Creation of Lien page3

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[93-2 USTC ¶50,517] John D. Snavely, Plaintiff v. United States of America , Defendant

U.S. District Court, No. Dist. Ala., Northeastern Div., CIV. CV 90-L-2065-NE, 10/15/92, On remand from an unpublished CA-11 decision

[Code Sec. 7402 ]

District court: Subject matter jurisdiction: Action to quiet title: Sovereign immunity: Waiver.--A taxpayer may rely on the waiver of sovereign immunity under 28 U.S.C. 2410 to challenge the procedural validity of a federal tax lien in an action to quiet title to real or personal property. K. A. Stoeklin (CA-11, 91-2 USTC ¶50,520 ) followed.
[Code Secs. 6321 and 6502 ]

Federal tax liens: Procedural validity.--An IRS tax lien was procedurally valid. Taxes were assessed because the taxpayer did not respond to a Notice of Deficiency within 90 days and the lien for unpaid taxes arose at the time of assessment. The taxpayer presented no evidence to refute the amounts assessed or to establish that the lien was unenforceable. His argument that the IRS failed to assess and collect tax within the permissible time period was without merit because ten years had not passed since the assessments were made. John D. Snavely, 3516 Maggie Ave., Huntsville, Ala. 35810, pro se. Caryl P. Privett, Jack W. Selden, 1800 5th Ave., Birmingham, Ala. 35203, Scott J. Crosby, Department of Justice, Washington, D.C. 20530, for defendant.

SUMMARY JUDGMENT

LYNNE; District Judge:

This cause came on to be heard on October 5, 1992, at the pretrial conference held in Decatur, Alabama, upon the motion to dismiss or, alternatively, for summary judgment, filed by defendant, the United States of America, on August 13, 1992. Plaintiff brought this action "to quiet title to certain real and personal property on which [the] United States Government claims a lien." Plaintiff's Complaint, paragraph I. On May 7, 1991, this Court dismissed the action for want of subject matter jurisdiction. On June 18, 1992, however, the United States Court of Appeals for the Eleventh Circuit vacated this Court's Order of Dismissal and remanded the case "for reconsideration of whether the government has a lien (and, if so, whether the lien has been perfected properly) in light of Stoecklin." Snavely v. United States , No. 91-7430 (11th Cir., June 18, 1992) (Unpublished Opinion). As the Court above discussed, "[i]n Stoecklin v. United States [91-2 USTC ¶50,520 ], 943 F.2d 42 (11th Cir. 1991) (decided after the district court dismissed this case), ... we held that a taxpayer may rely on the waiver of sovereign immunity under [28 U.S.C.] Section 2410 to challenge the procedural validity of a federal tax lien." Based on the Eleventh Circuit's decisions in both Stoecklin and the case at hand, the only questions remaining for this Court to determine are whether there is a lien attaching to plaintiff's property and, if so, whether it is procedurally valid. These questions are squarely presented in the government's Motion for Summary Judgment.

First, however, the government still maintains that this Court lacks subject matter jurisdiction over this quiet title action because sovereign immunity has not been waived. It argues that Section 2410 allows only a suit to quiet title on real or personal property on which the United States has a lien. It claims that because the federal tax lien does not attach to property for which a quiet title action can be brought, this suit should be dismissed. As the government itself concedes, however, "[t]he federal tax lien attaches to 'all property and rights to property, whether real or personal, belonging to such person.'" Plaintiff has brought suit under Section 2410 to quiet title to personal and real property. Thus, as the Eleventh Circuit has made abundantly clear, this Court has subject matter jurisdiction.

Nevertheless, the waiver of sovereign immunity under Section 2410 is limited; a taxpayer may challenge only the procedural validity of a federal tax lien. Stoecklin [91-2 USTC ¶50,520 ], 943 F.2d at 43. As the Eleventh Circuit instructed in Stoecklin, "a taxpayer cannot ... challenge the merits of the underlying assessment." Id. In the second part of its motion, the government seeks summary judgment on the grounds that its tax lien is procedurally valid.

In response to the government's motion, plaintiff asserts various arguments which, despite their novelty, are unconvincing. See Objection to Motion of the United States to Dismiss or in the Alternative for Summary Judgment, page 7 ("the Government has never proven that the plaintiff is a 'person' within the meaning of 26 U.S.C. Para . [sic] 6331(d)"; "it is shown that 'motion' and 'summary judgment' are not valid law procedures"). Moreover, based on his response to the government's motion it appears that plaintiff is confusing the issues before this Court. He insists that "the issue here is to determine the procedural regularity of the Government's liens against the Plaintiff and has the Government made a valid assessment against the Plaintiff." Plaintiff's attempt to challenge the assessment is misguided. The only questions on remand are whether a tax lien exists and, if so, whether it is procedurally valid.

The tax lien at issue in this case is imposed statutorily by Section 6321 of Title 26:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321 . Pursuant to Section 6322 , the lien arises "at the time the assessment is made" and continues until the liability is satisfied or becomes unenforceable. 26 U.S.C. §6322 . Thus, this Court must determine first whether a tax assessment was made, and, secondly, whether the tax liability has been satisfied or is unenforceable.

As the government correctly points out in its Memorandum of Law, Section 6213(c) provides that taxes are assessed if the taxpayer does not respond to the Notice of Deficiency within 90 days. 26 U.S.C. §6213(c) . The notices of deficiency for tax years 1986 and 1987 were mailed on April 9, 1990. It is evident from the pleadings and evidentiary submissions that plaintiff did not respond within 90 days to the notices of deficiency for tax years 1986 and 1987. Therefore, pursuant to Section 6213(c) the taxes have been assessed. Moreover, the government issued a Certificate of Assessments and Payments. Memorandum of Law in Support of Motion of United States , Exhibit C. Pursuant to Section 6322 , the lien for unpaid taxes arose at the time of assessment.

It is also apparent based on the government's evidentiary submissions that plaintiff still owes taxes, interest, penalties or costs. The Certificate of Assessments and Payments indicates that as of December 20, 1990, plaintiff still owed $6,837.64 in taxes and interest for tax year 1986. Id. The Schedule of Unpaid Tax Liability shows that plaintiff still owed taxes, interest, and penalties of $5,823.89 for tax year 1987. Id. , Exhibit D. Plaintiff has presented no evidence to refute these figures. Thus, unless the liability is unenforceable, the lien is still in effect.

Plaintiff does claim that the liability is unenforceable. He asserts that the Internal Revenue Service failed to assess and collect taxes within the time period specified in Section 6502(a) . This contention is without merit. Section 6502(a) allows ten years for the collection of taxes after assessment. 26 U.S.C. §6502(c). Ten years has not passed since the assessments were made.

Upon consideration of the pleadings, arguments and submissions of the parties, and it appearing to the Court that there is no genuine issue of material fact and that the defendant is entitled to judgment as a matter of law, Fed. R. Civ. P. 56, the defendant's motion for summary judgment is granted, and

It is ORDERED, ADJUDGED and DECREED by the Court that this action be and the same is hereby dismissed with prejudice.

 

 

[91-1 USTC ¶50,035] Duane E. Coplin and Patricia Coplin, Plaintiffs v. United States of America , Defendant

U.S. District Court, West. Dist. Mich. , So. Div., L89-30027 CA, 1/3/91

[Code Secs. 6303 and 6321 ]

Liens for taxes: Validity.--Liens filed against the taxpayer's property with respect to unpaid assessments for income taxes, failure to pay over employment tax penalties and return preparer penalties were valid. The IRS had complied with the statutory procedures and had properly mailed notices of assessment and demands for payment to the taxpayer's last known address within sixty days of the assessments.

[Code Secs. 6103 and 7431 ]

Disclosure of return information: Levy upon property.--Notices of levy sent to clients of an income tax return preparer who had not filed his own returns since 1981, who had failed to collect and pay over employment taxes and who was concealing assets did not constitute the wrongful disclosure of tax return information. By sending the notices of levy to his clients the IRS hoped to reach money that might be owed to the taxpayer for his income tax return preparation services. Any disclosures were made in connection with the IRS's attempt to levy upon valid liens placed upon the taxpayer's assets and were outside the reach of the wrongful disclosure provisions.

OPINION

GIBSON, District Judge:

Plaintiffs Duane E. Coplin and Patricia A. Coplin filed the present action against defendant United States of America alleging that unlawful liens were entered against plaintiffs' property under Title 28 United States Code Section 2410 and alleging wrongful disclosure of federal income tax return information under Title 26 United States Code Section 6103 . They seek a declaratory judgment by this Court that the liens filed by the Internal Revenue Service ("IRS") in Eaton County, Michigan, are invalid because no proper assessment has ever been made against plaintiffs as required by Internal Revenue Code (the "Code") Section 6203 , 26 U.S.C. §6203 . Plaintiffs also seek damages for the allegedly wrongful disclosure of federal income tax return information made by IRS agent Patricia Wilker. Following a bench trial held on September 25, 1990, and pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, the Court makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

I. Validity of Liens

At the time plaintiffs filed this lawsuit, the IRS had made nine different assessments against one or both of the plaintiffs. These assessments went unpaid. The IRS claimed liens against both plaintiffs with respect to these unpaid assessments as follows:

1. Three liens for unpaid assessments against both plaintiffs for federal income taxes for the years 1978, 1979, and 1981.

2. Two liens for unpaid assessments against plaintiff Duane Coplin for penalties imposed against him pursuant to Title 26 United States Code Section 6672(a) as a person responsible for taxes withheld from the wages of the employees of Coplin Business Services, Inc. (i.e., for "responsible person penalties").

3. Four liens for unpaid assessments against plaintiff Duane Coplin for penalties imposed against him pursuant to Title 26 United States Code Section 6694 as a tax return preparer (i.e., for "preparer penalties").

At the time the IRS made the assessments against plaintiffs, it mailed notice of the assessments and demands for payment to the plaintiffs. The fact that notices were mailed was established at trial through the testimony of Bonnie Dobson, a "Service Center Clerk Branch Revenue Officer" at the IRS service center in Cincinnati, Ohio. She testified that she was familiar with the procedures of the IRS and that the plaintiffs' "Individual Master File Transcript" ("IMFT") indicated that notices and demands for payment were mailed at the time the assessments were made. An IMFT is a regularly maintained record of the IRS of all activity undertaken by the IRS against a taxpayer. The IMFT for plaintiffs indicates that assessments were made and notices of assessment and demands for payment were mailed to plaintiffs' last known address on August 11, 1983, regarding the 1979 income tax assessment and on October 11, 1983, regarding the 1981 income tax assessment. On February 18, 1985, and September 30, 1985, assessments for return preparer penalties were made against Duane Coplin and notices and demands for payment of the assessments were mailed to his last known address. On September 3, 1987, the IRS assessed a responsible person penalty against Duane Coplin and mailed notice of the assessment and demand for payment to his last known address. Although plaintiffs contend that they never received any of the notices of assessment and demands for payment mailed by the IRS, Bonnie Dobson's testimony and the IMFT record establish that notices were mailed.

Moreover, there is substantial documentary evidence that the notices and demands for payment were properly mailed to plaintiffs' last known address. By letters dated November 13, 1987, and November 30, 1987, the IRS mailed notice of the assessment of a $9,848.87 responsible person penalty to Duane Coplin. He acknowledged delivery of the notice by signing certified mail receipts on November 21, 1987, and December 2, 1987, respectively. On at least one occasion the IRS mailed a letter to Duane Coplin by certified mail, but he never accepted delivery of the letter. The letter was returned to the IRS and was opened at trial. It contained a notice of an assessment for a responsible person penalty. Plaintiffs also received a final "Notice of Intention to Levy" dated September 15, 1988. This notice listed assessments for unpaid income tax for the years 1978, 1979, and 1981. It also listed assessments for responsible person penalties for the 1981, 1982, and 1986 tax years. The notice informed plaintiffs of the IRS' intention to levy their property and assets if the assessments were not satisfied. Taken in total, the documentary evidence clearly substantiates the IMFT record that notices were in fact mailed to plaintiffs.

Notice of the tax liens against both plaintiffs for unpaid assessments of income taxes were filed in the Eaton County Register of Deeds on December 28, 1987. On April 17, 1989, notice of the tax liens against both plaintiffs for unpaid assessments of income tax and against Duane Coplin for unpaid assessments of responsible person penalties were filed in the Eaton County Register of Deeds. On September 29, 1989, notice of a tax lien against Duane Coplin for unpaid assessments was filed in the Eaton County Register of Deeds. Notice of the tax liens against both plaintiffs for unpaid income taxes were also filed in the Ingham County Register of Deeds on January 13, 1983, and April 17, 1989.

II. Disclosure of Income Tax Return Information

Plaintiff Duane Coplin has been in the business of preparing income tax returns for the past twenty years. He presently makes his living by preparing federal individual income tax returns on behalf of Coplin & Associates (formerly known as Coplin & Baughman, Inc.). Coplin & Associates is a corporation run by Duane Coplin's son. At trial Duane Coplin asserted that he is not an employee of Coplin & Associates, but he works for that company as a consultant, or independent contractor, and so technically he is self-employed. Coplin & Baughman was the successor to Coplin Business Services, Inc. ("CBS"), a corporation which was owned and controlled by plaintiffs. The assessment against Duane Coplin for responsible person penalties arose out of his alleged failure to withhold taxes from the wages of employees of CBS. CBS was liquidated in bankruptcy in 1987. Many of the clients serviced by Coplin & Associates are former clients of Duane Coplin and CBS.

In September 1987, Internal Revenue Officer Patricia Wilker ("Wilker") was assigned to collect the unpaid assessments against plaintiffs. From September 1987 until January 1989, Wilker attempted unsuccessfully to collect the deficiencies by means of levy and distraint pursuant to Section 6331 of the Code. The majority of her activities were focused toward locating plaintiffs' assets and sources of income. Plaintiffs did not cooperate with Wilker's investigation. Duane Coplin refused to complete a "Collection Information Statement" and in interviews with Wilker he misrepresented his employment status in order to frustrate collection of any salary he might have been receiving. Wilker's investigation revealed that Duane Coplin owns no real property and almost no assets. The house he lives in is rented. He does not draw a regular salary and Coplin & Associates does not withhold taxes from the money it pays him because he works as an independent contractor. Plaintiffs have not filed a federal income tax return since the 1981 tax year.

One avenue of collection which Wilker undertook was to generate a list of persons whose income tax returns were prepared by Duane Coplin or CBS. After she received the list, on January 27, 1989, and again on February 10, 1989, Wilker served notices of levy on 374 persons whose income tax returns were prepared by Duane Coplin or CBS. Wilker testified that her reasoning in sending the notices of levy was that some of the individuals contacted might owe money to plaintiffs which the IRS could levy pursuant to its lien against plaintiffs' assets. The January 27, 1989, notices of levy sought to collect the individual assets of Duane Coplin, and the February 10, 1989, notices sought to collect the plaintiffs' joint assets. The notices indicated what type of assessments were owing, the amounts owed, and the tax period for which they were owing. This is the same information contained on the notices of levy filed in the Eaton and Ingham County Registers of Deeds. At the time the notices were mailed, the individuals who received notices were not clients of Duane Coplin. However, all the individuals contacted by Wilker were former clients of Duane Coplin or CBS and many of them were current clients of Coplin and Associates.

CONCLUSIONS OF LAW

I. Validity of Liens

Section 6321 of the Internal Revenue Code provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

26 U.S.C. §6321 . Section 6303(a) of the Code requires that for an assessment to be valid the government must give notice and a demand for payment to the taxpayer against whom the assessment is made within sixty days of making the assessment. For notice to be accomplished, the government must either leave notice at the taxpayer's dwelling or usual place of business, or mail notice to the taxpayer's last known address.

Title 28 United States Code Section 2410 waives sovereign immunity and grants subject matter jurisdiction over, inter alia, actions to "quiet title." This section permits a taxpayer to challenge an IRS lien entered against her property. However, the Sixth Circuit has held that the section grants jurisdiction, "only to challenge the procedural regularity of a lien; it may not be used to challenge the underlying tax liability." Pollack v. United States [87-2 USTC ¶9463 ], 819 F.2d 144, 145 (6th Cir. 1987). Plaintiffs challenge the liens registered against them by the IRS on the basis that the government failed to properly notify them of the assessments upon which these liens are based. This argument fails due to the fact that notices of assessment and demands for payment were properly mailed to plaintiffs' last known address within sixty days of the IRS making the various assessments. The liens are valid.

II. Disclosure of Income Tax Return Information

Internal Revenue Code Section 6103 guarantees the confidentiality of income tax return information. It limits the IRS' ability to disclose such information except under certain situations. Section 6103(k)(6) permits IRS officers to disclose return information

to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax, liability for tax, or the amount to be collected or with respect to the enforcement of any other provision of this title.

