellee. James A. Moore, Schware, Williamson, Wyatt, Moore & Roberts, 1100 S. W. Sixth Ave., Portland, Ore. 97204, Trammell, Rand, Nathan & Lincoln, Washington, D. C., William W. Saunders, 2299 Kuhio Ave., Honolulu, HI. 96815, for defendants-appellants.

Before CANBY, NORRIS and REINHARDT, Circuit Judges.

Opinion

CANBY, Circuit Judge:

The government initiated this action to foreclose income tax liens. After trial to the court, the district judge granted judgment in favor of the government. United States v. Stonehill [76-2 USTC ¶9647], 420 F. Supp. 46 (C. D. Cal. 1976). The taxpayers, their wives, their lawyers and certain other parties appeal.

Affirming, and reversing and remanding in part, the District Court, 76-2 USTC ¶9647 and 81-1 USTC ¶9370.

Facts

Appellants Harry S. Stonehill and Robert P. Brooks (the taxpayers) are United States citizens who entered business in the Philippines after World War II. They settled in the Philippines and both married Filipino women. They prospered, eventually controlling many successful corporations and wielding great influence in Philippine politics.

In 1950, the taxpayers branched out into the cigarette manufacturing business by establishing the United States Tobacco Company (USTC). Their fortunes brightened considerably after 1958 when one of their companies obtained the first and only exclusive license (barter permit) to import American tobacco into the Philippines . For the license, the taxpayers made payments totalling ten million pesos (three million dollars at the black market exchange rate) to the ultimately victorious Philippine presidential candidate. The license gave the taxpayers a monopoly on Philippine sales of American tobacco, which consumers greatly preferred. USTC, controlled and largely owned by the taxpayers, was the principal beneficiary of the license. USTC bought the American tobacco and manufactured cigarettes for sale in the Philippines . ¹ In the first fourteen months after the acquisition of the licence, USTC's share in the Philippine cigarette market increased by some 1500% (from a 3.7% share to 58%).

The district court found that, between 1958 and 1961, millions of dollars from various Philippine business dealings passed through the taxpayers' hands. Much of this money came from illegal and unrecorded sources. ² The taxpayers extracted commissions and rebates from exporters and shippers of the American tobacco. They received kickbacks from Philippine manufacturers who were permitted to buy imported tobacco, and they siphoned off large sums from USTC and other controlled corporations. Neither the corporate books nor the taxpayers' individual records reflected these transactions. Over nine million dollars flowed through black market channels to secret Swiss bank accounts and "shell" companies. Some of this money paid expenses of USTC in the United States . ³ About four million of these dollars were invested in American real estate and securities. During these years the taxpayers reported combined incomes of less than $200,000.

In about 1960, both American and Philippine officials became interested in the taxpayers' activities. The United States State Department believed that Stonehill was a corrupt influence on the Philippine government and wanted to get him out of that country. ⁴ Consequently, the United States Internal Revenue Service began to investigate the taxpayers' affairs.

On March 3, 1962, some 200 agents of the Philippine National Bureau of Investigation raided the offices of the taxpayers and seventeen of their corporations. The agents illegally seized thirty-five truckloads of documents. Representatives of the United States Internal Revenue Service were permitted to examine these documents, and over 35,000 were eventually copied by the Internal Revenue Service. ⁵ A three year, worldwide audit ensued. More than fifty revenue agents audited some twentyf-five business entities in the United States , the Philippines , Hong Kong , Australia , Japan , Canada , France , England and Germany . Because the taxpayers' records did not accurately reflect income, the Commissioner used the audit information to estimate unreported income by calculating the increase in the taxpayers' net worth. The Commissioner computed tax deficiencies (including interest and penalties) of $13,613,721.51 against Stonehill and $11,182,966.73 against Brooks.

Fearing that the taxpayers, if given time, would try to remove their assets from this country, the Commissioner issued "jeopardy" assessments pursuant to 26 U. S. C. §6861 against the taxpayers on January 18, 1965. ⁶ Section 6861 permits the Commissioner to issue an assessment without first sending the usual notice of deficiency (90 day letter) when collection would be "jeopardized by delay." The filing of the jeopardy assessments created tax liens on the property of the taxpayers. 26 U. S. C. §6321. ⁷ One week later, the United States Commenced week later, the United States commenced of the taxpayers' properties in the United States . ⁸

Years of litigation ensued, involving hundreds of depositions all over the world, dozens of hearings, and three successive judges. Resolution was complicated by the absence of crucial documents and witnesses (including the taxpayers themselves), by sensitive diplomatic and political considerations, and by many charges of misconduct made by both sides. In 1967, the taxpayers made a motion to suppress the evidence illegally seized in the Philippine raids. The district court concluded that the United States had not instigated or particiated in the illegal searches and denied the motion. [68-1 USTC ¶9167] 274 F. Supp. 420 (S. D. Cal. 1967). We affirmed. [69-1 USTC ¶9117] 405 F. 2d 738 (1968), cert. denied, 395 U. S. 960, (1969).

After pre-trial hearings in 1974, the government conceded that half of the taxpayers' income constituted income to their wives under Philippine community property laws. The wives are not subject to United States income taxation. Therefore, the amount of tax assessed against the taxpayers was halved.

Ten years after the action commenced, on May 27-30, 1975, it was tried before Judge Solomon. The government introduced many documents and depositions to prove fraud. To support the asserted tax deficiencies, however, the government introduced only the jeopardy assessments. The government thus chose to rely on the presumption that the assessments are correct, rather than proving each item of the underlying net worth computations. The jeopardy assessments themselves contained only bare assertions of tax due plus interest and penalties in each of the four years. Apparently by oversight, the net worth computations were never put into evidence at all.

The district court upheld the validity of the tax liens. The court adjusted the assessments to correct the treatment of the ten million peso bribe, and to reflect the conceded community property split. Although these adjustments greatly reduced the assessments, the district court held that the taxpayers had not rebutted the presumption of correctness. The district judge also rejected the wives' claim that the tax liens did not encumber their community half interest in the properties. United States v. Stonehill [76-2 USTC ¶9647], 420 F. Supp. 46 (C. D. Cal. 1976).

After the main trial, Trammell, Rand, Nathan and Lincoln (TRNL), the lawyers representing the taxpayers, intervened to foreclose liens securing legal fees against some of the properties subject to litigation. The district judge rejected their claim, ruling that the TRNL's rights were ineffective against or inferior to the government's tax liens.

Four groups of defendants appeal:

(1) The taxpayers, Harry S. Stonehill and Robert P. Brooks, appeal the finding of tax liability.

(2) Their wives, Lourdes Blanco Stonehill and Pacita C. Brooks, appeal the decision that the liens encumber their community property interest in the properties.

(3) Trammel, Rand, Nathan and Lincoln, the law firm that defended the taxpayers, appeals the district court's ruling that any liens for attorneys' fees that they have upon these properties are invalid against the government.

(4) Finally, certain third parties appeal the judgment on the ground that it extinguished their interests in the property without their having an opportunity to litigate the issue.

I. Tax Liability

In the trial to foreclose tax liens, the government produced no evidence on the amount of tax liability, but chose instead to rely upon the presumption of correctness which applied to the assessments of tax. The taxpayers contend that the district court erred in awarding judgment on the basis of the presumption. They argue that the presumption never arose, or was destroyed by the substantial errors in the original assessments.

A. Factual Foundation for the Assessments. In an action to collect tax, the government bears the burden of proof. The government can usually carry its initial burden, however, merely by introducing its assessment of tax due. Normally, a presumption of correctness attaches to the assessment, and its introduction establishes a prima facie case. Welch v. Helvering [3 USTC ¶1164], 290 U. S. 111, 115 (1933); United States v. Moltor [64-2 USTC ¶9820], 337 F. 2d 917, 922 (9th Cir. 1964). The presumption does not arise unless it is supported by a minimal evidentiary foundation. Weimerskirch v. Commissioner [79-1 USTC ¶9359], 596 F. 2d 358, 360 (9th Cir. 1979). The taxpayers contend that the assessments have were not entitled to the presumption of correctness because they lacked any factual foundation.

The factual foundation for the assessment is laid "once some substantive evidence is introduced demonstrating that the taxpayer received unreported income." Edwards v. Commissioner [82-2 USTC ¶9472], 680 F. 2d 1268, 1270 (9th Cir. 1982) (per curiam). Accord Weimerskirch v. Commissioner [79-1 USTC ¶9359], 596 F. 2d 358, 360 (9th Cir. 1979); United States v. Janis, [76-2 USTC ¶16,229], 428 U. S. 433, 441-42 (1976); Suarez v. United States [78-2 USTC ¶16,304], 582 F. 2d 1007, 1010 n. 3 (5th Cir. 1978); Carson v. United States [78-1 USTC ¶16,280], 560 F. 2d 693, 696-98 (5th Cir. 1977); Gerardo v. Commissioner [77-1 USTC ¶9322], 552 F. 2d 549, 552 (3d Cir. 1977). In Weimerskirch, the government assessed deficiencies based on allegedly unreported income from the sale of heroin. The government offered no evidence, however, showing that Weimerskirch had even sold any heroin, or that he had received any unreported income. 596 F. 2d at 361-62. This court held that the Commissioner was not entitled to rely solely on the presumption of correctness. Here, in contrast, overwhelming evidence demonstrated that the taxpayers had received millions of dollars of unreported income from their Philippine and American businesses. Between 1959 and 1962, more than nine million dollars flowed into secret Swiss bank accounts belonging to the taxpayers. The taxpayers acquired over four million dollars worth of property and securities in the United States with money from these Swiss accounts. During these years, the taxpayers reported income totalling only $200,000. The assessments thus stood securely upon a foundation of concrete evidence; the presumption of correctness was applicable.

