6321 Community Property page3

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In the Matter of American Business Machines, Inc., a Nevada corporation; James C. Edwards, a/k/a J. C. Edwards; and Constance J. Edwards, Bankrupts

U. S. Bankruptcy Court, Dist. Nev. , in Bankruptcy Nos. BK-LV 78-782, BK-LV 78-783, BK-LV 78-784, 9/15/80

[Code Secs. 6321 and 7403]

Lien for taxes: Attachment: Execution: Community property interest: Homestead exemption.--

The IRS was entitled to the one-half of the proceeds from the trustee's sale of the bankrupt taxpayers' homestead that represented the taxpayer-husband's interest in the property in order to satisfy his tax liability. The court refused to decide under Nevada law whether the "homestead exemption" of the taxpayers was a community property interest subject to attachment but not to execution with regard to a federal tax lien, or whether it was an exemption-type homestead subject to both attachment and execution on such a lien. Even if the interest granted under Nevada law was of the type not subject to execution, it was not clear from Nevada law whether this protection extended to the proceeds of the underlying real property once it was sold. Although in a community property analysis the taxpayer-husband would have no direct interest in the real property, the community interest itself had some value and was attachable by the federal government. In addition, any anti-alienation aspects of the state's law that would prevent execution on the interest where one spouse was not liable were state-created "exemptions" which were subject to the supremacy clause of Code Sec. 7403. Because under Nevada law each spouse had a one-half interest in the homestead, the court found it equitable that the taxpayer-wife and the IRS should each receive one-half of the proceeds. J. A. Overman, (CA-9), 70-1 USTC ¶9342, followed.

Peter F. Koppe, 300 S. 4th St. , Las Vegas , Nev. Trustee. John M. Sacco, Rogers, Monsey, Woodbury & Berggreen, 723 South Third St., Las Vegas, Nev. 89101, for debtors. B. Mahlon Brown, United States Attorney, William C. Turner, Assistant United States Attorney, Las Vegas, Nev. 89101, for IRS.

Memorandum Opinion

I. Litigational Background

GEORGE, Bankruptcy Judge:

Pursuant to an auction of real property held on April 7, 1979, the Trustee in the above-entitled matter now finds himself in possession of a sum slightly in excess of $20,000. Upon the whole of this amount, the Bankrupts, James C. and Constance J. Edwards, claim a homestead right vis-a-vis all general creditors and, hence, against the Trustee, in his representative capacity, as well. ¹ In response, the Trustee maintains that the extent of the Bankrupts' homestead should be measured under the pre-July 1, 1975 Nevada homestead statute, which set a maximum value limit on this right of $10,000. To cloud matters further, the United States Internal Revenue Service has made a demand upon the Trustee as to one-half of any sum eventually deemed to constitute homesteaded property under Nevada law. Consequently, in their formal objection to the Trustee's Report of Exempt Property, the Bankrupts question both the $10,000 homestead figure set forth therein and the Trustee's decision to withhold from the Bankrupts the proceeds of the sale of their home pending a resolution of the I. R. S. demand.

II. The Homestead Valuation Issue

Based upon the Court's recent holding in the La Mothe case, BK-LV 77-262, BK-LV 77-263, the Trustee must be found to be without authority under Section 70 of the Bankruptcy Act to assert any homestead exemption figure other than that which was in force as to creditors whose claims arose on the date of the filing of the Bankrupts' petition in this proceeding. ² And, since the obligation allegedly owed by the Bankrupt to the United States Internal Revenue Service apparently arose after July 1, 1975, no question is raised as to the ability of this governmental entity to make an attack of its own upon the Nevada homestead statutes under the impairment of contracts clause of the United States Constitution. See U. S. Const., Art. I, Sec. 10.

III. The Tax Lien Issue

The Government nonetheless has another potent instrument for reaching Mr. Edwards' portion of the homestead exemption claimed by him and his wife. ³ In this regard, a major question has been interposed as to the degree to which a state-created homestead right may adversely affect a federal tax lien in its attachment and/or execution. ⁴

A. The Hershberger "Property Interest" Test. Counsel seem to be in substantial agreement as to the general formula through which this Court may reach a proper result on this issue. State exemption laws, it would appear, have no effect upon a lawful levy based upon a correctly-filed federal tax lien. 26 U. S. C. §6334(c) (1976). Such a lien, however, may only attach to property rights of the person against whom the initial tax assessment was made, and not against the rights of any co-owner of the subject property. 26 U. S. C. §6321 (1976). Therefore, the question must be asked as to the circumstances under which the real property interest attached by a Section 6321 lien can be controlled by non-alienation and anti-execution limitations placed by state law in protection of rights of another interested party. With respect to state homestead laws, for example, some Courts have maintained that where such statutes create something in the nature of a "property interest" in one spouse which would preclude normal alienation by the other spouse without the voluntary consent of the first, the courts may allow attachment of a tax lien, but prevent any execution thereon pursuant to 26 U. S. C. §7403--at least while the non-taxpayer spouse remains in possession of the federally-attached real property. See, e.g., United States v. Hershberger [73-1 USTC ¶9289], 475 F. 2d 677 (10th Cir. 1973); Jones v. Kemp [44-2 USTC ¶9410], 144 F. 2d 478 (10th Cir. 1944).

The Government has indicated through its memoranda that it believes the legal position set forth in these cases to be basically sound, citing in support thereof a 1974 North Carolina Law Review piece analyzing the Hershberger decision. Note, Federal Tax Lien--Is It Effective Against a State Homestead Exemption?, 52 N. C. L. Rev. 695 (1974). It would now depart from the results reached in the Hershberger and Jones cases, however, by noting that in the instant proceeding the wife's homestead property has already been sold and that no reason remains for sustaining any non-alienation rights she may have had as to the real property, itself. Furthermore, the Government argues that Nevada 's homestead statute is of the "exemption," rather than the "property interest" variety, thus making the rationale of the Hershberger and Jones cases inapplicable in the present setting.

If the Court were now to rely upon the reasoning of the cited decisions, it would be prone to find against the Government on its second point, but to agree that the impact of these cases has been severely weakened by the Trustee's sale. The operative language of Article IV, Section 30 of the Nevada Constitution is virtually identical to that of the Kansas Constitution, upon which the United States Court of Appeals for the Tenth Circuit relied in the Hershberger case. this wording is quite different from the homestead provisions of the California Constitution, which have been repeatedly interpreted as providing only an exemption from execution, Gerlach v. Copeland, 212 Cal. 758, 300 P. 818 (1931), Smith v. Bangham, 156 Cal. 359. 104 P. 689 (1909), and thus no protection from levy under a federal tax lien. Shaw v. United States [64-1 USTC ¶9421], 331 F. 2d 493 (9th Cir. 1964). ⁵

Moreover, Nevada case law has carefully distinguished between common law property interests and the unique interest in real property created under the Nevada Constitutional and Nevada statutory law by the filing of a homestead declaration. In re Cook's Estate, 34 Nev. 217, 117 P. 27 (1911); Adams v. Baker, 24 Nev. 162, 51 P. 252 (1897); Roberts v. Greer, 22 Nev. 318, 40 P. 6 (1895); Smith v. Shrieves, 13 Nev. 303 (1878). Thus, although the Government argues that under N. R. S. 115.020(3) ⁶ the filing of a homestead declaration creates nothing more than a joint tenancy in the subject real property, the early Nevada Supreme Court case of Roberts v. Greer, supra, makes it clear that the similarly-worded predecessor of this statute provided a joint tenancy in the homestead, itself, and not in the underlying property. Id. at 329, 40 P. at 7. This "homestead" was ostensibly understood by the Roberts court to be an intangible identity entirely distinct from the real property which it affected; in many ways it was deemed a legal "right," apart from that of simple ownership, in that property. Id. at 330, 40 P. at 7. Writing at a time in which metaphysical concepts were still imbued by legal thinkers with a certain reality, in themselves, the Court supposes that the Roberts court was attempting to grant somewhat of the same dignity to this homestead right which early English lawmakers had bestowed upon the various estates in land. ⁷

If the Court can find any defensible differentiation between a "property interest" homestead statute and a mere homestead "exemption" law, it would have to be in this fictional bestowal of a right beyond the simple ability of the homestead declarant to raise a shield of state power. (The federal sword has proven far too adept at piercing the inadequate lorication provided by such constitutionally-subordinated paladins). The interest of the homestead declarant must be recognized as a right to property which, in itself, may parry the divisive blows of the federal taxing authority. It must be the type of interest upon which a Fifth Amendment "taking" argument can be asserted by the homestead owners. The Roberts court seems to have understood Nevada law as endowing the homestead declarant with this sort "sui juris" status. ⁸

Nevertheless, even this homestead "property interest" has not been without its limitations in Nevada . Once the real property in question is sold, for example, the homestead right arguably alters its status from that of a special interest in real property to being a simple protection against execution or unilateral alienation. Hence, N. R. S. 115.050(3) allows that upon execution on real property wherein the equity of a homesteading debtor is in excess of the statutory limit, the amount of that limit will be paid to the debtor and his or her spouse "and it shall possess all the protection against legal process and voluntary disposition of the husband as were the original homestead premises." (Emphasis supplied). By giving such proceeds a similar protection to that granted the homestead premises," the legislature seems to imply that the proceeds, themselves, are not "homestead" property. Otherwise, why not just state that the homestead continues in such proceeds? And, why is no mention made in the Nevada homestead statute as to the status of the proceeds of a voluntary sale of the homestead premises? Compare Cal. Civ. Code §1265 (West).

B. The Overman Test Having entertained these troublesome queries, however, the Court sees no reason to lay them to final rest. In United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir. 1970), the United States Court of Appeals for the Ninth Circuit, upon which this Court must rely for guidance, refused to draw any meaningful distinction, in effect, between "rights to property" community property laws and simple "exemption" statutes. Writing for the court in Overman, Judge Shirley M. Hufstedler put aside the argument of a taxpayer spouse that the whole of the property in question was protected from federal tax lien attachment or execution because of his wife's community property interest therein. The taxpayer had argued "that the rule [was] one of property law, and create[d] a limitation on the extent and quality of his ownership rights under stae law." Id. at 1145 (emphasis supplied). Therefore, as the Bankrupts here advocate with respect to the homestead limitation on alienation, the taxpayer in Overman maintained that the protections accruing to the wife's community property interest under state law were such a part of that interest as to preclude their avoidance by the Internal Revenue Service.

In response to this position and to another theory of the taxpayer that the community was an entity distinct from either of its members, Judge Hufstedler bifurcated the taxpayer spouse's community property interest into two elements. The first was the "community" interest, itself. Here, Judge Hufstedler applied a similar form of analysis to that employed by the Nevada Supreme Court in Roberts v. Greer to differentiate between the taxpayer's interest in the "community" and that which he held in the real property owned in community with his wife. Although holding that the underlying property was not subject to any direct interest of the husband, himself, Judge Hufstedler went on to note that the "community" interest had some value in and of itself:

"Early Washington cases suggest that neither spouse has title to the assets of the community, but our concern here is with the taxpayer's interest in the community. Whatever may be said with regard to his interest in particular assets of the community, Washington law has never suggested that his interest in the community is nonexistent or valueless. Thus, neither the rule of nonliability nor the entity theory negates our conclusion that the taxpayer's interest constitutes 'rights to property' [under 26 U. S. C. §6321]."

Id. (emphasis original) (footnotes omitted). Thus finding that the "community" interest of the taxpayer was susceptible to attachment by the federal tax lien, Judge Hufstedler then went forward to apply Section 7403 in such a way as to permit an execution upon that interest. Here, as the second element of Judge Hufstedler's analysis, the anti-alienation aspects of Washington community property law were treated merely as state "exemptions," which would rightly fall before the supremacy of subsection (c) of 26 U. S. C. §7403. See also Note, Federal Tax Lien--Is It Effective Against a State Homestead Exemption?, supra at 701-03 (discussing reasons why such a result is inherently equitable to general taxpayers). With respect to this result, Judge Hufstedler notes that

"Section 7403 provides that the Government in an action to enforce its tax lien may 'subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability.' It requires joinder of all parties having an interest in the property, and, if a claim of the United States is established, 'the court * * * may decree a sale of such property * * * and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and of the United States .'

"Once the lien has been established, the statute empowers the district court to subject the whole of the property in which the delinquent taxpayer has an interest to a forced sale. The power is not limited to the sale of only the delinquent taxpayer's interest. [Citations omitted]. Thus, the statute contemplates that the district court may subject the interests of persons other than the taxpayer to an involuntary conversion during the course of enforcing the Government's lien on the delinquent taxpayer's interest in the same property. The owners other than the taxpayer, however, are entitled to just compensation from the proceeds of the sale for that 'taking.'"

United States v. Overman, supra at 1146.

In determining what sort of just compensation should be received by the non-taxpayer spouse upon the sale of the other's "community" interest, Judge Hufstedler found herself in agreement with the Hershberger court that the trial court might apply its equitable powers to "work substantial justice among all interested parties." ⁹ Id. See also United States v. Hershberger, supra at 679. In so exercising its discretion, however, the trial court was commanded to "turn to state law to define the property interests involved." United States v. Overman, supra at 1146. Under the applicable state law in Overman, each spouse has a one-half undivided interest in the community. Judge Hufstedler therefore declared that it would not be improper for the trial court to permit an execution to take place against the community's property under consideration, with the non-taxpayer spouse retaining one-half of the proceeds of the sale. The taxpayer's share, based upon the "community" interest which had been attached under the federal lien, would be used in satisfaction of the taxpayer's debt to the Government. ¹⁰

While obviously the property interests existing under community property and homestead laws are quite distinct, it is not at all difficult to see why the analysis utilized in Overman should be applied by this Court to a homestead claim situation. See, e.g., Herndon v. United States [74-1 USTC ¶16,127], 501 F. 2d 1219 (8th Cir. 1974) (citing Overman, in a homestead circumstance, as negating any recourse to the "property interest" versus "exemption" dichotomy). In so holding, the Court finds no equitable reason why a division of the fungible proceeds already in the hands of the Trustee should not be made, with Mrs. Edwards receiving one-half of that amount pursuant to N. R. S. 115.050(3) and the government receiving Mr. Edwards' portion in at least partial satisfaction of its tax claim.

III. Conclusion

The Trustee will, therefore, be ordered to disburse one-half of the remaining proceeds of this sale to Mrs. Edwards and the other half to the United States Internal Revenue Service, to the extent necessary to satisfy the lien held by that entity. The Court will prepare its own order in this matter.

¹ The Trustee's sale of the Edwards' homesteaded property appears to have been conducted with the consent of all of the parties here involved.

² The Court, in La Mothe, held that neither Section 70c nor Section 70e of the Act empowered the Trustee to assert the rights of actual pre-petition creditors in utilizing the lower exemption amount in effect when the claims of such actual creditors arose. See Lewis v. Manufacturers National Bank of Detroit , 364 U. S. 603 (1961).

³ In the case at bar, only Mr. Edwards has been charged under Section 941 of the Internal Revenue Code for employees' income taxes which he failed to collect and/or pay over to the Internal Revenue Service.

⁴ The Bankrupts also raise the timeliness of what they perceive to be the Government's objection to the Trustee's Report of Exempt Property. The Government, however, has apparently made no objection to the Trustee's Report, claiming only that one-half of any sum deemed to be unreachable by general creditors under Nevada 's homestead laws, is subject to the federal tax lien against Mr. Edwards' property.

⁵ Article IV, Section 30, of the Nevada Constitution reads:

"A homestead as provided by law, shall be exempt from forced sale under any process of law, shall not be alienated without the joint consent of husband and wife when that relation exists; but no property shall be exempt from sale for taxes or for the payment of obligations contracted for the purchase of said premises, or for the erection of improvements thereon; Provided, the provisions of this Section shall not apply to any process of law obtained by virtue of a lien given by the consent of both husband and wife, and laws shall be enacted providing for the recording of such homestead within the County in which the same shall be situated." Article 15, Section 9, of the Kansas Constitution provides:

"A homestead to the extent of one hundred and sixty acres of farming land, or of one acre within the limits of an incorporated town or city, occupied as a residence by the family of the owner, together with all the improvements on the same, shall be exempted from forced sale under any process of law, and shall not be alienated without the joint consent of husband and wife, when that relation exists; but no property shall be exempt from sale for taxes, or for the payment of obligations contracted for the purchase of said premises, or for the erection of improvements thereon. Provided, the provisions of this section shall not apply to any process of law obtained by virtue of a lien given by the consent of both husband and wife. . . ."

The only visible difference between these sections would seem to be in the Kansas framers' choice not to leave the extent of the homestead up to later legislative delineation. On the other hand, Article XX, Section 1.5, of the California Constitution issues a simple mandate that

"[t]he Legislature shall protect, by law, from forced sale a certain portion of the homestead and other property of all heads of families."

Formerly at Cal. Const., Art. XVII, Sec. 1. While the homestead protection flows directly from the Nevada and Kansas Constitutions, their California counterpart leaves such protection to the state legislature, along with the defense of "other property" of family heads.