26 U.S.C. 6103(k)(6). In addition, the regulations promulgated under Section 6103 expressly authorize IRS employees to disclose tax return information

to locate assets in which the taxpayer has an interest . . . or otherwise to apply the provisions of the code relating to establishment of liens against such assets, or levy on, or seizure, or sale of, the assets to satisfy any such liability.

26 C.F.R. §301.6103(k)(6)-1(b)(6) (1989).

Plaintiffs contend that they are entitled to damages pursuant to Code Section 7431 which allows a taxpayer to collect damages for violations of Section 6103 . Section 7431 provides that a taxpayer injured by the wrongful disclosure of return information is entitled to $1,000.00 in damages for each wrongful disclosure. However, the section also provides that, "No liability shall arise under this section with respect to any disclosure which results from a good faith, but erroneous, interpretation of section 6103 ." 26 U.S.C. §7431(b) . Plaintiffs contend that the notices of levy sent by Patricia Wilker to 374 former clients of Duane Coplin and CBS amounted to wrongful disclosure under Section 6103 . They further assert that the IRS is not protected by the "good faith, but erroneous" exception of Section 7431(b) because Patricia Wilker was experienced enough to know that the disclosures were wrongful. Based on Wilker's knowledge of the propriety of disclosures made pursuant to Section 6103 , plaintiffs assert she could not have made a good faith mistake.

Plaintiffs' contention that the disclosure made by Wilker was a wrongful disclosure is in error. ¹ The language of IRS Regulation 301.6103(k)(6)-1(b)(6) , quoted above, applies to precisely this situation. The IRS had established a lien against plaintiffs' assets and Wilker was attempting to levy on those assets to satisfy the plaintiffs' liability when she disclosed the information. The information disclosed by Wilker is substantially the same as the information disclosed on the liens filed in the Eaton and Ingham County Registers of Deeds. It is clear that information disclosed by the establishment of a lien is not wrongfully disclosed information. See Maisano v. United States [90-2 USTC ¶50,399 ], 908 F.2d 408, 410 (9th Cir. 1990); Flippo v. United States [87-2 USTC ¶9476 ], 670 F.Supp. 638, 641 (W.D.N.C. 1987), aff'd, 849 F.2d 604 (4th Cir. 1988). Disclosure of the same information in an attempt to satisfy the lien is, likewise, not a wrongful disclosure.

SUMMARY

In accordance with its Findings of Fact and Conclusions of Law, the Court determines that notices and demands for payment of the assessments against plaintiffs Duane and Patricia Coplin were properly mailed to plaintiffs' last known address at the time the assessments were made. The liens filed by the IRS on the Eaton and Ingham County Registers of Deeds are valid liens. Furthermore, the Court concludes that no wrongful disclosure of return information was made by Revenue Officer Wilker. The disclosures she made to the former clients of Duane Coplin and CBS were made in an effort to levy on valid liens attaching to plaintiffs' property and assets. The disclosures were permitted by the Code.

¹ Because the Court finds that the disclosure of the information does not violate Section 6103(a) , it need not reach the government's alternative theory that the "good faith" exception of Section 7431 should apply.

 

 

[90-2 USTC ¶50,543] United States of America , Plaintiff(s) v. Edward Dean Christensen, et al., Defendant(s)

U.S. District Court, Dist. Utah , Cent. Div., Civ. 86-C-1041-S, 10/4/90, 751 FSupp 1532

[Code Secs. 6321 and 7403 ]

Lien for taxes: Creation of lien: Property subject to lien: Fraudulent conveyance: Foreclosure.--Federal tax liens for taxes owed and statutory additions were valid against an individual who failed to file federal income tax returns for six consecutive years. Conveyances of a residence and farm to relatives were fraudulent under state law and were set aside. Federal tax liens attached to the fraudulently conveyed property. The U.S. was granted judgment foreclosing its tax liens on the fraudulently conveyed property and was authorized to sell such property to satisfy the tax liens and additions to tax.

MEMORANDUM DECISION

SAM, District Judge:

The above-entitled matter came before the court for trial on April 20, 1990. The court, having considered the evidence presented at trial, the pre-trial and post-trial briefs submitted by the parties, and being fully advised in this matter, enters the following decision containing the court's factual findings and legal conclusions.

FACTS

This is a civil action by the United States to reduce to judgment the federal tax assessments against Edward Dean Christensen, to set aside the conveyance of two parcels of real property from defendant Edward Dean Christensen to defendants Farrell H. Christensen, Cheryl Lynn Christensen, Steven Wayne Christensen and Linda Ann (Christensen) Silver, and to foreclose the federal tax liens against the interest of Edward Dean Christensen in those parcels of real property. The first parcel of real property is located at 387 North 300 East, Richfield , Utah . On that parcel of real property is located a house. Edward Dean Christensen has resided in that house for 20 years. That parcel of real property is sometimes referred to herein as "the Residence." The second parcel of real property is approximately 40 acres in size and is used for farming. That parcel of real property is sometimes referred to herein as "the Farm."

Edward Dean Christensen is the brother of defendant Farrell H. Christensen and the uncle of defendants Steven Wayne Christensen, Cheryl Lynn Christensen and Linda Ann (Christensen) Silver. Edward Dean Christensen is not married and has no children.

Edward Dean Christensen failed to file a federal income tax return for the years 1972, 1973, 1974, 1975, 1976 and 1977.

On January 18, 1978, Edward Dean Christensen was convicted in the United States District Court for the Eastern District of Washington on three counts of willful failure to file federal tax returns for the years 1972, 1973 and 1974.

On November 22, 1982, the United States Tax Court entered a decision determining Edward Dean Christensen's federal tax liabilities for the years 1972, 1973, 1974, 1975, 1976 and 1977 to be as follows:

 Tax                                                              Tax and

Period                                                           Penalties

 1972  ......................................................... $13,486.69

                                                                   6,743.35  3 

 1973  ......................................................... $22,024.63

                                                                  11,012.31  3 

 1974  ......................................................... $16,629.20

                                                                   8,314.60

 1975  ......................................................... $22,178.98

                                                                   5,544.75  1 

                                                                   1,108.95  2 

 1976  ......................................................... $14,603.41

                                                                   3,650.85  1 

                                                                     730.17  2 

 1977  ......................................................... $   427.00

                                                                     106.75  1 

                                                                      21.35  2 

------------------------

 1  26 U.S.C., §6651(a) penalty.

 2  26 U.S.C., §6653(a) penalty.

 3  26 U.S.C., §6653(b) penalty.

 

On June 29, 1948, Louise Christensen, (Edward Dean Christensen's mother) conveyed the Residence to Edward Dean Christensen by Warranty Deed. The legal description of that property is:

Commencing at the northeast corner of Lot 4, Block 7, Plat "D", Richfield City Survey, and running thence South 214.5 feet; thence West 214.5 feet; thence North 214.5 feet; thence East 214.5 feet to the place of beginning, containing approximately 1.05 acres, situated in the Southwest quarter of the Northeast quarter of Section 25 , Township 23 South, Range 3 West of the Salt Lake Base and Meridian.

On May 10, 1957, Edward Dean Christensen recorded a Warranty Deed with the Sevier County, Utah Recorder conveying the Residence to Edward Dean Christensen and Clair M. Christensen as joint tenants. On November 6, 1968, Clair M. Christensen and Patricia M. Christensen recorded a Warranty Deed conveying their interest in the Residence to Edward Dean Christensen.

On January 7, 1975, Edward Dean Christensen recorded a Quit Claim Deed with the Sevier County Recorder conveying his interest in the Residence to Edward Dean Christensen, Trustee. On that same date, Edward Dean Christensen also recorded a document entitled "Declaration of Trust" ("Declaration (A)").

Declaration (A) named as beneficiaries of the trust Clair M. Christensen (Edward Dean Christensen's brother), Merle C. Mortensen (Edward Dean Christensen's aunt) and Una E. Christensen (Edward Dean Christensen's sister). Declaration (A) provided that Edward Dean Christensen retained "the power and the right at anytime during [his] lifetime to amend or revoke in whole or in part the trust . . . without the necessity of obtaining the consent of any beneficiary and without giving notice to any beneficiary."

Declaration (A) also reserved the right to Edward Dean Christensen to (a) place a mortgage or other lien upon the property, and (b) "to collect any rental or other income which may accrue from the trust property and, in [his] sole discretion as trustee, either to accumulate such income as an addition to the trust being held hereunder or pay such income to [himself] as an individual."

By Warranty deed recorded with the Sevier County Recorder on September 5, 1979, Edward Dean Christensen, Trustee, conveyed the Residence to Eagle Trust.

By Warranty Deed dated April 15, 1981 and signed by Edward Dean Christensen, Trustee, Eagle Trust conveyed the Residence to Steven Wayne Christensen and Linda Ann Christensen. That deed was not recorded until December 14, 1981. The deed also directed that the real property tax notices be sent to Edward Dean Christensen.

At the time the Residence was conveyed to Steven Wayne Christensen and Linda Ann Christensen, both of them were minors. Both were informed by their father, Clair Christensen, that the Residence was being given to them on the understanding that Edward Dean Christensen could continue to reside at the Residence for as long as he desired.

Defendants Steven Wayne Christensen and Linda Ann (Christensen) Silver did not pay defendant Edward Dean Christensen any sum in exchange for the transfer to them of the Residence.

From January 7, 1975 until the present, Edward Dean Christensen has resided at the Residence.

Edward Dean Christensen has never paid any rent to his niece and nephew for his occupation of the Residence. The niece and nephew have never undertaken any act which could be termed inconsistent with Edward Dean Christensen's ownership of the Residence.

On June 4, 1974, Edward Dean Christensen and Clair M. Christensen, as purchasers under a Uniform Real Estate Contract, filed a Notice of Contract listing the Farm with the Sevier County Recorder. The legal description of the Farm is:

The Northwest Quarter of the Northwest Quarter of Section 16 , Township 23 South, Range 2 West, Salt Lake Meridian, containing 40 acres. Together with all and singular tenements, hereditament and appurtenances belonging or in any wise appertaining thereto.

By Warranty Deed recorded with the Sevier County Recorder on January 7, 1975, Edward Dean Christensen transferred his interest in the Farm to himself as Trustee. On that same date a Declaration of Trust ("Declaration (B)") was recorded with the Sevier County Recorder by Edward Dean Christensen listing the Farm. The beneficiaries of that trust were Don C. Christensen (Edward Dean Christensen's brother) and Una Christensen (Edward Dean Christensen's sister). Declaration (B) had identical terms to Declaration (A). Thereafter, by Quit Claim Deed signed on February 28, 1975, but not recorded with the Sevier County Recorder until September 6, 1977, Clair M. Christensen quit-claimed his interest in the Farm to Edward Dean Christensen as trustee.

By Warranty Deed recorded with the Sevier County Recorder on September 5, 1979, Edward Dean Christensen, Trustee, conveyed the Farm to Eagle Trust.

By Warranty Deed signed April 15, 1981, but not recorded with the Sevier County Recorder until December 14, 1981, Eagle Trust conveyed the Farm to Farrell Christensen and Cheryl Lynn Christensen. The deed was signed by Edward Dean Christensen, Trustee. The deed directed that the real property tax notices be sent to Edward Dean Christensen.

Defendants Farrell Christensen and Cheryl Lynn Christensen did not pay Edward Dean Christensen any sum in exchange for the transfer to them of the Farm. Farrell Christensen is the brother and Cheryl Lynn Christensen the niece of Edward Dean Christensen.

From January 7, 1975 until the present, Edward Dean Christensen has had the use of the Farm, including the receipt of rental payments for the use of the Farm.

Edward Dean Christensen has never paid any rent to his brother or niece in connection with his use of the Farm. Farrell Christensen and Cheryl Lynn Christensen have never taken any action which could be termed inconsistent with Edward Dean Christensen's ownership of the Farm.

DISCUSSION

Tax Lien

Section 6321 of the Internal Revenue Code of 1986 (26 U.S.C.) provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.

Accordingly, if, as here, after assessment, notice and demand for payment, a taxpayer fails or refuses to pay outstanding federal taxes, a lien attaches to all property and rights to property belonging to him or her. Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265, 267-268 (1945).

"The statutory language 'all property and rights to property', appearing in §6321 * * * is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have." United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719-720 (1985). "Stronger language could hardly have been selected to reveal a purpose to assure the collection of taxes." Glass City Bank [45-2 USTC ¶9449 ], 326 U.S. at 267.

The tax lien, created automatically upon the assessment of the tax, continues until the tax liability is satisfied or the lien becomes unenforceable by reason of lapse of time. 26 U.S.C., §6322 .

A court proceeding to obtain a judgment for unpaid tax assessments must be instituted within six years after assessment, or prior to the expiration of any period for collection agreed upon in writing by the taxpayer and the Internal Revenue Service. 26 U.S.C., Sec. 6502(a) . The earliest assessment in the present case was made against Edward Dean Christensen on March 21, 1983. Accordingly, this action was timely filed for all taxable periods in suit. Utah Code Ann., §78 -12-26(3) provides that an action to set aside a fraudulent conveyance is barred if not brought within three years of the transfer. There is no question that this action was not brought within that period of time. However, case law is overwhelming in support of the proposition that the United States is not bound by a state statute of limitations unless Congress so provides. Congress has remained silent. See United States v. Becker [65-1 USTC ¶9309 ], 241 F.Supp. 283 (D. Az. 1965) (specifically ruling that the Utah statute of limitations does not bind the United States ). It is clear, therefore, that the present action is not barred by the Utah statute of limitations.

As a result of the judgment previously entered against Edward Dean Christensen as a sanction for his failure to comply with the United States' discovery, the United States is entitled to judgment in the amount of $165,101.75, plus statutory additions and interest according to law.

Fraudulent Conveyance

The relevant statutory provision defining a fraudulent conveyance is found in Utah Code Ann., §25 -6-5 (1989). That section provides in relevant part:

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

(a) with actual intent to hinder, delay or defraud any creditor of the debtor;

. . .

(2) To determine "actual intent" under Subsection (1)(a), consideration may be given, among other factors, to whether:

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

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

(c) the transfer or obligation was disclosed or concealed;

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

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

(f) the debtor absconded;

(g) the debtor removed or concealed assets;

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

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

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

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

Equity will act to set aside conveyances of land if they were fraudulently made to defeat the collection of taxes. United States v. Phillips, 59 F.Supp. 1006, 1008 (S.D. Ga. 1945).

In interpreting and applying the law of fraudulent conveyances, the Utah Supreme Court in Dahnken, Inc. of Salt Lake City v. Wilmarth, 726 P.2d 420, 423 (Utah 1986), stated that "[a]lthough actual fraudulent intent must be shown to hold a conveyance fraudulent . . . its existence may be inferred from the presence of certain indicia of fraud or badges of fraud."

The courts have considered the following to be among the badges of fraud:

1. insolvency of the grantor;

2. inadequate consideration;

3. the transfer of all of the debtor's property;

4. the transfer was made in anticipation of a suit or liabilities;

5. a close relationship between the transferor and transferee;

6. the conveyance was not made in ordinary course of business;

7. failure to record the conveyance;

8. the retention of possession by the transferor;

9. the reservation of an interest or benefit by the grantor;

10. the security given by the transferor is in excess of the debt;

11. secrecy or haste in the transfer;

12. the state taxes or real property taxes are paid by transferor.

See generally, Dahnken, supra; Givan v. Lambeth, 351 P.2d 959, 962 ( Utah , 1960); and United States v. Jones [86-2 USTC ¶9832 ], 631 F.Supp. 57, 59-60 (W.D. Mo. 1986).

With respect to the federal income taxes which accrued or were assessed prior to and following the conveyances of the Residence and Farm, the intent of the defendant Edward Dean Christensen to defraud the United States (as both an existing and subsequent creditor) was established at trial through the proof of many of the badges of fraud. The badges of fraud which characterized the transfers at issue here are:

First, all of the conveyances in question were made for no consideration whatsoever.

Second, the government's evidence at trial demonstrated that Edward Dean Christensen had been convicted of willful failure to file federal income tax returns on January 18, 1978. The conveyances at issue soon followed. It can be concluded that an attempt to place the Residence and the Farm beyond the reach of the United States was the major motivation for those conveyances.

Third, the conveyances were made by Edward Dean Christensen to near relatives, his brother, nieces and nephew, on December 14, 1981, and had the effect of rendering Edward Dean Christensen insolvent or unable to pay his existing debts.

Fourth, the fact that Edward Dean Christensen has continued to live in the Residence and use the Farm also evidenced his fraudulent intent in conveying the subject property to his niece and nephew.

Fifth, the transfers preceding the transfers to Edward Dean Christensen's relatives demonstrate a pattern of transferring property to hinder collection of Edward Dean Christensen's federal tax liabilities. The transfers to the trusts were made simply to interpose a buffer between the United States and Edward Dean Christensen.