The taxpayers next argue that this foundation evidence was admitted solely on the issue of fraud and cannot be used to support the presumption. This argument too narrowly restricts the ruling of the trial judge. He explained the permissible use of the evidence: "The Government may rely on any evidence to defend the integrity of the Commissioner's determination against the taxpayers' attacks. The Government may not, however, rely on evidence admitted on the issue of fraud to prove specific items of tax liability." 420 F. Supp. at 57 n. 10. The district judge was concerned that the government might abandon its reliance upon the presumption of correctness by trying to prove and total up many individual items of tax liability. The government is not doing that here. To "defend the integrity" of the assessments comprehends supplying the necessary factual basis to show that they are not utterly without foundation. The use of the fraud evidence by the district judge himself reinforces this interpretation. The district judge used the fraud evidence in deciding that the taxpayers' records were inadequate, id. at 55 n. 9, and in showing a likely source of income to justify the use of the net worth method, id. We are satisfied that the district court's admission of the fraud evidence was not so restricted as appellants contend, and that it is available to supply the Weimerskirch factual foundation.

We conclude the district court properly held that the presumption of correctness applied to the assessments.

B. Taxpayer's Rebuttal of the Presumption. The taxpayers contend that they successfully rebutted the presumption of correctness by demonstrating substantial errors in the assessments.

Introduction of the presumptively correct assessment shifts the burden of proof to the taxpayer. United States v. Molitor [64-2 USTC ¶9820], 337 F. 2d 917, 922 (9th Cir. 1964). If the taxpayer rebuts the presumption, it disappears. In a suit to collect tax on unreported income, the burden of proving the deficiency then reverts to the government. Herbert v. Commissioner [67-1 USTC ¶9421], 377 F. 2d 65, 69 (9th Cir. 1967); 9 Mertens, Law of Federal Income Taxation §49.218 (1976).

To rebut the presumption of correctness, the taxpayer has the burden of proving that the assessment is "arbitrary or erroneous." Helvering v. Taylor [35-1 USTC ¶9044], 293 U. S. 507, 515 (1935); Cohen v. Commissioner [59-1 USTC ¶9388], 266 F. 2d 5, 11 (9th Cir. 1959). Where an assessment is based on more than one item, the presumption of correctness attaches to each item. Proof that an item is in error destroys the presumption for that single item; the remaining items retain their presumption of correctness. Clark v. Commissioner [59-1 USTC ¶9430], 266 F.2d 698, 707 (9th Cir. 1959); Hoffman v. Commissioner [62-1 USTC ¶9218], 298 F. 2d 784, 788 (3d Cir. 1962); Foster v. Commissioner [68-1 USTC ¶9256], 391 F. 2d 727, 735 (4th Cir. 1968); Anderson v. Commissioner [58-1 USTC ¶9117], 250 F. 2d 242, 246 (5th Cir. 1957); Banks v. Commissioner [63-2 USTC ¶9698], 322 F. 2d 530, 538 (8th Cir. 1968). Even where the assessment has separable items, however, error which demonstrates a pattern of arbitrariness or carelessness will destroy the presumption for the entire assessment. Hoffman v. Commissioner [62-1 USTC ¶9218], 298 F. 2d 784, 788 (3d Cir. 1962). See Gasper v. Commissioner [55-2 USTC ¶9541], 225 F. 2d 284, (9th Cir. 1955); Cohen v. Commissioner [59-1 USTC ¶9388], 266 F. 2d 5 (9th Cir. 1959); Thomas v. Commissioner [55-1 USTC ¶9509], 223 F. 2d 83 (9th Cir. 1955).

Here, two "errors" reduced the assessments by about sixty percent: the pretrial concession that half of the conjugal income was not taxable ot the taxpayers, and the trial court's decision that the ten million peso bribe should be treated as a business expenditure. ⁹ The district court held that the presumption of correctness applied to the remaining parts of the assessment, and that the errors did not show arbitrariness. These factual determinations of the district court will not be overturned unless they are "clearly erroneous." Weimerskirch v. Commissioner [79-1 USTC ¶9359], 596 F. 2d 358, 359-60 (9th Cir. 1979).

The taxpayers contend that the "multiple items" doctrine could not apply here, for these assessments contained no separable items but only solitary assertions of tax due in each year. Thus, they say, the errors left no "unaffected parts" to which the presumption could adhere. The argument fails, however, for the parts need not be delineated in the assessment itself. In Clark v. Commissioner [59-1 USTC ¶9430], 266 F. 2d 698 (9th Cir. 1959), we held that error in one separable item did not infect the entire assessment. The parts in that case were not separately set forth in the assessment itself, but in a report prepared by a government agent. Id. at 705 & 707. Accord, Banks v. Commissioner [63-2 USTC ¶9698], 322 F. 2d 530, 538 (8th Cir. 1968). Thus, in the present case, the multiple items could be supplied by the net worth calculations underlying the assessments. Reliance upon the net worth computations is complicated by the government's failure to put them into evidence. In this case, however, the taxpyers admit that they received the net worth calculations in their notices of deficiency. They actually attacked several individual items of the calculations, and showed that the Commissioner had erroneously excluded the ten million peso bribe from their opening net worth. Attorneys for both sides, on the record, made repeated references to the net worth calculations and the numerous items of which they were comprised. ¹⁰ In these circumstances, the district judge correctly ruled that the assessments were based upon multiple items, and that the presumption continued to apply after the adjustments.

The taxpayers have also failed to prove that the errors demonstrate a pattern of arbitrariness. Gasper v. Commissioner [55-2 USTC ¶9541], 225 F. 2d 284 (9th Cir. 1955), presents the kind of pervasive arbitrariness that can taint the entire assessment. There, the Commissioner used the "mark-up" method to determine income for a small pub. The Tax Court found, however, that the number of bottles consumed during the year was known, as were the various prices per drink and number of drinks per bottle. A simple calculation could accurately determine income, yet the Commissioner adopted a method which appeared to bear only a slight relationship to actual income. For one class of liquor the markup method overstated income by more than fifty percent. Id. at 285. Thus, the method chosen was unnecessarily crude. All of the resulting assessments were infected by this fundamental error; no presumption could survive.

Neither of the errors here show the arbitrariness displayed in Gasper. Whether the taxpayers were taxable on all of their business income or (as ultimately proved to be the case) on only half presented a difficult question of Philippine law. Experts differed. The taxpayers themselves failed to make community property claims on their returns. In these circumstances, the government's pre-trial concession of this unclear legal point does not cast doubt upon the other items underlying the assessment, nor show carelessness. See Gobins v. Commissioner [CCH Dec. 19,218], 18 T. C. 1159, 1169 (1952), aff'd per curiam, [55-1 USTC ¶9160], 217 F. 2d 952 (9th Cir. 1954); Silverman v. Commissioner [76-2 USTC ¶13,148], 538 F. 2d 927, 930-31 (2d Cir. 1976). The district judge was correct in finding that this error did not destroy the presumption.

Similarly, the Commissioner's classification of the ten million peso bribe as a personal expenditure, although error, was reasonable. The payment was illegal and was not reflected in the records of any of the taxpayers' corporations. The money apparently came from the taxpayers' personal funds. The mistaken treatment of this payment did not demonstrate a pattern of pervasive arbitrariness that could infect the entire assessment.

These conclusions are buttressed by the nature of this case. The Commissioner was forced to use the imprecise net worth method of estimating income because the taxpayers' records were unreliable and did not accurately reflect income. 420 F. Supp. at 55. Some error is unavoidable in such a reconstruction. Banks v. Commissioner [63-2 USTC ¶9698], 322 F. 2d 530, 548 (8th Cir. 1963). Errors arising from the taxpayers' attempts to conceal their income will rarely rebut the overall presumption of correctness. Skillful concealment must not raise an insurmountable barrier to proof. United States v. Johnson [43-1 USTC ¶9470], 319 U. S. 503, 518 (1943).

The district judge was correct in holding that the assessments, after adjustment to reflect necessary changes, continued to carry the presumption of correctness. Because the taxpayers failed to discharge their burden of rebutting the presumption, the tax liability was established.

C. Other Contentions. The taxpayers contend that the use of the net worth method was improper. The net worth method is acceptable only if the taxpayers' records do not accurately reflect income. Holland v. United States [54-2 USTC ¶9714], 348 U. S. 121, 125 (1954). Here, taxpayers caused millions of unrecorded dollars to be deposited in Swiss bank accounts. Any contention that the taxpayer's records accurately reflected income is frivolous. Use of the net worth method here was proper.

The taxpayers next argue that the government may have abandoned the presumption of correctness by switching to a theory of constructive dividends. Such a change of legal theory may destroy the presumption that the assessments were correct. Helvering v. Tex-Penn Oil Co. [37-1 USTC ¶9194], 300 U. S. 481 (1937). The government's constructive dividend theory, however, was not a change from the net worth method, but an integral part of it. Some of the money from the Swiss accounts was used to pay expenses of USTC in America . In calculating the taxpayers' closing net worth, the government treated these payments as capital contributions to USTC, and therefore as evidence of taxable income. The taxpayers attacked this allocation, arguing that the money represented USTC earnings in the Philippines used to pay USTC expenses in the United States . Thus, the taxpayers argued that these increases in net worth were not yet taxable to them. See United States v. Smith [69-2 USTC ¶9726], 418 F. 2d 589, 593 (5th Cir. 1969); Ireland v. United States [80-2 USTC ¶9556], 621 F. 2d 731, (5th Cir. 1980) (a constructive dividend must advance the shareholder's personal, not business interest). The government replied that while in the Swiss accounts, the money was under the sole control of the taxpayers. The money thus amounted to constructive dividends to them from their corporations, and was income. Corlis v. Bowers [2 USTC ¶525], 281 U. S. 376, 378 (1930); Hartman v. United States [57-2 USTC ¶9726], 245 F. 2d 349, 352-53 (8th Cir. 1957). So employed, the constructive dividend theory was merely an underlying part of the government's net worth case. Reliance on this sub-theory does not defeat the presumption.