⁶ N. R. S. 115.020(3) reads as follows:

"The [homestead] declaration shall be signed by the person or persons making the same, and acknowledged and recorded as conveyances affecting real property are required to be acknowledged and recorded. From and after the filing for record of the declaration, the husband and wife shall be deemed to hold the homestead as joint tenants."

(Emphasis supplied).

⁷ Even earlier Nevada case law favorably cites California cases which speak in terms of the homestead "estate," see Smith v. Shrieves, supra at 310, though the present impact of those California cases has been severely deflected by the later "exemption" analysis which has typified court holdings with respect to the homestead laws of that state. Cf. United States v. Hershberger, supra at 680 (citing Helm v. Helm, 11 Kan. 19 (1873), which emphasized the "estate" of the wife in the homestead).

⁸ In Roberts, the question raised was whether the homestead right would survive the death of one spouse, in the absence of specific statutory language creating such survival protection. As previously stated, the Nevada Supreme Court ruled that the state legislature had clearly distinguished between the homestead and the property to which it adhered. Once this homestead was recognized, therefore, the legislature did not need to create any further protection for those who held the interest. This protection was implicit in its constitutional mandate. The legislature needed only to define the manner in which homestead would be held by these parties. In so doing, it had designated the joint tenancy as being the form in which married couples would concurrently hold the homestead. From this explanation, the Court must find that the Roberts court considered the Nevada homestead to be more than a mere "exemption" established by state law. It was deemed to be a special interest in real property, controllable only as to its extent by the Nevada legislature, but not as to its existence.

⁹ A question still exists in this Court's mind as to whether the result reached in Hershberger might have nonetheless been possible under Judge Hufstedler's thinking in Overman. The Overman court did not seem to hamper the equitable relief which a court might give a non-taxpayer spouse on the proposed sale of community property to satisfy a federal tax lien, except to note that state law must be followed in ascertaining the extent of the taxpayer's interest in the "community." And, the permissive language of 26 U. S. C. §7403, which is cited in Overman, would appear to admit considerable leeway through which a court might protect a non-taxpayer spouse's immediate possessory interest under the homestead or community property laws where, in contradistinction to the facts of the instant case, this possessory interest has not been abated by a voluntary sale.

¹⁰ The Court is somewhat puzzled by the ease with which Judge Hufstedler here transposes what seems to be a sale of the taxpayer's interest in the "community" to a permissible sale of the property owned by that community, especially since the "community," itself, would continue to exist between the husband and the wife so long as the two remained wedded. Perhaps what is really being sold is the taxpayer's community interest in that particular piece of property, and nothing more. (More likely, Judge Hufstedler merely sidestepped the complexities of community property theory in order to reach a realistic result).

 

 

 

United States of America, Plaintiff-Appellee v. James A. Overman, Marie T. Overman, Circle J. Inc., a corporation, Defendants-Appellants

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 23,866, 424 F2d 1142, 4/8/70, Aff'g District Court, 69-1 USTC ¶9251

[Code Secs. 6321 and 6322]

Lien for taxes: Community property: Washington: Premarital tax obligation.--The separate tax liabilities of the taxpayer husband were liens upon his undivided one-half interest in property of his marital community. The Government had a valid lien on the taxpayer's undivided one-half interest in the marital community, the lien was enforceable against the community assets as to which foreclosure was sought, and the Government was not precluded from enforcing its lien by limitations or laches

[Code Sec. 7403]

Action to enforce lien: Community property: Premarital tax obligation: Foreclosure.--The taxpayer's undivided one-half interest in community property was subject to tax liens, and those liens could be enforced by foreclosure against assets of the community. From the proceeds of the sale, the Government received such share attributable to the taxpayer's interest, due regard being given to the compensation of those persons, including the taxpayer's wife, whose interests had been established in the property. Karl Schmeidler, Johnnie M. Walters, Assistant Attorney General, Department of of Justice, Washington, D. C. 20530, Stan Pitkin, United States Attorney, Seattle, Wash., Gale D. Barbee, 1515 Norton Bldg., 801 Second Ave., Seattle Wash., Ralph Bremer, 4th Follor, Hoge Bldg., 705 Second Ave., Seattle Wash., for plaintiff-appellee. Loren D. Prescott, Reaugh, Hart, Allison, Prescott & Davis, 1100 IBM Bldg., 1200 Fifth Ave., Seattle, Wash., for defendants-appellants.

Before BARNES, ELY, and HUFSTEDLER, Circuit Judges.

HUFSTEDLER, Circuit Judge:

This interlocutory appeal raises novel questions about the creation and enforcement of federal tax liens on Washington community property to secure payment of a husband's premarital income tax liability.

[Facts]

In 1954 the Internal Revenue Service levied deficiency assessments against the taxpayer in respect of his income taxes for the years 1946 and 1947. The taxpayer married Marie Overman in 1948. When the taxpayer failed to meet the deficiency demand, a notice of federal tax liens was filed with the proper Washington state officials. The Government sued in 1960 to recover judgment against the taxpayer for the tax liabilities underlying the assessments, and a judgment for $109,709.56 in favor of the Government was rendered in 1961. The judgment recited that it was "individually only, and not against his marital community." The Government brought the present action on August 2, 1967, under section 7403 of the Internal Revenue Code (26 U. S. C. §7403), to enforce the liens, joining as defendants the taxpayer, his wife, and certain other persons claiming an interest in the property attached. ¹

In the order from which this appeal has been taken the district court decided 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, or by the doctrines of res judicata, estoppel, or waiver. We affirm the order.

[Rights to Property]

I. Section 6321 of the Internal Revenue Code (26 U. S. C. §6321) provides that the amount of the delinquent taxpayer's liability "shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." The statute incorporates state law for the limited purpose of ascertaining whether or not the taxpayer's interest is "property" or "rights to property." (Aquilino v. United States (1960) [60-2 USTC ¶9538] 363 U. S. 509; United States v. Bess (1958) [58-2 USTC ¶9595] 357 U. S. 51.) 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 is.

[ Washington Law]

Under Washington law the marital community, with certain stated exceptions, is composed of all property acquired by the spouses after marriage. (Rev. Code Wash. §§ 26.16.010, 26.16.020, 26.16.030.) The interest of each spouse in the community is an intangible asset, giving each spouse an equal, present, and vested right in the marital community with full rights of enjoyment. (In re Towey's Estate (1945) 22 Wash. 2d 212, 155 P. 2d 273; Marston v. Rue (1916) 92 Wash. 129, 159 P. 111.) The interest of each in the community is protected from certain acts of the other that would impair his interest. (E.g., Occidental Life Ins. Co. v. Powers (1937) 192 Wash. 475, 74 P. 2d 27; Bergman v. State (1936) 187 Wash. 622, 60 P. 2d 699; Rev. Code Wash. §§ 26.16.030, 26.16.040, 26.16.100.) Each spouse can sell or give his community to the other during the life of the community (Rev. Code Wash. §26.16.050), and each has the right of testamentary disposition of his moiety. (In re Towey's Estate, supra; Rev. Code Wash. §§ 11.04.050, 26.16.030.)

These incidents accorded to the taxpayer by virtue of his interest in the marital community make 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." (In re Towey's Estate, supra; Poe v. Seaborn (1930) 282 U. S. 101, 111.) No more is needed to identify the interest as one to which a federal tax lien can attach. We disapprove the contrary conclusion reached in Stone v. United States (W. D. Wash. (1963) [64-1 USTC ¶9204] 225 F. Supp. 201).

[Entity Theory]

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. ² While admitting that a state rule of exemption is ineffective against a United States tax lien (United States v. Heffron (9th Cir.) [47-1 USTC ¶9194] 158 F. 2d 657, cert. denied (1947) 331 U. S. 831), the taxpayers 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 this 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. Similarly, taxpayer's reliance on the "entity theory" of community property is misplaced. Early Washington cases suggest that neither spouse has title to the assets of the community, ³ but our concern here is with the taxpayer's interest in the community. Whatever may be said with regard to his interest in particular assets in the community, Washington law has never suggested that his interest in the community is nonexistent or valueless. ⁴ Thus, neither the rule of nonliability nor the entity theory negates our conclusion that the taxpayer's interest constitutes "rights to property."

The attachment of a tax lien under section 6321 and the enforcement of the lien under section 7403 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.

[Enforcement of the Lien]

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. The result is sometimes reached by labeling as an "exemption" state law immunizing some kinds of property against the claims of some kinds of creditors and by concluding that such law does not bind the United States (E.g., United States v. Heffron, rupra.) Labels aside, state 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 (Aquilino v. United States, supra, 363 U. S. at 512-14), and nothing in section 7403, under which this action was brought, suggests that Congress intended to change that rule.

Section 7403 provides that the Government in an action to enforce its tax lien may "subject any property, of whatever nature, of the delinquent, or in which he has any right, title, or interest, to the payment of such tax or liability." It requires joinder of all parties having an interest in the property, and, if a claim of the United States is established, "the court may decree a sale of such property . . . and a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and the United States ."

Once the lien has been established, the statute empowers the district court to subject the whole of the property in which the delinquent taxpayer has an interest to a forced sale. The power is not limited to the sale of only the delinquent taxpayer's interest. ( United States v. Trilling (7th Cir. 1964 [64-1 USTC ¶9292] 328 F. 2d 699, 703; accord, Washington v. United States (4th Cir. 1968) [68-2 USTC ¶15,864] 402 F. 2d 3, cert. filed (Dec. 13, 1968) 38 U. S. L. W. 3001 (no. 22); United States v. Mosolowitz (D. Conn. 1967) [67-1 USTC ¶9350] 269 F. Supp. 12. Contra, Folsom v. United States (5th Cir. 1962) [62-2 USTC ¶9648] 306 F. 2d 361, 367.) Thus, the statute contemplates that the district court may subject the interests of persons other than the taxpayer to an involuntary conversion during the course of enforcing the Government's lien on the delinquent taxpayer's interest in the same property. The owners other than the taxpayer, however, are entitled to just compensation from the proceeds of the sale for that "taking."

We emphasize that section 7403 is cast in mandatory terms only in respect to the establishment of the Government's lien, the joinder of all persons interested in the property involved, and the determination of their respective interests. The remainder of the section confers broad discretionary powers upon the court in shaping a decree designed to work substantial justice among all interested persons. "Congress [in enacting §7403] intended that the Court function with the full traditional flexibility of the Chancellor, United States v. Morrison, 5 Cir., [57-2 USTC ¶9801] 247 F. 2d 285." ( United States v. Boyd (5th Cir.) [57-2 USTC ¶9791] 246 F. 2d 477, cert. denied (1957) 355 U. S. 889.)

[Reliance on State Law]

In shaping its decree the court, however, must turn to state law to define the property interests involved. Under Washington law, as we have earlier stated, each spouse has an undivided one-half interest in the marital community. ⁵ The Government cannot claim from the proceeds of sale more than that share of the proceeds attributable to the taxpayer's half of the community interest in the asset. It cannot reach the proceeds attributable to the wife's interest. Her interest was not subject to attachment for her husband's premarital tax debt, and the Government's right to share in the proceeds of sale does not exceed the taxpayer's interest in the property subjected to the lien. (Cf. Stuart v. Willis (9th Cir. 1957) [57-1 USTC ¶9330] 244 F. 2d 925, 929; United States v. Winnett (9th Cir. 1947) [48-1 USTC ¶9115] 165 F. 2d 149, 151.)

We therefore conclude that the district court correctly held that the taxpayer's undivided one-half interest in the community was subject to the tax liens, and that those liens could be inforced by foreclosure against assets of the community. From the proceeds of the sale, the Government should receive such share attributable to the taxpayer's interest, due regard being given to the compensation of those persons, including the taxpayer's wife, whose interests have been established in the property.

The district court has not shaped a final decree. Nothing in the record before us on this interlocutory appeal suggests that the court has abused its discretion in causing a forced sale of the property or in allocating the proceeds of a sale to the persons having interests in such property.

[Lapse of Time]

II Enforcement of the Government's liens on the taxpayer's interest in the community is not barred by limitations, laches, or equitable estoppel.

The tax liens that the Government seeks to enforce in the present action arose in 1954, when taxpayer failed to respond to a notice of assessment issued by the District Director of Internal Revenue. (26 U. S. C. §6321.) Under section 6322 of the Code, those liens were to continue until the underlying liability was satisfied or became "unenforceable by reason of lapse of time." (26 U. S. C. §6322.) ⁶ The Government brought suit to recover judgment upon the liability underlying the assessments before the expiration of the six-year statute of limitations upon the collection of an assessment. (26 U. S. C. §6502(a).) The life of the liens was thereby extended beyond the initial six-year period. (Hector v. United States (5th Cir. 1958) [58-1 USTC ¶9372] 255 F. 2d 84; United States v. Ettelson (7th Cir. 1947) [47-1 USTC ¶9137] 159 F. 2d 193.) The 1961 judgment entered in the suit again extended the enforceability of the liability and thus the life of the liens. Although a lien based on that judgment is subject to state-created limitations (28 U. S. C. §1962; Fred R. Civ. Proc. 69(a)), the judgment itself is not subject to limitations and is enforceable at any time. (United States v. Ettelson, supra, 159 F. 2d at 196; Investment & Securities Co. v. United States (9th Cir. 1944) 140 F. 2d 894, 896; Plumb, "Federal Tax Collection and Lien Problems" (1958) 13 Tax L. Rev. 247, 250-51.) ⁷ The tax liens are merged neither into the judgment nor into the judgment liens; they continue to exist independently of either. (United States v. Hodes, (2d Cir. 1966) [66-1 USTC ¶9232] 355 F. 2d 746, cert. dismissed (1967) 386 U. S. 901.) The tax liens are enforceable at any time, because the underlying liability has been merged into the 1961 judgment and that liability cannot become "unenforceable by reason of lapse of time." (United States v. Ettelson, supra; Investment & Securities Co. v. United States, supra; Plumb, supra.)

[Laches]

The United States is not subject to the defense of laches in enforcing its rights. (United States v. Summerlin (1940) [40-2 USTC ¶9633] 310 U. S. 414, 416.) No case has been made out by the appellants for the application of the doctrine of equitable estoppel, even if the doctrine were otherwise applicable to the Government.

The appellants claim that the assertion of the Government's lien against taxpayer's interest in the community is foreclosed by the recitation in the 1961 judgment that it was "individually only, and not against his marital community."

[Conclusion]

Under Washington law a personal judgment against a married man is presumed to be against the community. (E.g., La Framboise v. Schmidt (1953) 42 Wash. 2d 198, 254 P. 2d 485.) The purpose of the recitation was to make clear that the judgment was against the taxpayer for a separate, not a community, debt. No greater significance can be attributed to the recitation.

The interlocutory is AFFIRMED, and the cause is REMANDED for further proceedings.

¹ Some of the property involved is community property, some is separate property, and the status of the remainder property is yet undetermined. Only three of the original defendants are appellants: the taxpayer, Marie Overman, and Circle J., Inc.

² The rule was modified to some extent in 1969. Laws of 1969, Ex. Sess., ch. 121, amending Rev. Code Wash. §26.16.200. But the new statute has been given solely prospective application. National Bank of Commerce v. Green (1969) -- Wash. App. --, 463 P. 2d 187. An established exception to the rule is that a divorced wife may collect alimony from personal property of the husband's second marital community. Fisch v. Marler (1939) 1 Wash. 2d 698, 97 P. 2d 147.

³ Stockland v. Bartlett (1892) 4 Wash. 730, 331 P. 24; Ryan v. Ferguson (1891) 3 Wash. 356, 28 P. 910; but of. Bortle v. Osborne (1930) 155 Wash. 585, 285 P. 425.

⁴ Compare United States v. Hutcherson (8th Cir. 1951) [51-1 USTC ¶9249] 188 F. 2d 326, discussing the Missouri estate by the entirety.

⁵ The undivided nature of that interest is not impermeable under state law, however. See Fisch v. Marler, supra note 2. We have no occasion, therefore, to decide the enforceability of a federal tax lien against property in which owners have an absolutely indivisible interest under state law. Compare Shaw v. United States (9th Cir. 1964) [64-1 USTC ¶9421] 331 F. 2d 493, 497, with Jones v. Kemp (10th Cir. 1944) [44-2 USTC ¶9410] 144 F. 2d 478, 480.

⁶ We are dealing with §6322 as it stood prior to amendment by the Federal Tax Lien Act of 1966, Pub. L. No. 89-719, 80 Stat. 1146. Pursuant to §114 of the Act, reproduced in the Historical Note to 26 U. S. C. A. §6323, the Government in its brief offered to treat the appeal under either the old or the new §6322 at the appellants' election. Appellants did not respond. Because the new section appears to have removed any merit from appellants' argument (see J. Mertens, Federal Income Taxation (1969) §54.66.28), we are applying the earlier version to the issues on this appeal.

⁷ Appellants' brief states: "When Federal statutes do not provide otherwise, state law will prevail respecting periods of limitation and enforcement of judgments rendered by a Federal court." This overlooks the established rule that a state statute of limitation cannot run against the United States unless a federal statute permits. United States v. Summerlin (1940) [40-2 USTC ¶9633] 310 U. S. 414, 416; United States v. Rose (3d Cir. 1965) 346 F. 2d 985, 990, cert. denied sub nom. Aetna Ins. Co. & United States (1966) 382 U. S. 979.