Lastly, Edward Dean Christensen failed, at trial, to articulate credible reasons for making the conveyances in the manner in which he did. The claim that Edward Dean Christensen transferred the property to his brother, nieces and nephew in lieu of making a will or for estate planning purposes does not, in view of the circumstances surrounding the conveyances, convince the court that this was anything other than an attempt to hinder, delay and defraud his creditors, including the United States. The court specifically finds that the conveyances in question are fraudulent under Utah Code Ann., §25 -6-5 (1989).

Section 7403 of the Internal Revenue Code of 1986 (26 U.S.C.) provides in pertinent part that:

(c) Adjudication and Decree.--The court shall, after the parties have been duly notified of the action, proceed to adjudicate all matters involved therein and finally determine the merits of all claims to and liens upon the property, and, in all cases where a claim or interest of the United States is established, may decree a sale of such property, by the proper officer of the court, and a distribution of the proceeds of such sale according to the interest of the parties and of the United States.

. . .

Conclusions

Having considered the evidence and testimony of record, the court finds that the United States is the holder of federal tax liens in the total amount of $165,103.75, plus statutory additions to tax according to law.

The conveyances of the above-described parcels of real property by Edward Dean Christensen are fraudulent within the meaning of Utah Code Ann., §25 -6-5 (1989), and are hereby set aside.

The federal tax liens of the United States attach to the property owned by Edward Dean Christensen, which specifically include the above-described parcels of real property.

Accordingly, the United States of America is granted judgment against Edward Dean Christensen in the amount of $165,103.75, plus additions and interest according to law.

The United States is granted judgment foreclosing its federal tax liens on the parcels of real property described above.

The United States is authorized to sell the parcels of real property which are the subject of this action and described herein at a Marshal's sale, with the proceeds to be paid as follows:

First, the costs of this action, including the costs of this sale;

Second, the United States , to the extent of its federal tax liens plus any statutory additions to tax; and

Third, the remainder, if any, to be paid to Edward Dean Christensen.

 

 

[90-1 USTC ¶50,268] United States of America , Plaintiff v. Harold John Mathews, et al., Defendants

U.S. District Court, West. Dist. Mo. , St. Joseph Div., 89-6044-CV-SJ-8, 4/6/90

[Code Secs. 71 and 6321 ]

Tax liens: Attachment: Franchise agreements: Deduction of alimony payments.--The taxpayer's argument that a forfeiture provision in his franchise agreement prevented attachment of a tax lien was without merit. These provisions are not effective against a federal tax lien. Further, the lien attached even though the franchise was subsequently transferred to the taxpayer's wife. The taxpayer's payments from the franchise to his former wife could not be deducted as alimony as they were part of a property settlement. The taxpayer was also liable for various penalties.

[Code Secs. 6651 , 6653 , 6654 and 6702 ]

Penalties: Negligence: Failure to pay: Delinquency: Frivolous return.--The taxpayer's argument that his review of IRS publications and legal advice made imposition of the negligence penalty inapplicable was rejected. The contention that a taxpayer took a particular position in good faith and conscientiously sought out legal advice is inadequate. The penalty was also applicable because the taxpayer took a farming deduction when he was not in the farming business. Further, the taxpayer's assumption that his former wife would pay her portion of taxes due and his lack of funds to pay the taxes were insufficient. An uninformed and unsupported belief or innocent mistake does not constitute reasonable cause. Also, a plea of financial hardship is not a defense for failure to pay taxes. A frivolous return penalty was not contested.

Memorandum Opinion and Order

STEVENS, JR., District Judge:

This action was filed by the plaintiff in order to reduce its federal tax liens against Harold John Mathews to judgment and to foreclose upon those liens. In addition, the plaintiff sued Mathews' ¹ wife, Lorienne G. Mathews alleging tortious conversion of the property subject to the federal tax liens. Plaintiff also named Karen Knapp Hanes, Mathews former wife, as a defendant because she claims an interest in the property the plaintiff claims should be foreclosed. Defendant Hanes then cross-claimed against Mathews and his wife Lorienne alleging that Mathews' transfer of certain franchise income to Mrs. Mathews was an unlawful conversion of Mrs. Hanes' interest in the franchise money.

In its complaint, plaintiff placed the 1980, 1982, 1983, 1985 and 1986 taxable years in issue. Defendant Mathews counterclaimed for a declaratory judgment against plaintiff fixing his liability for the years originally in issue. His counterclaim also placed the taxable years of 1979 and 1984 in issue. Plaintiff has settled with respect to defendant Hanes, agreeing that she is entitled to take her interest from the franchise funds.

Before the court are the following motions: (1) Plaintiff's motion for partial summary judgment against Mathews; (2) Defendant Mathews' motion for partial summary judgment against Karen Knapp Hanes; (3) Defendant Karen Knapp Hanes' motion to compel Mathews to produce documents; and (4) Defendant Mathews' motion to compel defendant Hanes to produce documents. For reasons noted below, the court grants plaintiff's motion for partial summary judgment and denies the remaining motions.

I. Plaintiff's Motion for Partial Summary Judgment

A. Standard of Review

In reviewing plaintiff's motion for summary judgment this court must consider whether "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). In making this determination the court is guided by the Supreme Court's reminder that summary judgment is "properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed 'to secure the just, speedy and inexpensive determination of every action.' " Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed. R. Civ. P. 1). Thus,

Rule 56 must be construed with due regard not only for the rights of persons asserting claims and defenses that are adequately based in fact to have those claims and defenses tried to a jury, but also for the rights of persons opposing such claims and defenses to demonstrate in the manner provided by the Rule, prior to trial, that the claims and defenses have no factual basis.

Id.

The Supreme Court has explained that "there is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. . . . If the evidence is merely colorable . . . or is not significantly probative . . . summary judgment may be granted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986) (citations omitted). See also Matsushita Electric Industrial Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) ("When the moving party has carried its burden of Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts . . .. In the language of the Rule, the nonmoving party must come forward with 'specific facts showing that there is a genuine issue for trial.' ") (footnote and citations omitted) (emphasis in original).

In the instant case, plaintiff has the initial burden of demonstrating that the taxes have been assessed, and that notice and demand have been made. United States v. Rindskopf, 105 U.S. 418, 422 (1881). Mathews, as a taxpayer, may contest his liability, however, the burden of proof with respect to liability falls upon Mathews. United States v. Lease [65-2 USTC ¶9478 ], 346 F.2d 696, 700 (2nd Cir. 1965). The apportionment of burdens is important for purposes of summary judgment because when the moving party does not have the burden of proof, that party need show only that the nonmoving party cannot sustain his burden at trial. Calderone v. United States , 799 F.2d 254, 259 (6th Cir. 1986).

The court will now proceed to consider the merits of plaintiff's allegations.

B. Assessment of Taxes

Plaintiff contends it is entitled to summary judgment on Counts I and II of the amended complaint wherein judgment is sought against Mathews for unpaid federal income taxes for the following years in the following amounts: 1980--$6,750.36; 1982--$5,826.31; 1983--$20,186.61; 1985--$6,847.53. When proof of valid assessments are supplied to the court, the government is entitled to summary judgment against a taxpayer thus allowing for the reduction of the tax assessments to judgment. United States v. Miller [63-2 USTC ¶12,155 ], 318 F.2d 637, 639 (7th Cir. 1963). Plaintiff has provided the court with proof of valid assessments shown by four notices of federal tax liens filed with the Platte County, Missouri Recorder of Deeds on July 14, 1986, and therefore summary judgment in favor of plaintiff is appropriate.

Upon assessment of a tax, the United States obtains a lien on all property of a taxpayer. 26 U.S.C. §§6321 , 6322 ; United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 720 (1985). Plaintiff seeks to reduce the tax assessments to judgment by attaching a lien on the Conklin franchise including monthly payments accruing therefrom. Plaintiff contends that Mathews was the owner of the Conklin Franchise prior to April-May of 1987, and therefore the statutory lien attaches to all rights under this franchise.

Defendant Mathews argues that summary judgment is not appropriate because there is a genuine issue of material fact as to whether the franchise and the monthly payments from it can be subject to a lien. Mathews argues that the forfeiture provision in the Conklin Franchise Agreement provides that Conklin may "terminate the franchise agreement if the franchisee makes an unauthorized assignment, transfers or encumbers the franchise agreement." Defendant Mathews' Suggestions in Opposition to Plaintiff's Motion at 3-4. Mathews states that the result of this forfeiture provision is that the tax lien does not attach to the franchise agreement or related payments from it. This argument is without merit.

A simple spendthrift trust cannot defeat a federal tax lien, First Northwestern Trust Co. of South Dakota v. Internal Revenue Service, 622 F.2d 387 (8th Cir. 1980), nor can a spendthrift trust combined with a forfeiture provision. United States v. Taylor [66-2 USTC ¶9522 ], 254 F.Supp. 752 (N.D. Cal. 1966). The reason a federal tax lien is not defeated is because provisions such as spendthrift or forfeiture provision are not effective against a federal tax lien, as a matter of federal law. United States v. Mitchell [71-1 USTC ¶9451 ], 403 U.S. 190 (1971). Similarly, the court finds a forfeiture provision in a franchise agreement is not effective to defeat a federal tax lien. Accordingly, the forfeiture provision in the Conklin Agreement does not defeat the federal tax lien at issue.

Mathews also argues summary judgment is not appropriate at this time because there is a genuine issue of fact as to whether he was the sole owner of the franchise at the time the lien attached. Mathews states his interest was not absolute because it was subject to Mrs. Lorienne Mathews' marital rights and ownership interest in the franchise. More specifically, Mathews contends that Mrs. Lorienne Mathews' interest in the franchise became effective when they married in 1984 and all the lien filings were subsequent to this marriage (the liens were filed with the County Recorder on July 16, 1986) and therefore the federal tax liens which apply only to Mathews cannot attach to this franchise and the income therefrom. A federal tax lien attaches to a taxpayer's property where the government properly files notice of the tax lien, even if there is a judgment to foreclose on the property. United States v. Del Valle & Del Valle, Inc. [82-1 USTC ¶9344 ], 532 F.Supp. 337, 338 (D.P.R. 1981). Similarly, the court finds the federal tax lien attaches to the Conklin payments, even though Mathews had married before the liens were filed and title to the franchise was subsequently transferred to Mrs. Mathews on April 30, 1987.

In summary, the court finds the federal tax lien attaches to the Conklin payments even though the Conklin Agreement contains a forfeiture provision and even though the franchise was subsequently transferred to Mrs. Mathews. Thus, pursuant to 26 U.S.C. §7403 , this court has broad authority to order appropriate relief to provide for the collection of the proceeds of the Conklin franchise. The court therefore orders that the funds from the Conklin franchise be remitted to the United States until such time as the federal tax liabilities are satisfied.

C. Liability of Mathews for Assessed Taxes

Defendant Mathews contends in his counterclaim that he may deduct 35% of the Conklin payments from his income for the tax years of 1979, 1980, 1982, 1983, 1984, and 1985 because this amount was paid to his ex-wife Karen Knapp Hanes. The court will first consider Mathews' argument for the 1979 and 1984 taxable years and then consider his argument for the remaining taxable years in issue.

(1) The 1979 and 1984 Tax Years. Mathews filed amended returns ² for the above-noted tax years claiming a refund because he had not deducted 35% of the Conklin payments from his income. The Internal Revenue Code requires that a claim for a refund be filed with the Internal Revenue Service prior to instituting litigation regarding a particular tax year. 26 U.S.C. §7422 . The filing of a timely claim for a refund is a jurisdictional prerequisite to suit over the year in issue. Canton v. United States [68-1 USTC ¶9206 ], 388 F.2d 985, 986 (8th Cir. 1968). The claim for a refund must he filed within three years from the time the return was filed or two years from the date the tax was paid, whichever is later. 26 U.S.C. §6511 . Mathews filed his 1979 return late (April 30, 1980) and the taxes assessed for 1979 were paid in full on April 27, 1987. The amended return relating to the 1979 taxable year was filed on May 23, 1989, ³ which is more than two years after the tax was paid in full and more than three years after the original return was filed. Mathews filed his 1984 federal tax return on or before April 15, 1985 and the taxes were paid in full at the same time. The amended return relating to the 1984 taxable year was filed on May 23, 1989, more than two years after the tax was paid in full and more than three years after the original return was filed.

Because the filing of a timely claim for a refund is a jurisdictional prerequisite, and Mathews failed to file timely claims, this court lacks jurisdiction over these two tax years and his claim for a refund for the taxable years of 1979 and 1984 is barred. Accordingly, the court grants summary judgment in favor of plaintiff on Mathews' counterclaim with respect to the 1979 and 1984 tax refund claim.

(2) The 1980, 1982, 1983, and 1985 Taxable Years. Defendant Mathews claims the taxes assessed for 1980, 1982, 1983, 1985 are improper because he is entitled to deduct 35% of the Conklin payments since this amount was paid over to his ex-wife Karen Knapp Hanes. He relies on the general rule that alimony payments are deductible to the paying spouse and includable in gross income for federal tax purposes for the payee spouse. Sydnes v. Commissioner [78-2 USTC ¶9487 ], 577 F.2d 60, 62 (8th Cir. 1978); 26 U.S.C. §215 . In order for Section 215 to apply, the payment must be "periodic" and must be an obligation imposed "because of marital or family relationship." 26 U.S.C. §71(c) and (a)(1976) . ⁴

The court will not decide the issue of whether these payments are periodic because the court finds that the Conklin payments were not made "because of marital or family relationship," 26 U.S.C. §71(a) , but rather were made as part of the property settlement after the dissolution of Mathews' marriage to Hanes.

The issue of whether payments are in the nature of alimony or support or in the nature of a property settlement is a factual question of intent. Schatten v. United States [84-2 USTC ¶9965 ], 746 F.2d 319, 321 (6th Cir. 1984). In the instant case, the intent that these payments are in the nature of a property settlement is demonstrated by (1) The divorce decree itself which states "ALIMONY--That neither KAREN KNAPP MATHEWS, PLAINTIFF, nor HAROLD JOHN MATHEWS, DEFENDANT, are entitled to alimony," and (2) Deposition testimony given by Mathews where he admitted he did not intend to provide alimony or support to Karen Knapp Hanes (Question: When you entered into this agreement, did you intend to give Karen alimony? Answer: No. Deposition of Mathews at 89.).

Because of the divorce decree and defendant Mathews' sworn statement, the court finds that Mathews did not intend that the payments from the Conklin franchise to be alimony. Consequently, Mathews may not avail himself of the general rule allowing deduction of alimony payments on his federal income taxes pursuant to 26 U.S.C. §215 .

C. Mathews' Liability for Penalties

Plaintiff contends defendant Mathews is liable for negligence penalties, failure to pay estimated tax penalties, delinquency penalties and frivolous return penalties in connection with the assessed taxes. The court finds Mathews liable for all the penalties.

(1) Negligence Penalty for 1980. A negligence penalty was imposed pursuant to 26 U.S.C. §6653(a) for the 1980 taxable year in the amount of $241.27. Mathews' counterclaim contests this penalty only as to the alimony deduction. He contends the negligence penalty should not apply because he spent considerable time in reviewing Internal Revenue Service publications and also sought legal advice on the issue of whether 35% of the Conklin proceeds were deductible from his income. A taxpayer's contention that negligence penalties were not appropriate because they took a particular position in good faith and conscientiously sought outside legal advice was held to be inadequate to avoid negligence penalties. Page v. Commissioner [87-2 USTC ¶9420 ], 823 F.2d 1263, 1272 (8th Cir. 1987), cert. denied, 108 S.Ct. 775 (1988). In the instant case, even though Mathews held a good faith belief that the deduction was allowed and he sought legal advice, the negligence penalty nevertheless applies. The court also notes that Mathews took a farming deduction when he was not in the business of farming. This is also an instance in which the negligence penalty is applicable. 26 U.S.C. §6653(a) (1976). Accordingly, the court finds defendant Mathews is liable for the negligence penalty of $241.27.

(2) Delinquency Penalties, Failure to Pay Estimated Tax Penalties, Failure to Pay Penalties. Plaintiff contends the Certificates of Assessments and Payments demonstrate that Mathews failed to file his returns on time and has yet to pay the taxes for the 1980, 1982, 1983, and 1985 taxable years. Plaintiff claims the following amounts are owed:

1982 -   Delinquency Penalty - $783.25

         Failure to Pay Estimated Tax - $305.56

         Failure to Pay Penalty - $407.29

1983 -   Delinquency Penalty - $2,542.73

         Failure to Pay Estimated Tax - $691.00

         Failure to Pay Penalty - $1,638.64

1985 -   Delinquency Penalty - $755.73

         Failure to Pay Estimated Tax - $130.00

         Failure to Pay Penalty - $139.95

These penalties were assessed pursuant to 26 U.S.C. §§6651 , 6654 .