The taxpayers also complain that, although they were ready to attack specific items of the net worth computations, they were unable to do so because the figures were never put into evidence. The absence of these calculations, they contend, made it unfairly difficult for them to carry their burden of proving the assessment arbitrary or erroneous.

The taxpayers' protestations of unfairness, however, fly in the face of the record. The taxpayers admit that they received notices of deficiency which set forth the net worth calculations. The taxpayers deposed a government agent regarding the net worth statements and in 1972 received detailed requests for admissions concerning the net worth computations. Their own counsel repeatedly referred to the large number of items comprised in the calculations. Finally, the taxpayers actually attacked several individual elements of the net worth calculations: the cash on hand in the opening net worth, the government's failure to include the ten million peso payment as an asset in their opening net worth, the original value of stock in USTC, and the inclusion in the closing net worth of payments from the Swiss accounts for the benefit of USTC in the United States. The district court agreed with their argument concerning the ten million peso payment. 420 F. Supp. at 59.

Fairness may indeed require that the taxpayer know the basis for an assessment. We certainly do not recommend that the government refrain from putting its net worth computations into evidence. Nevertheless, the taxpayers here knew each detail of the calculations. Under these circumstances, no substantial unfairness resulted from the failure to introduce the computations into evidence.

Finally, the taxpayers argue that the judgment assumes certain matters that are not supported by the record: for example, the amount of long-term capital gain, the amount of dividends received credit, and whether the ten million peso bribe was made with separate or community property funds. This argument is not well-founded. The assumptions of capital gains and dividends credit were used in making the assessment and so are presumptively correct. The taxpayers have not carried the burden of proving them wrong. The fifty-fifty split made by the district court in allocating the community property interest was reasonable in the absence of other indications; the taxpayers have not shown it to be incorrect. The judgment thus rests securely on the prima facie case created by the assessments.

We therefore hold that the presumption of correctness applied to those assessments and was not rebutted. The judgment of tax liability is accordingly affirmed.

II. Community Property Interests

The realty covered by the government's tax liens is community property. The parties agree that the nature and extent of the husband's interests in the properties is, governed by Philippine law. Taxpayers' wives contend that under Philippine law and the Internal Revenue Code the tax liens cannot apply to more than their husbands' half interests in the property. The district court rejected this argument and the wives appeal.

Under Philippine law, income from the husbands' businesses was conjugal property ¹¹ in which the wife had an immediate vested half interest. Philippine Civil Code Ann. Art. 153 (1971). The taxpayers are taxable only on their half of the community income. Rev. Rul. 269, 1956-1 C. B. 318; United States v. Mitchell [71-1 USTC ¶9451], 403 U. S. 190, 197 (1971). The wives are neither citizens nor residents of the United States and so are not subject to United States income tax.

The government concedes that it cannot tax the wives on their half of the conjugal income. The issue here is whether tax liens arising from properly assessed deficiencies on the husbands' half of the income can be foreclosed against all of the conjugal property.

Philippine law provides that the conjugal property is liable for certain debts of the husband. Article 161 of the Philippine Code provides: "The conjugal partnership shall be liable for (1) all debts and obligations contracted by the husband for the benefit of the conjugal partnership . . .." Generally, obligations incurred in the course of a trade or business are for the benefit of the community. Luzon Surety Co. v. DeGarcia, 30 S. C. R. A. 111, 115 (Phil. 1969). In certain unusual circumstances, where the community received no actual benefit, business obligations have been held to fall beyond the scope of article 161. Id. (husband received no consideration for standing as surety on a debt); Laperal v. Katigbak, 104 Phil. 999, 1004-05 (1958) (spouses separated and wife no longer received any of the business income). Here, the wives undeniably received the benefits of their husbands' business income; the tax obligations were incurred to benefit the community.

The wives argue that, although they received income from their husband's businesses, they received no benefit from the attachment of the tax liens. This argument ignores the reality of this transaction. The income and tax were not two unrelated transactions; rather they are aspects of a single transaction. The wives can no more retain the benefit of earnings while avoiding the non-beneficial taxes than they could retain a loan while avoiding the non-beneficial obligation of a promissory note. See Laperal v. Katigbak, 104 Phil. at 1004; Javier v. Osmena, 34 Phil. 336 (1916).

Second, the wives contend that their husbands lack any property interest in the wives' half of the property to which the tax liens can attach.

Pursuant to 26 U. S. C. §6321 (1967), a lien for unpaid taxes arises upon "all property and rights to property, whether real or personal, belonging to such person." ¹² Local law, here Philippine, determines whether the taxpayer has "rights to property" to which the tax lien may attach. See Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 80 (1940); Runkel v. United States [76-1 USTC ¶9152], 527 F. 2d 914 (9th Cir. 1975). Because the tax deficiencies were assessed only against the husbands, the tax liens under Section 6321 can encumber only property in which the husbands have some right. The wives contend that their husbands have no property rights in the wives' half of the conjugal property, and that the tax liens therefore cannot extend to more than the husbands' half of the conjugal properties.

For support, the wives cite United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir. 1970); Ackerman v. United States [70-1 USTC ¶9343], 424 F. 2d 1148 (9th Cir. 1970), and Commissioner v. Cadwallader [42-1 USTC ¶10,173], 127 F. 2d 547 (9th Cir. 1942). None of these cases, however, is controlling.

In both Overman and Ackerman, state law prevented a husband's premarital creditors from reaching any of the community property. The government nevertheless attempted to foreclose premarital tax liens against the community property. The wives argued that the husband lacked a separate property interest in any of the community property to which a premarital tax lien could attach. Overman, 427 F. 2d at 1145; Ackerman, 424 F. 2d at 1149. We held that §6321 overrode the state creditor exclusion and that the husband had a sufficient property right in his undivided one half interest in the community property for the assertion of tax liens. Overman, 424 F. 2d at 1146; Ackerman, 424 F. 2d at 1150.

Thus, Overman and Ackerman extended the reach of premarital tax liens to half of the community property even when state law insulated the community property from premarital creditors generally. In the present case, in contrast, Philippine law (article 161) permits the liens to reach all of the conjugal property. Nothing in Overman or Ackerman reduces the reach of the tax liens below what local law permits.

In Commissioner v. Cadwallader [42-1 USTC ¶10,173], 127 F. 2d 547 (9th Cir. 1942), we considered the application of federal estate taxes to an American couple living in the Philippines . When the husband died, we held that "for the purpose of the federal estate tax the husband must be held to have no interest in the wife's share of the conjugal estate." Id. at 549-50. Thus, the assessment of estate tax wasl limited to his half of the community property. Similarly, here, income tax was assessed on only half of the community income. Cadwallader does not control on the issue of whether the husband has a property interest in the conjugal property for purposes of section 6321.

We faced this issue squarely in Babb v. Schmidt [74-1 USTC ¶9476], 496 F. 2d 957 (9th Cir. 1974). There, California law made the community property liable for the husband's separate debts. The government tried to foreclose pre-marital incom tax liens against all of the community property. Relying upon Overman and Ackerman, the wife argued that her husband had no property right in her half of the community property to which a tax lien could attach. We rejected her contention: "If California law makes the wife's share of the community property available to creditors of the husband, California law has by the same rule implicitly given the husband rights in that property sufficient to meet the requirements of 26 U. S. C. §6321." Id. at 960.

The present situation is indistinguishable. Article 161 gives certain of the husband's creditors rights against the conjugal property. Under the holding of Babb v. Schmidt, this is a sufficient property interest to support the tax liens. Accord United States v. Rexach, F. V., 77-1 USTC ¶9105 (D. P. R. 1977); United States v. Benitez Rexach [76-1 USTC ¶9135], 411 F. Supp. 1288 (D. P. R. 1976) rev'd on other grounds, United States v. Lucienne D'Hotelle [77-2 USTC ¶9486], 558 F. 2d 37 (1st Cir. 1976) (the tax liens imposed on the community property, but tax liability so secured did not exceed half of community assets).

The district court was therefore correct in deciding that the tax liens encumbered all of the conjugal property.

III. Liens for Attorney's Fees

TRNL appeals the district court's ruling that any rights TRNL has in these properties are subordinate to the government's tax liens.

On January 25, 1965, the United States filed notices of tax liens and notices of pendency of action covering all of the property subject to this suit. Shortly thereafter, the taxpayers employed TRNL to defend them in the ensuing litigation.

On April 8, 1965, the taxpayers and the United States executed a stipulation regarding the property subject to the tax liens. Paragraph four of the stipulation provides:

(a) Upon the approval hereof by the Court this stipulation shall constitute an order of the Court effective forth with and restraining defendant Harry S. Stonehill, his agents, employees and attorneys, from in any manner, either directly or indirectly, selling, mortgaging, pledging, encumbering, assigning, or otherwise disposing of, or withdrawing or removing all or part of the properties or assets which he owns in the United States, including, but not limited to those listed in the attached Schedule A, from the jurisdiction of this Court or from the jurisdiction of the United States District Court for the Northern District of California or from the jurisdiction of the United States District Court for the District of Hawaii (as the case may be) or from the territorial confines of the United States.

Attorneys from TRNL signed the stipulation on behalf of the taxpayers. ¹³

By 1977, the taxpayers owed TRNL some $800,000 in legal fees. To satisfy this obligation, the taxpayers executed trust deeds conveying security interests in certain California properties to TRNL. The law firm filed the deeds in the records of Marin County , California . The properties were already the subject of this litigation.

TRNL asserts that it has liens on these properties, either because of the trust deeds or because of equitable liens for attorney's fees arising under California law. TRNL also argues that its rights have priority over the government's tax liens.