 

 

 

Mildred Babb, Plaintiff-Appellant v. Frank S. Schmidt, District Director of Internal Revenue and the United States of America , Defendants--Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 71-2621, 496 F2d 957, 5/10/74, Aff'g District Court, 71-2 USTC ¶9570

[Code Secs. 6321 and 7403--Result unchanged by '69 Tax Reform Act]

Lien for taxes: Action to enforce lien: Community property: California: Premarital tax obligation.--The Appellate Court upheld the District Court's decision that the wife's share of community property consisting of the proceeds remaining after the filing and foreclosure of a tax lien can be used to pay the premarital tax liability of the taxpayer husband since, under California law, the wife's community interest is not immune from liability for the husband's premarital debts.

Herbert S. Miller, Schiff, Hirsch, Levine, Burk & Schreiber, 9777 Wilshire Blvd., Beverly Hills, Calif., for appellant. Scott P. Crampton, Assistant Attorney General, Donald H. Olson, John M. Scott, Jr., Department of Justice, Washington, D. C. 20530, Martin N. Gelfand, United States Attorney, Los Angeles, Calif., for appellee.

Before MERRILL, CARTER and SNEED, Circuit Judges.

Opinion

MERRILL, Circuit Judge:

In 1959 Kroger Babb, now husband of the appellant, was assessed by the district director, pursuant to a decision of the Tax Court, for taxes, interest and penalties arising out of the 1944 and 1945 tax years. In 1961 appellant Mildred Babb and Kroger Babb were married. In 1970 the director served a levy upon certain bank accounts in California and Nevada , community property of these California citizens, for the purpose of obtaining partial satisfaction of the husband's premarital tax liabilities described above.

[ California Community Property Law]

Plaintiff brought this action under 26 U. S. C. §7426 for wrongful levy upon her community interest in the bank accounts. The district court granted summary judgment for the Government.

26 U. S. C. §6321 creates "a lien in favor of the United States upon all property and rights to property * * * belonging to" a person who has neglected or refused to pay federal taxes for which he is liable. The issue presented here is whether this lien reaches a California wife's community one-half interest where the lien is for taxes owed by the husband before the marriage.

In Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13 (1960), the Court stated:

"The threshold question in this case, as in all cases where the Federal Government asserts its tax lien, is whether and to what extent the taxpayer had 'property' or 'rights to property' to which the tax lien could attach. In answering that question, both federal and state courts must look to state law, for it has long been the rule that 'in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property . . . sought to be reached by the statute.' Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82. Thus, as we held only two Terms ago, Section 3670 [26 U. S. C. §6321] 'creates no property rights but merely attaches consequences, federally defined, to rights created under state law . . ..' United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55."

It is conceded that under California law the wife has a vested interest in her share of the community. Appellant contends that this being so, her husband cannot be said to have "property or rights to property" in that which is her property. She relies on United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142, 1146 (9th Cir. 1970), and In Re Ackerman [70-1 USTC ¶9343], 424 F. 2d 1148, 1150 (9th Cir. 1970), in both of which this court held that the Government's lien for the husband's premarital tax debt could not extend to the wife's half of the community estate.

[Wife's Interest May Be Reached]

State law, however, provides the basis for distinction. Overman dealt with Washington law, and Ackerman dealt with Arizona law, both of which deny premarital creditors of the husband access to the wife's share of the community. California law is established to be otherwise. In Grolemund v. Cafferata, 17 Cal. , 2d 679, 111 P. 2d 641, cert. denied, 314 U. S. 612 (1941), it was implied that a wife's community interest can be reached for satisfaction of the husband's premarital debts. That such has continued to the the law of the state was made clear in Weinberg v. Weinberg, 67 Cal. 2d 557, 563-64, 432 P. 2d 709, 711, 63 Cal. Rptr. 13, 15 (1967). There the California Supreme Court stated (citing Grolemund):

"The policy of protecting the husband's creditors outweighs the policy of protecting family income even from premarital creditors of the husband. Community property is therefore available to such creditors."

The proposition is now generally recognized. See, e.g., Marsh, Property Ownership During Marriage, in State Bar of California , 1 The California Family Lawyer §4.36, at 134 (1962); H. Verral & A. Sammis, Cases and Materials on California Community Property 285 (1971) (semble). ¹ The California Supreme Court in Grolemund expressly distinguished Washington law on matters of the liability of the community for the husband's debts, and declined to follow Washington precedents in this area. It said that the differences in result arise from the concept of "community debts" which California rejects but which is fundamental to the law of Washington (and of Arizona ). ² See also, Marsh, supra (contrasting with California law both Washington and Arizona in this regard).

Appellant seeks to reduce this rule of state law to something less than one of "property or rights to property," and to make of it no more than a rule regulating creditors' rights. She points to this language of our court in Overman:

"Labels aside, state 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 * * *."

424 F. 2d at 1146.

This language was directed to the contention of the taxpayer in Overman that the husband's share of the community could not be reached by the Government because, under Washington law, no part of the community could be reached for premarital debts of the husband. We held that notwithstanding this limitation on the rights of creditors generally, the husband's interest in the community did constitute "property and rights to property" reachable by the United States .

"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."

424 F. 2d at 1145.

The point appellant fails to recognize is that while creditors' rights can be less extensive than a debtor's property right (under state law there may be property rights that a creditor is not permitted to reach), they can hardly be more extensive. 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. Cancino v. United States, 451 F. 2d 1028, 1033-34 (Ct. Cl. 1971), cert. denied, 408 U. S. 925 (1972).

On appeal for the first time appellant contends that the applicable law may be different as to the Nevada bank account. This issue was not tendered to the district court and we decline to consider it here.

Judgment affirmed.

¹ §5117 of the California Civil Code exempts earnings of the wife from liability for any debts of the husband, except those contracted for necessities of life while husband and wife are living together. Appellant here makes no claim that the bank accounts involved represented her earnings.

² The court stated:

"The Washington statutes are based on the theory of tenancy by entireties, with its fundamental concept of 'community debts', and in that state the community property is not liable for the separate debts of the husband * * * but is liable only for so-called 'community debts'. * * * But in California there is no like concept of 'community debts', though occasionally the courts in this state refer to such, overlooking the fact that the phrase is not appropriate to the California system. * * * [O] ur community system is based upon the principle that all debts which are not specifically made the obligation of the wife are grouped together as the obligations of the husband and the community property (with the single exception of the wife's earnings, which are exempted from certain types of debt * * *)."

17 Cal. 2d at 688, 111 P. 2d at 645.

 

 

 

Frank L. Broday, Plaintiff-Appellee v. United States of America , Defendant-Appellant

(CA-5), U. S. Court of Appeals, 5th Circuit, No. 71-2135 Summary Calendar ^*, 455 F2d 1097, 3/1/72, Aff'g an unreported District Court decision

[Code Sec. 7426(a)(1)]

Civil actions by nontaxpayers: Wrongful levy: District Court jurisdiction.--The District Court properly denied the government's motion to dismiss taxpayer's complaint for lack of jurisdiction. The person claiming interest in a bank account can pay the levy and thus free the account from government restriction, and then sue to recover because the levy was wrongful

[Code Sec. 6321]

Lien for taxes: Community property: Pre-nuptial debts: Texas.--Under Texas property law, the community property bank account, of which the husband had sole right to management and control, was subject to levy for a federal tax debt of the wife incurred prior to marriage. Accordingly, the government was entitled to a lien for taxes, plus interest, upon all of the wife's property and rights to property.

Harold D. Rogers, P. O. Drawer 5008, Wichita Falls , Tex. , for plaintiff-appellee. Eldon B. Mahon, United States Attorney, Ft. Worth, Tex., Martha Joe Stroud, Assistant United States Attorney, Dallas, Tex., Fred B. Ugast, Acting Assistant Attorney General, Meyer Rothwacks, Loring W. Post, Richard Farber, Department of Justice, Washington, D. C. 20530, for defendant-appellant.

Before BROWN, Chief Judge, INGRAHAM and RONEY, Circuit Judges.

RONEY, Circuit Judge:

Frank Broday married his present wife, Billie Shipman Broday, on June 7, 1966. As of that date, Billie Shipman was liable for income taxes assessed against her and her former husband, Joe Shipman (now deceased), for the taxable year 1962. In an effort to collect this tax, the District Director of Internal Revenue levied upon a checking account which held funds received as dividend income from Mr. Broday's separate property. Mr. Broday paid his wife's income tax liability and then filed a claim for refund on the ground that there was a wrongful levy upon the bank account. Holding that under Texas community property law the wife possessed a property right in the dividend income from the separate property of her husband, which property right is subject to a federal tax lien for prenuptial income taxes of the wife, we must reverse the decision of the lower court which awarded a refund to Mr. Broday.

I. Initially, we hold that the district court was correct in denying the government's motion to dismiss the taxpayer's complaint for lack of jurisdiction.

Section 7426(a)(1) of the Internal Revenue Code provides as follows:

"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."

The government argues that the only actions that could have been brought under this section by Mr. Broday were a suit for an injunction against the wrongful levy or a suit for recovery of the property if the bank had paid the levy from the account. We believe this construes Congressional intent too narrowly. This section makes no restriction on the kind of civil action that can be brought against the United States because of the wrongful levy. There appears to be no logical reason why Congress would have intended the technicality asserted by the government in this case. The legislative history ¹ does not support the government's position and no cases have been cited to us which support its argument on the motion to dismiss.

The argument misconceives the practical problems of the owner of a bank account against which a wrongful levy may have been made. It seems clear that the person claiming the interest in a bank account can pay the levy and thus free the account from government restriction, and then sue to recover because the levy was wrongful. We have been given no indication as to how the government can be harmed by such a procedure.

II. The basic issue involved in this appeal is whether, under Texas property law, the community property bank account of which the husband had sole right to management and control is subject to levy for a federal tax debt of the wife incurred prior to marriage. The government is entitled to a lien for the tax plus interest upon all of the wife's "property and rights to property." ² The question of whether and to what extent the wife has property and rights to property is determined under the applicable state law. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-513 (1960); Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82 (1940). However, once it has been determined under state law that the taxpayer owns property or rights to property, federal law is controlling for the purpose of determining whether a lien will attach to such property or rights to property. United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 56-57 (1958).

There is no question that the bank account upon which the government levied constituted community property of Mr. and Mrs. Broday under Texas law. This point is made clear by the decision of this Court in Commissioner v. Chase Manhattan Bank [58-2 USTC ¶11,818], 259 F. 2d 231, 239, (5th Cir. 1958), cert. den., 359 U. S. 913, (1959), in which we said:

"All property accumulated during marriage is community property, unless it is received by gift, devise or inheritance. In Texas , even income derived from separate property belongs to the community, including interest and dividends from separately owned securities."

See Warren v. Schawe, 163 S. W. 2d 415 ( Tex. Civ. 1942). As community property, Mrs. Broday had a present vested interest therein equal and equivalent to that of her husband. Hopkins v. Bacon [2 USTC ¶613], 282 U. S. 122, 126-127 (1930); see Poe v. Seaborn [2 USTC ¶611], 282 U. S. 101 (1930); Bender v. Paff, 82 U. S. 127 (1930).

The taxpayer contends that Article 4620 of Vernon's Texas Civil Statutes Annotated, as amended by Acts of 1967, 60th Legislature, p. 738, ch. 309, Section 1, ³ which by its terms would operate to exempt the particular community property here in issue from the antenuptial debts of Mrs. Broday, is effective to prevent attachment of a federal tax lien on her vested present interest in such property. Taxpayer concedes that mere state exemption statutes are ineffective against a statutory lien of the federal government for federal taxes. United States v. Hoper [57-1 USTC ¶9508], 242 F. 2d 468 (7th Cir. 1957). However, he argues that Article 4620 gives a property right in the husband which transcends the federal tax law.

When the district court granted the taxpayer summary judgment in this case, it did not have the advantage of United States v. Mitchell [71-1 USTC ¶9451], 403 U. S. 190 (1971), in which the Supreme Court by unanimous decision reversed the decisions of this Court in Mitchell v. Commissioner, 430 F. 2d 1 (5th Cir. 1970) and Angello v. Metropolitan Life Ins. Co. [70-2 USTC ¶9476], 430 F. 2d 7 (5th Cir. 1970). This Supreme Court decision controls the instant case. Indeed, it is pointed out in the government's brief that the taxpayer's brief in support of his motion for summary judgment before the trial court relied upon this Court's decisions in Mitchell, Angello and Ramos v. Commissioner [70-2 USTC ¶9510], 429 F. 2d 487 (5th Cir. 1970) as presenting the identical issue as the case at bar, and argued that those decisions were controlling. The decision in Ramos was based upon the Mitchell and Angello cases, and therefore was effectively overruled by the Supreme Court in Mitchell. Although those cases involved Louisiana community property law, while this case involves Texas law, it was properly conceded below by the taxpayer that the law of Texas is identical to the law of Louisiana as to whether the community fund is liable for the wife's separate debts incurred before marriage.

In Mitchell, the Supreme Court held that under the laws of Louisiana a married woman has a present vested interest in community property equal to that of her husband and therefore is personally liable for federal income taxes on her one-half share of the community income, notwithstanding her subsequent election under state law to renounce all of her rights in the community. The Court rejected the contention that the taxpayers involved should not be personally liable for community debts because under Louisiana law their husbands had complete control over the community property.

Since a married woman in Louisiana or Texas has a vested interest in, and is the owner of, a half share of the community income sufficient to require her to pay income taxes thereon, it follows a fortiori that she has "property" or "rights to property" to which a federal tax lien would attach under Section 6321 of the Code.

We think that the taxpayer must fail in his argument that Article 4620 of Vernon 's Texas Civil Statutes should be characterized in a different manner than an exemption statute. The Ninth Circuit cases of United States v. Overman [70-1 USTC ¶9342], 424 F. 2d 1142 (9th Cir. 1970) (relating to the law of the State of Washington) and In re Ackerman [70-1 USTC ¶9343], 424 F. 2d 1148 (9th Cir. 1970) (relating to the law of Arizona), which held against the taxpayer in cases similar to this one, were specifically approved in the opinion of the Supreme Court in Mitchell. In Overman the taxpayer advanced the argument that the state statute in issue was not merely an exemption statute but instead was one which defined property rights and therefore was controlling. In rejecting this argument, the Court noted, "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." 424 F. 2d at 1145. It appears clear from the decision in Mitchell that the right of the United States to enforce its liens does not depend upon state laws which regulate the rights of creditors generally and does not depend upon whether the "exemption" label is attached to the particular statute in question.

The only cases cited by the taxpayer in his brief in support of his position are Bice v. Campbell [64-1 USTC ¶9423], 231 F. Supp. 948 (N. D. Tex. 1964) and Mulcahey v. United States [66-1 USTC ¶9356], 251 F. Supp. 783 (S. D. Tex. 1966). It is apparent that these decisions are now incorrect because they are fundamentally incompatible with the decisions in Mitchell, Overman and

Ackerman, supra.

REVERSED.

^* Rule 18, 5th Cir.; see Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York, et al, 5th Cir. 1970, 431 F. 2d 409, Part I.

¹ H. Rep. No. 1884, 89th Cong., 2d Sess., pp. 76-77 (1966-2 Cum. Bull. 815, 834-835).

² Section 7321 [6321] of the Internal Revenue Code of 1954.

"Lien for taxes.

"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."

³ "The community property subject to sole or joint management, control and disposition of a spouse shall be subject to the liabilities of that spouse incurred before or during marriage. The community property subject to the sole management, control and disposition of a spouse shall not be subject to any liabilities of the other spouse incurred before marriage or nontortious liabilities incurred by the other spouse during marriage unless both spouses are liable by other rules of law. All the spouses' community property is subject to liability for all torts committed by either spouse during marriage." Effective Jan. 1, 1970, Article 4620 was repealed by Acts of 1969, 61 Leg. p. 2707, ch. 888, §6. However, similar language now appears in the new Texas Family Code, ch. 5.

 

 

 

Jim Prater and Evelyn Prater, his wife, as a marital community, Plaintiffs v. United States of America and George D. Patterson, Director of Internal Revenue, Defendants

U. S. District Court, Dist. Ariz. , No. Civ. 6260 Phx., 268 FSupp 754, 5/26/67

[1954 Code Sec. 6331]

Levy and distraint: Property subject to levy: Community property: Pre-marital tax debt.--Where a husband's liability for excise taxes arose before he was married, a levy to collect these taxes was properly made against one-half of his community income. Although Arizona courts have held that community property is not subject to liability for pre-marital debts of either spouse, an exception was permitted on the basis of public policy for pre-marital tax debts. Draper v. U. S. (DC, Wash. ), 65-2 USTC ¶9604, 243 F. Supp. 563, followed.

Dykes, Selden, Bayham & Fike, Ltd., 502 Greater Arizona Savings Bldg., Phoenix , Ariz. , for plaintiff. William P. Copple, United States Attorney, Phoenix , Ariz. , for defendant.