Mathews argues there is reasonable cause for his failure to pay the assessed taxes, and therefore the penalties should not be imposed. 26 U.S.C. §6651(a) . Mathews states he had assumed his ex-wife would pay her portion of the tax on the income from the Conklin franchise. He also states that due to changed circumstances (new marriage, children and decrease in the Conklin business) he was without funds to pay the estimated tax. The court finds these contentions do not amount to reasonable cause and therefore Mathews is not relieved from paying these penalties.

An uninformed and unsupported belief or innocent mistake does not constitute reasonable cause, Henningsen v. Commissioner [57-1 USTC ¶9637 ], 243 F.2d 954, 959 (4th Cir. 1957), nor does inadvertence amount to reasonable cause, Logan Lumber Co. v. Commissioner [66-2 USTC ¶9605 ], 365 F.2d 846, 853 (5th Cir. 1966). Also, a plea of financial hardship is not a defense for failure to pay taxes. Wolfe v. United States [85-2 USTC ¶9476 ], 612 F.Supp. 605, 608 (D. Mont. 1985), aff'd, [86-2 USTC ¶9655 ], 798 F.2d 1241 (9th Cir. 1986). Because Mathews' reasons for his failure to pay estimated tax or failure to pay tax do not amount to reasonable cause, the court finds plaintiff is entitled to recover the above-noted penalties.

(3) Frivolous Return Penalty. Plaintiff claims $500.00 penalty for the 1986 tax year for frivolous return pursuant to 26 U.S.C. §6702 . This penalty has not been contested in either Mathews' counterclaim or in his suggestions in opposition to plaintiff's motion for summary judgment. Accordingly, plaintiff is entitled to recover $500.00 penalty for frivolous return.

E. Conclusion

In summary, the court finds plaintiff is entitled to summary judgment with respect to defendant Mathews' counterclaim. Mathews is liable for the unpaid taxes as noted on page 7 of this order. Further, Mathews cannot claim either a refund or reduced tax liability on the basis that 35% of the Conklin franchise proceeds are deductible from his income. Mathews is also liable for the various penalties noted above.

II. Remaining Motions Before the Court

The remaining motions before the court include Mathews' motion for partial summary judgment against Karen Knapp Hanes, Karen Knapp Hanes' motion to compel Mathews to produce documents, and Mathews' motion to compel Hanes to produce documents. These motions are before the court based on ancillary jurisdiction--that is, jurisdiction based on "power of the court to adjudicate and determine matters incidental to the exercise of its primary jurisdiction of an action." Black's Law Dictionary 79 (5th ed. 1979). The doctrine of ancillary jurisdiction is a discretionary doctrine and the court may properly decide not to exercise its jurisdiction over the ancillary claim. Curtis v. Sears, Roebuck & Co., 754 F.2d 781, 785 (8th Cir. 1985). More specifically, "when the federal claim drops out before trial, and a complete trial of the facts would be necessary to determine the state claim, the federal court should not proceed with such a trial. Rather, the parties should be remitted to the state courts for this purpose." Id. Similarly, the Seventh Circuit has "indicated a strong preference for the dismissal of pendent or ancillary claim whenever the district court disposes of the federal claim or claims prior to trial." United States v. Zima, 766 F.2d 1153, 1158 (7th Cir. 1985). In the instant case, the remaining motions are concerned with the state law claims of whether Mathews tortiously converted Hanes' interest in the Conklin franchise, or whether Hanes did not have any right to possession of the Conklin franchise and therefore no tortious conversion occurred. The court finds that because these claims are concerned with state law issues, that no pressing reasons for retention of jurisdiction over these claims exist and that the main claim has been disposed of by granting plaintiff summary judgment, dismissal without prejudice of remaining motions is warranted.

Accordingly, it is

ORDERED that plaintiff's motion for summary judgment with respect to Harold John Mathews' counterclaim is granted. It is further

ORDERED that plaintiff's motion for summary judgment with respect to Counts I and II of the amended complaint requesting judgment for $37,799.67 plus statutory additions according to law is granted. It is further

ORDERED that the federal tax liens which attach to the Conklin franchise be foreclosed and the proceeds, including the proceeds currently held in the Registry of the Court, made payable to the United States until the federal tax liabilities, penalties and interest have been satisfied. It is further

ORDERED that plaintiff submit a proposed form of judgment in order that all penalties and interest accruing to the date of judgment may be reflected in that judgment. It is further

ORDERED that defendant Karen Knapp Hanes' cross claim against defendant Mathews and defendant Lorienne Mathews is dismissed without prejudice.

ORDERED that defendant Mathews' motion for partial summary judgment against defendant Hanes is denied. It is further

ORDERED that defendant Mathews' motion to compel defendant Hanes to produce documents is denied. It is further

ORDERED that defendant Hanes' motion to compel defendant Mathews to produce documents is denied.

¹ Mathews, in this order, refers solely to Harold John Mathews unless otherwise indicated.

² An amended return is essentially a claim for a refund and is used when taxes have been already paid. For the 1979 and 1984 tax years, defendant Mathews had already paid the tax liabilities for those years and subsequently filed amended returns.

³ The court notes that Mathews' counterclaim gives the filing date as April 12, 1989. The return however was mailed by Mathews on May 22, 1989 and received by the Internal Revenue Service on May 23, 1989. If a return is not timely filed, the filing date is the date the return is received, not the date it is mailed. 26 U.S.C. §7502 . In Mathews' case, in order for the amended return to have been timely filed, it had to have been mailed on April 27, 1989.

⁴ The agreement at issue in this case was executed in 1979. Thus, the applicable version of section 215 and related section 71 is that appearing in the 1976 United States Code.

 

 

[97-2 USTC ¶50,813] In re Angelo & Mary Avola, Debtor. Angelo & Mary Avola, Plaintiffs v. United States of America , Internal Revenue Service, Defendant

U.S. Bankruptcy Court, Dist. N.J., 9525068(WFT), 7/17/97

[Code Secs. 6312 , 6322 and 6871 ]

Liens: Bankruptcy: Discharge of tax liability: Property subject to lien: Prepetition property: Avoidance powers.--

Although debtors' personal liability for taxes had been discharged in a Chapter 7 bankruptcy proceeding, the IRS's tax liens survived and attached to the debtors' prepetition property and rights to property. Even though bankruptcy is defined as a fresh start for debtors, Congress intended that valid tax liens would survive bankruptcy. The debtors could not employ the expansive powers under Chapter 11 of the Bankruptcy Code to avoid the tax liens in their Chapter 7 case.

Shashaty & Lalomia, P.C., 219 Peterson Ave. , Little Falls, N.J. 07424, for plaintiffs. Lawrence P. Blaskopf, Department of Justice, Washington , D.C. 20530 , for defendant.

OPINION

TUOHEY, Bankruptcy Judge:

This matter comes before the Court by way of motion of defendant, the United States, seeking a determination that federal tax liens continue to survive and attach to the debtors' prepetition property and rights to property, although the debtor's personal liability for the taxes have been discharged through a Chapter 7 bankruptcy petition. The debtors oppose the United States' motion to maintain the federal liens on the basis that such liens are voidable pursuant to 11 U.S.C. ¶545(2) of the United States Bankruptcy Code. As such, the debtors contend that the Code provides a debtor with power to avoid the fixing of a statutory lien on a debtor's property.

The issues raised by this matter are "core" proceedings as defined by Congress in 28 U.S.C. ¶157. The within Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

FINDINGS OF FACT

1. Angelo and Mary T. Avola ("debtors"), owed federal income tax to the United States for their 1985 through 1989 tax years.

2. On or about December 2, 1992, the Internal Revenue Service ("IRS") filed a notice of federal tax lien with respect to such debts.

3. On July 3, 1995, the debtors filed a voluntary Chapter 7 bankruptcy petition.

4. On August 29, 1995, the debtors filed an adversary proceeding to discharge tax debts owing to the United States for years of 1985 through 1989 pursuant to 11 U.S.C. ¶523(a)(1) and ¶507(a)(7).

5. In response to the adversary proceeding, the United States admitted that the federal tax liens of these debtors for the years 1985 through 1989 are discharged in bankruptcy. Nonetheless, the United States averred that the federal tax liens that arose against the debtors' property continued to attach to their pre-petition property and rights to property although the debtor's personal liability for the taxes have been discharged through this bankruptcy case.

6. On April 21, 1997, the United States filed a motion for partial summary judgment to continue attaching the federal liens to the debtors' property even though the debtors' personal liability for the taxes has been discharged.

7. On May 9, 1997, the debtors filed a motion in opposition to the United States ' motion, and a request an alternative judgment avoiding all outstanding federal tax liens against the debtors property.

DISCUSSION

The specific issue presented in this case is whether federal tax liens continue to attach to the debtors' pre-petition property even though the debtors' personal liability for the taxes have been discharged.

Upon a thorough examination of the case law in this area, including the United States Supreme Court decision of Johnson v. Home State Bank, 501 U.S. 78 (1991); In Re Isom [90-1 USTC ¶50,216], 901 F.2d 744 (9th Cir. 1990); In Re Znider [93-1 USTC ¶50,165], 150 B.R. 239 (Bankr. Ct. C.D. Cal. 1993); U.S. v. Sierer, 139 B.R. 752 (D. Ct. N.D. Fla. 1991); 11 U.S.C. ¶524(a)(2) and 26 U.S.C. ¶6321 and 6322, this court holds that federal liens continue to attach to the debtors' pre-petition property even though the debtors' personal liability for the taxes has been discharged under a Chapter 7 bankruptcy petition.

ANALYSIS

The analysis which must be employed here arise out of the interpretation and application of two provisions of the Bankruptcy Code: 26 U.S.C. ¶6321 and 6322. Section 6321 declares a lien for taxes as follows:

[I]f any person liable to pay tax neglects or refuses to pay the same after demanded, 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.

In addition, ¶6322 specifies the period of such a lien as follows:

[U]nless another date is specifically fixed by law, the lien imposed by Section 6321 shall arise at the time the assessment is made and shall continue until liability for the amount so assessed (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

The United States claims that federal liens continue to attach to the debtors' pre-petition property even though the debtors' personal liability for the taxes have been discharged. Relevant case law and statutes support this contention. In Johnson v. Home State Bank, 501 U.S. 78 (1991), the Court found that a Chapter 7 bankruptcy discharge extinguishes only an action against the debtor in personam while leaving intact an action in rem. Furthermore, 11 U.S.C. ¶524(a)(2) dictates that a discharge operates as an "injunction against the commencement or continuation of an action . . . any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived. 11 U.S.C. ¶524(a)(2) (emphasis added).

Furthermore, In Re Isom [90-1 USTC ¶50,216], 901 F.2d 744 (9th Cir. 1990) is directly on point with the present case. In that case, the debtors filed for chapter 7 bankruptcy after the IRS had valid tax liens against the debtors' property for unpaid taxes. As such, the debtors sought to release these liens under 26 U.S.C. ¶6325(a)(1) as a result of their Chapter 7 petition. The court found, however, that the liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in the bankruptcy proceeding. In Re Isom [90-1 USTC ¶50,216], 901 F.2d at 745. A discharge in bankruptcy prevents the IRS from taking any action to collect the debt as a personal liability of the debtor. Id.

Moreover, allowing these liens to remain alive does not defeat the purpose of Section 6325 because Congress intended for valid tax liens to survive bankruptcy. Id. In defining a fresh start in bankruptcy, Congress took cognizance of the fact that tax liens would survive. Id.

The debtors claim that federal liens are voidable pursuant to 11 U.S.C. ¶545(2) and can be avoided as against their pre-petition property. The debtors contend that ¶545(2) gives a Debtor many of the rights, powers and duties of a Bankruptcy Trustee, including the rights to avoid the fixing of a statutory lien on a debtor's property if the lien is not enforceable at the time of the commencement of the case. However, 11 U.S.C. ¶545(2) explicitly prescribes that:

[t]he trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists. (emphasis added)

Accordingly, the debtors claim that the Federal Bankruptcy Code extends the above provision to a debtor. The debtors rely on two cases to support this position. In In Re Znider [93-1 USTC ¶50,165], 150 B.R. 239 (Bankr.C.D.Cal. 1993), the debtors filed a petition under Chapter 11 of the Bankruptcy Code. The Chapter 11 debtors-in-possession then filed a complaint against the United States through the IRS, contending that they were entitled to avoid federal tax lien on property to the extent a hypothetical bona fide purchaser could acquire the property free and clear of tax liens on date of petition.

The IRS claimed that ¶545(2) did not allow the debtors to avoid federal liens as to property. In support, the IRS cited case law which dealt with the exact issue as it applies to Chapter 13 debtors. The court noted, however, that the debtors filed their petition under Chapter 11 of the Code. Accordingly, the court distinguished between the limited powers granted to Chapter 13 debtors and the expansive powers granted to a Chapter 11 debtor. Thus, Chapter 13 cases cited for or against the proposition that a Chapter 11 debtor-in-possession may not utilize a trustee's avoiding powers are inapplicable to this case.

Pursuant to a Chapter 11 proceeding, the court held that (1) debtors were entitled to avoid federal tax lien for which no Notice of Federal Tax Lien ("NFTL") had been filed as to all of their real and personal property, and (2) debtors were entitled to avoid federal tax lien for which a NFTL had been filed as against money on hand, money in bank and retirement accounts, corporate stock and motor vehicle.

The debtors claim that U.S. v. Sierer, 139 B.R. 752 (D. Ct. N.D. Fla. 1991) supports Znider and therefore their position against the federal liens. In that case, as in Znider, the debtors filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, and sought to avoid tax lien on stock and an automobile by claiming an exemption for certain personal property under 11 U.S.C. ¶545(2). See Sierer, 139 B.R. at 753. The court however distinguished, as it did in Znider, that different chapter proceedings grant different levels of power:

This distinction is quite important given the limited powers granted Chapter 13 debtors, in relation to the same for Chapter 11 debtors. Whereas Chapter 11 debtors are granted all powers and rights of a trustee, Chapter 13 debtors enjoy only those powers pertaining to the use, sale, and lease of property. See Sierer, 139 B.R. at 754-55.

As such, the court noted that the debtor relied on Chapter 13 cases to support a Chapter 11 proceeding which was in applicable to this case. Id.

In the present case, the debtors filed a voluntary bankruptcy petition under Chapter 7. Johnson and Isom are clearly on point with the case at bar because both cases apply to Chapter 7 proceedings. In Johnson, the court clearly found that a Chapter 7 bankruptcy discharge extinguishes only an action against the debtor in personam while leaving intact an action in rem. Isom supports the Johnson holding finding that liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in a bankruptcy proceeding. Thus, pursuant to the debtors' Chapter 7 petition, the federal tax liens against their pre-petition property continue to survive and attach to such property.

Znider and Sierer do not fit with the present case. The debtors attempt to enlarge their power under Chapter 11 case law. Both cases distinguished the expansive powers granted under Chapter 11 proceedings and the more limited powers of other Chapter proceedings. Accordingly, in Znider and Sierer, the courts found that a petitioner cannot use the limited powers enumerated in Chapter 13 case law to a Chapter 11 proceeding. Here, the debtors seek to employ the expansive powers under Chapter 11 case law to a Chapter 7 proceeding. Therefore, under the principles set forth in Znider and Sierer, the debtors cannot support their position under Chapter 11 case law, especially with Chapter 7 case law clearly addressing the specific issue at hand.

CONCLUSION

We ultimately rule therefore, that based upon the law as has been established pursuant to Chapter 7 proceedings and for the reasons as aforestated, the federal tax liens continue to attach to the debtors' pre-petition property even though the debtors' personal liability for the taxes has been discharged. The Court hereby denies debtors' motion to avoid the federal liens against their pre-petition property.

ORDER GRANTING SUMMARY JUDGMENT OF DISMISSAL

This matter having come before the Court by way of Summary Judgment motion by United State of America, the Internal Revenue Service ("defendant") seeking a determination that federal tax liens continue to survive and attach to Angelo and Mary Avola's ("debtors") pre-petition property and rights to property, although the debtors' personal liability for the taxes has been discharged through a Chapter 7 bankruptcy petition; and the Court having rendered its written opinion this date, the terms of which are incorporated herein by reference;

IT IS ORDERED that Summary Judgment of Dismissal is granted in favor of defendant.

 

[90-1 USTC ¶50,216] In re Robert H. Isom, Mary E. Isom, Debtors. Robert H. Isom, Mary E. Isom, Appellants v. United States of America, Internal Revenue Service, Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 89-35032, 4/13/90, Affirming BAP-9, 89-1 USTC ¶9200 , 95 BR 148

[Code Secs. 6321 , 6322 and 6325 ]

Tax liens: Release: Bankruptcy discharge.--The U.S. Court of Appeals at San Francisco (CA-9), affirming a judgment of the Bankruptcy Appellate Panel, held that Code Sec. 6325(a)(1) does not require the IRS to release valid tax liens when the underlying tax debt is discharged in bankruptcy. Although a discharge in bankruptcy prevents the IRS from taking any action to collect the debt as a personal liability of the debtor, their property may remain liable for a debt secured by a valid tax lien. The Bankruptcy Code allows debtors to exempt stated property from the bankrupt estate so they can have a fresh start, but it also provides for the survival of tax liens on that property. In defining fresh start, Congress was aware of the fact that tax liens would survive.