The government's properly filed tax liens normally would take priority over the subsequent rights of TRNL. 26 U. S. C. §6321. To retain the original priority longer than six years, however, 26 U. S. C. §6323(g) requires the government to refile its notice of tax lien. Here the government failed to refile within the statutory period. Although the failure to refile does not affect the validity of the liens, it may reduce their priority. S. Rep. No. 1708, 89th Cong., 2d Sess. (Sen. Fin. Comm.) reprinted in 1966 U. S. Code Cong. & Admin. News 3733. Treasury Regulation 26 C. F. R. 301.6323(g)-1, however, creates an exception to the refiling requirement for property "which is the subject matter of a suit to which the United States is a party, commenced prior to the expiration of the required refiling period." TRNL contends that the regulation is invalid because it is contrary to the legislative intent of the statute it purports to interpret. Because of our resolution of TRNL's claims, we need not reach this issue. ¹⁴

A. The Deeds of Trust. Generally, a client may by agreement grant his attorney a lien to secure legal fees. Isrin v. Superior Court, 63 Cal. 2d 153, 403 P. 2d 728, 45 Cal. Rptr. 320 (1965); Norman v. Berney, 235 Cal. App. 2d 424, 45 Cal. Rptr. 467 (1965); Wagner v. Sariotti, 56 Cal. App. 2d 693, 133 P. 2d 430 (1943). Here, however, the district judge ruled that the deeds of trust conveyed no valid security interest because they violated the court order. TRNL argues that this ruling was error. By affidavit, TRNL states that the stipulation was not intended to apply to attorney's fees, but was only to prohibit assignment to foreign entities.

TRNL's interpretation ignores the plain wording of the order. The order prohibits "in any manner, either directly or indirectly, selling, mortgaging, pledging, encumbering" the property subject to tax liens. This language is unambiguous. TRNL's own 1969 explication of the meaning of the order is in accord. See note 13 supra. The district court did not err in finding that the attempted conveyance violated the order.

Nor did the district judge err in holding that the deeds of trust could convey to TRNL no interest superior to the tax liens. TRNL was present at the negotiation and signing of the stipulation. The attempted conveyance treads dangerously close to wilful violation of a court order. A federal court's general equitable and disciplinary powers suffice to invalidate the deeds of trust under these circumstances. See Lamb v. Cramer, 285 U. S. 217 (1932). Any rights of TRNL arising by agreement with the taxpayers are junior to the government's tax liens.

TRNL also asserts equitable liens for attorney's fees arising by operation of California law. California law provides an equitable lien for attorneys in only two situations: the creation of a "common fund" or the maintenance of litigation which produces "substantial benefits" for a class. Mandel v. Hodges, 54 Cal. App. 3d 596, 620, 127 Cal. Rptr. 244, 260 (1976); Fletcher v. A. J. Industries, Inc., 266 Cal. App. 2d 313, 320, 72 Cal. Rptr. 146 (1968). TRNL contends that by substantially reducing the assessment it "protected and preserved" a fund, and thus falls within the "common fund" doctrine under the holding of Winslow v. Harold G. Ferguson Corp., 25 Cal. 2d 274, 153 P. 2d 714 (1944).

In Winslow, a lawyer represented some beneficiaries of a trust. The trust purpose had become impossible to achieve and all the beneficiaries were in danger of losing the value of their interests. The lawyer succeeded in terminating the trust and securing the appointment of a receiver to liquidate the trust assets and distribute them to the beneficiaries and creditors. 153 P. 2d at 716. The California Supreme Court stated:

It is a well-established doctrine of equity jurisprudence that where a common fund exists to which a number of persons are entitled and in their interest successful litigation is maintained for its preservation and protection, an allowance of counsel fees may properly be made from such fund. By this means all of the beneficiaries of the fund pay their share of the expense necessary to make it available to them.

Id. at 715. In Winslow, the United States was one of the creditors. The court held that an equitable lien arose upon the trust assets for the attorney's fees and took precedence even over pre-existing tax liens. The court commented: "Counsel's right to compensation under such circumstances arises from the benefit conferred upon those who would have suffered loss but for his timely intervention, and not by reason of an agreement to pay his fees." Id. at 719.

The situation at hand is very different from Winslow. In Winslow, the United States was one of a class of creditors who benefited from the lawyer's efforts in protecting the common fund from dissipation. Here, in contrast, no "common fund" existed. TRNL did not "preserve" a fund for the benefit of the United States . Its efforts, in fact, were directed toward defeating the government's claims. TRNL's reliance upon Winslow thus is misplaced. No lien arises in these circumstances. For the same reason the following cases cited by TRNL are inapposite: Kennebec Box v. O. S. Richards Corp., 5 F. 2d 951 (2d Cir. 1925); In re Holmes Manufacturing Co., 19 F. 2d 239 (2d Cir. 1927); In re Columbia Ribbon Co., 117 F. 2d 999 (3d Cir. 1941); Bauer & Son v. Wilkes-Barre Light Co., 274 Pa. 165, 117 A. 920 (1922), and Malm v. Home Riverside Coal Mines Co., 152 Kan. 489, 103 P. 2d 798 (1940).

Finally, TRNL argues that Mackall v. Willoughby, 167 U. S. 681 (1897), supports its claim to an equitable lien. Mackall, however, is not on point. In Mackall, the attorney and client had a written fee agreement. The dispute involved the proper construction of the word "recovered" as used in the contract. Mackall provides no benefit for a party asserting non-contractual liens.

Thus, California law provides no equitable lien in favor of TRNL. Because the trust deeds conveyed no interest, the district court correctly ruled that TRNL has no interest in any of the properties subject to the government's tax liens.

IV. Other Appellants

Appellants Ben Gromet, William W. Saunders, Tower Development Corporation, and Meriwether Development Corporation claim interests in certain properties involved in this suit. These appellants stipulated that the validity of the tax liens should be tried before determination of their respective rights in the property. The district court's order purported to dispose of the interests of all parties, although it did not expressly consider the claims of these appellants.

These appellants have not yet had their day in court. The judgment, insofar as it pertains to them, is reversed and remanded to the district court for determination of their claims.

Conclusion

The judgment insofar as it relates to Ben Gromet, William W. Saunders, Tower Development Corporation, and Meriwether Development Corporation is reversed and remanded for resolution of their claims. The judgment as it relates to all other appellants is affirmed.

AFFIRMED in part; REVERSED in part and REMANDED.

¹ The imported tobacco was used in cigarettes sold under the brand names Kent and Old Gold.

² These illegal dealings were documented by evidence introduced on the issue of fraud. The district court held that the government had proved fraud by clear and convincing evidence. The taxpayers do not contest this portion of the decision.

³ The tobacco barter permit allowed the taxpayers to import ten million pounds of American tobacco on condition that they export fourteen million pounds of Philippine tobacco. Supposedly, the value of the exported tobacco would equal the value imported, and thus prevent any flow of currency out of the Philippines . In fact, American tobacco cost about four times as much as Philippine. The taxpayers therefore needed large sums of money in the U. S. to purchase the American tobacco. Philippine law, however, severely restricted the outflow of currency from the country. Part of the diversion of funds to Switzerland was to evade these Philippine currency restrictions.

⁴ A State Department interoffice memorandum dated January 10, 1962 stated:

"Parsons stated in the opinion of the Embassy it is imperative for American interests in the Philippines that some way be found to get Stonehill out of the Philippines and break his stranglehold here. The reasons for their concern were known to me, although I did not concern my December memorandum with details on the areas not of direct interest to Internal Revenue; nor will I burden the memo with these details. In general, however, Stonehill has had an evil and corrupt influence on the Philippine government in the past and has now indicated that he will manipulate the new administration in the Philippines even more visciously (sic). Whereas the American government is vitally interested in developing and improving the democracy and economy of the Philippines, it appears that Stonehill's individual influence may be sufficient to undermine the entire American effort and perhaps destroy democracy here and the cost to the United States will be immeasurable and much beyond the hundreds of millions involved in the aid programs and loans."

The memorandum concluded that the "only attack that can be made on Stonehill is through IRS."

⁵ The taxpayers' records were never returned to them by the Philippine government. Many of the records were apparently destroyed by a typhoon in 1970.

⁶ 26 U. S. C. §6861(a) provides:

"(a) Authority for making.--If the Secretary or his delegate believes that the assessment or collection of a deficiency, as defined in section 6211, will be jeopardized by delay, he shall, notwithstanding the provisions of section 6213(a), immediately assess such deficiency (together with all interest, additional amounts, and additions to the tax provided for by law), and notice and demand shall be made by the Secretary or his delegate for the payment thereof."

⁷ 26 U. S. C. §6321 is quoted at note 12, infra.

⁸ The government filed suits to foreclose tax liens in the district courts for the Northern District of California, the Contral District of California, and the District of Hawaii. The parties have agreed that the judgment of the District Court for the Central District of California shall be entered as the judgments in the other actions.

⁹ One other adjustment was made to the assessments. About $700,000 in bribes to various officials were documented in a secret "Blue Book." The State Department feared that publication of the Blue Book would damage United States foreign policy interests. The government therefore agreed to treat the $700,000 as deductible business expenses and the taxpayers agreed not to claim that this change in the assessments made them arbitrary. The district court then sealed the book.

¹⁰ The status of the net worth calculations was somewhat unclear. The district judge based portions of his opinion upon them. 420 F. Supp. at 59-61.

¹¹ Philippine law uses the term "conjugal property" instead of community property. For our purposes, they have the same meaning.

¹² 26 U. S. C. §6321 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.

¹³ Hans Nathan, a partner in TRNL, later explained the stipulation:

"I personally negotiated and reached an understanding with opposing counsel to the effect that, to effect an orderly disposition of this case without causing any prejudice to the United States, the Defendant would be permitted to obtain funds from sources abroad; to expend these funds freely to defray his living expenses and for the expenses of this suit during the pendency thereof. Defendant in turn would not attempt to dispose of any assets located in the United States at the time of the entering into of said agreement. The agreement was implemented by a stipulation and order dated April 9, 1965 and filed herein."