Judgment and Order

COPPLE, District Judge:

This is an action under Section 7426(a) and (b)(1) of the Internal Revenue Code of 1954, seeking relief from an alleged improper levy made by the Director of Internal Revenue for the District of Arizona. The facts are not in dispute.

As a result of a business enterprise, the plaintiff Jim Prater failed to pay certain Federal excise taxes for the fiscal years 1964 and 1965 in the approximate sum of $1,737.06. These taxes were payable by the said plaintiff individually.

On February 9, 1966, Jim Prater married the plaintiff Evelyn Prater. On January 16, 1967, a notice of levy was served on the Reliance Truck Company, the employer of the plaintiff Jim Prater. This notice was served with a notation that it was attaching one-half of the community income of the plaintiff-husband. Subsequent to this levy, Reliance Truck Company paid the sum of $72,68 to the Internal Revenue Service.

On or about January 17, 1967, a notice of levy was served on one H. C. Charlie Evins, with the same notation that it was attaching one-half of the community income of the plaintiff-husband. On or about January 23, 1967, a check in the sum of $61.96 was received from Mr. Evins by the Internal Revenue Service in response to the levy.

On or about February 14, 1967, the plaintiffs, as a marital community, brought this suit. The plaintiffs alleged that the levies made upon their community property were illegal for the reason that, under the laws of the State of Arizona , community property cannot be taken or divided to satisfy a separate debt of either spouse. The matter is presently before the Court on the motion of the defendant United States to dismiss the complaint and the cross-motion of the plaintiffs for summary judgment against the United States of America for the sums obtained by it by virtue of the levies on the Reliance Truck Company and H. C. Charlie Evins.

Arizona Revised Statute 25-216B provides as follows:

"The community property of the husband and wife is liable for the community debts contracted by the husband during marriage unless specifically excepted by law."

Arizona courts have held that community property is not susceptible to liability for pre-marital debts of either spouse. Forsythe v. Paschal, 271 P. 865 ( Ariz. 1953); Barr v. Petzhold, 77 Ariz. 399, 273 P. 2d 161 (1954).

Earnings of either spouse during marriage constitute community property. Shaw v. Greer, 67 Ariz. 223, 194 P. 2d 430 (1948).

The Supreme Court of Arizona, however, has observed a distinction in the area of pre-marital obligations by differentiating contractual obligations and obligations arising by operation of law. In the case of Cardner v. Gardner, 95 Ariz. 202, 388 P.2d 417 (1964), the Supreme Court of Arizona considered the question whether the husband's alimony debt from a prior marriage could be allowed from the community property of his present marriage. The Court allowed such payment based on the distinction between an alimony obligation and a contracted debt, as well as on grounds of public policy.

In Ogelsby v. Poage, 45 Ariz. 23, 40 P. 2d 90 (1935), the court had under consideration a question of what property of honorably discharged soldiers is exempt from taxation as provided for by the Arizona constitution. The court in that case allowed that the wife's share of the community property involved was subject to taxation. There does not appear to be a reported decision in this District on the precise point in question. Arizona has recognized the similarity of its community property laws with those of the State of Washington . In Cosper v. Valley National Bank, 28 Ariz. 373, 237 P. 175 (1925), the court, at page 379, stated that the Arizona community property statutes are more analogous to the State of Washington than to any other.

In the case of Draper v. United States [65-2 USTC ¶9604], 243 Fed. Supp. 563 (D. C.--W. D. Washington 1965), the Federal District Court was faced with a complaint to quiet title to community funds levied on to satisfy assessment against wife for income taxes on premarital earnings and to quash the tax levy. The court in that case dismissed to complaint on the basis that state law allowed exceptions to the general rule of immunity on the basis of public policy, and that such an exception was needed in the case of public taxation. This Court is persuaded by the logic of that decision and therefore determines this matter in accord with it.

The complaint will be dismissed with prejudice and without costs. Counsel for the defendant will prepare and order in compliance herewith for presentation to the Court

 

 

 

Delmar H. Draper, Jr. and Shirley Shively Draper, as a marital community, Plaintiffs v. United States of America and Neal S. Warren, District Director of Internal Revenue, Defendants

U. S. District Court, West. Dist. Wash. , No. Div., Civil No. 6347, 243 FSupp 563, 7/19/65

[1954 Code Sec. 6331]

Collection of tax: Levy and distraint: Levy upon community funds: Separate liability.--Washington community property wages were not exempt from levy for the income tax liability of one spouse on income earned prior to marriage, on the basis of public policy and Washington law. Request denied for an order quieting title to funds and an order quashing the tax levy. Stone v. U. S., 64-1 USTC ¶9204, 225 F. Supp. 201, rejected.

Esther Jane Johnson, 830 Central Bldg., Seattle , Wash. , for plaintiffs. William N. Goodwin, United States Attorney, Gerald W. Hess, Assistant United States Attorney, 1012 U. S. Courthouse, Seattle, Wash., for defendants.

Opinion

BEEKS, District Judge:

The tomes of the law are replete with ingenious attempts to lawfully avoid the payment of income taxes. This is one of them. The case presents the unusual situation of a person seeking to avoid the payment of taxes admittedly due and owing by reliance on an element in the Washington community property law which is colloquially referred to among members of the Washington bar as "marital bankruptcy."

The facts are not in dispute. Shirley Shively Draper is obligated to the United States of America for income taxes for the calendar years 1960 and 1961. Notice and demand have been made upon her to pay these taxes and she has refused to do so. The taxes here in question were assessed on August 10, 1962. On June 29, 1963, Shirley Shively married Delmar H. Draper, Jr. at Seattle , Washington . Since that time they have resided in the State of Washington and at all times pertinent hereto were domiciled in the State of Washington and have not lived separately and apart since their marriage. On September 17, 1964, the District Director of Internal Revenue for the District of Seattle levied upon one-half of the wages earned by Shirley Draper as an employee of Marie's Cafe in Seattle . Pursant to this levy, Marie's Cafe sent a check to the District Director of Internal Revenue payable to the order of the Internal Revenue Service in the amount of $22.44. This check was certified but has not been cashed. The check represents one-half of the wages earned by Shirley Shively Draper for her personal services performed by her for Marie's Cafe for the week beginning December 14, 1964. The total obligation owed by Shirley Shively Draper for the years 1960 and 1961, including lien fees and interest accrued to February 4, 1965, is $733.02.

The Drapers, as a marital community, seek herein to quiet title to the funds levied upon by the Government and to obtain a judicial order quashing the tax levy.

It has long been the law of the State of Washington that community property is not subject to the claims of creditors for the satisfaction of the separate debts of either spouse. Brotton v. Langert, 1 Wash. 73, 23 Pac. 688 (1890); Stockand v. Bartlett, 4 Wash. 730, 31 Pac. 24 (1892); Schramm v. Steele, 97 Wash. 309, 166 Pac. 634 (1917); Katz v. Judd, 108 Wash. 557, 185 Pac. 613 (1919). The parties agree that the wages of Shirley Shively Draper which were levied upon by the Government are community property as defined by Washington law and that under such law the tax liability of Shirley Shively Draper is her separate obligation.

The same legal issue was before another Judge of this district in the case of Stone v. United States [64-1 USTC ¶9204], 225 F. Supp. 201 (1963). The Government advances the same argument now as it did then, viz., that although Federal courts must look to the law of Washington for a definition of the property rights of the taxpayer, 26 U. S. C. §6321, United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 78 S. Ct. 1054, 2 L. Ed. 2d 1135 (1958), Acquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 80 S. Ct. 1277, 4 L. Ed. 2d 1365 (1960), the Internal Revenue Service is not bound by state statutes or judicial decisions on the question of whether property rights as so defined are subject to levy by the Federal Government. United States v. Bess, supra; United States v. Heffron [47-1 USTC ¶9194], 158 F. 2d 657 (9th Cir. 1947), cert. denied, 331 U. S. 831, 67 S. Ct. 1510, 91 L. Ed. 1845.

Stone v. United States, supra, held that the immunity of the community property from seizure for a separate premarital debt of a spouse is an inherent characteristic of the particular type of property interest involved. With the utmost respect for the erudition of my friend and colleague, I regrettably dissent from this conclusion.

It is the opinion of this court that the plaintiffs are not entitled to the relief sought for the reason that the Washington courts have judicially created exceptions to such rule of immunity, which exceptions are based on grounds of public policy, and this court finds as to the facts of this case that public policy requires such an exception here also.

The case of Fisch v. Marler, 1 Wn. 2d 698, 97 P. 2d 147 (1939), involved an attempt by a divorced wife to collect alimony by garnishing the wages of her former husband. Since he had remarried the wages were the community property of the husband and his second wife and under the usual rules of community property in Washington immune from the claims of creditors of one of the spouses individually. The able opinion of the late Judge Steinert illustrates the court's dilemma:

"It must be conceded that this presents a difficult problem; for, seemingly, we must adopt, as controlling of this case, one of two conflicting principles. One principle, well settled in this jurisdiction, is that community property may not be taken in satisfaction of a separate judgment or indebtedness of either spouse. The other principle, if we are to give it recognition, is that a divorced wife has such an interest in the earnings of her former husband as will support a garnishment for unpaid installments of alimony. Apparently, there has been some doubt among the members of the bar as to which of these principles governs the other in case of conflict." 1 Wn. 2d at 712, 713, 97 P. 2d at 154.

The opinion then goes on to decide, on broad grounds of public policy and "on grounds of justice and reason," that an exception to the rule of immunity should be created, stating that the first wife had a fixed and prior interest in the earnings of her husband. ¹

This court is of the opinion that the basis for the exception "on grounds of reason and justice" is equally strong, if not stronger, on the facts of this case where collection of the Federal income tax, the economic lifeblood of our nation, is involved. If this court were to find for the plaintiffs, the United States would be unable to collect the tax--even though there might be a considerable wealth of community property--until the marital community was dissolved by death or divorce. Permitting a "marital bankruptcy" to be operative against valid and admitted tax obligations would not only be unjust and unreasonable but violative of sound public policy.

There is a statement in the case of Stafford v. Stafford, 18 Wn. 2d 775, 140 P. 2d 545 (1943), to the effect that the decision in Fisch v. Marler, supra, even though not therein discussed, was based on the rule in Haakenson v. Coldiron, 190 Wash. 627, 70 P. 2d 294 (1937), that alimony is not a "debt" but an obligation created by judicial decree. Accepting such distinction as the law of Washington , this court does not find that the distinction dictates a conclusion contrary to that herein reached, for neither alimony nor tax obligations involve a voluntarily created contractual "debt"; both arise by operation of law, one by judicial decree and the other by legislative enactment. Both are imposed by public policy, one for the support of the family, the other for the support of the nation. Neither is more or less important than the other.

The complaint will be dismissed with prejudice and with costs. Counsel for defendants will prepare an order in compliance herewith for presentation to the court on July 26, 1965, at 9:30 a. m.

¹ In a case in the Superior Court of the State of Washington for King County which was not appealed, Electrical Products Consolidated v. Clarke, Judge Malcolm Douglas held that public policy required an exception to the immunity rule where a couple were divorced and later remarried. They claimed that the property of the second community was immune from a community debt incurred during the first marriage. Under the Washington law all property of the first community became separate property on divorce. McLean v. Burginger, 100 Wash. 570, 171 Pac. 518 (1918). Thus, strict application of the community property rules would have required immunity, but to eliminate the possibility of divorce and remarriage being used as a substitute for bankruptcy the property of the second community was subjected to liability for the debts of the prior community. The case is reported in 1 Seattle Bar Bulletin, No. 9, p. 4 (April 1958) The Ninth Circuit in Greear v. Greear, 303 F. 2d 893, in applying Nevada community property law on a point which Nevada had not yet decided, determined that on the basis of public policy considerations Nevada would, when confronted with the situation, follow Fisch v. Marler, supra.

 

 

 

Emilie Furnish Funk, Plaintiff v. Richard D. Furnish, Sr., and Robert Riddle, etc., Defendants

U. S. District Court, So. Dist. Calif., Central Div., No. 543-61 TC Civil, 8/17/61

[1939 Code Sec. 3670--similar to 1954 Code Sec. 6321]

Lien: Community property: Suit to impose constructive trust.--The Commissioner was entitled to the dismissal of a suit by a co-owner of community property against the Commissioner and the taxpayer wherein the co-owner sought to impose a constructive trust on the community property which was under lien for unpaid taxes owed by the taxpayer. The property was subject to liability for the unpaid taxes. The court also lacked jurisdiction of the subject matter and of the parties.

Palmer & Long, 6331 Hollywood Blvd. , Los Angeles 28, Calif. , for plaintiff. Francis C. Whelan, United States Attorney, Robert H. Wyshak, Assistant United States Attorney, Tax Division, Los Angeles, Calif., Lillian W. Wyshak, Assistant United States Attorney, 808 Federal Bldg., Los Angeles 12, Calif., for defendants.

Findings of Fact, Conclusions of Law and Judgment of Dismissal

CLARKE, District Judge:

This matter regularly came on for hearing on the plaintiff's Order to Show Cause and the Motion to Dismiss of the defendant Robert A. Riddell, erroneously named herein as Robert Riddle, before the Honorable Thurmond Clarke, United States District Judge, presiding without a jury, the plaintiff represented by her attorney: Palmer & Long, by Dermot R. Long, and the defendant Robert A. Riddell by this attorneys, Francis C. Whelan, United States Attorney, Robert H. Wyshak, Assistant United States Attorney, Chief, Tax Division, Eugene N. Sherman and Lillian W. Wyshak, Assistant United States Attorneys, and the Court having considered the pleadings, affidavits and briefs on file herein, and the arguments of counsel, makes its findings of fact and conclusions of law as follows:

Findings of Fact

I. This is an action to impose a constructive trust on property under lien by the defendant Robert A. Riddell, as District Director of Internal Revenue; to enjoin the sale of stock, or in the alternative to require an impound of funds received from any sale of stock or assets, and, in effect, for declaratory relief.

II. The subject property, shares of stock, is admittedly the community property of the plaintiff and the taxpayer Richard D. Furnish, Sr.

III. The defendant Richard D. Furnish, Sr. owes federal income taxes plus additions in the amount of $832,781.56 for the years 1940 through 1949, together with interest at the rate of $92.04 per day from May 29, 1961, until paid, consisting of liability for the following years in the following amounts:

1940, $537.64 plus$.07 per day

1942, $15,259.38 plus $.07 per day

1943, $75,523.55 plus $8.49 per day

1944, $176,731.08 plus $19.89 per day

1945, $116,988.62 plus $13.16 per day

1946, $209,409.30 plus $23.56 per day

1947, $132,387.87 plus $14.89 per day

1948, $93,261.62 plus $10.49 per day

1949, $12,677.50 plus $1.42 per day

Lien fees $5.00

IV. There is no diversity of citizenship between the parties to this action.

V. Every conclusion of law which is deemed to be a fact is hereby found as a fact and incorporated herein as a finding of fact.

Conclusions of Law

I. This Court lacks jurisdiction of the subject matter and the parties hereto.

II. The property seized by the defendant Robert A. Riddell was the community property of the plaintiff and the taxpayer Richard D. Furnish, Sr., and as such is liable for the taxes of said taxpayer.

III. Defendant Robert A. Riddell is entitled to judgment that the complaint be dismissed with prejudice and that this defendant have his costs to be taxed by the Clerk of this Court.

IV. Every finding of fact deemed to be a conclusion of law is hereby determined as a matter of law.

Judgment of Dismissal

In accordance with the foregoing findings of fact and conclusions of law,

IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the complaint be dismissed with prejudice, that the defendant Robert A. Riddell have his costs in the sum of $....., and that the Order filed July 17, 1961, to the effect that the proceeds from the sale of the stock which is the subject of this action shall be deposited by the defendant Robert A. Riddell with the Clerk of this Court pending further order of this Court be, and it hereby is, vacated.

 

 

 

United States of America , Plaintiff v. Edwin M. Furtado and Marjorie H. Furtado, Defendants

In the United States District Court for the Northern District of California, Southern Division, Civil No. 30932, February 16, 1954

Estates and trusts: Conversion of tax payments by employee: Violation of fiduciary capacity: Recovery by U. S. as beneficiary.--While the defendant was an employee in the Collector's office, he violated his fiduciary duties in failing to pay over amounts of tax moneys belonging to the United States which he received from parties who employed him to prepare their withholding, social security and unemployment tax returns, which amounts of taxes he converted to his own use. On the theory that the United States was the express beneficiary of the contract between the defendant and such taxpayers, judgment was entered against the defendant for the taxes so paid to him as money had and received for the use of the United States. Attachment allowed on proceeds of sale of property of wife of defendant.

United States Attorney, Post Office Building , Seven and Mission Streets, San Francisco , Calif. , for plaintiff. H. A. Dannenbrink, 505 Easton Building, Oakland , Calif. , for defendant Edwin M. Furtado. Anderson and Peck, 915 Financial Center Building, Oakland , Calif. , for defendant Marjorie H. Furtado.