W. Jeff Davis, Hawley, Troxell, Ennis & Hawley, Seattle , Wash. , for appellants. Joel A. Rabinovitz, Department of Justice, Washington , D.C. 20530 , for appellee.

Before WRIGHT, REINHARDT and O'SCANNLAIN, Circuit Judges.

OPINION

WRIGHT, Circuit Judge:

The question presented is whether the I.R.S. must release tax liens, pursuant to 26 U.S.C. §6325(a)(1) , when the underlying tax debt has been discharged in bankruptcy.

BACKGROUND

There are no material facts in dispute. Robert and Mary Isom filed for chapter 7 bankruptcy in March 1987. At that time, the I.R.S. had valid tax liens against the debtors' property for unpaid taxes from 1974 through 1982. The taxes were dischargeable under 11 U.S.C. §§523(a)(1), 507(a)(7), and 727.

The debtors sought an order in the bankruptcy proceeding to compel the I.R.S. to release the liens under 26 U.S.C. §6325(a)(1) . The bankruptcy court granted that relief by summary judgment in favor of the debtors. The Bankruptcy Appellate Panel reversed with one judge dissenting. In re Isom, 95 Bankr. 148 (Bankr. 9th Cir. 1988). We have jurisdiction under 28 U.S.C. §158(d), and we affirm the judgment of the Bankruptcy Appellate Panel.

ANALYSIS

We review de novo the appellate panel's decision. Romley v. Sun Nat'l Bank (In Re Two S. Corp.), 875 F.2d 240, 242 (9th Cir. 1989). We review de novo the bankruptcy court's decision granting summary judgment. Id.

The Internal Revenue Code, at 26 U.S.C. §6325(a)(1) , provides that a lien shall be released when:

The Secretary finds that the liability for the amount assessed . . . has been fully satisfied or has become legally unenforceable. (Emphasis added)

The debtors argue that the liability becomes legally unenforceable upon the discharge of taxes in bankruptcy, ¹ so the liens must be released. We disagree.

The liability for the amount assessed remains legally enforceable even where the underlying tax debt is discharged in the bankruptcy proceeding. A discharge in bankruptcy prevents the I.R.S. from taking any action to collect the debt as a personal liability of the debtor. The debtors concede, however, that their property remains liable for a debt secured by a valid lien, including a tax lien. See Long v. Bullard, 117 U.S. 617 (1886); see also Southtrust Bank v. Thomas (In re Thomas), 883 F.2d 991, 997 (11th Cir. 1989) (discussing Congressional intent to codify the rule of Long v. Bullard); H.R. Rep. No. 95-595, 95th Cong., 1st Sess. 361, reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 5862; S. Rep. No. 95-989, 95th Cong., 2d Sess. 76, reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 5862 (indicating Congressional intent that the rule of Long v. Bullard survive).

We hold that 26 U.S.C. §6325(a)(1) does not require the I.R.S. to release valid tax liens when the underlying tax debt is discharged in bankruptcy.

The debtors argue that although liability is not defined in the tax code, "liability for the amount assessed" refers only to personal liability. ² We reject that strained reading of §6325 . That provision is designed to protect taxpayers by requiring the I.R.S. to release liens when the tax debt has become satisfied or is no longer legally enforceable. Allowing these liens to remain alive does not defeat the purpose of §6325 because Congress intended for valid tax liens to survive bankruptcy. ³

Finally, the debtors argue, and the BAP dissenting judge agreed, that allowing the liens to remain defeats the fresh start policy underlying the bankruptcy code. We disagree. 11 U.S.C. §522 allows debtors to exempt stated property from the bankrupt estate so that they may have a fresh start. It also provides for the survival of tax liens on that property. 11 U.S.C. §522(c)(2)(B). In defining fresh start, Congress took cognizance of the fact that tax liens would survive.

AFFIRMED.

¹ 11 U.S.C. §524(a)(2) provides that a discharge:

operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived . . .

Prior to 1984, this provision also prohibited proceedings against the property of the debtor. The provision was amended and now only prohibits actions to recover debt as a personal liability of the debtor.

² Debtors argue that if liability, as used in §6325 , means only personal liability, then the discharge of taxes in bankruptcy would require the I.R.S. to release the liens because the "liability for the amount assessed" would be "legally unenforceable." Yet, the bankruptcy code provides that valid tax liens survive. The debtors' argument concentrates on resolving this apparent conflict between the tax and bankruptcy codes. Because we reject their premise that liability under §6325 means only personal liability, and in doing so find that the codes are not in conflict, we need not address their proposed resolutions.

³ The BAP found that while in personam liability may be discharged, in rem liability remains enforceable for purposes of §6325 . In re Isom [89-1 USTC ¶9200 ], 95 Bankr. 148, 151 (BAP 9th Cir. 1988). The BAP decision has been cited for this proposition. See, e.g., In re Holland , 102 Bankr. 208, 210 (Bankr. S.D. Cal. 1989). We reject this distinction. While this result makes sense in the bankruptcy discharge context, it might not make sense if applied in other contexts. For example, if a taxpayer prevails in a court action against the I.R.S. and is discharged of personal liability, the I.R.S. would not necessarily be required to release the liens under the BAP's reasoning. The better approach is to determine the legal enforceability of the liability by referring to the relevant law affecting the liens. In this case, we refer to the bankruptcy code to determine if the liability is legally enforceable.

 

[88-2 USTC ¶9600] Billye Joyce Glass, Plaintiff v. Secretary, Department of Treasury Internal Revenue Service, Defendant

U.S. District Court, West. Dist. Ky. , Louisville Div., Civ. 87-0321-P(J), 9/28/88

[Code Secs. 6321 , 6323 and 7425 --Result unchanged by the Tax Reform Act of 1986 ]

Lien for taxes: Creation of lien: Priority: Notice or knowledge of lien.--A federal tax lien was valid against a subsequent purchaser in the chain of title to property encumbered by the tax lien. The lien was valid and choate at the time of the assessment and the lien was perfected on the date that the lien was filed. The subsequent purchaser of the property did not assume the position of prior lien holders when she purchased the property because the IRS had filed its notice against a previous owner more than 30 days prior to his sale of property and the IRS was not furnished with notice of that sale. Code Sec. 7425(d) was not applicable because the government did not redeem the property; therefore, the subsequent purchaser was not entitled to recover her improvement expenses ahead of the IRS.

MEMORANDUM OPINION

JOHNSTONE, Chief Judge:

This case is before the court on cross motions for summary judgment. Both parties claim that their lien on certain property is superior to the other's lien. Jurisdiction exists under 28 U.S.C. §2410.

On August 1, 1979, Charles R. Spain ( Spain ), purchased real property with Floyd Cottrell (Cottrell). On March 22, 1982, Defendant Internal Revenue Service (IRS) made an income tax assessment against Spain . On September 24, 1982, the IRS filed a notice of tax lien against Spain 's property and refiled it on January 12, 1988. On September 22, 1983, a foreclosure judgment was obtained against Spain and Cottrell for failing to comply with the terms of the purchase. In lieu of foreclosure, Spain sold his interest to Cottrell, who in turn sold the full fee simple interest to Billye Joyce Glass, the plaintiff. The parties did not notify the IRS of the foreclosure action or the sale to the plaintiff.

The plaintiff invested an additional $34,918.69 in the property for improvements. Later, she attempted to sell the property, but the purchaser balked after locating the tax lien. To clear title, this court ordered the IRS to issue a partial release of its tax lien upon the plaintiff's deposit with the court, the amount owed the IRS.

The issue before the court is which of the parties has the superior lien. For the reasons that follow, the court concludes that the IRS has the superior lien.

The plaintiff's first two arguments can be summarized as follows. First, she claims that the IRS's lien expired because it failed to refile its notice. In contrast, the court finds that the IRS refiled its notice on January 12, 1988, which was within the required refiling period set forth in 26 U.S.C. §6323(g) . Second, she claims that the IRS fully released its lien when it issued a Certificate of Release. It was the intention of the court and the parties to substitute the money deposited with the court for the lien. Thus, the IRS's right to the money was not extinguished. We now address which of the parties has the superior lien.

The basic rule regarding competing statutory liens is the first in time is the first in right. United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 74 S.Ct. 367, 98 L.Ed. 520 (1954). A federal tax lien under 27 U.S.C. §6321 is choate and perfected at the date of assessment. United States v. Vermont [64-2 USTC ¶9520 ], 377 U.S. 351, 84 S.Ct. 1267, 12 L.Ed.2d 370 (1964). However, such a lien is not valid against a purchaser until proper notice has been filed. 26 U.S.C. §6323(a) .

The IRS's lien was choate and perfected on March 22, 1982, the date of assessment. U.S. v. Vermont, supra. The lien became valid against the plaintiff, a purchaser, on September 24, 1982, the date notice was filed. 26 U.S.C. §6323(a) . Thus, the IRS's lien was first in time and first in right. City of New Britain , supra.

However, the plaintiff claims that she assumed the position of the prior lien holders when she purchased the property. In contrast, the IRS relies upon Southern Bank of Lauderdale v. Internal Revenue Service [85-2 USTC ¶9670 ], 770 F.2d 1001, 1005 (11th Cir. 1985), cert. denied, 476 U.S. 1169, 106 S.Ct. 2890, 90 L.Ed.2d 977 (1986), which stated that under 26 U.S.C. §7425(b) , a sale of property on which the United States has a lien is made subject to the lien if two requirements are met: "First, the United States must file its notice of lien 30 days prior to the sale. Second, the United States must not be furnished with notice of the sale . . ."

The IRS satisfied the two requirements in 26 U.S.C. §7425(b) because it filed its notice approximately a year before the sale and because it was not furnished with notice of the sale. Thus, the sale to the plaintiff was made subject to the IRS's lien. Southern Bank, supra.

The plaintiff next argues that the IRS's lien should not apply to her because she sold the property for a loss, having spent $35,000 for improvements. To counter her argument, the IRS relies upon U.S. v. Polk [87-2 USTC ¶9432 ], 822 F.2d 871 (9th Cir. 1987). There, the court noted that certain cases had held that maintenance expenses incurred by a senior lienholder can be given priority over a tax lien. Id. at 875. However, the court distinguished such cases because they involved a government redemption of property under 26 U.S.C. §7425(d) , which incorporates the provision in 28 U.S.C. §2410(d) that the government pay for maintenance and improvements. Id. at 876. Polk concluded that 26 U.S.C. §7425(d) did not apply to its case and rejected the taxpayer's claim that he be allowed to recover his maintenance and improvement expenses ahead of the government. Id. Likewise, 26 U.S.C. §7425(d) does not apply to this case and we reject the plaintiff's claim to recover her improvement expenses ahead of the IRS.

Defendant IRS has the superior lien.

An appropriate order is this day entered.

SUMMARY JUDGMENT

This matter having come before the court on both parties' motions for summary judgment, and the court having entered its memorandum opinion.

IT IS ORDERED AND ADJUDGED:

1. The motion for summary judgment by the United States , on behalf of the Internal Revenue Service, United States Department of the Treasury, is GRANTED.

2. The Clerk of the Court is directed to execute a check from the Registry of this Court in the sum of $4,735.38 plus any accrued interest, payable to the Internal Revenue Service and delivered to the attorney of record for the United States .

 

[93-2 USTC ¶50,597] United States of America v. Donald J. Mueller

U.S. District Court, East. Dist. Pa. , Civ. 93-0196, 8/30/93

[Code Sec. 6321 ]

Tax liens: Assessments: Reduction to judgment: Foreclosure: Stock certificates.--An individual who failed to pay assessed taxes after demand was required to surrender his stock certificates to the government in payment of the assessed and liened taxes. The court determined that the individual, and not his children, was the owner of the stock. The government had made timely assessments and had perfected liens on each assessment. Therefore, the liens could be reduced to judgment. Execution of the judgment could reach any property, real or personal, belonging to the individual. The individual did not carry his burden of proving that the assessments were wrong.

Angelo A. Frattarelli, Department of Justice, Washington , D.C. 20530 , for plaintiff. Allen L. Feingold, A.L. Feingold Assocs., 809 One E. Penn. Square , Philadelphia , Pa. 19107 , for defendant.

MEMORANDUM

 

NEWCOMER, District Judge:

This is a suit brought by the United States ("plaintiff") against Donald J. Mueller ("defendant") to reduce to judgement certain federal tax assessments made against the defendant for the taxable years 1984, 1985, 1986, 1987, 1988 and the taxable quarter ending June 30, 1989 (Count 1), and to foreclose existing federal tax liens on shares of stock currently owned by the defendant (Count II). I conducted a bench trial on July 8, 1993. The following are my Findings of Facts and Conclusions of Law.

I. Findings of Fact:

The parties have stipulated at an earlier pre-trial conference to findings 1-15. As such, the court accepts the following facts as established for the purposes of this case.

A. Count I:

1. On September 25, 1989, the Internal Revenue Service assessed federal income tax in the amount of $6,225.00, accrued interest in the amount of $887.74, and penalties of $600.40 against the defendant for the 1984 taxable year.

2. Proper notice and demand for payment of the assessment referenced in paragraph 1 was made on September 25, 1989, the date of assessment.

3. The following payments and credits were properly applied against the liability referenced in paragraph 1:

a. Withholding credits of $4,961.00;

b. Separate payments of $753.31 and $25.56.

4. On November 27, 1989, the Internal Revenue Service assessed federal income tax in the amount of $8,391.00, accrued interest in the amount of $1,270.49, and penalties of $908.79 against the defendant for the 1985 taxable year.

5. Proper notice and demand for payment of the assessment referenced in paragraph 4 was made on November 27, 1989, the date of assessment.

6. Withholding credits of $6,018.00 were properly applied against the liability referenced in paragraph 4.

7. On December 20, 1991, the Internal Revenue Service assessed against the defendant, as transferee of Pleasure Marine, Inc. pursuant to Section 6901 of the Internal Revenue Code (26 U.S.C.), Form 941, tax liabilities of Pleasure Marine, Inc. for the years ending 1986, 1987, and 1988 in the amounts of $19,116.55, $39,282.05, and $20,451.20 respectively, and interest on those liabilities of $13,936.00, $21,773.45, and $9,521.95 respectively.

8. Proper notice and demand for payment of the assessments referenced in paragraph 7 was made on December 20, 1991, the date of assessment.

9. On May 8, 1989, the Internal Revenue Service assessed $73,693.96 against the defendant, pursuant to section 6672 of the Internal Revenue Code (26 U.S.C.) as a responsible person of Pleasure Marine, Inc. who willfully failed to collect or pay over the withholding taxes of that corporation for the first, second, and third quarters of 1986, and for consecutive quarters beginning with the first quarter of 1987 through the second quarter of 1988.

10. Proper notice and demand for payment of the assessment reference in paragraph 9 was made on May 8, 1989, the date of assessment.

11. The following payments and credits were properly applied against the liability referenced in paragraph 9:

a. Overpayment credits of $14.00, $138.74 and $22.75;

b. Separate payments of $202.19 and $11,473.41.

12. Despite the notices and demands for payment of each of the assessments described in paragraphs 1, 4, 7, and 9, above, the defendant has failed to pay the entire amount due.

13. As of the date that the complaint was filed, the defendant was indebted to the plaintiff in the amount of $231,844.72, which sum includes interest and penalties that have accrued under the law since the respective dates of assessment.

B. Count II:

14. By reason of the assessments described in paragraphs 1, 4, 7, and 9 above, federal tax liens arose on the dates of assessment and attached on those dates to all property and rights to property owned or thereafter acquired by Donald J. Mueller.

15. The plaintiff properly recorded the following notices of federal tax lien against the defendant in the office of the Prothonotary in Bucks County , PA :

a. Lien serial number 238912096, recorded on August 18, 1989 in the amount of $73,693.96 representing the unpaid responsible person "penalty" for the second quarter of 1988.

b. Lien serial number 238918193, recorded November 21, 1989, in the amount of $3,628.94 representing unpaid income tax liabilities for the taxable years 1983, and 1984.

c. Lien serial number 239004243, recorded February 8, 1990, in the amount of $4,532.28 representing unpaid income tax liabilities for the taxable year 1985.

d. Lien serial number 229211209, recorded March 20, 1992, in the amount of $6,535.55 representing unpaid income tax liabilities for the taxable years 1984, and 1985.

e. Lien serial number 229211210, recorded on March 20, 1992, in the amount of $61,872.87 representing the unpaid responsible person "penalty" for the second quarter of 1988.

f. Lien serial number 239215721, recorded on or about April 23, 1992, in the amount of $124,081.20 representing unpaid Form 941 tax liabilities for the taxable years 1986, 1987, and 1988.

g. Lien serial number 229227074, recorded on or about May 4, 1992, in the amount of $124,081.20 representing unpaid Form 941 tax liabilities for the taxable years 1986, 1987, and 1988.