¹⁴ The government argues that regardless of the validity of the treasury regulation the tax liens take priority under the California law of lis pendens. We note that the special filing procedures for tax liens may preclude reliance upon state lis pendens rules to protect tax liens. Again, however, in view of our disposition of TRNL's claims, we need not decide this issue.

 

 

 

Barbara Hollingshead v. the United States of America

U. S. District Court, No. Dist. Tex. , Abilene Div., No. CA1-85-54-K, 7/1/85

[Code Secs. 7421 and 7426]

Jurisdiction: Suit by nontaxpayer: Spouse of taxpayer: Assessment of Tax: Restraint: Community property subject to lien.--A district court had jurisdiction to hear a request made by the wife of a delinquent taxpayer for injunctive relief from a wrongful levy. Although IRS had not taken action against the wife, a levy was placed on her husband's one half interest of her real estate commissions. The Anti-Injunction provision did not apply against her, whether or not her husband had a vested interest in her earnings which were sold management community property under Texas law.

[Code Sec. 6321]

Lien for taxes: Community property subject to lien.--The wife of a delinquent taxpayer was denied injunctive relief from a levy on a one half interest of her real estate commissions because her commissions were subject to her husband's tax debts under Texas community property law. Even though the wife's commissions were under her sole management and control, her interest was equal, not superior, to her husband's. Although sole management community property would not have to be divided equally in a divorce case, the distinction was unimportant for tax purposes. Texas state law did not exempt a nondelinquent spouse's sole management community property from the other spouse's federal tax liability. Lastly, the IRS was allowed to levy any property interest the husband possessed, regardless of how "meaningful" his ownership was. C. J. Wyly Est. (CA-5 80-1 USTC ¶13,332) distinguished

[Code Sec. 6331]

Levy and Distraint: Sufficiency of Notice.--A levy on the real estate commissions of the wife of a delinquent taxpayer was properly imposed even though the wife was not given the required ten day notice. The levy was valid because the ten day notice and demand had been given to the husband, who held a one half interest in his wife's commissions under Texas community property law. The notice given to the wife four days prior to the levy was irrelevant because she was not the delinquent taxpayer and because she had no interest in her husband's portion of her wages.

Charles L. Black, Scarborough , Black, Tarpley & Scarborough, 104 Pine St. , Abilene , Tex. 79601 , for plaintiff. Mrs. Cynthia E. Robokos, Department of Justice, Dallas , Tex. 75242 , for defendant.

Memorandum Opinion

BELEW, Jr., District Judge:

Plaintiff has filed this lawsuit to enjoin the Internal Revenue Service ("IRS") from placing a levy on her earnings in order to satisfy the tax deficiencies of her husband, Thomas N. Hollingshead. For the reasons hereinafter stated, we deny Plaintiff's Motion for Preliminary and Permanent Injunction.

Findings of Fact

On January 17, 1985, the IRS opened an investigation regarding the possible nonfiling of federal income tax returns by Thomas N. Hollingshead and his wife, Barbara, Plaintiff herein, for the years 1982 and 1983. On January 22, 1985, a summons was served on Thomas N. Hollingshead requiring him to produce income tax returns for both Mr. and Mrs. Hollingshead, among others, for the years 1982 and 1983.

On February 8, 1985, the Hollingsheads filed separate returns for the years 1982 and 1983 for the first time; however, Mr. Hollingshead did not pay his tax liability for those years and was subsequently found to owe the government $94,560.29 in unpaid taxes, plus additional interest and statutory additions as provided by law. ¹

On February 11, 1985, a 1058 form called "Final Notice" was sent to Mr. Hollingshead at 73 Fairway Oaks, Abilene , Texas 79606 , by certified mail. The IRS still received no payment. Finally, on May 16, 1985, the IRS sent to Neal and Barbara Hollingshead, P. O. Box 3055 , Abilene , Texas 79604 , a Final Notice of Intention to Levy Wages or Salary. The Notice made clear that the levy was an attempt to satisfy the tax debt of Mr. Hollingshead, although it did not state what property was to be levied.

On May 21, 1985, Ronald W. Matthews, Revenue Officer, served a Notice of Levy upon Coldwell Banker Metro Realtors, Plaintiff's employer. The Notice stated:

By virtue of the taxes assessed and owing against Thomas N. Hollingshead, this levy will cover and attach to the interest of Thomas N. Hollingshead in one-half of any funds due and owing to Barbara Hollingshead. Such funds being the community property of Mr. and Mrs. Thomas N. Hollingshead.

On May 24, 1985, Plaintiff filed this lawsuit as well as her various motions for injunctive relief claiming first, that pursuant to Section 5.22 of the Texas Family Code, Plaintiff's earnings are sole management community property in which Mr. Hollingshead has no vested interest, and second, that pursuant to 26 U. S. C. §6331, she did not receive the statutory ten day notice prior to the levy. For these two reasons, Plaintiff claims that the IRS is not entitled to any portion of her wages in satisfaction of Mr. Hollingshead's tax deficiencies. ² The Court entered a temporary restraining order on the ex parte motion of Plaintiff on May 24, 1985, which order was to continue in full force and effect until the Court's hearing in this matter conducted on June 17, 1985. At the hearing, the Court extended the order to remain in full force and effect until July 1, 1985.

Conclusions of Law

Plaintiff premises jurisdiction upon 26 U. S. C. §7426, ³ but the government argues that this Court lacks jurisdiction of this matter pursuant to 26 U. S. C. §7421(a), the Anti-Injunction provision of the Internal Revenue Code. We disagree with the government's position.

Section 7421(a) of the Internal Revenue Code of 1954 ("I. R. C.") states: "No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed", with certain exceptions, one of which is a civil action by a nontaxpayer who claims that his or her property has been the subject of a wrongful levy. See 26 U. S. C. §7426(a).

Plaintiff herein is a nontaxpayer who claims that half of her earned real estate commissions has been wrongfully levied to pay the tax debt of her husband. Hence, her situation is expressly within the ambit of the above-referenced exception to the Anti- Injunction provision. See Bob Jones University v. Simon [74-1 USTC ¶9438], 416 U. S. 725 (1974); Belton v. Comm'r, 82-2 USTC ¶9455 (D. Col. 1982).

Nevertheless, the government argues that Plaintiff's claim of wrongful levy is not valid. Since the community property law of Texas gives her no interest in the half portion of her earnings levied by the government, the argument goes, she is not a person "who claims an interest in" that half portion. ⁴ By this argument, the government attempts to lift itself by its bootstraps. The very issue before the court today is whether community property law in Texas vests in the husband a property interest in the wife's personal eanings. The fact that we will ultimately decide this issue in the government's favor, ⁵ does not affect our power to hear the lawsuit under the Section 7426(a) exception to the Anti-Injunction provision. See J. A. Wynne C., Inc. v. R. D. Phillips Construction Co. [81-1 USTC ¶9305], 641 F. 2d 205 (5th Cir. 1981).

To determine whether Plaintiff's husband does have property rights ⁶ in Plaintiff's earnings, we must look to the definition of underlying property interests under state law, although the consequences that attach to those interests are determined by federal law. United States v. Rodgers [83-1 USTC ¶9874], 461 U. S. 677 (1983); Lange v. Phinney [75-1 USTC ¶9230], 507 F. 2d 1000 (5th Cir. 1975).

Pursuant to Section 5.22 of the Texas Family Code, Plaintiff's real estate commissions are community property under her sole management and control. ⁷ While Section 5.22 does unequivocally refer to a spouse's personal earnings as community property, it is silent on the nature of each spouse's ownership interest in the earnings. The government suggests that in Texas, "community property" means equal ownership regardless of control, ⁸ and our review of the pertinent case law reveals that the government's position is the correct one.

In 1930, the Supreme Court had occasion to rule upon the nature of the property interest given by the predecessor of Section 5.22 to the non-managing spouse. In Hopkins v. Bacon [2 USTC ¶613], 282 U. S. 122 (1930), it found that under Texas law, the wife had a "present vested property interest, equal and equivalent to that of her husband" in the sole management community property of the husband. 282 U. S. at 126-27. This ownership interest gave the wife the right to file a separate income tax return declaring one-half of this income.

In determining the Texas law on this issue, the Supreme Court relied on Arnold v. Leonard, 273 S. W. 799 (1925). The Arnold case involved a then newly enacted Texas statute which purported to give a wife a separate property interest in the rents and revenues from her separate realty interest. On the basis of that statute, Mrs. Arnold sought to enjoin the administrator of her husband's estate from seizing such revenues to satisfy a judgment creditor of the decedent-husband. The Texas Supreme Court found that according to the Texas Constitution, the revenues from Mrs. Arnold's separate property were necessarily community property and since the decedent-husband "had an interest in and to property which, under the Constitution, was guaranteed . . . to the community", the administrator would not be enjoined from seizing the revenues. 273 S. W. at 805. We find nothing in subsequent statutes or cases ⁹ to indicate a change in this basic principle that a spouse has a vested property interest in the other spouse's sole management community property.

Plaintiff, however, maintains that any ownership interest that the husband has is all but illusory, and she advances several arguments in support of this theory. First, she cites the fact that in Texas , upon a divorce, a spouse does not automatically receive half of the sole management community property. While the presiding judge can in his or her discretion divide this property between the spouses, he need not. ¹⁰ See Tex. Fam. Code §3.63 ( Vernon 1975). Furthermore, Plaintiff argues the marital liabilities provisions of the Texas Family Code demonstrate the legislative intent that a spouse be treated as the sole owner of his or her personal earnings. ¹¹ For example, Section 5.61 of that Code specifically protects one spouse's property from the liabilities of the other spouse incurred before marriage or nontortiously during the marriage.