Findings of Fact and Conclusions of Law

This cause came on regularly to be heard before the above-entitled Court, the Honorable O. D. Hamlin presiding without a jury, on October 15, 1953. Plaintiff appeared by Harold H. Bacon and George A. Blackstone, Special Assistants to the Attorney General; defendant EDWIN M. FURTADO appeared by H. A. Dannenbrink, Esq., and defendant MARJORIE H. FURTADO appeared by Milner J. Anderson, Esq., and Edward F. Peck, Esq.

Thereupon oral and documentary evidence was introduced on behalf of plaintiff. Defendants offered no evidence and moved for dismissal of the action at the conclusion of plaintiff's case. The matter was argued and submitted on briefs and the Court, being fully advised in the premises, filed its memorandum order for judgment for plaintiff against defendant Edwin M. Furtado on December 23, 1953. Pursuant to said memorandum order the Court now makes the following Findings of Fact and Conclusions of Law:

Findings of Fact

1. This action is brought by the United States of America against defendant EDWIN M. FURTADO for money had and received. All of the allegations of the complaint are true except that the total amount of money had and received by said defendant for the use and benefit of plaintiff is $22,255.16 and not $18,000 as alleged in the complaint.

2. Defendant MARJORIE H. FURTADO intervened in the action but filed no complaint in intervention. Her only pleading is a general denial of the allegations of the complaint against defendant EDWIN M. FURTADO. Plaintiff's complaint seeks no affirmative relief against defendant MARJORIE H. FURTADO. Said defendant has consented, however, to the payment in accordance with the final judgment herein, of the proceeds from the sale of a certain parcel of real property heretofore attached in this action and which proceeds have heretofore been deposited with the Clerk of this Court. Said defendant has introduced no evidence to show her right to said proceeds. Said parcel of property at the time it was attached was the community property of said defendants and had been purchased with money received by defendant EDWIN M. FURTADO for the use and benefit of plaintiff as indicated in the following paragraphs.

3. During the period involved in this action, defendant EDWIN M. FURTADO (hereinafter called "FURTADO") was employed in the office of the Collector of Internal Revenue in San Francisco , California . He was Chief of Accounts of the Wage and Excise Tax Department in that office. He had the title of Deputy Collector of Internal Revenue but his authority as such deputy was limited to administering oaths, and he had no authority to collect taxes.

4. For several years prior to 1947 and during the period involved in this action FURTADO was employed on a part time basis by George Pucci and Leo Banovich to prepare withholding, social security and unemployment tax returns in connection with a bar and restaurant known as "George's Steak House."

[Tax Payments Converted by Defendant]

5. Prior to the taxable quarter ending June 30, 1947, remittances for said taxes on account of George's Steak House were made by check drawn by Mrs. Esther Pucci, wife of George Pucci, payable to the Collector of Internal Revenue. Commencing with the taxable quarter ending June 30, 1947, FURTADO induced Mrs. Pucci, the person authorized to draw checks in payment of taxes on account of George's Steak House, to draw checks for payment of such taxes either to cash or to FURTADO personally. FURTADO represented and promised Mrs. Pucci that he would deliver such checks to the Collector of Internal Revenue at San Francisco and transmit a receipt therefor to show discharge of the tax liability of George's Steak House. In reliance upon this representation and promise, Mrs. Pucci drew checks payable to cash or to FURTADO for payment of taxes for the quarters ending June 30, 1947, June 30, 1948, December 31, 1948, and each quarter thereafter to and including the quarter ending June 30, 1951 except for the quarter ending June 30, 1950.

6. Prior to the quarter ending June 30, 1949 the total tax liability for both the bar and the restaurant business of George's Steak House was reported each quarter on a single return and a single check drawn by Mrs. Pucci was given each quarter to FURTADO for both the bar and restaurant tax liability upon the understanding and agreement that FURTADO would deliver each such check to the Collector of Internal Revenue in San Francisco. In each instance Leo Banovich reimbursed the Puccis for the amount of said check representing the tax liability of the restaurant business of George's Steak House. Commencing with the quarter ending June 30, 1949, Leo Banovich each quarter filed a separate tax return for taxes relating to the restaurant business of George's Steak House, and George Pucci each quarter filed a separate tax return for taxes relating to the bar business of George's Steak House. Mrs. Pucci continued to draw checks for the tax liability of the bar business payable to cash or to FURTADO personally in reliance on FURTADO's agreement to pay over such checks to the Collector of Internal Revenue in San Francisco in satisfaction of such tax liability. FURTADO thereupon induced Leo Banovich to draw checks in the amount of the restaurant tax liability to the order of Mrs. Esther Pucci rather than to the Collector of Internal Revenue and promised Leo Banovich that FURTADO would obtain the endorsement of Mrs. Pucci on said checks and would personally deliver them to the Collector of Internal Revenue in San Francisco in satisfaction of such tax liability. In reliance upon such representation and promise, Leo Banovich drew his checks in this manner for each quarter commencing with the quarter ending June 30, 1949 to and including the quarter ending June 30, 1951. FURTADO obtained the endorsement in blank of Mrs. Pucci on each of these checks drawn by Leo Banovich on the representation and promise to Mrs. Pucci that he would deliver such checks to the Collector of Internal Revenue in San Francisco and transmit a receipt therefor to show discharge of tax liability.

7. FURTADO received a total of $22,255.16 for the use and benefit of plaintiff from checks drawn by Mrs. Pucci and Leo Banovich as aforesaid. FURTADO cashed these checks and converted all of the proceeds thereof to his own use.

[Issue of Spurious Receipts]

8. FURTADO wrongfully obtained official forms of receipts from the office of the Collector of Internal Revenue in San Francisco and without authority transmitted such receipts to Mrs. Pucci wrongfully indicating that taxes for the quarters in question were paid. Because of such receipts, neither Mrs. Pucci nor Leo Banovich had any reason to suspect that FURTADO converted the proceeds of the checks to his own use and that he had not in fact delivered said checks to the Collector of Internal Revenue in accordance with his agreement to do so. FURTADO wrongfully made entries on the books and records of the Collector of Internal Revenue to mislead plaintiff into believing that said taxes had been paid when in truth and in fact FURTADO converted said taxes to his own use.

9. Withholding and Federal Insurance Contribution Act taxes have been assessed against the proprietors of George's Steak House for the period here in question on account of the tax liability which FURTADO agreed to discharge to the extent of the checks received by him as aforesaid. No payment had been received by plaintiff on account of such assessments.

Conclusions of Law

1. FURTADO, as an employee of plaintiff, violated his fiduciary duty to plaintiff in failing to pay over to plaintiff the sum of $22,255.16 received by him from Mrs. Esther Pucci and Leo Banovich for payment to plaintiff of the tax liability of George's Steak House.

[Fiduciary Relationship]

2. Plaintiff is the express beneficiary of a contract between FURTADO and Esther Pucci and Leo Banovich for the payment by FURTADO to plaintiff of the sum of $22,255.16. FURTADO is indebted to plaintiff in said sum by virtue of said contract.

3. FURTADO is indebted to plaintiff for money had and received in the sum of $22,255.16, together with interest thereon at the rate of 6 per cent per annum to be computed from the following dates on the following amounts:

Date                                                                    Amount

June 30, 1947                                                         $1425.62

June 30, 1948                                                          1600.00

Dec. 31, 1948                                                          1533.25

Mar. 31, 1949                                                          1530.75

June 30, 1949                                                          1830.60

Sept. 30,

1949 ........                                                          1999.35

Dec. 31, 1949                                                          1922.52

Mar. 31, 1950                                                          1870.75

June 30, 1950                                                          1440.00

Sept. 30,

1950 ........                                                          1701.40

Dec. 31, 1950                                                          1750.60

Mar. 31, 1951                                                          1793.75

June 30, 1951                                                          1856.57

 

4. Plaintiff is entitled to judgment herein against defendant EDWIN M. FURTADO in said sum of $22,255.16, together with interest thereon at the rate of 6 per cent per annum to be computed as aforesaid, and for plaintiff's costs of suit to be taxed in the manner provided by law.

[Wife's Property Attached]

5. Plaintiff is not entitled to personal judgment herein against defendant MARJORIE H. FURTADO. No determination is made in this action of the property rights, if any, of defendant MARJORIE H. FURTADO in the property attached in this action, except that the proceeds from the sale of one parcel of attached property, which proceeds have heretofore been deposited with the Clerk of this Court with the consent of said defendant, are subject to the payment of the judgment herein against defendant EDWIN M. FURTADO.

Let judgment be entered accordingly.

 

 

 

United States of America , Plaintiff v. Helen Stolle, Stolle Revocable Living Trust, Krisler Management Company, Adler Holding Company, and Arrow Investment Company, Defendants

U.S. District Court, Cent. Dist. Calif. , CV 99-00823-GAF (CWx), 2/14/2000

[Code Sec. 6321 ]

Tax liens: Creation: Validity of assessment: Evidence.--Tax liens against married taxpayers were issued pursuant to a valid assessment of deficiencies that resulted from the deceased husband's scheme to evade taxes by claiming false deductions. The government presented a certified transcript indicating that the IRS sent the taxpayers timely notice and demand for payment, and the widow presented no evidence to challenge the validity of the assessments. Accordingly, the liens were enforceable.

[Code Secs. 6321 and 6323 ]

Tax liens: Property subject to: Trusts: Control of assets: Community property: Character as: Joint and several liability.--Married taxpayers' community property was subject to federal tax liens that arose after the couple transferred the property to a revocable trust. Since the taxpayers retained total control of the trust assets, they effectively owned the property under state ( California ) and federal law. They were the settlors, trustees and beneficial owners of the trust with the right to withdraw its assets or dissolve the trust at any time. Moreover, the husband was jointly and severally liable for the entire amount of the deficiencies that arose from the couple's joint returns, and state law permitted a creditor to reach the entire community property in order to satisfy a debt owed by one spouse.

[Code Sec. 6015 ]

Tax liens: Property subject to: Community property: Innocent spouse relief: Joint and several liability: Personal liability.--A widow was not entitled to innocent spouse relief from tax liens that attached to community property that had belonged to her and her late husband. Their deficiencies arose from joint returns on which the husband claimed false deductions. Thus, he was jointly and severally liable for the entire amount of the deficiencies, and state ( California ) law permitted a creditor to reach the entire community property in order to satisfy a debt owed by one spouse. Moreover, the government was not attempting to collect against the widow personally; it was merely pursuing liens that arose against her husband. Innocent spouse relief did not prevent the government from collecting against community property in accordance with state law.

[Code Sec. 6323 ]

Tax liens: Property subject to: Community property: Death of spouse: Extinguished liens: Amount of lien: Interest: Inherited property.--A husband's death did not extinguish tax liens against community property that he had owned with his wife. The property presumably passed to the widow's sole ownership, but it did so subject to the liens, which functioned like a mortgage that reduced the value of the property. The court reserved the question of whether the amount of the liens continued to increase to account for interest that accrued on the deficiencies after the husband's death.

[Code Sec. 1 ]

Double jeopardy: Criminal conviction: Collection actions.--The collection of tax liens against an individual who was convicted of filing false tax returns did not violate his protection against double jeopardy. His conviction represented punishment for committing a crime, while the liens were intended to collect the taxes that the couple should have paid.

ORDER GRANTING PLAINTIFF UNITED STATES MOTION FOR PARTIAL SUMMARY JUDGMENT

I. INTRODUCTION

FEESS, District Court Judge:

The present motion concerns the relationship between federal tax liens and property held in a revocable trust. ¹ The Court must determine the extent to which a federal tax lien against an individual attaches to community property held by a revocable trust on behalf of the individual and his wife. The Court finds first that, in California , a tax lien can attach to property held within a revocable trust, notwithstanding the fact that the trust nominally holds title to the property. The Court next finds that a tax lien may attach to community property for the tax debts of an individual. Thus, in California , the tax lien may attach to community property that is held on behalf of the individual and his wife by a revocable trust, and the property may be used to satisfy the tax debts of the individual.

As discussed in greater detail below, Emile Stolle II ("Stolle") fraudulently overstated certain expenses on his family's tax returns for 1985, 1986, 1987, 1989, 1990, and 1991, and then significantly underpaid his taxes for those years. In 1992, Stolle was convicted of criminal charges relating to the false tax returns for 1985, 1986, and 1987. In 1992 and 1993, the government calculated the amount of tax that Stolle ought to have paid for the years 1985, 1986, 1987, 1989, 1990, and 1991; the government then served Stolle with a demand that the Stolles pay the difference between what was already paid and what he should have paid (plus interest and penalties). Stolle's debt to the government for his underpayments in 1985, 1986, and 1987 exceeded $400,000, while his debts for the underpayments in 1989, 1990, and 1991 exceeded $10,000. ²

In the current case, the government seeks to validate tax liens filed on four pieces of real property. Stolle and his wife originally owned the four pieces of property as community property in California . In 1989, Stolle and his wife transferred the property to a revocable trust. In 1992 and 1993, the government served Stolle with assessments for amounts owed as a result of Stolle's underpayment of taxes, and Stolle failed to either contest or pay those assessments.

The government contends that Stolle's failure to contest or pay the assessments resulted in a lien against all of Stolle's property. The government further contends that, as viewed by federal tax law, Stolle continued to have an interest in the four pieces of real property. As such, the government contends that Stolle's interest in those four pieces of government property became subject to lien. The government seeks validation of those liens.

As noted above, the Court agrees that under federal tax law Stolle continued to have an interest in the four pieces of property. As such, the government's tax liens attached in 1992 and 1993 to Stolle's interest in the four pieces of property. Finally, because Stolle and his wife held the property in 1992 and 1993 as community property, all of the property became subject to the liens and the liens attached to the entire property. As a result, the liens have continued to exist on the property since 1992 and 1993 and Stolle's subsequent death did not remove the liens.

II. BACKGROUND

On a motion for summary judgment, the Court must resolve all disputed facts in favor of the non-moving party, and draw all reasonable inferences in favor of the non-moving party. In this motion, Stolle's widow Helen Stolle ("Helen Stolle") and the Stolle Revocable Family Trust ("Revocable Trust") are the non-moving parties. As a result, the Court resolves all disputed facts in favor of Helen Stolle and the Revocable Trust, and draws all reasonable inferences in their favor. ³

Under that standard, the relevant facts are as follows:

A. Stolle Establishes a Scheme to Inflate Expenses Reported on His Family's Tax Returns and Thereby Underpay Tax

In a nutshell, it appears that Stolle created various off-shore trusts and then purported to execute mortgages on various parcels of real property in favor of those trusts. ⁴ Stolle then made payments to the trusts, and treated those payments as deductions in his family's income tax filings as though the payments were business (or residential interest) expenses. In fact, the payments to the trusts were not expenses, but were no more than the transfer of Stolle's own money from one Stolle account to another Stolle account. As such, Stolle's treatment of the payments as deductions was improper, and he claimed higher deductions than he should have.

Because Stolle claimed higher deductions than he should have, Stolle claimed that his income tax was lower than it should have been. Stolle filed inappropriate deductions on his joint tax returns for 1985, 1986, 1987, 1989, 1990, and 1991, and he significantly underpaid taxes for those years.

B. Stolle and His Wife Establish a Revocable Living Trust and Transfer Four Parcels of Community Property Into the Revocable Living Trust

On August 23, 1989, Stolle and his wife established the Stolle Revocable Living Trust ("Revocable Trust").

1. Stolle and His Wife Retain Total Control of the Assets in the Trust

Pursuant to the terms of the Revocable Trust, Stolle and his wife retained the "express and total power to control and direct payments, add or remove trust property, and amend or revoke this trust."

2. Stolle and His Wife Transfer Four Parcels of Community Property Into The Trust

Schedule A to the Revocable Trust lists property that Stolle and Helen Stolle transferred into the trust at the inception of the trust. Schedule A indicates that "all of the following described property is the community property of the Settlors, unless otherwise specified."

The first four items listed in Schedule A are: "Real property located at 4900 Briggs Avenue, La Crescenta, California 91214," "Real property located at 3651 Foothill Blvd., La Crecenta, California 91214," "Real property located at 3852 Vista Court, La Crescenta, California, 91214," and "Real property located at 2910 Sycamore, La Crescenta, California 91214."

There is no indication that any of this property was separate property of either spouse, and consequently it appears undisputed that the property was community property at the time of the transfer to the trust.

At the same time that the Stolles executed the Revocable Trust, they signed and subsequently filed quitclaim deeds for the four properties, transferring their interest in the properties to the Revocable Trust. ⁵ The fact that both Stolles signed the quitclaim deeds reinforces the conclusion that the properties were held by the Stolles as community property.

3. The Trust Maintains Community Property As Community Property Unless Otherwise Indicated

Pursuant to the terms of the Revocable Trust, "[a]ny community property, including the proceeds from such property, which is or becomes trust property, shall remain community property during the lives of both of us." Moreover, any "conveyance or transfer of community property to our trust, whether directly transferred or transferred to a nominee or agent on behalf of our trust, shall not be construed as a partition of community property unless there is an express written agreement to that effect between us."