16. The defendant, Donald J. Mueller, and not his children, currently owns the following shares of stock to which the federal tax liens described in paragraph 15 attach: ¹

a. 120 shares of AT&T;

b. 24 shares of NYNEX;

c. 12 shares of Pacific Telesis Group;

d. 36 shares of Bell Atlantic;

e. 30 shares of Ameritech;

f. 36 shares of Bell South;

g. 12 shares of Southwestern Bell ;

h. 36 shares of U.S. West.

II. Conclusions of Law:

In a suit to reduce tax assessments to judgment, the United States establishes a prima facie case when it shows a timely assessment was made against the taxpayer. Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154 (3d Cir. 1971); Sadowski v. United States, 687 F. Supp. 966, 072 (E.D. Pa. 1988). A presumption of correctness attaches to the assessments which form the basis for Count I. Welch v. Helvering [3 USTC ¶1164 ], 290 U.S. 111 (1933); Higginbotham v. United States [77-2 USTC ¶16,265 ], 556 F.2d 1173, 1175-76 (4th Cir. 1977). Once a prima facie case has been established, the burden of proving that the assessments are erroneous falls upon the taxpayer. United States v. Eshelman [87-2 USTC ¶9419 ], 663 F. Supp 285, 287 (D. Del. 1987). This burden is not merely one of producing evidence; it is the burden of persuasion by a preponderance of the evidence that the assessment is wrong. Sinder v. United States [81-2 USTC ¶9612 ], 655 F.2d 729, 731 (6th Cir. 1981).

If any such person liable to pay any tax neglects or refuses to pay such tax after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue thereon) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. 26 U.S.C. §6321 . As a result of the defendant's failure to pay tax liabilities referenced above, the tax liens described in the preceding paragraphs attached to the shares of stock referenced in paragraph 16 above. 26 U.S.C. §6321 ; Glass City Bank v. United States [45-2 USTC ¶9449 ], 326 U.S. 265 (1945).

Accordingly, plaintiff must turn over his certificates of ownership to the United States government as partial payment of his tax liabilities.

AND IT IS SO ORDERED.

¹ During trial there arose a dispute as to the exact number of stocks owned by Mr. Mueller with respect to certain companies. In an effort to avoid litigating the actual number of stock for each company, the parties agreed any and all stock in the named companies that is titled in Donald J. Mueller's name would be subject to government seizure.

 

 

[2000-2 USTC ¶50,583] In re Richard M. Gibout, Debtor

U.S. Bankruptcy Court, East. Dist. Mich. , So. Div., 96-51995-R, 6/6/2000

[Code Secs. 6321 , 6322 , 6323 and 6871 ]

Liens for taxes: Priority: Bankruptcy: Jeopardy assessment: Lien creation: Assessment.--

An IRS tax lien that was filed prior to a taxpayer's bankruptcy filing had priority over another creditor's claim because the lien arose at the time of the assessment. Although the lien was satisfied from the sale of the taxpayer's real property prior to his bankruptcy filing, the payment was deemed preferential and the IRS was eventually required to return to the estate all of the amounts received. The creditor's argument that the IRS did not have a secured claim because it originally filed a jeopardy assessment that was paid within ten days of filing was rejected because the lien arose at the time the assessment was made and continued until the liability was satisfied.

Opinion

RHODES, Bankruptcy Judge:

The IRS filed a proof of claim asserting a secured claim for $627,953.36. Of that amount, $403,612 is for taxes for the tax years 1992-1995; $133,612 is for penalties; and $90,942.36 is for interest. Creditor Bank of Hawaii filed an objection. The Court conducted a hearing on March 13, 2000, and took the matter under advisement.

I.

On August 13, 1996, the IRS assessed taxes, penalties and interest against Richard Gibout in the amount of $607,110 for the tax years 1992 through 1995. On August 14, 1996, the IRS issued a notice of intent to levy on Richard Gibout. The notice indicated that the IRS had discovered that Gibout was preparing to sell his residence on August 15, 1996 and put it beyond the reach of the IRS. On August 15, 1996, Gibout sold his residence and the IRS received $607,110 from the proceeds. On September 11, 1996, Gibout filed his chapter 7 petition.

On November 14, 1996, the chapter 7 trustee filed an adversary proceeding complaint against the IRS. The trustee alleged that the $607,110 payment was preferential. On January 8, 1998, the trustee filed a motion for partial summary judgment seeking return of the $607,110 payment. The trustee argued that had the $607,110 payment not been made to the IRS, the IRS would have had a priority claim of $473,711 for unpaid taxes and interest and an unsecured claim of $133,399 for penalties. The trustee further alleged that given the amount of unsecured claims filed in the case, the IRS would have received no distribution on its claim for penalties. Thus, the trustee asserted, the IRS received more than it would have in a chapter 7 liquidation and the entire payment was therefore avoidable. The IRS conceded that the $133,399 applied to the penalties was a preference. However, it argued that only the amount which enabled it to receive more than it would have in a chapter 7 should be avoided, not the entire $607,110 payment.

Following a hearing on April 7, 1998, the Court granted the trustee's motion for partial summary judgment and ordered the IRS to turnover to the trustee the sum of $607,110, plus statutory interest. The IRS filed an appeal with the district court, which affirmed this Court's decision on September 14, 1998. The IRS then appealed to the Sixth Circuit. On January 28, 1999, the Sixth Circuit dismissed the appeal by stipulation of the parties.

On March 9, 1999, the trustee and the IRS entered into a Stipulation and Agreed Order of Settlement in the adversary proceeding. However, the trustee did not file a motion for approval of this settlement under Fed.R.Bankr.P. 9019(a). This was brought to the Court's attention at a hearing on October 4, 1999, on the Bank of Hawaii's motion for interim distribution. The Court instructed the trustee to file an application to compromise. The trustee filed the application to compromise and the IRS and the Bank of Hawaii filed objections. The parties reached a settlement and, on November 19, 1999, the Court entered an order approving the March 9, 1999 settlement between the trustee and the IRS, indicating however that it was not binding on the Bank of Hawaii. The order further preserved the rights of the Bank of Hawaii or any other creditor to object to the IRS's proof of claim and authorized the trustee to distribute to the IRS $473,711, to be applied to tax principal and to accrued pre-levy interest.

On May 19, 1999, the IRS filed its proof of claim asserting a secured claim for $627,953.36.

II.

Bank of Hawaii argues that because the IRS never had a lien on the debtor's property, it does not have a secured claim and therefore is not entitled to post-petition interest. Bank of Hawaii contends that pursuant to 26 U.S.C. §6321, a lien arises only after a party responsible for the payment of taxes refuses or neglects to pay after notice and demand. The Bank of Hawaii contends that the IRS's assessment on August 13, 1996, was a jeopardy tax assessment which occurs when the IRS has reason to believe that the taxpayer is about to place his assets beyond the reach of the IRS. Bank of Hawaii asserts that when a jeopardy tax assessment is made pursuant to 26 U.S.C. §6861, the taxpayer has 10 days in which to pay the amount assessed. Bank of Hawaii contends that because the IRS was paid in full on August 15, 1996, within the 10 day grace period, no lien ever arose.

Notwithstanding the fact that its proof of claim asserts that the entire $627,953.36 claim is secured, the IRS now takes the position that only the tax portion of $403,612 and the interest on tax to the petition date of $90,942.36 are secured, because the tax lien is avoidable, pursuant to 11 U.S.C. §§724(a) and 726(a)(4), to the extent that it secures the $133,399 penalty amount.

In November of 1999, the IRS received payment from the trustee of $473,711, which represented the amount of the tax and the pre-seizure interest on the tax. Thus, the only remaining claims of the IRS are for interest of $20,843.36 which accrued from August 15, 1996 to the September 11, 1996 petition date and for post-petition interest on its secured claim.

The IRS states that in late 1998, it returned the $133,399 penalty plus interest to the trustee and in June of 1999, it returned the amount related to the tax and interest on tax of $473,711, plus statutory interest from the date of the April 10, 1998 judgment. The IRS argues that because it returned the amounts that were declared a preference, it has a claim against the estate, pursuant to §502(h), as if the claim had arisen prepetition. The IRS contends that because it perfected its lien with the filing of the Notice of Federal Tax Lien with the Register of Deeds for Oakland County on August 13, 1996, it would have had a secured claim had the seizure not taken place. Therefore, the IRS argues, it is entitled to a secured claim now and post-petition interest on its claim to the extent there are sufficient assets in the estate.

III.

Section 502(h) provides:

A claim arising from the recovery of property under section . . . 550 [after the avoidance of a transfer under §547] . . . of this title shall be determined, and shall be allowed under subsection (a), (b), or (c) of this section, or disallowed under subsection (d) or (e) of this section, the same as if such claim had arisen before the date of the filing of the petition.

11 U.S.C. §502(h).

The IRS's claim arose as a result of the trustee's recovery under §550 of a payment deemed preferential under §547. "Section 502(h) therefore mandates that the [IRS's] claim be determined and allowed as though it had arisen before the date the petition was filed." In re Toronto , 165 B.R. 746, 753 (Bankr. D. Conn. 1994).

Section 6321 of the Internal Revenue Code provides:

If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property, whether real or personal, belonging to such person.

26 U.S.C. §6321.

Bank of Hawaii argues that because the debtor did not refuse to pay the tax and the IRS was paid within 10 days of the August 13, 1996 jeopardy tax assessment, no lien arose. However, this argument ignores the relevant provision of the statute. Section 6322 of the Internal Revenue Code provides:

Unless another date is specifically fixed by law, the lien imposed by section 6321 shall arise at the time the assessment is made and shall continue until the liability for the amount so assessed . . . is satisfied or becomes unenforceable by reason of lapse of time.

26 U.S.C. §6322.

Thus, the lien arose on August 13, 1996, the time the assessment was made. See Redondo Construction Co. v. U.S. [98-2 USTC ¶50,841], 157 F.3d 1060, 1062 (6th Cir. 1998) (The lien arises at the time of assessment and attaches to all property of the debtor.); William J. Cooney, P.C. v. United States (In re Carlucci), 49 B.R. 679, 681 (Bankr. S.D. Ga. 1985) ("A federal tax lien arises immediately upon assessment to prevent the taxpayer from hiding or dissipating his assets before a court has the chance to determine the taxpayer's liability."); United States v. Stonehill [83-1 USTC ¶9285], 702 F.2d 1288, 1292 (9th Cir. 1983) ("The filing of jeopardy assessments created tax liens on the property of the taxpayers.").

Although the lien arises at the time of assessment, it is only valid in bankruptcy if it is recorded before the bankruptcy petition. United States v. Speers [66-1 USTC ¶9101], 382 U.S. 266, 86 S.Ct. 411 (1965) (A tax lien must be recorded prior to the filing of the bankruptcy petition to escape the avoidance power of the trustee.). There is some dispute as to when the lien was filed. The IRS states that it was filed on August 13, 1996. Bank of Hawaii contends, relying on the Notice of Release of Tax Lien, that the lien was recorded on September 6, 1996. However, resolution of this dispute is not necessary because, either way, the lien was filed before the debtor filed his September 11, 1996 bankruptcy petition. The lien is therefore valid. See In re Michaud [72-1 USTC ¶9346], 458 F.2d 953, 959 (3d Cir. 1972) ("[U]nder the terms of Sections 6861(a), 6321 and 6322 of the Internal Revenue Code a jeopardy assessment creates a tax lien against the taxpayer's property, which, if properly recorded pursuant to Section 6323, is valid as against the trustee in bankruptcy."); 11 U.S.C. §547(b)(6).

To the extent that the IRS's claim is oversecured, it is entitled to post-petition interest. 11 U.S.C. §506(b). See also United States v. Ron Pair Enterprises [89-1 USTC ¶9179], 489 U.S. 235, 109 S.Ct. 1026 (1989). In determining the amount of post-petition interest, the Court must consider the fact that the IRS had unrestricted use of the funds during a period of the post-petition time. In June of 1999, the IRS returned to the trustee the portion of the seized amount that related to the tax ($403,612) and the interest on tax ($70,099), plus interest from April 10, 1998, the date of the judgment in the adversary proceeding. The IRS thus had use of the funds from August 15, 1996 through April 10, 1998. It is therefore only entitled to post-petition interest from April 10, 1998 through the date it received payment on its claim in November of 1999.

The IRS also seeks prepetition interest for the period from August 15, 1996 through September 11, 1996. However, as noted above, the IRS had the use of these funds during that period of time. Therefore, prepetition interest will not be allowed.

Order Regarding Objection to the IRS's Proof of Claim

For the reasons stated in this Court's Opinion entered this date, the IRS is entitled to interest on its claim from April 10, 1998 through the date it received payment on its claim in November, 1999.

IT IS SO ORDERED.

 

 

[97-2 USTC ¶50,739] In re Richard F. Morgan, Mary A. Morgan, Debtors. The First National Bank of Mt. Dora, Florida, Plaintiff v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan and Joseph Morgan, Defendants. United States of America, Intervenor and Richard E. and Mary A. Morgan, Cross-Plaintiffs v. United States of America, Cross-Defendants and United States of America, Cross-Plaintiffs v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan and Joseph Morgan, Cross-Defendants and V. John Brook, Chapter 7 Trustee, Cross-Plaintiff v. Richard Morgan a/k/a Richard E. Morgan, Mary A. Morgan and Joseph Morgan, Cross-Defendants

U.S. Bankruptcy Court, Mid. Dist. Fla., Tampa Div., 95-4824-8P7, 6/6/97

[Code Sec. 6323 ]

Tax liens: Validity: Priority: Bankruptcy: Trustee: Garnishment lien: Attorneys' fees.--

The IRS had a valid, enforceable tax lien, superior to the claim of a bankruptcy trustee, on funds that had been held in a bank account belonging to the debtors but that were placed in a court registry following the bank's interpleader action. The IRS had assessed the taxes, the debtors refused to make payment, and a tax lien arose against all of their properties, including their bank deposits. Furthermore, since the debtors failed to timely challenge the IRS's deficiency determination by filing a petition with the Tax Court, the deficiency became assessable. Finally, the trustee acquired a valid garnishment lien for attorneys' fees incurred with respect to the debtors on the funds in the registry that was junior to the tax lien.

Roberta Colton, P.O. Box 1102 , Tampa , Fla. 33601-1102 , for plaintiff. Alan C. Watkins, 1509 Swann Ave., Tampa, Fla. 33606, David B. McEwen, Schneikart & McEwen, 150 Second Ave., N., St. Petersburg, Fla. 33701, for defendant V. John Brook. Brian L. Schwalb, Department of Justice, Washington , D.C. 20530 , for intervenor U.S.

ORDER ON MOTIONS FOR SUMMARY JUDGMENT

PASKAY, Chief Bankruptcy Judge:

THIS IS a Chapter 7 liquidation case and the matters under consideration are three Motions for Summary Judgment filed by the United States of America (Government); V. John Brook (Trustee); and Richard E. Morgan and Mary A Morgan (Debtors), respectively. In order to place the Motions in their proper perspective, it is helpful to briefly recap the procedural background of this adversary proceeding, originally styled, The First National Bank of Mt. Dora , Florida (Bank) v. V. John Brook, Jr., Chapter 7 Trustee, Richard E. Morgan, Mary A. Morgan, and Joseph Morgan, Defendants. On July 6, 1995, the Bank filed its Complaint for Interpleader. On August 9, 1996, this Court entered an Order granting leave to the Government to intervene. The Order was entered on October 16, 1996, after this Court overruled the Debtor's objection to the intervention by the Government. The Order also granted thirty days to the Government to file cross-claims against the Debtors and the Trustee, and thirty days to the Debtors to file a cross-claim against the Trustee and the Government.

On October 30, 1996, the Debtors filed their Cross-Claim against the Government. On November 13, 1996, the Government filed its Cross-Claim against the Trustee and the Debtors. On November 15, 1996, the Trustee filed his Cross-Claim against the Debtors. On November 30, 1996, the Bank deposited the funds in controversy in the Registry of this Court pursuant to an Order entered by this Court on July 31, 1995, granting partial summary judgment of interpleader in favor of the Bank. Thus, left for consideration are the competing claims to the funds in the Registry by the Government, the Trustee, and the Debtors.

The controversy presented for this Court's consideration is the three Motions for Summary Judgment described earlier, in which each of the Movants contend that there are no genuine issues of material fact and that each is entitled to a judgment in their respective favors as a matter of law. In its Motion, the Government contends that the Debtors are indebted to the Government for unpaid, assessed income tax liabilities for the years 1992 up to and including 1995; that as a matter of law, the Government has a lien on all assets of the Debtors, including the funds held by them in the Bank which are now deposited in the Registry; and that the controlling facts are not in dispute. Therefore, the Government contends that its Motion should be granted as a matter of law. In his Motion, the Trustee contends that he and his wife obtained judgment against the Debtor, Richard Morgan, for slander of title; that in aid of execution of this judgment he garnished the funds which are in the Registry; that he has an agreement with the Government as to the respective priorities of the Trustee and the Government; and that based on the undisputed facts he acquired a valid lien on the funds vis-a-vis the Debtors. Therefore, the Trustee contends that his Motion for Summary Judgment should be granted.