Finally, the Plaintiff cites the recent Fifth Circuit case of Estate of Wyly v. Comm'r of Internal Revenue [80-1 USTC ¶13,332], 610 F. 2d 1282 (5th Cir. 1980) for the proposition that the ownership right of a spouse in Mr. Hollingshead's situation gives a spouse so little influence over the sole management community property that it is really no interest at all. ¹² We are not persuaded by any of these arguments.

The fact that a judge had discretion to divide sole management property does not demonstrate that Plaintiff has an ownership interest in her sole management property superior to that of her husband. Under Texas law, a judge has discretion to divide all community property upon a divorce of the parties. See Cameron v. Cameron, 641 S. W. 2d 210 ( Tex. 1982). Only a spouse's separate property cannot be so divided. See Eggemeyer v. Eggemeyer, 554 S. W. 2d 137 ( Tex. 1977). In this respect, the sole management property is treated no differently than jointly owned community property to which both parties have an equal right.

As to Plaintiff's argument regarding Section 5.61 of the Code, that section defines the liability that follows from different types of marital property. Plaintiff is correct that subdivision (b) of that section exempts on spouse's sole management community property from liability in certain instances. But under subdivision (c), all community property, jointly or solely managed by a spouse, "is subject to the liability incurred by him or her before or during the marriage." Pursuant to these provisions, courts applying Texas law have found the sole management community property interest of nondelinquent taxpayers to be subject to the tax debts of their spouses. See Short v. United States [75-1 USTC ¶9232], 395 F. Supp. (E. D. Tex. 1975). ¹³ The Court cannot ignore the obligations of Section 5.61(c) in favor of the portion of §5.61(b) that Plaintiff deems more favorable to her cause of action.

As to Plaintiff's final argument concerning the Wyly case, we find the Wyly case inapposite because it deals solely with federal estate and not federal income tax law. In Wyly, the Fifth Circuit Court of Appeals was faced with the question of what a decedent was required to include in his gross estate. The decedents in the three companion cases had made gifts to spouses prior to their death which gifts had earned income. Under Texas community property law, the earned income was sole management community property, so the IRS took the position that the donors had all arguably retained a "right to income", pursuant to 26 U. S. C. §2036(a)(1), which had to be declared as part of the decedents' gross estates.

While finding that the decedent-donors had an ownership right to the income, ¹⁴ that court found that it was ownership "in an almost abstract sense" and by no means enough to constitute a meaningful "right to income" such that would have to be declared in their gross estates. 610 F. 2d at 1289, 1291-92.

The Fifth Circuit's conclusion in Wyly is logical in light of the purpose of 26 U. S. C. §2036(a)(1) which is "to prevent circumvention of federal estate law by use of inter vivos schemes which do not significantly alter lifetime beneficial enjoyment of property supposedly transferred by a decedent." 610 F. 2d at 1290. The Wyly donors clearly had no access to their "retained" interests such that they were underestimating the value of their gross estates.

By contrast, the inquiry in a federal income tax lien situation such as the one at bar should not be whether the ownership right that admittedly exists is a meaningful one, but whether it exists at all. See Broday v. United States [72-1 USTC ¶9269], 455 F. 2d 1097 (5th Cir. 1972). Raising revenue is a crucial function which cannot be performed efficiently if those who own property are permitted to keep that property out of the government's reach by a claim that the ownership right is not meaningful. Section 6321 of the I. R. C. entitles the government to enter a lien on all property or rights to property, not just "significant" rights in property. ¹⁵

Since Plaintiff has not been able to convince us that the rule of Hopkins and Arnold regarding equal ownership of property regardless of control has changed, we find that rule governs this case. Mr. Hollingshead is, therefore, the owner of one-half of Plaintiff's real estate commissions and therefore, the government is entitled to pursue the course of action it has taken to levy that property. Furthermore, in light of the aforementioned findings of fact and conclusions of law, it is our view that we have, for all practical purposes, decided this case on its merits. Therefore, we need not discuss the four factors which a movant seeking preliminary injunctive relief generally must establish. ¹⁶

Plaintiff's final argument is that she did not receive the requisite ten (10) day notice prior to the government's service of the notice of levy on her employer. Because the law only requires that notice be given to the delinquent taxpayer, we find Plaintiff's argument to be without merit.

Section 6331(d) of the I. R. C. provides: "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."

As the legislative history to this provision reflects, the notice and demand need only be given to the taxpayer. In the General Explanation of the Tax Equity and Fiscal Responsibility Act of 1982, prepared by the staff of the Joint Committee on Taxation for H. R. 4961, P. L. 97-248 (Dec. 31, 1982), the explanation of Section 6331(d) is contained under a Section entitled "Taxpayer Safeguard Provisions." One portion of this report states:

"Levy may be made upon the salary or wages of a taxpayer only after the Secretary has notified the taxpayer in writing of his intention to make such levy, unless there has been a finding that the collection of tax is in jeopardy." Id. , at 260. (Emphasis added).

Further in the report, the explanations states:

"The Act provides that levy may be made upon the salary, wages, or other property of any person with respect to any unpaid tax only after the Secretary has notified the person in writing of his intention to make such levy. . . . As under prior law, a single notice will be sufficient to cover all property of the taxpayer subject to levy," Id. at 262.

In the instant case, Plaintiff claims that her property cannot be the subject of a levy since the only notice and demand that she received came a mere four days before the notice of levy was served on her employer. First of all, as we make clear today, her property has not been levied. Only her husband's share of her sole management community property has been levied; the government has made no attempt to levy her half of that property. Secondly, her receipt of the notice and demand is not relevant to the ten day period since she is not the delinquent taxpayer. The Final Notice sent to Mr. Hollingshead, who is the delinquent taxpayer, on February 11, 1985 fulfills the ten day notice requirement of §6331.

Plaintiff's Motion for Preliminary and Permanent Injunction is denied and the Complaint is dismissed with prejudice in its entirety. An order will be entered in accordance with this opinion.

Order

Came on to be heard Plaintiff's Motion for Preliminary Injunction and Complaint for Permanent Injunctive Relief. Having considered the Motion, Complaint, Briefs and responses thereto, as well as testimony adduced at a hearing held before this Court on June 17, 1985, the Court is of the opinion that said Motion be and is, therefore DENIED. It is further ordered that the Complaint be dismissed in its entirety.

IT IS ORDERED.

¹ It is possible that Mrs. Hollingshead also owes taxes for those same tax years; however, the IRS has, as yet, taken no action against her.

² On June 17, 1985, the Plaintiff filed a supplement to her Complaint, seeking to enjoin the IRS from levying funds in a checking account of one Verna Mae Ramsey. The IRS has agreed to remove the levy on these funds upon a showing by Plaintiff that none of her own monies is in the account. Plaintiff also, in this Supplemental Complaint, brings to the Court's attention a post-nuptial agreement regarding the tax treatment of future earnings of the Plaintiff and her husband. Because this agreement was entered into on June 11, 1985, almost two weeks after the filing of this lawsuit, it has no bearing on the already earned commissions that are the subject of this lawsuit.

³ 26 U. S. C. §7426 provides: "If a levy has been made on property . . ., any person (other than the person against whom is assessed the tax out of which such levy arose) who claims an interest in . . . such property and that such property was wrongfully levied upon may bring a civil action against the United States in a district court of the United States . . ."

⁴ See Brief in Support of Removal of Temporary Restraining Order, pp. 4-5.

⁵ See discussion, infra.

⁶ 26 U. S. C. §6321 provides: "If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount . . . 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."

⁷ Section 5.22 of the Texas Family Code provides: "During marriage, each spouse has the sole management, control and disposition of community property that he or she would have earned if single, including but not limited to (1) personal earnings . . ." (emphasis added).

⁸ See Supplemental Brief to Show Cause Why Preliminary Injunction Should Not Issue, pp. 2-3.

⁹ Plaintiff argues that changes in Texas community property law since Hopkins and Arnold were decided have made the holdings in those cases obsolete. See Brief in Support of Issuance of Preliminary Injunction, pp. 2-7. While community property law in Texas has admittedly liberalized a wife's rights in many ways since the Hopkins and Arnold decisions, the notion that the nonmanaging spouse has an ownership interest in property equivalent to that of the managing spouse has not changed. Hopkins and Arnold are still cited as good law for this proposition. United States v. Mitchell [71-1 USTC ¶9451], 403 U. S. 190 (1971); Lange v. Phinney [75-1 USTC ¶9230], 507 F. 2d 1000 (1975).

¹⁰ Brief in Support of Issuance of Temporary Restraining Order, p. 4.

¹¹ Brief in Support of Issuance of Temporary Restraining Order, pp. 4-5.

¹² Brief in Support of Issuance of Preliminary Injunction, pp. 2-5.

¹³ Recently, the Supreme Court held that under Texas law, a wife's homestead interest, "a separate and undivided possessory interest" could be sold to satisfy her husband's tax debts. The wife was, however, entitled to compensation. United States v. Rodgers [83-1 USTC ¶9374]. 461 U. S. 677 (1983).

¹⁴ The court identified two interests that a nonmanaging spouse has in sole management community property: "(1) a spouse's ability to complain of fraud on his or her account, and (2) his or her ability to complain that the other spouse used such income to improve a separate estate." 610 F. 2d at 1289. For estate tax purposes, the court found these two interests to be worth very little.

¹⁵ The importance of enabling the government to collect the taxes which are its due is reflected by the broad scheme of lien provisions available to it. See United States v. Rodgers [83-1 USTC ¶9374], 461 U. S. 677 (1983).