C. Stolle Is Criminally Convicted For Filing False Returns In Three of the Years During Which He Engaged In This Scheme

In August of 1992, Stolle was convicted of criminal charges relating to the false tax returns for 1985, 1986, and 1987. The criminal case did not involve Stolle's underpayment for 1989, 1990, and 1991. ⁶

D. The Government Sends Stolle and His Wife Notices of Jeopardy Assessment and Deficiency

1. Notices Related to Tax Years 1985, 1986, and 1987

On July 15, 1992, the government sent Stolle and his wife a notice of jeopardy assessment amounting to $428,130. These assessments included underpayments, interest, and penalties for underpayment.

On September 11, 1992, the government sent Stolle and his wife a notice of deficiency, allowing them to challenge the July 15, 1992 assessment in front of the tax court. The Stolles did not challenge or contest the jeopardy assessment.

On September 11, 1992, the government seized approximately $397,884 from bank accounts controlled by Stolle and his wife. These funds were applied to the July 15, 1992 jeopardy assessments, leaving a balance of $30,245.

2. Notices Related to Tax Years 1989, 1990, and 1991

On April 9, 1993, the government sent the Stolles a notice of deficiency arising out of Stolle's underpayment of his family's taxes for the years 1989, 1990, and 1991. This notice assessed taxes and penalties totaling $12,226 for the tax years 1989, 1990 and 1991. ⁷ The Stolles did not challenge or contest this notice of deficiency.

On September 7, 1993 and September 27, 1993, following the Stolles' default on the April 9, 1993 notice of deficiency, the government assessed additional taxes and penalties against the Stolles such that the total amounted to $12,371 for the tax years 1989, 1990, and 1991.

E. The Government Files Notices of Federal Tax Lien

On July 16, 1992 and April 6, 1994, the government filed Notices of Federal Tax Lien in connection with the assessments noted above. These Notices indicated the existence of a lien against all property and all rights to property belonging to the taxpayers and were filed in the County Recorder 's office for Los Angeles County , California .

F. Emile Stolle II Passes Away

On December 16, 1994, Stolle passed away. Stolle's interest in community property presumably passed to his wife, Helen Stolle, subject to any appropriate claims on the property that existed at the time of Stolle's death on December 16, 1994. ⁸

G. The Government Brings This Action to Seek to Validate Liens on the Four Parcels Pursuant to 26 U.S.C. §6321

On January 27, 1999, the government filed this action to validate the tax liens on the four parcels.

III. LEGAL ANALYSIS

A. Standard for Summary Judgment

Under the Federal Rules of Civil Procedure, summary judgment is proper only where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party has the burden of demonstrating the absence of a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S. Ct. 2505, 2514 (1986). If the moving party satisfies the burden, the party opposing the motion must set forth specific facts showing that there remains a genuine issue for trial. Id. ; see Fed. R. Civ. P. 56(e). Summary judgment may be granted on part of an action, Lewis v. Anderson, 615 F.2d. 778 (9th Cir 1979), FRCP 56(a) (plaintiff may seek summary judgment upon all or any part of an action), including questions of liability. KMLA Broadcasting v. Twentieth Century Cigarette Vendors, 264 F.Supp 35 (C.D. Cal.1967).

B. The Court Must Accept the Validity of the Tax Assessments

The United States has presented this Court with a certified transcript indicating that timely notice and demand for the outstanding assessments has been made and that there remains an unpaid balance. The certified transcript is prima facie evidence that the assessments therein are valid, meaning that the transcript will constitute sufficient evidence of the validity of the assessments unless Defendants provide evidence that would show an error in the assessments. Welch v. Helvering [3 USTC ¶1164], 290 U.S. 111, 114 (1933); Hughes v. United States [92-1 USTC ¶50,086], 953 F.2d 531, 535 (9th Cir. 1992).

As noted in the factual discussion, Defendants have not provided any evidence to challenge the validity of the assessments. As such, the Court must accept the validity of the tax assessments.

C. Emile Stolle II Was Jointly And Severally Liable For the Entire Sum Due

Pursuant to 26 U.S.C. §6013(d)(3), both husband and wife are normally jointly and severally liable for all tax liability when a joint return is filed. Although the United States may collect no more than the total amount due, joint and several liability means that the United States may normally pursue either spouse (or both) for the amount of the tax liability.

In certain instances, one spouse may be an "innocent spouse." See 26 U.S.C. §6015(b). In those circumstances, the United States may be precluded from pursuing the "innocent spouse" for the full amount of the tax liability.

However, even if one spouse is an innocent spouse, the culpable spouse remains individually liable for the full amount of the tax liability. In this case, Emile Stolle II was net an innocent spouse, and Stolle was therefore liable for the full amount of the tax liability.

D. A Lien Arose under 26 U.S.C. §6321 on Stolle's Community Property Interest in the Four Parcels, Notwithstanding the Trust's Nominal Ownership of the Parcels

26 U.S.C. §6321 provides that: [i]f 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.

As the United States Supreme Court reaffirmed last December in Drye v. United States, the language of §6321 is broad and " 'reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.' " Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 120 S.Ct. 474, 480 (1999) (quoting United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 719-20 (1985)).

In determining whether a taxpayer possesses property or rights to property, the Court begins by looking to state law to determine what rights the taxpayer has in the property. In this case, Stolle and his wife had a right under the Revocable Trust to withdraw all four parcels from the Revocable Trust, and indeed they had the absolute right to dissolve the Revocable Trust at any time. Stolle and his wife were not only the settlors of the trust, but also the trustees and beneficial owners with the right to dispossess any other beneficial interest. As California law recognizes, Stolle and his wife effectively owned the property. See, e.g., Gagan v. Gouyd, 73 Cal.App.4th 835, 842 (1999) (noting that creditors may reach property held in revocable trust); Dawes v. Rich, 60 Cal.App.4th 24 (1997) (holding that creditors of husband may reach community property held in family trust).

Having determined whether a taxpayer could have a right to the property under state law, the Court then applies federal law to determine whether such a right constitutes property or a right to property under §6321. Drye [99-2 USTC ¶51,006; 99-2 USTC ¶60,363], 120 S. Ct. at 481. Given the broad scope of §6321, the Court has little difficulty concluding that Emile Stolle II and his wife owned the property within the Stolle Revocable Trust within the meaning of federal tax law. Don Gastineau Equity Trust v. United States [88-1 USTC ¶9314], 687 F. Supp. 1422, 1426 (C.D. Cal. 1987) (holding that taxpayers owned property within Revocable Trust where third parties held rights in trust but taxpayers could unilaterally ignore and eliminate the rights of the third parties); see also Neely v. United States [85-2 USTC ¶9791], 775 F.2d 1092 (9th Cir. 1985) (holding that income of trust can be attributed to individual taxpayer); Belshe v. Hope, 33 Cal.App.4th 161, 175 (1995) (holding that decedent's revocable inter vivos trust constituted "estate" for purposes of federal Medicaid act allowing reimbursement to state from decedents "estate").

In short, because Stolle and his wife had effective dominion at all times over the property, the federal lien statute simply treats the property as though it belonged to Stolle and his wife. As such, liens arose against that property for the tax liabilities of Stolle and his wife when they were presented with the notices of deficiency and failed to pay.

Moreover, the Court notes that the Stolles clearly expressed their intention that said property be community property: it was community property at the inception of the Revocable Trust, and it was intended to be maintained as community property during the existence of the trust.

E. The Government May Reach The Entire Community Property To Satisfy a Debt Owed by the Husband

1. California Law Permits a Creditor to Satisfy a Debt of One Spouse Out of Community Property Owned by Both Spouses

Pursuant to California Family Code §910(a), "the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt."

In other words, community property is available to satisfy a debt from either spouse, even if the other spouse is not responsible for the debt.

In this case, even if Helen Stolle were to be treated as an "innocent spouse," Emile Stole II would still have been responsible for the entirety of the debt, and all of his separate and community assets would have been subject to lien to satisfy that debt. See Dawes v. Rich, 60 Cal.App.4th 24 (1997) (holding that creditors of husband may reach community property held in family trust). As noted above, the four parcels of property were held as community assets, and as assets of the community, they were available to satisfy the debts of Emile Stolle II.

2. Whether Helen Stolle Is an "Innocent Spouse" Is Irrelevant Because the Innocent Spouse Provision of 26 U.S.C. §6015(b) Does Not Protect Community Property

Helen Stolle argues that she is an innocent spouse and that her property should not be taken to satisfy the liabilities of Emile Stolle.

Unfortunately, the property could only belong to Helen Stolle to the extent that it is free of the liens of the United States . It helps to remember that a lien is like a mortgage. If Emile and Helen had mortgaged one of the properties to a bank, the bank would have a mortgage on the property to secure payment. Emile and Helen's equity in the property would exist only to the extent that the value of the property were to exceed the value of the mortgage. If Emile were to die, the property might pass to Helen as sole owner--but the mortgage would still exist on the property. Helen's interest in the property would still exist only to the extent that her equity exceeded the value of the mortgage.

In 1992 and 1993, the government served the Stolles with notices of deficiency. When the Stolles failed to pay, both of them became individually liable for that debt, and liens arose against each of their property.

Even if Helen Stolle were an innocent spouse, the liens still arose against all of Emile's property, and all of the community property available to satisfy Emile's debt. See Dawes v. Rich, 60 Cal.App.4th 24 (1997). The federal government therefore had liens on the properties in 1992 and 1993 to guarantee that Emile would pay the debts he owed. The liens acted like mortgages, in the sense that the value of the liens diminished the value of the properties left in the hands of the owners. Emile and Helen only owned equity in the properties to the extent that the value of the properties exceeded the value of the liens.

When Emile died in 1994, the properties presumably became Helen's sole property. However, she did not receive the properties free and clear. She received the properties subject to the government's lien, just as she would have received the properties subject to a mortgage. Her interest in the property amounts only to the equity that existed beyond the value of the liens on December 16, 1994.

Nothing in the language or the case law suggests that the "innocent spouse" provisions of the Internal Revenue Code prevents the government from collecting against community property in accordance with state law. ⁹ Rather, the innocent spouse provisions of 26 U.S.C. §6015 are designed to prevent the government from pursuing an individual independently for tax liability that arose out of a joint return. At the present time, the government is not pursuing Helen Stolle individually, but is rather seeking to confirm the validity of liens that arose against the assets of Emile Stolle II while he was alive. His death no more removes those previously valid liens than his death would remove a previously valid mortgage. Emile's debts to the IRS were secured by an interest in the property, and the property passed to his heirs subject to that interest. ¹⁰

IV. CONCLUSION

For the reasons discussed above, the motion of Plaintiff United States for Partial Summary Judgment is GRANTED and the Court confirms that valid tax liens arose against the community property of Emile Stolle II.

IT IS SO ORDERED.

¹ This motion originally came before the Court on January 24, 2000. At that time, Helen Stolle was not present and her son Emile Stolle III ("Emile III") sought to represent her pursuant to a general power of attorney. The Court explained to her son that, under Ninth Circuit precedent, a party must either retain an attorney or represent him or herself. A party may not designate a non-attorney representative, even by way of a general power of attorney. Jons v. County of San Diego , 114 F.3d 874, 876 (9th Cir. 1997). The Court therefore continued the hearing for three weeks to permit Helen Stolle to appear or retain counsel.

Because Emile III had indicated that his mother was very elderly and infirm, the logical solution would have been for Mrs. Stolle (or her children, acting on her behalf) to have retained counsel for her.

The hope that logic would prevail was dashed when the matter came again for hearing on February 14, 2000. Having ignored the two possibilities explained at the prior hearing, Emile III announced that he had brought his mother "as the Court had asked." The Court did not in fact ask him to bring his mother, but had merely informed him of the two possibilities available under Jons: Mrs. Stolle could represent herself or Mrs. Stolle could retain counsel. Although Emile III sought to represent his mother, the Court again explained that he could not speak on her behalf.

The fact that Emile III could not speak for his mother in this case should have been apparent from the January 24, 2000 hearing. It appears to the Court that Emile brought his mother (who is wheelchair bound and appears quite infirm) for the sole purpose of putting her on display. The Court wishes at this point to express its disappointment that neither Mrs. Stolle nor her children (as her representative) retained counsel for her to handle this tax case on her behalf.

At the February 14, 2000 hearing, the Court very briefly attempted to conduct the hearing with Helen Stolle but it was immediately apparent that Mrs. Stolle could not meaningfully participate because she could not even hear the Court. At that point, the Court asked the government to report on the status of the settlement negotiations that the Court had ordered at the last hearing. Government counsel began by stating that Emile III had made an offer to settle, but Emile III began violently shaking his head back and forth indicating that no offer had been made. By that time, it was apparent that nothing productive could be accomplished at the hearing and the Court took the matter under submission.

² In 1992, the federal government seized over $397,000 from bank accounts controlled by Stolle and his wife to satisfy the assessments for taxes underpaid for 1985, 1986, and 1987.

³ Although the Court resolves all disputed facts in favor of Helen Stolle and the Revocable Trust, the Court must accept all undisputed facts supported by competent evidence. In other words, once the government has established a fact, the fact will be accepted unless Helen Stolle and/or the Revocable Trust provide contrary evidence.

In this case, neither Helen Stolle nor the Revocable Trust have provided any contrary evidence. Quite the opposite, in fact: Helen Stolle has attested that she has "no knowledge of these matters" and that she is "unable to rebut, correct, respond or otherwise defend this matter properly." The entirety of her affidavit amounts to a declaration that she was in total ignorance of the events at issue and that she cannot provide any evidence on the subject. As a result, there is no contrary evidence that could create disputed issue of fact, and the evidence must be evaluated as presented by the government.

As a final matter, the Court notes that Helen Stolle did request the Court to delay resolution of this motion pursuant to Rule 56(f) because she has not yet received the answers to unspecified interrogatories served on the government after the government's original motion. Although Helen Stolle did not use the proper form for making a Rule 56(f) motion, she is pro se and the Court will consider her request as though it were a formal Rule 56(f) motion.

To prevail upon a Rule 56(f) motion, a party must identify specific facts that establishe that evidence may exist on an important fact, the reasons why evidence cannot be presented at the current time, and the steps that the party has taken to obtain the evidence.

In this instance, Helen Stolle has failed to identify any specific facts that suggest that the government possesses evidence that might help her. In fact, Helen Stolle attests that the government's response "may or may not enlighten" her. As such, the Court denies her request to postpone consideration pursuant to Rule 56(f). Terrell v. Brewer, 935 F.2d 1015, 1018 (9th Cir. 1991); Brae Transportation, Inc. v. Coopers & Lybrand, 790 F.2d 1439, 1443 (9th Cir. 1986).

⁴ Because Stolle executed liens in favor of the offshore trusts on the property at issue in this suit, the trusts were originally named as defendants in the current suit as parties with potential interests in the real property at issue. The offshore trusts failed to appear despite appropriate service, and the Court granted summary judgment against the offshore trusts in an earlier summary judgment motion. Any interests that the offshore trusts may have had in the real property at issue has thus been extinguished and the Court's discussion of the facts will largely omit facts related to any interests purportedly held by the offshore trusts.

⁵ In its briefing and in its proposed Statement of Uncontroverted Facts and Conclusions of Law, the United States indicates that the Stolles signed the quitclaim deeds in favor of the Revocable Trust in July, 1989. This is both nonsensical, because the Revocable Trust did not exist until August, 1989, and flatly contradicted by the deeds themselves which are dated August 23, 1989.

This is but one of several indicia of carelessness in the government's briefing. (See also Plaintiff's Mem. of P & A at 17 (citing 26 U.S.C. §6621 rather than 26 U.S.C. §6321). The Court strongly cautions counsel against unprofessional behavior.

⁶ The criminal case also did not constitute an attempt by the government to collect on Stolle's underpayment of taxes. Helen Stolle argues in her opposition papers that the current action violates the protection of double jeopardy because she believes that the government is further attempting to punish Stolle for his underpayment. However, Stolle committed a crime when he filed false tax statements, and his criminal conviction represented the punishment for the mere fact of filing false statements. Stolle also owed the government money because he paid less than he should have. The sums assessed by the government constitute the money that Stolle should have paid, plus interest and penalties. In this respect, the government behaves no differently than a credit card company or other private entity: failure to pay the government money you owe results in a balance to be paid, plus accrued penalties and interest. Collection of delinquent taxes along with penalties and interest on those delinquent taxes is not punishment for the crime of filing a false statement and does not constitute double jeopardy after conviction of the crime. This principle was established by the Supreme Court in 1938 in Helvering v. Mitchell [38-1 USTC ¶9152], 303 U.S. 391, 404 (1938) and has been recently reaffirmed by the Supreme Court in Hudson v. United States, 522 U.S. 93 (1997). See also I & O Publishing Co. Inc. v. Commissioner of Internal Revenue [98-1 USTC ¶50,115], 131 F.3d 1314, 1416 (9th Cir. 1997); United States v. Alt [96-1 USTC ¶50,267], 83 F.3d 779, 781 (6th Cir. 1996); Thomas v. C.I.R. [95-2 USTC ¶50,439], 62 F.3d 97, 100-02 (4th Cir. 1995).