Finally, the Debtors, in their Motion consisting of fifteen separate paragraphs, contend inter alia that this Court erred in permitting the Government to intervene due to "lack of knowledge"; that there is no such entity as the "Internal Revenue Service" set forth in the Constitution nor in any law written by Congress; that the assessment was improper because it was not signed by an "assessment officer"; that the Government lost all of its immunity (or sovereignty) when it filed a claim in the Bankruptcy Court; that the Proof of Claim filed contains an illegible signature; that the Proof of Claim is not supported by any documents; that the "United States of America nor the Internal Revenue Service" addressed the proof to a Table of Authorities provided by the Debtor; and that the Government successfully convinced the Court that it acquired a new client, the Southern Bank, even though "the Southern Bank sent no representative to a hearing." In addition to the foregoing, the Debtors also set forth various and sundry statements, none of which are remotely relevant to their Motion for Summary Judgment. Therefore, it is unnecessary to either recite or paraphrase them.

The Debtors in the Wherefore Clause of their Motion request the following relief:

1. Order the monies in the Registry to be paid over to the Debtors.

2. Order any monies held in the estate to be paid over to the Debtors.

3. Order the sanction of the United States of America for representing the Southern Bank of Central Florida .

4. Order the non-existent "Internal Revenue Service" sanctioned for its entry of a non-perfect document described as "Form 10."

5. Order an award of justicable (sic) money to the Debtors for the Department of the Treasury/Internal Revenue Service; as described by Title 18 United States Code; Sections 152 and 3571; for the violation in not submitting assessment forms signed by an "assessment officer" with properly delegated (published in the Federal Register) authority to sign such a documents.

6. Issue any other orders deemed justicable (sic).

In addition, the Debtors also filed a document entitled, "Objections to the Government's and Brook's Motions for Summary Judgment." Neither the Rules which govern adversary proceedings nor any other rule of procedure provide for an "objection to summary judgment." Nevertheless, this Court considers the same as a response and written argument against the Motions filed by the Government and the Trustee. Stripping the document of largely meaningless and irrelevant rhetoric, the Debtors' argument presents nothing new and is, in essence, a rehash of the matter set forth in their Motion for Summary Judgment, reiterating a twenty-five page document with some reprint from the Internal Revenue manual and citations which are claimed to support the proposition urged by the Debtors. It shall suffice to note that the foregoing contentions of the Debtors are merely restatements of the old refrain that the Internal Revenue Service (IRS) does not exist; that there is no obligation to pay income tax; that the system is voluntary; that there is nothing in the Internal Revenue Code providing that any part of earnings known as wages and commissions is regulated; that no one has an obligation to file Form 1040; and that there was no valid assessment of unpaid taxes against the Debtors.

The one and only issue involves the validity, vel non, of the tax and the garnishment liens claimed by the Government and the Trustee respectively. The facts relevant to this issue as they appear from the record can be summarized as follows.

It is without dispute that the Debtors did not file an income tax return (Form 1040) for the tax years of 1993, 1994, and 1995. On April 10, 1995, the IRS addressed a request to Richard Morgan urging him to file his tax return for the tax year ending December 31, 1993. On March 18, 1996, the IRS informed Mary E. Morgan that she failed to file her tax returns for 1993, 1994, and 1995, and urged her to file her tax returns. On June 3, 1996, the IRS requested that both Debtors contact the IRS within ten days and stated that if they failed to do so, the IRS would proceed with other action to bring them into compliance with the tax laws. (Govt. Exh. 7).

On June 10, 1996, Richard Morgan wrote to N. Kenyon, Tax Auditor, an employee of the IRS, and informed Mr. Kenyon that he does not meet the definition of a person who is required to file any Form 1040. Mr. Morgan also demanded that the IRS furnish him with an authoritative regulation to show that he is required to file a tax return, and send him any information the IRS had as to what his gross or taxable income was for the years in question and from what source derived, plus additional documentation to show Mr. Kenyon's authority to send the letters (Govt. Exh. 8). Mrs. Morgan sent an identical letter to Mr. Kenyon.

After concluding the audit, the IRS made a jeopardy assessment of the federal income tax liabilities of Mr. Morgan for the years 1993, 1994, and 1995 in the total amount of $138,286.97 (Certificate of Assessment and Payments) (Govt. Exh. 9). On July 24, 1996, the IRS made a jeopardy assessment of Mrs. Morgan's federal income tax liability for the years 1993, 1994, and 1995 in the total amount of $97,703.60 (Certificate of Assessment and Payments, Govt. Exh. 10). On July 24, 1996, the IRS mailed a Notice of Jeopardy Assessment and Right to Appeal (Govt. Exhs. 11, 12). The Notice was sent to both Mr. and Mrs. Morgan.

On July 14, 1996, the IRS filed a Notice of Federal Tax Lien (Form 668(Y)) in the amount of $138,286.97 based-on the tax liability assessed against Mr. Morgan. The Notice was filed in the Office of the County Comptroller . (Govt. Exh. 13). In addition, on July 14, 1996, the IRS served Notices of Levy upon the Clerk of the Bankruptcy Court, one concerning the tax liability of Mr. Morgan, the other of Mrs. Morgan (Govt. Exh. 14).

On May 18, 1995, the Debtors filed their joint Petition for Relief under Chapter 7 of the Bankruptcy Code. (Doc. No. 1). On their Schedule of Assets, the Debtors listed a joint checking account at the First National Bank of Mount Dora, Florida (Bank), stating a balance of $100,000.00. It is without dispute that on the date the Debtors filed their Petition they had three separate accounts in the same Bank: Accounts Numbers 0220338453, 02220338024, and 220338013, respectively. At the time the Debtors filed their Petition, Mr. and Mrs. Morgan were the only signatories on these accounts. (Govt. Exh. 2). On June 19, 1996, after the commencement of the case, the Debtors amended their signature cards and added Joseph M. Morgan, their son, as an additional signatory. (Govt. Exh. 3). There is nothing in this record and it is not contended by the Debtors that Joseph Morgan contributed to the funds on deposit in the Bank.

In due course, V. John Brook was appointed as Chapter 7 Trustee and placed in charge of the administration of the estate of the Debtors. On June 28, 1995, the Trustee made a written demand on the Bank to turn over all funds in the accounts maintained by the Debtors. (Govt. Exh. 4). On July 5, 1995, Joseph Morgan made a written demand on the Bank and requested that the funds in the accounts be wire-transferred to the Bank of Mississippi, Tupelo , Routing No. 0653-00486, Account Number 22379440. (Govt. Exh. 5). Faced with the two competing claims to the funds in the three accounts, the Bank filed its Complaint for Interpleader. (Doc. No 11). The Government was not named initially by the Bank as a defendant. On July 31, 1995, this Court entered a Partial Final Judgment in favor of the Bank, directing the Bank to deposit in the Registry all funds in the three bank accounts. (Doc. No. 23). On August 17, 1995, the Bank deposited in the Registry in the amount of $125,943.49 in compliance with the Partial Final Judgment. (Adv. Doc. No. 26).

On July 27, 1995, the Debtors converted their Chapter 7 case to a Chapter 13 case, (Doc. No. 12), but on September 12, 1995, the Chapter 13 case was reconverted to a Chapter 7 case on the motion filed by the Trustee (Doc. No. 53).

On August 28, 1995, the IRS filed a Proof of Claim in the amount of $60,322.27. (Govt. Exh. 6). The Proof of Claim was filed as secured based on the federal tax liens for assessed and unpaid income tax liability for the years 1990 through 1992, inclusive. On November 6, 1995, this Court dismissed the Debtor's Chapter 7 case, retaining jurisdiction to determine fees and costs and to order the disbursement of the funds being held by the Clerk of the Bankruptcy Court. Furthermore, it is understood by all parties that the Court reserved jurisdiction to determine the respective right of the claimants to the funds deposited by the Bank in the Court's Registry. (Doc. No. 69).

On May 8, 1996, after the case had been dismissed, the Debtors filed an objection to the Proof of Claim filed by the IRS. On May 22, 1996, this Court overruled the objection and after the IRS collected the assessed income tax liabilities of the Debtors for years 1990 through 1991, this Court allowed the Government's claim against Mr. Morgan in the amount of $886.70, and against Mrs. Morgan in the amount of $17,715.23. (Doc. No. 106).

As noted earlier, on October 16, 1996, this Court granted leave to the Government to intervene in the interpleader filed by the Bank. The Government filed its Motion to Intervene, (Adv. Doc. No. 42), coupled with a Cross-Claim, (Adv. Doc. No. 44), as well as a response to the Cross-Claim filed by the Debtors, (Adv. Doc. No 43). On January 31, 1997, this Court granted the Government's Motion to Intervene. (Adv.Doc. No. 53). Although this Court granted leave to Joseph Morgan to file a cross-claim asserting his claim against the fund in the Registry, he failed to file a cross-claim within the time fixed by this Court. Consequently, Joseph Morgan no longer has any claim against the funds in the Registry. The Government in its Cross-Claim asserted that the Government has a valid tax lien securing the Debtor's unpaid assessed federal income tax liability for the tax years of 1993, 1994, and 1995 in the total amount of $254,000.00, made up of the amount of the liability of Mr. Morgan and the amount of the liability of Mrs. Morgan in the amount of $103,539.95, plus interest and statutory additions.

The Trustee and his wife are the fee simple owners of their homestead, located in Pinellas County , Florida . There is no question that the Debtor was aware that the Trustee's residence in Pinellas County was his properly established homestead. Notwithstanding, Mr. Morgan recorded in the Office of the Clerk of the Circuit Court of Pinellas County, in O.R.Book 9190, Page 1845, an instrument dated December 12, 1995, claiming a "common law" lien, or a "commercial lien" on the Trustee's homestead.

In order to remove this cloud on the title on his homestead, the Trustee engaged the services of an attorney who filed a writ against Mr. Morgan to quiet title, for slander of title and also sought injunctive relief. On July 3, 1996, the Circuit Court in and for Pinellas County, Florida, entered its order on the Trustee's Motion for Summary Judgment, finding that the property involved was in fact the homestead of the Trustee, that the Notice of Lis Pendens recorded in the Public Records of Pinellas County is a cloud on the Trustee's title and shall be expunged. Furthermore, based on Fla. Stat: §57.105, the Court entered a judgment in favor of the Trustee and against the Debtor, Mr. Morgan, for $1,950 together with taxable cost in the amount of $210.50, or a total of $2,160.50 bearing a rate of interest at 12% per annum.

As the Debtor had not satisfied the Judgment within the time ordered by the Court, the Trustee filed a Motion for Writ of Garnishment on July 15, 1996. On July 18, 1996, the Clerk of the Circuit Court issued the Writ which was served on the Clerk of the Bankruptcy Court on July 14, 1996. In due course, the Government filed an Answer to the Writ on behalf of the Government and the Clerk of the Bankruptcy Court. In its Answer, the Government stated on behalf of the Clerk that the Clerk is not indebted to Mr. Morgan, who is merely a stakeholder of the funds. On December 16, 1996, Christine R. Brook, the Trustee's spouse, assigned her interest in the Judgment to the Trustee (State Court Exhibit C). The Government and the Trustee agreed as to the respective priority of their claims to the fund. This leaves for consideration the dispute between the Government, the Trustee, and the Debtors.

GENERAL PRINCIPLES GOVERNING SUMMARY JUDGMENTS

Motions for summary judgment are governed in adversary proceedings by F.R.B.P 7056, which adopted Fed.R.Civ.P. 56. Fed.R.Civ.P. 56 is an integral part of federal practice and was designed to secure a just, speedy, and inexpensive determination of controversies where the relevant facts are not in dispute. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). It is well established that it is appropriate to dispose of the controversy

if the pleadings, depositions, answers to interrogatories, and admissions on file, together with 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.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).

It is clear that the moving party has the burden to establish not only the absence of any genuine issue of material fact, but also that the controlling law supports, the claim and the relief sought. Celotex Catrett, supra; Adickes v. S. H. Kress & Co., 398 U.S. 144, 157 (1970); Sweat v. Miller Brewing Co., 708 F.2d 655 (11th Cir. 1983). To assure that the non-moving party receives a fair consideration of its position and especially its right to a plenary disposition of the controversy if there are genuine issues of material facts, the underlying facts and all reasonable inferences must be viewed in a light most favorable to the non-moving parties. Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). It is equally clear, however, that the non-moving party may not rely on mere allegations or denials in the pleadings. Instead, it must set forth specific facts in affidavits or through competent evidence that there are genuine issues of material facts which require a resolution by trial.

This Court is satisfied that there are no disputed facts which would prevent the disposition of the conflicting claims of the Government and the Debtors by summary judgment. The Government made repeated efforts to secure the tax returns for the years in question and the Debtors did not file the tax returns for the years in question. It is equally without dispute that the Government sent and the Debtors received the notices of the deficiency and the notice of assessments and demand for payment; that they failed and refused to pay the amount found to be due and assessed for the years in question; that the Government made a jeopardy assessment against Mr. Morgan for the years 1993, 1994, and 1995 in the total amount of $138,286.97 and made a jeopardy assessment against Mrs. Morgan for the unpaid taxes for the same years in the amount of $97,793.60; and that the Notice of Jeopardy Assessment and Right to Appeal, along with an explanation of the income tax determination and demand for payment, were sent to both Debtors.

It is clear that the moment the assessment is made a federal tax lien arises, and shall continue until the liability for the tax assessed is satisfied or becomes unenforceable due to lapse of time. 26 U.S.C. §6322. The tax lien as a matter of law becomes a valid charge on all properties of the taxpayer.

The Debtors, who do not deny the material facts and albeit do not expressly concede the absence of any genuine issues of material fact basically dispute that: (1) they are required to pay income tax; (2) the IRS is an existing entity with power to make the assessment; and (3) that there is a valid easement because there is nothing in this record to show an assessment signed by an "assessment officer." The Debtors, therefore, contend that the Government never acquired any valid enforceable tax lien on the funds which were on deposit in the Bank, and that the Debtors are entitled to all the funds in the Registry.

Section 6201 of the Internal Revenue Code authorizes the Secretary of Treasury, or his delegate, to assess all taxes, including interest and additional taxes imposed by the Code. The assessment is made by "recording the liability of the taxpayer in the Office of the Secretary in accordance with the rules and regulations prescribed by the Secretary." 26 U.S.C 6203. While it is true that in the present instance the actual assessments are not part of this record, the Government filed a Certificate of Assessment and Payments. It is recognized that such a certificate is presumptive proof of a valid assessment. United States v. Chila [89-1 USTC ¶9299], 871 F.2d 1015, 1018 (11th Cir. 1989), quoting United States v. Dixon [87-2 USTC ¶9485], 672 F.Supp. 503, 505 (M.D.Ala. 1987) aff'd, 849 F.2d 1478 (11th Cir. 1988). See also Freck v. Internal Revenue Service [94-2 USTC ¶50,518], 37 F.3d 986, 991-92 n.8 (3d Cir. 1994) Long v. United States [92-2 USTC ¶50,431], 972 F.2d 1174, 1181 (10th Cir. 1992). Moreover, the Debtors failed to challenge the IRS's determination of their tax liability before it was assessed by filing a timely petition with the U.S. Tax Court. 26 U.S.C. §6213. Therefore, the assessment was timely made. The Debtors had a right to challenge the correctness of the notice of deficiency issued after the jeopardy assessment of their 1993, 1994, and 1995 tax liabilities by filing a timely petition in the U.S. Tax Court. 26 U.S.C. §6961(b). While they did challenge the jeopardy assessment in the U.S. District Court, the jurisdiction of the District Court is limited to a review of the reasonableness of the assessment. Because they did not file a petition in the Tax Court within ninety days of the receipt of the notice of deficiency, the deficiency became assessable, 26 U.S.C. §6213(c), regardless of the jeopardy assessment procedure. Humphreys v. United States , 62 F.3d 667 (5th Cir. 1995). Lastly, while the Government may be named as a party in an interpleader action, the taxpayer cannot challenge the underlying tax assessment. Stoecklin v. United States, 943 F.2d 42, 43 (11th Cir. 1991); Robinson v. U.S. [91-1 USTC ¶50,001], 920 F.2d 1157, 1161 (3d Cir. 1990); Schmidt v. King [90-2 USTC ¶50,487], 913 F.2d 837, 839 (10th Cir. 1990). The only litigation which may be brought under 28 U.S.C. §2410 is to challenge the procedural validity of the federal tax lien and the taxpayer may not attack the merits of the underlying assessment.