¹⁶ The movant must show: (1) a substantial likelihood that he will prevail on the merits; (2) a substantial threat of irreparable injury which (3) outweighs the harm an injunction might inflict upon the nonmovant; and (4) no disservice to the public interest. See Productos Carnic, S. A. v. Central American Beef and Seafood Treading Co. , 621 F. 2d 683 (5th Cir. 1980); 11 Wright and Miller §2948.

 

 

 

Samuel C. Short, III v. United States of America et al.

U. S. District Court, East. Dist. Tex. , Paris Div., No. P-73-CA-14, 395 FSupp 1151, 1/15/75

[Code Sec. 6321]

Tax liens: Property subject to: Community property: Voidable transfer: Interpleader: Attorney's fees.--Proceeds from a sale of restaurant equipment were property to which a tax lien against the seller's husband could attach. The proceeds were community property--they were not separate property of the wife. A transfer to their son of the payments due was void under state law. The buyer, who brought this interpleader action, was not entitled to attorney's fees, since the lien covered the entire amount in controversy.

T. D. Wells, Jr., 41 First N. W. St., Paris , Tex. , for plaintiff. Roby Hadden, United States Attorney, Houston Abel, Assistant United States Attorney, Tyler, Tex., W. M. Holman, San Angelo, Tex., pro se, for defendants.

Memorandum Opinion and Order

JUSTICE, District Judge:

This civil action, involving federal tax liens, ¹ is in the nature of an interpleader. Plaintiff, Short, complains that the controversy between the United States and William M. and Alma Jean Holman leaves him in the position of stakeholder, threatened with law suits by both defendants.

[Background]

Plaintiff entered into a contract with the Holmans on or about June 1, 1973, for the purchase of equipment for use in an Ozark Fried Chicken outlet. Alma Jean Holman was the major shareholder in Ozark Fried Chicken, Inc., at the time in question. Negotiating with W. M. Holman (the husband of Alma Jean), Short made a $4,000.00 down payment in the form of a check, dated June 6, 1973, payable to Alma Jean Holman. This check was endorsed by Mrs. Holman and cashed by her. The full purchase price negotiated with the Holmans was $10,000. Short executed a note for the $6,000.00 balance, payable in twelve monthly payments of $500.00 each to W. R. Holman, son of W. M. and Alma Jean Holman. Short testified that W. M. Holman directed that the note be made payable to W. R. Holman, in order to help finance W. R. Holman's college expenses. Although Alma Jean Holman testified that the note was partly in consideration for the work done by W. R. Holman in the family stores while he was growing up, she admitted that the money came as a surprise to him and that it was, in effect, a gift.

By August 23, 1973, the Secretary of the Treasury had made assessments, in the form of 100% penalties, against W. M. Holman, because of the failure of corporations in which he was a responsible officer to pay taxes. (Apparently there were insufficient corporate assets to pay for withholding taxes, which had not been withheld.) On that date, a delegate of the Secretary of the Treasury served a copy of a notice of levy upon plaintiff. ² This notice informed Short that W. M. Holman owed the United States the sum of $57,290.12, that demand had been made for such amount, and that all property and rights to property belonging to W. M. Holman in Short's possession were thereby levied upon and seized. By this time, Short had made two of the $500.00 payments, and therefore still owed $5,000.00 on the note.

It is the contention of defendants W. M. Holman and Alma Jean Holman that the restaurant equipment sold to Short was Alma Jean Holman's separate property, and that the proceeds therefrom cannot be reached to satisfy tax liens of her husband.

[Wife's Property Interest]

The question of whether and to what extent each spouse has property is determined under the applicable state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509 (1960); Morgan v. Commissioner of Internal Revenue [40-1 USTC ¶9210], 309 U. S. 78 (1940). Once it is determined under state law that the taxpayer owns property or rights to property, federal law is controlling to determine whether a tax lien will attach to such property. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51 (1958); United States v. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197, 200 (5th Cir. 1963).

The evidence discloses that Alma Jean Holman went into the fried chicken business in 1963, developing a special recipe for cooking fried chicken which she registered under the trade name "Miss Alma's Recipe". Desiring to open franchises under the name "Ozark Fried Chicken", she moved to Little Rock , Arkansas early in 1965. There, she incorporated her business as Ozark Fried Chicken, Inc., the only corporate asset being $1,000.00 in a bank account.

In December of 1965, the Holmans moved to Paris , Texas , and changed the name of Ozark Fried Chicken, Inc., to O. F. C. Operating Co., Inc., doing business in Texas . The Paris "Ozark Fried Chicken" outlet was opened in 1965, and was managed by Mrs. Holman. At some time after moving to Paris , Alma Jean formed a corporation in Delaware , for the corporate purpose of selling franchises using the name Ozark Fried Chicken, Inc. She then sold several franchises in Texas , employing the names Ozark Fried Chicken and Miss Alma's Recipe. W. M. Holman was designated as president and chief executive officer of Ozark Fried Chicken, Inc.

The restaurant equipment which Short bought had been acquired by Alma Jean Holman from two sources. Part of the equipment was transferred from the Paris franchise and the rest was purchased from a franchise in San Angelo , Texas in 1970. Mrs. Holman testified that she bought this property in her individual capacity; she does not contend that this was a corporate transaction. There was no evidence introduced by either defendant as to the source of the funds which were used by Mrs. Holman to acquire the equipment that was sold to plaintiff Short. It is against this background that the Holmans make their claim that the equipment was Mrs. Holman's separate property.

Under Texas law, property acquired during marriage, other than that acquired by gift, devise, descent, or personal injury recovery, is community property. Texas Family Code §5.01. A spouse's separate property consists of that acquired by the above-mentioned means and any property owned by the spouse before marriage. Id. All property possessed during marriage is presumed to be community property, until the contrary is satisfactorily proved. Texas Family Code. §5.02. See also Duncan v. Duncan , 374 S. W. 2d 800 (Tex. Civ. App.--Eastland 1964); Kitchens v. Kitchens, 407 S. W. 2d 300 (Tex. Civ. App.--El Paso 1966). Since the restaurant equipment was acquired during the Holman's marriage and no evidence sufficient to overcome the presumption has been produced, it must be deemed to be community property.

This court need not consider whether the equipment or proceeds were Mrs. Holman's special community property. This portion of a community estate is generally exempt from the spouse's creditors under the Texas Family Code §5.61(a)(2). The right of the United States to enforce its liens does not depend, however, upon state laws which regulate the rights of creditors. United States v. Mitchell [71-1 USTC ¶9451], 403 U. S. 190 (1971). The Texas statute is subject to Mitchell even if it "defines property rights" rather than being a "mere exemption statute." Broday v. United States [72-1 USTC ¶9269], 455 F. 2d 1097, 1101 (5th Cir. 1972). Thus, even if the equipment and proceeds from its sale were Mrs. Holman's special community property, they are reachable by a federal tax lien.

[Transfer Void]

The controlling issue, then, is whether the transfer of the monthly payments due under the contract with Short from the Holmans to their son removes these funds from the reach of the federal lien. The court finds that the payments are subject to the lien, since the transfer may be set aside under Texas law as void. (See United States v. St. Mary [72-1 USTC ¶9319], 334 F. Supp. 799, 802 (E. D. Pa. 1971), wherein that court examined Pennsylvania law to draw the same conclusion.)

Under V. T. C. A. §24.03 Business and Commerce Code,

(a) A transfer by a debtor is void with respect to an existing creditor of the debtor if the transfer is not made for fair consideration, unless, in addition to the property transferred, the debtor has at the time of transfer enough property in this state subject to execution to pay all of his existing debts.

Subsection (b) of §24.03 states that "Subsection (a) of this section does not void a transfer with respect to a subsequent creditor of or purchaser from the debtor". But subsection (b) does not apply to the present situation, even though the transfer took place before the notice of levy on August 23, 1973. The obligation to pay the tax penalties arose before the transfer, as evidenced by the dates of assessment. The United States is deemed a creditor of the taxpayer from the date when the obligation to pay taxes accrues. Coca-Cola Co. of Tuscon v. C. I. R. [CCH Dec. 25,380], 37 T. C. 1006 (1962), aff'd [64-2 USTC ¶9643] 334 F. 2d 875 (9th Cir. 1964); United States v. Kaplan, 267 F. 2d 114 (2d Cir. 1959); United States v. 58th St. Plaza Theatre, Inc. [68-1 USTC ¶9407], 287 F. Supp. 475 (S. D. N. Y. 1968). The fact that the notice of levy was issued after the transfer does not materially affect the question of whether the transferred property is subject to the federal lien. In 58th St. Plaza, supra, the Government's lien arose from delinquent corporate income taxes. The court there commented:

[t]o permit taxpayers to manipulate assets during the pendency of Tax Court or IRS proceedings and still shield themselves from transferee liability merely because such transfers were made prior to final decisions, would be manifestly unjust. The better result places the government in essentially the same position as that of a private creditor. Successful creditors . . . are not limited to reaching only those assets transferred . . . after their claims have been reduced to a judgment. 287 F. Supp. at 501.

It was virtually conceded by Alma Jean Holman, and the court finds, that the transfer was not "for fair consideration" within the meaning of §24.03. Se, e.g., Fitzgerald v. Brown, Smith and Marsh Bros., 283 S. W. 576 (Tex. Civ. App.--Texarkana 1926). Actual intent to defraud creditors is not necessary to render a voluntary conveyance void as to the creditors. First State Bank of Mobetti v. Goodner, 168 S. W. 2d 941 (Tex. Civ. App.--Amarillo 1943). The burden is on the party seeking to uphold the transfer to show valid consideration or the capacity of the debtor to pay his debts. Cf. Alamo Lumber Co. v. Guajardo, 315 S. W. 2d 672 (Tex. Civ. App.--Eastland 1958), vacated on other grounds, 317 S. W. 2d 725 ( Tex. 1958). Here, the Holmans did not meet either burden; hence, as against the tax liens of the United States , the transfer of the right to payments to W. R. Holman is void. The United States , then, is entitled to receive the remaining $5,000.00 due on the $6,000.00 promissory note.