⁷ The notice also assessed $24,194 in taxes and penalties for tax year 1998, but that year is not at issue in this current motion.

⁸ The terms of the Revocable Trust may have modified the normal course of inheritance. Those modifications are not relevant to the current motion, inasmuch as the government seeks only to confirm the validity of liens that arose on the community property assets before Stolle's death. Any lien validly existing on the property at the date of Stolle's death remains on the property unless satisfied or otherwise expunged.

⁹ Section 6015(b) does indicate that community property should be ignored in determining what income should be attributed to an individual for the purpose of determining their tax. In other words, since Helen Stolle apparently had no income herself during this period, and assuming without deciding that she were an innocent spouse, the IRS could not attribute half of Emile Stolle II's income to her and request that she pay tax on that income.

¹⁰ The Court at this time concludes only that the government has valid tax liens on the properties to secure the debt owed by Emile Stolle II at the time of his death. The Court does not address the question of whether those liens continued to grow after his death. In other words, although the debt of Emile Stolle II may have continued to accrue interest, it is not clear to the Court that the liens on the properties continue to grow after Stolle's death in 1994 because the remainder of the equity became separate property upon Emile Stolle's death. It is therefore possible that any additional interest remains a debt of Emile Stolle II but not a lien against his wife's equity in the property. The Court expressly reserves this question, concluding today only that valid tax liens arose in favor of the United States for the full value of Emile Stolle's debts up to the day he died. At the very least, therefore, the government currently has valid liens on the property for the value of Stolle's tax debt as of the date of his death.

At this juncture, it appears to the Court that both parties would benefit from another attempt to settle this case. Although the government has prevailed in this motion and demonstrated that tax liens currently exist for at least the value of Stolle's tax debts at the time of his death, the government will have to continue to litigate this case to determine whether or not the tax liens continued to grow. This should provide some incentive for the government to settle.

From Helen Stolle's perspective, the benefits to resolving this situation should be evident. If the government can be satisfied with the moneys from one or two of the properties, the tax liens on the other properties can be removed. Moreover, Mrs. Stolle may not even have to surrender any of the properties if she can get a loan on one or more of the properties to settle the case. The existence of the tax liens should not be an impediment to getting a loan if the banks know that the proceeds of the loan will go to remove the tax lien as part of the loan transaction. By contrast, if Mrs. Stolle continues to litigate, all four properties will continue to be subject to the tax liens and she runs the risk that interest will keep accruing against the properties.

 

 

 

Dale Walter Smith and Johanna Smith, Plaintiffs v. Melvin Hamilton, Eva H. Hamilton, United States of America, a body politic, John Doe, Jane Doe, and John Doe Company, a corporation, Defendants, by original summons, and between the said United States of America Cross-Claimant v. Dale Walter Smith, Johanna Smith, Melvin Hamilton, Eva H. Hamilton, John Doe, Jane Doe, and John Doe Company, a corporation, Cross-Defendants by Cross-Claim

In the District Court of the United States, Southern District of California, Central Division, No. 15768-BH, March 31, 1954

Priority of liens: Equitable or secret lien.--The recorded tax lien of the United States was superior to an unpaid vendor's lien where the latter was purely equitable in nature. Equitable liens because of their secret nature will not be enforced against creditors without notice, either actual or constructive.

Property subject to lien: Community property.--Property in question was community property notwithstanding that the form of deed granting it was one of joint tenancy. The spouses considered it as community property and, consequently, the entire real property was subject to the government's claim based on a tax lien. Oregon Smith, 115 West C. St. , Ontario , Calif. , for Dale W. and Johanna Smith. Walter S. Binns (later Laughlin E. Waters), United States Attorney, E. H. Mitchell and Edward R. McHale, Assistant United States Attorneys, and Eugene Harpole, Special Attorney, Bureau of Internal Revenue, all of 600 Federal Bldg., Los Angeles 12, Calif., for the United States.

Memorandum Opinion

The unpaid vendor's lien upon which the plaintiff bases his claim for a priority over the recorded tax lien of the United States is purely equitable in nature even though recognized in California by statute and as such it is recognized as a secret lien. [Martin v. Becker, 146 P. 665 (1915).] It is well settled in this circuit, as well as elsewhere, that equitable liens because of their secret nature will not be enforced against creditors without notice, either actual or constructive. [Stepp v. McAdams, 88 Fed. (2d) 925 (9th Cir., 1937)]. Inasmuch as the United States is here in the position of a creditor without notice, it must be accorded a position of priority over the claim of the plaintiff.

It is my view that the entire real property in question is subject to the government's claim. It is well settled in California that the marital property of the spouses is liable for the debts of the husband with minor exceptions not applicable here. [Grolemund v. Cafferata, 111 P. (2d) 641 (1941).] The evidence introduced here showed that the property in question was community notwithstanding that the form of the deed granting it is one of joint tenancy. It is settled law in California that if the spouses consider the property as belonging to the community, it does so regardless of the form of the deed by which it was taken and evidence may be received to show its true character. [Tomaier v. Tomaier, 146 P. (2d) 905 (1944); United States v. Pierotti, 154 Fed. (2d) 758 (9th Cir., 1946) [46-1 USTC ¶9230, 10,261].]

I assume that the parties will agree on a form of decree of foreclosure, wherein the plaintiff shall receive any surplus after the government's lien is satisfied.

Findings and decree to be filed within ten days from date hereof.

Findings of Fact and Conclusions of Law (March 31, 1954)

This cause came on regularly for trial on the 1st day of March, 1954, and was continued to March 5, 1954, for further proceedings, before the Court without a jury, Oregon Smith appearing as attorney for the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith; Laughlin E. Waters, United States Attorney for the Southern District of California and Edward R. McHale, Assistant U. S. Attorney for said District, Chief, Tax Division, appearing for the defendant and cross-claimant, United States of America; the defendants and cross-defendants, Melvin Hamilton and Eva Hamilton, having been served with both the Complaint and Cross-claim and not having appeared, and their defaults having been entered; and the defendants and cross-defendants, Jane Doe and John Doe Company, a corporation, having been dismissed as such, and evidence both oral and documentary having been introduced and the cause having been submitted to the Court, and the Court being fully advised in the premises, finds the facts as follows:

Findings of Fact

I. The defendant and cross-claimant, United States of America, is a corporation sovereign and body-politic, and by statute (Title 28, U. S. C. §2410) consented to be sued in the Superior Court of the State of California, in and for the County of San Bernardino, in an action to foreclose a lien against real property, and thereafter removed the matter to this Court pursuant to Title 28, U. S. C. §1444, and is entitled to the affirmative relief of foreclosure of its liens pursuant to Title 28, U. S. C. §2410(c).

II. This Court has no jurisdiction over the defendant United States of America with respect to the first and second causes of action for the collection of promissory notes, because the United States of America has not consented to be sued in such actions.

III. Prior to August 26, 1952, the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, were the owners of record of that certain real property located in the City of Ontario, County of San Bernardino, State of California, particularly described as follows, to-wit:

"The East 1/2 of Lot 25, TRACT NO. 2540, CALTONIA TRACT, in the City of Ontario, County of San Bernardino, State of California, as per plat thereof recorded in Book 36 of Maps, Page 40, Records of said County;

SAVING AND EXCEPTING an undivided 1/2 interest in the West Four Feet of the said East half of Lot 25; TOGETHER with an undivided 1/2 interest in the East Four Feet of the West half of said Lot 25,"

subject to a trust-deed securing a note in the principal balance remaining unpaid at that date of $5,476.40 executed by Dale Walter Smith, Trustor, to Pioneer Title Insurance and Trust Company, a California corporation, Trustee, to secure an original indebtedness of $7,000 in favor of the First National Bank of Ontario, a national banking association.

IV. On or about August 26, 1952, the Smiths entered into an escrow with the defendants and cross-defendants Hamilton, for the sale of the aforementioned real property to the Hamiltons for the total consideration of $8,500, $1,000 to be paid in cash through the escrow, $5,476.40 by assumption of the trust deed in favor of the First National Bank of Ontario, and $1,723.60 by two promissory notes executed by the Hamiltons, one in the sum of $500 and the other in the sum of $1,523.60, both of which were unsecured. The escrow agent was the First National Bank of Ontario , California , and on or about said date, the Smiths delivered to the escrow the aforesaid two promissory notes made and executed by them and the sum of $1,000 in cash. The plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, delivered into escrow a grant deed conveying the property to the defendants and cross-defendants, Melvin Hamilton and Eva H. Hamilton, as joint tenants. On or about November 10, 1952, the escrow was completed and the various instruments deposited therein were delivered pursuant to instructions to the respective parties and the deed to the Hamiltons was recorded on November 10, 1952, in Book 3051, at page 143 of Official Records in the Office of the County Recorder of San Bernardino County , California .

V. Melvin Hamilton and Eva H. Hamilton raised the $1,000 in cash required to be paid into escrow by borrowing money from a finance company on a note secured by a chattel mortgage on their household furnishings which was their community property. From the time of the completion of the escrow, in November 1952, until the commencement of this action in July 1953, the Hamiltons paid to the First National Bank of Ontario the amounts due on the first trust deed. Said payments were made from the community earnings of the Hamiltons .

VI. On or about August 26, 1952, the Hamiltons made, executed and delivered to the escrow agent their promissory note in writing, in the principal sum of $500, dated said date, and payable to the order of the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith on or before September 29, 1952, with interest at the rate of 6% per annum from the date thereof until paid, payable at maturity; at all times herein mentioned, the Smiths have been and still are the owners and holders of said note; no part of the principal of said note or any of the interest thereon has been paid, although the Smiths have demanded payment of the same from the said Hamiltons; the Hamiltons have neglected, failed and refused, and still neglect, fail and refuse, to pay said sum of $500, or any part thereof, or any of the interest on said note, and the sum of $500, together with interest thereon at the rate of 6% per annum from August 26, 1952, which is now wholly due, owing and unpaid from Melvin Hamilton and Eva H. Hamilton, and each of them, to the Smiths.

VII. On or about August 26, 1952, Melvin Hamilton and Eva H. Hamilton made, executed and delivered to the Smiths their promissory note in the principal sum of $1,523.60, payable to the order of the Smiths in installments, including interest on the unpaid balance of said principal at the rate of 6% per annum from the date of said note until paid, of $40.00 per month, or more, on the 14th day of each month, commencing on October 14, 1952, and continuing until said principal and interest should be paid; at all times herein mentioned the Smiths have been and still are the owners and holders of said note, said note by its terms provided that if default should be made in the payment of any such installment, then the whole of said principal sum and the interest thereon should become immediately due at the option of the holders thereof. No part of the principal of said promissory note, or any of the interest thereon, has been paid. The Hamiltons made default in the payment of the installment of $40.00 due on October 14, 1952, and of the installment of $40.00 due on November 14, 1952; no part of said installments, or either of them, has been paid by the Hamiltons, or either of them to the Smiths, although the Smiths have many times demanded payment of the same. On or about November 25, 1952, the Smiths notifed the Hamiltons in writing of the non-payment of said installments and demanded payment of same, and notified them that should they fail to pay the same on or before November 29, 1952, plaintiffs would elect to declare the whole sum of principal and interest due and to become due under said promissory note immediately due and payable; that thereafter and on or about December 2, 1952, the Smiths notified the Hamiltons in writing that the Smiths elected to declare, and thereby declared the entire balance of principal and interest due, and to become due, under said promissory note immediately due and payable and demanded payment of said sum of $1,523.60, with interest thereon at the rate of 6% per annum from August 26, 1952, and the plaintiffs do hereby so elect. The Hamilton's have neglected, failed and refused, and still neglect, fail and refuse to pay said sum of $1,523.60, or any part thereof, or any of the interest thereon, to the Smiths, and that said sum of $1,523.60, together with interest thereon at the rate of 6% per annum from August 26, 1952, until paid is now wholly due, owing and unpaid from the Hamiltons, and each of them to the Smiths.

VIII. The said notes set out in paragraphs VI and VII above, by their terms each provided that if action should be instituted in any Court to enforce payment of the same, then the Hamiltons would pay such sum as the Court should fix as attorney's fee in said action for the Smiths' attorney. The Smiths have been compelled to employ and have employed an attorney for the prosecution of the within action on the collection of both of the notes. The sum of $200.00 is a reasonable sum to be allowed and ordered to be paid to plaintiffs for said attorney's fees in connection with the note in the prinvipal amount of $500, and the sum of $300.00 is a reasonable amount to be allowed and ordered paid to plaintiffs for said attorney's fees in connection with the collection of the note in the principal amount of $1,523.60, the Hamiltons not having contested the action.

IX. The United States of America filed with the County Recorder of San Bernardino County , on April 16, 1952, a notice of tax lien for withholding and employment taxes for the fourth quarter of 1951 in the amount of $962.83 against Melvin Hamilton, Melvin Hamilton Electric, which tax lien has been paid in full.

X. On December 30, 1952, the Commissioner of Internal Revenue assessed against the defendant Melvin Hamilton doing business as Melvin Hamilton Electric, withholding and employment taxes for the third quarter of 1952 in the sum of $1,504.73 taxes and $15.05 interest, for a total assessment of $1,519.78; the assessment list showing the assessment of the aforesaid taxes and interest was received in the office of the Director of Internal Revenue at Los Angeles, California, on January 5, 1953; notice and demand for the payment of the taxes and interest so assessed was made upon the taxpayer shortly thereafter, but no payment was made and no part thereof was paid on March 4, 1953, as alleged in the complaint, a notice of tax lien was filed in the office of the County Recorder of San Bernardino County, California, as Nos. 4986 and 263; remaining due, owing and unpaid is the sum of $1,654.95, representing the aforesaid assessment together with penalties and interest computed to August 31, 1953; further interest continues to accrue on the aforesaid assessment at the statutory rate of six per centum per annum from September 1, 1953, until paid; lien filing fees of $1.00 have been incurred.

XI. On March 6, 1953, the Commissioner of Internal Revenue assessed against Melvin Hamilton, doing business as Melvin Hamilton Electric, withholding and employment taxes for the 4th quarter 1952 in the sum of $658.16; the assessment list showing the assessment of the aforesaid tax was received in the office of the Director of Internal Revenue at Los Angeles, California, on March 9, 1953; notice and demand for the payment of the tax so assessed was made on the taxpayer shortly thereafter, but no payment was made and no part thereof was paid; on April 17, 1953, as alleged in the complaint, a notice of tax lien was filed in the office of the County Recorder of San Bernardino County, California, as No. 5044; remaining due, owing and unpaid is the sum of $709.25, representing the aforesaid assessment together with penalties and interest computed to August 31, 1953; further interest continues to accrue on the aforesaid assessment at the statutory rate of six per centum per annum from September 1, 1953, until paid; lien recording fees of $1.00 have been incurred.

XII. Internal Revenue tax liens in favor of the cross-claimant, United States of America, arose upon all the property and rights to property which then belonged or thereafter came into the possession of the cross-defendant Melvin Hamilton, or the cross-defendant Eva H. Hamilton, on the dates indicated herein that the Director of Internal Revenue received the assessment lists carrying the assessments of Federal Internal Revenue taxes against Melvin Hamilton, and said liens became valid as to all the world upon filing notice thereof in the office of the County Recorder of San Bernardino County, California.

XIII. The Hamiltons purchased the real property with community funds during the time their marital community was indebted to the cross-claimant, the United States of America .

XIV. The aforesaid real property purchased by the Hamiltons was purchased with community funds and it was the intent of the Hamiltons that the property would remain community property despite the form of the deed to them in joint tenancy.

XV. All the community property of Melvin Hamilton and Eva H. Hamilton is liable for the debts incurred by Melvin Hamilton in his community business venture of his electric contracting business, including his liability to the United States of America , cross-claimant herein, for withholding and employment taxes incurred therein.

Conclusions of Law

From the foregoing facts, the Court concludes as follows:

I. The Court has jurisdiction of this action, and of the United States of America and of all the other parties hereto with respect to the third cause of action. This Court has jurisdiction with respect to the plaintiffs and the defendants, Melvin Hamilton and Eva H. Hamilton only, under the first and second causes of action.

II. Internal Revenue tax liens in favor of the cross-claimant, United States of America, arose upon all of the property and rights to property which then belonged or which thereafter came into the possession of the defendants and cross-defendants, Melvin Hamilton and Eva H. Hamilton, on the dates indicated in the findings that the Collector of Internal Revenue received the assessment lists carrying the assessments of Federal internal revenue taxes against said defendant and cross-defendant Melvin Hamilton, and said liens became valid as to all the world, including all the cross-defendants herein upon filing of notice thereof in the office of the County Recorder of San Bernardino County, California.

III. The United States of America has a lien against the property and rights to property of Melin Hamilton by reason of Internal Revenue taxes for the third quarter of 1952 in the sum of $1,654.95, together with interest at the rate of 6 per centum per annum on the sum of $1,519.78 from September 1, 1953, until paid, and lien filing fees of $1.00, which sums are a lien upon the hereinafter described real property, prior and superior to the rights of all cross-defendants herein.