Based on the foregoing, this Court is satisfied that there is no dispute that the assessment has been made; that the Debtors failed and refused to pay the taxes assessed; and that as a result a tax lien arose against all properties of the Debtors, including the funds which were on deposit in the Bank. There being no genuine issues of the material fact, the Government is entitled to an Order granting its Motion for Summary Judgment vis-a-vis the Debtors, and based on the stipulation by the Trustee, its tax lien is superior to the claim of the Trustee, but only to the extent and consistent with the stipulation.

MOTION FOR SUMMARY JUDGMENT BY THE TRUSTEE

The facts relevant to the Trustee's Motion are equally without dispute. The validity of the Judgment obtained by the Trustee in the State Circuit Court is not in dispute and neither is the fact that the Trustee obtained a Writ of Execution which was served on the Clerk of the Bankruptcy Court. The only question remaining is whether the garnishment lien did attach to the funds while the funds were in custodia legis.

In light of the fact that the Chapter 7 case has been dismissed, and although ordinarily any property remaining would be returned to the Debtor, the estate as such has no further interest in the property. However, because it is understood that this Court retained jurisdiction over the adversary proceedings in which competing claims to the funds deposited in the Court's Registry have been asserted by all parties in interest, this Court is satisfied that it is appropriate to consider the validity of the garnishment lien asserted by the Trustee. Based on the foregoing, undisputed record this Court is satisfied that the Trustee acquired a garnishment lien on the funds in the Registry, albeit junior to the tax lien of the Government. Since there are no genuine issues of material fact, the Trustee's Motion for Summary Judgment should be granted.

Accordingly, it is

ORDERED, ADJUDGED AND DECREED that Motion for Summary Judgment filed by the Government be, and the same is hereby, granted.

It is further

ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgement filed by the Trustee be, and the same is hereby, granted.

It is further

ORDERED, ADJUDGED AND DECREED that the Motion for Summary Judgment filed by the Debtors be, and the same is hereby, denied.

A separate final judgment will be entered in accordance with the foregoing.

DONE AND ORDERED.

 

 

[86-1 USTC ¶9480] B & H Opticks, Inc., d/b/a Pearl Vision Center, Plaintiff v. Internal Revenue Service, and Janice Patrice Nelson, and Allan H. Zerman, and Stanley Rabushka, Defendants

U.S. District Court, East. Dist. Mo. , East. Div., 85-2990C(6), 5/13/86, 633 FSupp 1356, (633 FSupp 1356.)

[Code Secs. 6321 , 6322 and 6323 ]

Federal tax liens: Interpleader action: Priority of claims: Subsequently created interests: Attorneys' fees.--A federal tax lien took priority over all other claims filed in an interpleader action involving an optics business, one of its former employees, and the employee's ex-wife. The court ruled that the lien was created at the time of the tax assessment and covered not only property belonging to the taxpayer at the time of assessment, but any and all after-acquired property that comes into its possession during the period of the lien. Once perfected, the lien had priority over all interests subsequently created. The interpleader, the employee, was not entitled to an award of attorneys' fees.

Gary H. Lange, Bartley, Goffstein, Bollato & Lange, 130 S. Bemiston St. , St. Louis , Mo. 63105 , for plaintiff. Wesley D. Wedemeyer, Assistant United States Attorney, St. Louis, Mo. 63101, Robert D. Metcalfe, Department of Justice, Washington, D.C. 20530, for IRS. Allan Zerman, Stanley D. Rabushka, 225 S. Meramec St. , Clayton , Mo. 63105 , for Janice Patrice Nelson and pro se.

MEMORANDUM

GUNN, District Judge:

This is an action in interpleader. Plaintiff B & H Opticks (B & H) tendered into court $10,533.86, the amount of a debt owed to Ronald Nelson for employment services rendered B & H prior to the commencement of this action. B & H was prompted to file suit by its receipt of notice of competing claims on the debt filed by defendants United States through its agent, the Internal Revenue Service; Janice Patrice Nelson, former wife of Ronald Nelson; and Allan H. Zerman and Stanley Rabushka, attorneys who apparently represented the Nelsons in their divorce proceedings. The $10,533.86 is insufficient to satisfy all the claims made upon it; hence, B & H seeks a declaration of priority among the competing claims.

The United States , as the proper party defendant substituted for the named Internal Revenue Service, has moved the Court for summary judgment on the ground that its federal tax lien has priority over all other claims on the interpleaded fund. A reading of the applicable sections of the revenue law gives clear support to the position of defendant United States , which is entitled to judgment as a matter of law. Since payment of the tax assessment will exhaust the fund, no issue of fact remains in this case concerning the priority of claims on the fund made by the other party defendants, and summary judgment is appropriate. See Buller v. Buechler, 706 F.2d 844 (8th Cir. 1983).

Failure to pay taxes owing to the federal government creates a lien in the amount of the liability in favor of the United States on all property and rights to property belonging to the taxpayer. 26 U.S.C. §6321 . The lien attaches at the time of the tax assessment, 26 U.S.C. §6322 ; United States v. City of New Britain [54-1 USTC ¶9191 ], 347 U.S. 81, 85 (1954); Rice Investment Co. v. United States [80-2 USTC ¶9654 ], 625 F.2d 565 (5th Cir. 1980), and covers not only property in the possession of the taxpayer at the time of assessment but also any after-acquired property that comes into the taxpayer's possession throughout the duration of the lien. Id. The lien continues until the liability for the assessed amount is satisfied, 26 U.S.C. §6322 , and, once perfected, the lien has priority over all interests subsequently created in the subject property apart from certain enumerated interests excepted by statute. 26 U.S.C. §6323 . ¹

In the instant case the IRS assessed tax liabilities of $31,654.06 against Ronald Nelson on April 2, 1984. The lien created thereby, which was filed with the Recorder of Deeds of St. Louis County on that date in accordance with statute, 26 U.S.C. §2623(f) , runs against all property or rights to property belonging to Nelson, including the debt owed him by B & H. A notice of levy with respect to this debt was served by the IRS on B & H d/b/a Pearl Vision Center on November 6, 1985. The other claims on the interpleaded fund were all filed subsequent to the perfection of the IRS lien. ² Hence, the claim of the United States has priority, and the IRS is entitled to the full amount tendered into court.

Motion for Recovery of Attorneys' Fees. "[A] stakeholder who interpleads funds into court is not entitled to attorneys' fees if such award would diminish the portion of the interpleaded fund to which the United States is entitled by virtue of its tax lien." Juengel Construction Co. v. Moenning, 78-2 USTC ¶9812 , 85, 745 (E.D. Mo. 1978); see also Millers Mutual Ins. Ass'n v. Wassall [84-2 USTC ¶9621 ], 738 F.2d 302 (8th Cir. 1984). Since the United States holds a priority lien on Ronald Nelson's property in excess of the amount interpleaded in this action, an award of attorneys' fees in this case would impermissibly diminish the amount of the government's recovery and must therefore be denied in accordance with §§6321 and 6322 of the revenue laws.

ORDER

Pursuant to the memorandum filed herein on this date,

IT IS HEREBY ORDERED that the motion of the United States for summary judgment in the above-styled action be and is granted.

IT IS FURTHER ORDERED that the motion of plaintiff B & H for discharge from liability and award of attorneys' fees be and is denied.

¹ The United States in its memorandum in support of its motion for summary judgment anticipates an argument by defendants Zerman and Rabushka that their claims enjoy a "superpriority" status under §6323(b)(8) , which excepts from IRS priority attorneys' liens on property acquired as a judgment or in satisfaction of a legal settlement, either of which the attorney dedicated professional services to obtain. The Court agrees that the legal fee claims in the instant case do not fall under §6323(b)(8) . The debt on which the United States seeks to levy does not represent a settlement or judgment secured through the services of the defendant attorneys, but rather represents expected compensation for services rendered by Ronald Nelson to B & H.

² The other claims were filed on May 29, 1985 (Janice Nelson), June 26, 1985 (Allan Zerman), June 26, 1985 (Stanley Rabushka) and November 7, 1985 (Janice Nelson).

 

 

52-1 USTC ¶9295]In the Matter of Eagle Frosted Foods Corporation, Bankrupt

In the District Court of the United States for the District of Delaware , No. 1459. In Bankruptcy, Filed April 21, 1952

Validity of tax lien against creditor of bankrupt: Notice of tax lien given to trustee in bankruptcy without permission of the court and after assignment by creditor of bankrupt of possible distribution on claim: Lien for attorney's fees.--After a recognized creditor of a corporation which had been adjudicated to be bankrupt had agreed with his attorney as to the amount of his fee and had given the attorney for same a lien upon any possible distribution that he (creditor of bankrupt) might receive on his claim, the Collector of Internal Revenue, without permission of the court, filed notice of a lien for taxes against said creditor. The action of the Collector of Internal Revenue to inject himself into the bankruptcy proceedings cannot be given effect. Even though effect must be given to Code Sec. 3670 and the action taken by the Collector's office, the claim of the attorney is superior to the tax lien because his rights were established long before the notice of assessment of the tax was received in the Collector's office and before any attempt was made to give notice of the tax lien to the trustee in bankruptcy.

William Marvel, Delaware Trust Building , Wilmington , Delaware , for bankrupt. Daniel J. Layton, Georgetown , Delaware , for trustee. Robert W. Tunnell, Georgetown , Delaware , for claimant.

Findings of Fact; Conclusions of Law, and Opinion on Petition of Peter P. Zion Filed December 6, 1951, and Order Thereon

LYNCH, Referee:

At Wilmington, in said District, on this 21st day of April, A. D. 1952, there heretofore having come on to be heard the petition of Peter P. Zion, filed December 6, 1951,

AND it appearing that due notice was given to all parties in interest, all of which will more fully appear from the certificate of notice of hearing and the record in these proceedings,

AND the Referee, having heard testimony, and, after mature consideration of the petition, the transcript of testimony taken at the hearing on said petition, and the brief ^* filed by petitioner, Peter P. Zion, makes the following

Findings of Fact

1. Eagle Frosted Foods Corporation filed a voluntary petition seeking to be adjudicated bankrupt. An order adjudicating it bankrupt and of general reference was entered on April 8, 1948, referring the bankruptcy proceedings to the Referee in in Bankruptcy. On April 21, 1948, Isaac D. Short, 2nd, an attorney at Georgetown , Delaware , was appointed Trustee in Bankruptcy.

2. On April 21, 1948, Lawrence Udell filed a claim against the bankrupt, alleging that the bankrupt was indebted to him in the sum of $10,000.00. Among other things, the claim provided that--

"The undersigned creditor of the above-named bankrupt hereby authorizes Peter P. Zion * * * to attend * * * all meetings of creditors * * * for and in the name of the undesigned; * * *; and for the undersigned * * * to receive payment of dividends, and of money due the undersigned * * *; and for any other purpose in the undesigned's interest whatsoever, * * *"

The claim was signed and verified before a notary public in compliance with the requirements of the Bankruptcy Act.

3. Late in June or early in July of 1949, an agreement was made at Mr. Zion's office in Philadelphia, Pennsylvania, between Lawrence Udell and Mr. Zion that Mr. Zion was to retain, as his fee for representing Mr. Udell, one-third of the dividend realized by Mr. Udell from the proof of claim filed in this case, and in October of the same year, Lawrence Udell orally assigned to Mr. Zion one-third of his expected recovery "as assurance" to Mr. Zion in payment of his fee, and about that time agreed, if it was necessary, to make a written assignment.

4. Objections were filed by the Trustee, and as well by certain creditors of the bankrupt, to the claim of Lawrence Udell. Then later--on January 18, 1950--the Trustee filed a petition asking that the claim of Lawrence Udell, Jacob Udell, and Jacob and Leah Udell, "be subordinated to the claims of other general creditors". It was charged in the petition that the Udells owned 1,667 shares of the 2,000 shares issued and outstanding of the bankrupt corporation, and that--

"* * * the bankrupt corporation was at all times a family corporation, in fact, managed, directed and controlled by Jacob Udell acting for himself, his wife, Leah Udell, and his son, Lawrence Udell".

The petition also charged--

"8. That the bankrupt corporation began operation early in January, 1947, and ceased to operate in the spring of the same year."

"9. That the moneys alleged to have been loaned to the bankrupt corporation, evidenced in part by the notes of the corporation as hereinabove related, were a part of a plan of permanent and personal financing, and were in effect capital contributions, and do not have an equitable status with other general creditors."

An extended answer was filed by the Udells, represented by Peter P. Zion, to the petition.

5. Between January 23, 1950, and April 20, 1951, there were at least fifteen hearings on the objections to all the Udell claims and on the petition of the Trustee, filed January 18, 1950, at which hearings evidence was received on the objections and in support of and against the petition. Peter P. Zion appeared for Lawrence Udell at all these hearings. Following the hearings, elaborate briefs were filed by Mr. Zion in opposition to the objections and the petition.

6. Prior to February 9, 1951, the Trustee filed a petition asking that a stipulation made between his attorney and Mr. Zion, representing the Udells, and settling the controversy arising from the filing of the Trustee's petition, be approved, and hearings were held on February 9, 1951, March 16, 1951, March 19, 1951, and April 6, 1951, on this petition for approval of the stipulation, at which hearings Mr. Zion appeared for Mr. Udell.

7. On April 20, 1951, an order was entered approving the stipulation referred to in Finding No. 6.

8. On July 20, 1950, an assessment was made by the Commissioner of Internal Revenue against Lawrence Udell, and Notice of such assessment was subsequently received in the Office of the Collector of Internal Revenue for the District of Delaware, and on February 20, 1951, the Collector of Internal Revenue for the District of Delaware, at the direction of the Collector of Internal Revenue for the First Revenue District of New York, filed Notice of Lien against Lawrence Udell, reciting the tax assessments totaling $89,185.05. About March 20, 1951, notice of the said lien was given to the Trustee in Bankruptcy. The Notice, in part, is as follows:

"To Isaac Short, Referee in Bankruptcy c/o U. S. District Court, Wilmington , De. in Re; Eagle Frosted Foods Corp. Georgetown , Del. "

9. No application was made or has been made to the United States District Court for the District of Delaware by any Collector of Internal Revenue, or on his behalf, for permission to file any notice of claim on the part of the Collector of Internal Revenue for the First Revenue District of New York or to assert any claim against Lawrence Udell, a creditor of the bankrupt corporation, for taxes due to the United States.

10. On March 21, 1951, there was no liquidated sum or definitely known amount of money in the hands of the Trustee in Bankruptcy that could be considered due and owing to Lawrence Udell.

11. By the filing of the order of April 20, 1951 (Finding No. 7, supra), Lawrence Udell was recognized by the Trustee and the Referee as a creditor of the bankrupt corporation.

12. On June 30, 1951, the Referee determined the total amounts of money that would be available for distribution to creditors; and prior to that time other objections to claims were then under consideration; and there had been no determination of the amounts due and owing for administration costs, including commissions to the Trustee and to his attorney, and for other administration expenses. Before that time, it was not possible to show the extent of the dividend that Mr. Udell would, as a creditor, receive from the bankrupt, or the Trustee.

13. That Mr. Zion rendered extensive and valuable services to Mr. Udell, and it was the services of Mr. Zion for Mr. Udell that made it possible ultimately for Mr. Udell to be recognized as a creditor of the bankrupt.

14. On November 30, 1951, an order of distribution was entered in these proceedings, and the Trustee on that date was "authorized and directed to pay by check, countersigned by the Referee, a first and final dividend of 39.8622% on the claims" allowed to creditors, and by that order the Trustee was directed to pay $3,986.22 on the claim filed by Lawrence Udell; that the Trustee was orally directed by the Referee to hold up the delivery of a check on the claim filed by Mr. Udell, pending the determination of the effect to be given to the Notice of Lien filed by the Collector of Internal Revenue.

15. Peter P. Zion filed a petition with the Referee in Bankruptcy reciting the services he rendered to Mr. Lawrence Udell and the agreement concerning his fee. By his petition, Mr. Zion alleged he "became entitled to a one-third (1/3) part of the said dividend or the sum of $1,328.66", and reciting that "under the terms of the power of attorney made granted" by Lawrence Udell "any moneys payable to the said Lawrence Udell because of any dividend are payable to" Mr. Zion. The petition recited that the funds in the hands of the Trustee in Bankruptcy "are not subject to an attachment or lien, and that notice of such lien is not effective". Mr. Zion concluded his petition by a prayer for the issuance of a rule to show cause directed to the Trustee and to the Collector of Internal Revenue for the First Revenue District of New York, "why the fund of $1328.66 * * * set forth and declared as payable to the credit of Lawrence Udell, should not be paid and turned over to" Mr. Zion.

16. On December 6, 1951, an order was entered and a rule to show cause issued. Service was effected on the Collector of Internal Revenue for First Revenue District of New York, and on the return day of the rule the United States Attorney for the District of Delaware appeared at and participated in the hearing on Mr. Zion's petition.