[Attorney's Fees]

The sole remaining issue is that of attorney's fees. However disposed this court may be to award such fees to an innocent stakeholder forced into litigation to prevent double vexation, the rule seems well settled that "in United States tax cases, at least, the attorneys' fees and costs are tied to the fund. If the Government gets the whole fund, the fundholder takes nothing from it for attorneys' fees and costs." Bank of American National Trust and Sav. Ass'n v. Mamakos [73-1 USTC ¶9290], 57 F. R. D. 198, 202 (N. D. Cal. 1972). See also United States v. Liverpool & London Globe Ins. Co. [55-1 USTC ¶9136], 348 U. S. 215 (1955); United States v. R. F. Ball Const. Co. [58-1 USTC ¶9327], 355 U. S. 587 (1958); United States v. Gurley [69-2 USTC ¶9562], 415 F. 2d 144 (5th Cir. 1969); United States v. Hubbell [63-2 USTC ¶9724], 323 F. 2d 197 (5th Cir. 1963). Plaintiff's reliance on United States v. State National Bank of Connecticut [70-1 USTC ¶9209], 421 F. 2d 519 (2d Cir. 1970) does not sufficiently distinguish this civil action from the above-cited authorities. Since the Government's lien here more than covers the amount in controversy, attorney's fees can not be deducted from the judgment and must be denied.

¹ See 28 U. S. C. §2410, wherein the United States waives its sovereign immunity in such claims.

² See 28 U. S. C. §6321, pursuant to which liens in favor of the Government are created from non-payment of taxes. See also 26 U. S. C. §6671 which provides that penalties are to be treated in the same manner as taxes under this title.

 

 

 

United States of America , Plaintiff v. John R. Mayfield, et al., Defendants

U. S. District Court, So. Dist. Tex., Hoston Div., Civil Action No. 65-H-358, 1/18/67

[1954 Code Sec. 6321]

Lien for taxes: Seized cash: Community property.--Cash seized from a safety deposit box rented in the name of the taxpayer and his wife community property in the absence of proof that it was the separate property of the wife. The cash was subject to the Government's tax lien for delinquent wagering taxes owed by a partnership of which the taxpayer-husband was a member.

John H. Baumgarten, Assistant United States Attorney, Houston, Tex., Joel P. Kay, Department of Justice, Washington, D. C. 20530, for plaintiff. Newton Schwartz, West Bldg., Houston , Tex. , for defendants.

Memorandum and Order

NOEL, District Judge:

This is an action in which the United States seeks to obtain a judgment for unpaid federal gambling excise taxes assessed against John R. Mayfield, Robert J. Butler, and John R. Mayfield and Robert J. Butler, a partnership, in the amount of $16,342.50, plus interest, for the year 1963. Internal Revenue Code of 1954, §4401. The assessment was made December 20, 1963, and notice of the assessment was given and demand for payment made March 25, 1964. The taxpayers have refused to pay the amounts alleged to be due.

The government seeks to foreclose a tax lien against a certain sum of money, $13,017.00, which was seized from a safe deposit box at the Sharpstown State Bank December of 1963. The safe deposit box was rented in the names of Mr. and Mrs. John R. Mayfield. The money is now in the registry of the Court.

Plaintiff asserts that the $13,017 is the property of the defendants, or the community property of Mr. and Mrs. Mayfield, and that it is subject to the payment of Mr. Mayfield's tax debts. In their answer, defendants deny that the government has a valid tax lien against them, in part because plaintiff failed to give immediate notice following the making of the assessment and demand, as required by Internal Revenue Code of 1954, §6862, and because no facts were alleged to support the imposition of a jeopardy assessment. Furthermore, Mrs. Mayfield, an intervenor, contends that the $13,017 was a gift from her husband, John R. Mayfield, and that it is, therefore, her separate property and not subject to the debts or liabilities of Mr. Mayfield.

The government served notice to take oral depositions of both John R. Mayfield and Mrs. Mayfield, intervenor, under Fed. R. Civ. P. 30, but neither parties appeared before the officer who was to take their depositions. Defendants Mayfield and Butler failed to respond to the written interrogatories properly served upon them pursuant to Fed. R. Civ. Proc. 33. Plaintiff has filed a Motion to Strike Defendants' Original Answer and Intervenor's Claim and Intervention, and asks that the Court enter default judgment against the parties under the provision of Fed. R. Civ. P. 37(d), which reads: "if a party . . . wilfully fails to appear before the officer who is to take his deposition, after being served with proper notice, the court on motion and notice may strike out all or any part of any pleading of that party . . . or enter a judgment by default against that party."

The case was tried to the Court on December 5, 1966. Defendants' counsel was present at the trial, but neither Mr. Mayfield, Mrs. Mayfield, nor Mr. Butler appeared. Defendants have been accorded ample opportunity to prepare and present their case and to allege facts at the trial or in response to plaintiff's discovery or by use of their own discovery procedure which might raise or support a defense to the complaint. Not only have they failed to avail themselves of this opportunity, but they have intentionally eluded discovery efforts of the plaintiff and the proceedings of this Court. Defendant's counsel offered no reasonable excuse for the inadvertance of his clients and, indeed, it appears that there is none.

Defendants' noncompliance with Federal Rules 30 and 33 is solely due to the fault of the defendants and is the result of their willful failure and refusal to comply with the rules, as is evidenced by their failure to appear for the taking of oral depositions, their failure to answer written interrogatories, and their absence at the trial of the case. Accordingly, plaintiff is entitled to the remedies available under Rule 37(d), and its motion to strike will be granted and default judgment entered in favor of the government. See Societe Internationale v. Rogers, 357 U. S. 197 (1958); West & Brooker Co. v. Continental Casualty Co., 303 F. 2d 91, 92-93 (4th Cir. 1962).

The defendants have the burden of proving that they do not owe the taxes which have been assessed against them. See Eagle v. Commissioner [57-1 USTC ¶9543], 242 F. 2d 635 (5th Cir. 1957); Kjar v. United States [47-1 USTC ¶9150], 69 F. Supp. 406 (Ct. Cl.), cert. denied, 332 U. S. 768 (1947). The amount of the assessment, absent refutation, is presumed correct, and if the taxpayers desire to challenge the assessment, they have the burden of proof. Pepsi-Cola Bottling Co. of Washington, D. C. v. District of Columbia , 337 F. 2d 109, 112 (D. C. Cir. 1964). The decision to make a jeopardy assessment is within the sound legal discretion and judgment of the Commissioner, and is not subject to judicial review. Lloyd v. Patterson [57-1 USTC ¶9549], 242 F. 2d 742, 743-44 (5th Cir. 1957). And finally, money earned during marriage and held in the names of both spouses is presumed to be community property, and subject to the husband's debts; this presumption will be overcome only by clear and convincing proof that the money is the separate property of one spouse. See Duncan v. Duncan, 374 S. W. 2d 800, 802 (Tex. Civ. App. 1964); Commissioner v. Fleming [46-1 USTC ¶10,271], 155 F. 2d 204, 206 (5th Cir. 1946). Defendants have failed to offer any proof to rebut the preceding presumptions. In striking defendants' answer and intervenor's claim, plaintiff's allegations become uncontroverted and permit entry of default judgment. Counsel for plaintiff shall prepare an appropriate final judgment.

The Clerk shall record this Memorandum and Order and furnish copies to counsel of record.

Corrected Judgment (3/6/67)

Came on to be heard the above-entitled and numbered cause, whereupon appeared the plaintiff, United States of America, by the United States Attorney For the Southern District of Texas, and the defendants, John R. Mayfield, Robert J. Butler and John R. Mayfield and Robert J. Butler as a partnership, and the intervenor, Mrs. John R. Mayfield, appeared by their counsel of record, Newton B. Schwartz;

And the Court having considered the evidence introduced by plaintiff at the trial herein, the failure of defendants and the intervenor to personally appear and introduce evidence at said trial, the memorandums of law filed by the parties hereto and all other pleadings heretofore filed in this proceeding by all parties;

It is therefore ORDERED, ADJUDGED and DECREED that the claim of the intervenor, Mrs. John R. Mayfield, is stricken and defaulted and that she take nothing by her claim.

It is further ORDERED, ADJUDGED AND DECREED that John R. Mayfield is indebted to the United States of America in the amount of $19,391.67, together with costs of court in the amount $44; that Robert J. Butler is indebted to the United States of America in the amount of $19,391.67; and that John R. Mayfield and Robert J. Butler, a partnership, are indebted to the United States of America in the amount of $19,391.67;

It is further ORDERED, ADJUDGED AND DECREED that the United States of America by virtue of the foregoing liabilities has valid and subsisting tax liens, each in the amount of $19,391.67 which encumber the fund of money in the Registry of the Court in the above-numbered and titled proceeding in the amount of $13,017; and that said tax liens be foreclosed against said fund of money and that said fund, after the deduction of court costs in the amount of $44, be delivered to the United States of America for application to each of the three liabilities heretofore stated;

It is further ORDERED, ADJUDGED AND DECREED that the United States of America do have and recover a deficiency judgment against John R. Mayfield in the amount of $6,378.70, together with interest at the rate of 6 percent per annum until the foregoing amounts are paid, for all of which the plaintiff may have its execution; that the United States of America do have and recover a deficiency judgment against Robert J. Butler in the amount of $6,378.70, together with interest at the rate of 6 percent per annum until the foregoing amounts are paid, for all of which the plaintiff may have its execution; and that the United States of America do have and recover a deficiency judgment against John R. Mayfield and Robert J. Butler, a partnership, in the amount of $6,378.70, together with interest at the rate of 6 percent per annum until the foregoing amounts are paid, for all of which the plaintiff may have its execution.