IV. The United States of America has a lien for Internal Revenue taxes against Melvin Hamilton, doing business as Melvin Hamilton Electric for Internal Revenue taxes for the fourth quarter 1952 in the sum of $709.25 together with interest on the sum of $658.16 at the statutory rate of 6 per centum per annum from September 1, 1953, until paid, and lien filing fees of $1.00, which sums are a lien upon the hereinafter described real property, prior and paramount to the interest of all cross-defendants herein.

V. The cross-claimant the United States of America has liens upon the property described as:

"The East 1/2 of Lot 25, TRACT NO. 2540, CALTONIA TRACT, in the City of Ontario, County of San Bernardino, State of California, as per plat thereof recorded in Book 36 of Maps, Page 40, Records of said County;

SAVING AND EXCEPTING an undivided 1/2 interest in the West Four Feet of the said East half of Lot 25; TOGETHER with an undivided 1/2 interest in the East Four Feet of the West half of said Lot 25,"

which liens are prior and paramount to liens of all other parties herein and cross-claimant is entitled to a judgment foreclosing its tax liens against the herein described real property and ordering the sale of the property by the Marshal of this Court, proceeds thereof to be applied as set forth in Paragraph VII hereinafter.

VI. The plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, have a vendors' lien upon the real property, which is a secret lien, subsequent and subordinate to the aforementioned liens of the United States of America but prior to the rights of every other party hereto, and they are entitled to judgment foreclosing said liens upon the real property.

VII. The defendant and cross-claimant, United States of America , and the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, are entitled to have their respective encumbrances enforced and foreclosed and the lands and premises hereinafter described sold in the manner prescribed by law, and the proceeds of the sale of said real property applied, as follows:

FIRST: To the payment of Marshal's fees, disbursements, and expenses of sale;

SECOND: To the costs incurred in this action and by the defendant and cross-claimant, United States of America ;

THIRD: To the United States of America the sum of $2,364.20, as of August 31, 1953, plus interest at the rate of six per centum per annum on the sum of $2,177.94 from said day to date of payment, and the further sum of $2.00 for its lien filing fees;

FOURTH: To the costs incurred in this action by the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith;

FIFTH: To plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith the sum of $2,023.60 with interest thereon at the rate of six per centum per annum from August 26, 1952, together with the sum of $500.00 as an attorney's fee for plaintiffs' attorney for the prosecution of the within action;

and that all of said sums be declared to be a lien upon said premises hereinafter described.

VIII. The real property shall be sold according to law by the United States Marshal for this District and the proceeds be applied to the payments of amounts as set forth in Paragraph VII hereinabove. If the proceeds of said sale be insufficient to pay amounts as aforesaid, and it shall so appear from the Marshal's return, a further hearing shall be had for the purpose of establishing the amount of the deficiency judgment or judgments, if any, to be entered for the cross-claimant against the cross-defendant Melvin Hamilton and for the plaintiffs Walter Smith and Johanna Smith, against the defendants Melvin Hamilton and Eva H. Hamilton.

IX. The liens of the defendant and cross-claimant, United States of America, the plaintiffs and cross-defendants, Dale Walter Smith and Johanna Smith, are valid and subsisting liens upon the lands and premises; and the United States of America and Dale Walter Smith and Johanna Smith are entitled to judgment and decree of this Court foreclosing said liens and to carry out the foregoing and also providing that any party of this action may become a purchaser at the sale of said property, said purchaser, or purchasers to be let into possession of said premises so sold after the expiration of the redemption period and that a writ of assistance issue therefor, if necessary, without notice. The defendant and cross-claimant, United States of America , is entitled to credit on its bid in the amount of its first and prior liens set forth in Paragraph VII hereinafter.

 

 

 

Mrs. Thelma Ford Smith, Plaintiff v. C. A. Donnelly, United States Collector of Internal Revenue of the State of Louisiana , et al., Defendants

United States District Court, Eastern District of Louisiana, New Orleans Division, Civil Action No. 414, 65 FSupp 415, April 6, 1946

Property subject to lien: Louisiana community interest: Liability of spouses: Insurance policies: Exemption under state law.--In Louisiana each spouse is liable for one-half of the tax falling upon the community property. Therefore, the rights of the wife and husband to the cash surrender value of insurance policies on the life of the husband, with the wife as beneficiary, were subject to the lien of the United States for unpaid taxes, interest and penalties against them. It was held that such property is not protected from the incidence of Federal taxation by reason of a claim that under Louisiana law such policies are exempt from the payment of debts.

Walter B. Hamlin, 712 Maison Blanche Bldg., New Orleans , La. , attorney for plaintiff. Herbert W. Christenberry, United States Attorney, Richard B. Montgomery, Jr., Maritime Bldg., New Orleans, La., Attorney for New York Life Insurance Company and State Life Insurance Company, Milton W. Mangus, 1208 State Life Bldg., Indianapolis, Ind., Attorney for State Life Insurance Company, John May, Henry Kelleher, Canal Bldg., New Orleans, La., Attorneys for Travelers Insurance Company, Harry P. Gamble, Carondelet Bldg., New Orleans, La., Attorney for Guaranty Income Life Insurance Company of Baton Rouge, Phelps, Dunbar, Marks and Claverie, United Fruit Co., Attorneys for New York Life Insurance Co., attorneys for defendants. James Monroe Smith, appearing in proper person.

BORAH, District Judge:

In this action plaintiff seeks to prevent the United States from seizing the cash surrender value of eighteen insurance policies taken out by James Monroe Smith, her husband, on his life, and of three policies taken out by her on her life. The relief asked is that warrants of distraint, seizure, levy and demand issued by the United States Collector of Internal Revenue at New Orleans , Louisiana , be quashed and vacated.

The Collector, as defendant, has by way of answer and cross-claim set up the interest of the United States in respect of the policies, this interest being based on assessments of taxes against Smith and his wife. At the request of the Collector, Smith was made a third party defendant.

The United States has intervened and has set up its claim for the assessed taxes against the Smiths, and has objected to the authority of the Court to issue an injunction as being contrary to the provisions of 26 USCA 3653.

In its cross claim the United States is asserting a lien upon all property and rights to property of the Smiths by virtue of the assessments, and particularly upon whatever property rights exist as regards either of them in the twenty-one insurance policies referred to above. The United States has prayed for the foreclosure of its lien as concerns the property rights in those policies.

To summarize each of the twenty-one insurance policies would serve no useful purpose. In the Findings of Fact that follow, the pertinent provisions common to most of the policies will be given, and the respects in which the others differ will also be set forth.

The facts were stipulated. In so far as necessary to state, they are as follows:

Findings of Fact

1. Between the years 1910 and 1936, inclusive, James Monroe Smith, hereinafter referred to as Smith, took out eighteen insurance policies on his own life.

2. Seventeen of the aforesaid policies, either in their original provisions or in subsequent changes, name the plaintiff as the beneficiary, the right to change the beneficiary being reserved to the insured in each policy. The remaining policy, No. 7757, issued by the Guaranty Income Life Insurance Company, which named Marjorie Lee Smith, daughter of the insured, as beneficiary, lapsed for non-payment of annual premium and was placed automatically on extended term insurance, which expired on December 28, 1945.

3. All but two of Smith's eighteen policies contain assignments to the plaintiff of all his rights in the sixteen policies, including the right to change the beneficiary.

4. Of the remaining two policies, one, No. 595-A, issued by the Guaranty Income Life Insurance Company, contains an indorsement reading in part as follows:

"In accordance with the Surrender Value Option 'b' elected by the Insured and Beneficiary effective February 12, 1941, this Policy is hereby amended, and the fact amount reduced to ($3,111.00) Three Thousand One Hundred Eleven Dollars, purchased by the net cash value on the effective date hereof, and premium payments are hereby discontinued and the indebtedness at the effective date hereof has been paid from said policy value and the evidence of such indebtedness cancelled.

"The owner hereof may exercise the rights and privileges hereof including the right to Cash Loans, Cash Surrender Value, Settlement Options, and Change of Beneficiary; but the Provisions for Premium Payment, extended Term Insurance, Profit-Sharing Endowment Options, Additional Options of Paid Up Insurance, and Pure Endowment Options do not apply hereto and are hereby no longer in effect."

5. The remaining policy is the one referred to in Finding No. 2, as having expired.

6. Three insurance policies were taken by the plaintiff on her life, on March 4, 1940, each naming James M. Smith, Jr., as the beneficiary, and reserving to the insured the right to change the beneficiary. The plaintiff has never exercised that right.

7. On February 13, 1940, the Commissioner of Internal Revenue made assessments of taxes against Smith, adding interest and penalties, for the years 1936, 1937 and 1938, totaling $315,409.13. At the same time he made assessments against the plaintiff for unpaid income taxes, interest and penalties for the same years, totaling the same amount.

8. The list upon which the assessments aggregating the sums aforesaid were entered, was certified to the then Collector of Internal Revenue for the District of Louisiana, on or about February 13, 1940. Immediately upon receipt of the list, on February 15, 1940, the then Collector gave notice to the parties assessed respectively, and made demand upon each of them for the assessments applying.

9. Notwithstanding such notice and demand, neither the sums assessed nor any part thereof have been paid, and for the total amount assessed, the United States claims a lien pursuant to 26 USCA 3670, 3671, and 3672 against all property and rights to property belonging to the parties assessed or either of them.

10. On or about February 15, 1940, the then Collector of Internal Revenue for the District of Louisiana filed notice of tax liens for the tax assessed and listed to him as aforesaid, or some part thereof, with the Clerk of Court, Parish of East Baton Rouge, Baton Rouge, Louisiana; with the Clerk of the United States District Court for the Eastern District of Louisiana, at New Orleans, Louisiana; with the Clerk of Court, Parish of Lafayette, Lafayette, Louisiana; and with the Clerk of the United States District Court for the Western District of Louisiana, at Shreveport, Louisiana, as follows:

In the sum of $16,554.67 for the 1936 assessment against Smith and the plaintiff, jointly and severally; in the sum totaling $149,441.11 for the 1937 and 1938 assessments against Smith; in the sum totaling $149,410.35 for the year 1937 and 1938 assessments against the Plaintiff.

11. On October 25, 1940, the then Collector of Internal Revenue for the District of Louisiana issued and served upon each of the insurance companies that had issued the policies in suit a notice of levy upon all property, rights to property, moneys, credits and/or bank deposits in the possession of the said companies or any or either of them, belonging to Smith and/or the plaintiff.

12. Neither C. A. Donnelly, Collector of Internal Revenue for the District of Louisiana, nor any of his predecessors in office who have from time to time appeared as defendants herein, have any interest in this case except as officials of the United States of America, and any and all rights that they have or have claimed herein are subject to the rights of the United States as claimed herein.

Discussion

The plaintiff contends (1) that the paid-up values of the insurance policies became part of her separate estate, by donation from her husband, and that the claim for taxes by the United States against her husband and herself is a debt of the husband, as head of the community of acquets or gains, and not of the plaintiff individually; and (2) that, under Act 88 of 1916, Act 94 of 1934, and Act 155 of 1934, of the State of Louisiana, the proceeds, avails, or dividends of all life insurance policies are exempt from all liability for any debt, except in certain cases not applicable herein.

These two grounds will be considered seriatim.

The plaintiff and her husband, Smith, the third-party defendant, both contend that the present value of each of the insurance policies belongs to the plaintiff. We are inclined to agree with this view save as to the policies referred to in Findings Nos. 2 and 4. The policy mentioned in Finding No. 2, has, as stated, expired, and therefore need not be considered. The endorsement on the policy referred to in Finding No. 4 is not susceptible of the construction for which plaintiff contends. It is not an assignment and the insured specifically reserved the right to change the beneficiary. In consequence the insured retained a property interest in the policy, including the right to surrender for the cash value thereof. Assuming, however, as plaintiff would have us do, that the paid-up value of each of the policies referred to in the findings belonged to the separate estate of the plaintiff, this court is of the opinion that the plaintiff's position is clearly untenable and at variance with the controlling authorities. The Supreme Court and the Circuit Court of Appeals for this Circuit have consistently held that each spouse is liable for one-half of the Federal income taxes relating to the community.

In Bender v. Pfaff, 282 U. S. 127, 132 [2 USTC ¶614], the court held that, inasmuch as the wife in Louisiana has a present vested interest in community property equal to that of her husband, the spouses are entitled to file separate returns, each treating one-half of the community income as income of each of them as an individual. This case was cited with approval in Fernandez v. Wiener, decided on December 10, 1945, 90 L. ed. 147, 152; 66 S. Ct. 178, 182 [45-2 USTC ¶10,239].

The Fifth Circuit Court of Appeals has interpreted the decision of Bender v. Pfaff to mean that in Louisiana each spouse is liable for one-half of the tax falling upon community property. In Saenger v. Commissioner, 69 Fed. (2d) 633 [1934 CCH ¶9141], the court said:

Unlike in Earl's case, 281 U. S. 111, 50 S. Ct. 241, 74 L. ed. 731 [2 USTC ¶496], husband and wife here are joint, not separate, earners. Together they are the tree. They share its fruits and the burdens of that sharing. Bender v. Pfaff * * *

Again citing Bender v. Pfaff, the same court, in Commissioner of Internal Revenue v. Hyman, 135 Fed. (2d) 49, 50 [43-1 USTC ¶9403], said:

* * * under Louisiana law every cent of income from that property 'fell into the community,' vesting equally in the husband and the wife, and should be taxed accordingly--one-half to the wife, one-half to the husband.

In the light of the foregoing it is plain that since Mr. and Mrs. Smith are "co-owners of the income earned, they are co-payers of the tax on it," Saenger v. Commissioner, supra.

The second contention of plaintiff is likewise without merit, for it is well settled that state exemption laws do not protect property from the incidence of Federal taxation. Glass City Bank of Jeanette, Pa., v. United States, 90 L. ed. 72, 74, 66 S. Ct. 108, 110 [45-2 USTC ¶9449], and the cases there cited.

The Fifth Circuit Court of Appeals, too, has held that the Federal government, in its collection of the public fisc, is not to be frustrated by any chance provisions of state law. In the recent case of United States v. Dallas Nat. Bank, 152 Fed. (2d) 582, 585, [46-1 USTC ¶9117], the court said:

We held in Shambaugh v. Scofield, 5 Cir., 132 Fed. (2d) 345 [42-2 USTC ¶9826], that the provision of the Texas Constitution exempting homesteads from forced sale did not operate to exempt a Texas homestead from a sale to satisfy a federal income tax lien. Having been enacted within the scope of the power delegated to the Federal Government, the Internal Revenue statutes are a part of the supreme law of the land. If they are in conflict with State law, constitutional or statutory, the latter must yield.

See also Cannon v. Nicholas (CCA 10), 80 Fed. (2d) 934, 935 [35-2 USTC ¶9672]; Kyle v. McGuirk (CCA 3), 82 Fed. (2d) 212, 213 [36-1 USTC ¶9121]; Kieferdorf v. Commissioner of Internal Revenue (CCA 9), 142 Fed. (2d) 723, 725-726 [44-1 USTC ¶9323], certiorari denied, 323 U. S. 733; Jones v. Kemp (CCA 10), 144 Fed. (2d) 478, 480 [44-2 USTC ¶9410].

The United States having a lien on whatever property rights are represented by the insurance contracts which is superior to any rights claimed by the Smiths or defendant insurance companies, it follows that the government may by foreclosure effect the application of the property to the reduction of the tax obligation, and the court now states its conclusions.

Conclusions of Law

1. The plaintiff's prayer that warrants of distraint, seizure, levy and demand issued by the United States Collector of Internal Revenue be stayed, quashed and vacated, should be denied.

2. The lien of the United States upon all property and rights to property of both James Monroe Smith and his wife, Thelma Ford Smith, by virtue of the tax assessments hereinbefore described, should be recognized as superior to any rights claimed by said Smiths, particularly as to whatever property rights exist as regards either of them in the policies of insurance referred to in the Findings of Fact.

3. The property and rights to property of the plaintiff and said Smith in the aforesaid life insurance policies are subject to the lien of the United States for the unpaid balance of the 1936, 1937 and 1938 income taxes and interest and penalties against plaintiff and her husband, Smith.

4. The prayer of the United States for the foreclosure of its lien as concerns the property and rights to property of the plaintiff and her husband Smith in the aforesaid policies of insurance should be granted.

5. The United States shall be entitled to a judgment for the taxes represented by said assessments, to be paid first out of the cash surrender values of the aforesaid policies.

6. After the sum representing the total cash surrender value of the said policies has been applied against the taxes assessed against the plaintiff and her husband Smith, the United States shall be entitled to judgment for such taxes as may remain due thereafter against the plaintiff and her husband.

7. The United States is entitled to a judgment decreeing that each of the defendant insurance companies, respectively, pay to the United States the value of the respective interests, property and rights to property of the Smiths in and to the aforesaid policies.

Judgment shall be held in abeyance for forty-five days, during which time the parties hereto have agreed to submit a computation showing the effect, in dollars and cents, of the decision rendered by this court.