Annotations- Homestead Page3

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Even if the government could convey Mr. O'Hagan's interest under federal law, Minnesota law nevertheless defines the extent of that property right. Without the right to sever the joint tenancy or to convey his interest in the homestead property, if lawfully severed, Mr. O'Hagan's right to use and occupy the property is a limited, personal right of possession. See Elfelt, 485 N.W.2d at 62 (stating that "the statutory requirement of spousal consent illustrates that the nature of the property interest owned by a spouse in a jointly held homestead is a limited interest"). Neither the government nor a third-party purchaser would be able to exercise this limited right of possession because under Minnesota law only the spouses have this possessory right in homestead property. See Minn. Stat. §507.02; see generally United States v. Certain Real Property Located at 2525 Leroy Lane, 910 F.2d 343, 351 (6th Cir. 1990) (stating that "the Government may properly acquire only the interest which Mr. Marks held as cotenant by the entireties ... [but] cannot occupy the position of Mr. Marks in the entireties estate, since the estate is founded on marital union, and the Government obviously cannot assume the role of spouse to Mrs. Marks"), cert. denied, Marks v. United States, 499 U.S. 947 (1991). Therefore, Mr. O'Hagan's possessory interest in the homestead property "wears out" when it is held by another party. This would seem to be the precise scenario contemplated by the phrase that the government " 'steps into the taxpayer's shoes but must go barefoot if the shoes wear out.' " Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 691 n.16 (quoting 4 Bittker, ¶111.5.4 at 111-102).

During her lifetime, Mrs. O'Hagan retains the right to exclude all people, other than Mr. O'Hagan, from the homestead property. This right derives from the Minnesota statute addressing homestead property and would apply equally to joint tenants and tenants in common. Minn. Stat. §507.02. Mrs. O'Hagan's right to exclude all persons other than Mr. O'Hagan from using or occupying the homestead property demonstrates that her right is superior to that of the government or a third-party purchaser who would be attempting to exercise a possessory right that is limited and personal to Mr. O'Hagan. Therefore, Mrs. O'Hagan satisfies the first prong of the statutory exception to the Anti-Injunction Act by demonstrating that she has a right superior to that of the government in Mr. O'Hagan's right to use and occupy the homestead property.

The second prong of the statutory exception to the Anti-Injunction Act requires Mrs. O'Hagan to demonstrate irreparable injury resulting from the forced sale of Mr. O'Hagan's interest in the homestead property. Allowing any person other than Mr. O'Hagan to exercise his right to use and occupy the homestead property would destroy Mrs. O'Hagan's right to exclude all persons other than Mr. O'Hagan from the homestead property. Moreover, as a practical matter, the sale of Mr. O'Hagan's interest would undoubtedly diminish the value of Mrs. O'Hagan's property interest. More fundamentally, monetary relief fails to provide adequate compensation for an interest in real property, which by its very nature is considered unique. See, e.g., Shaughnessy v. Eidsmo, 23 N.W.2d 362, 368 (Minn. 1946) (stating that when an interest in land is involved, the common-law remedy is deemed to be inadequate); Strangis v. Metropolitan Bank, 385 N.W.2d 47, 48 (Minn. Ct. App. 1986) (stating that the property owners "would suffer irreparable harm by the foreclosure of the mortgage on their homestead [because] [r]eal property is unique, which money damages may not adequately compensate"). ⁶ Thus, Mrs. O'Hagan would suffer irreparable injury by the proposed forced sale of Mr. O'Hagan's possessory interest in the homestead property. Accordingly, we conclude that the district court has jurisdiction to enjoin the sale of Mr. O'Hagan's right to use and occupy the homestead property.

C. Right of Survivorship

We must next analyze whether Mrs. O'Hagan's interest is superior to that of the government with regard to Mr. O'Hagan's right of survivorship. We conclude that although Mrs. O'Hagan could probably prohibit the conveyance of Mr. O'Hagan's right of survivorship, she cannot demonstrate irreparable injury. Thus, the government can attempt to convey this interest, subject to the limitations discussed below.

As earlier noted, Mrs. O'Hagan can prohibit the conveyance of an interest in the homestead property under Minnesota law. See Minn. Stat. §507.02. Mrs. O'Hagan has failed to demonstrate how the conveyance of her husband's survivorship interest would cause her irreparable injury. We recognize that the applicable Minnesota statutes demonstrate a public policy in favor of protecting a spouse's continued occupancy of the homestead. Hendrickson, 161 N.W.2d at 691 (citing Minn. Stat. §§507.02 & 525.145(1)). This public policy, however, "does not necessarily apply to the remainder interest, which can be disposed of without adversely affecting the right of the surviving spouse to continue in possession and enjoyment for so long as she might live." Id. In the present case, therefore, the government can levy upon and attempt to convey a single straw from the proverbial "bundle of interests," namely, Mr. O'Hagan's right of survivorship to Mrs. O'Hagan's interest in the homestead property.

In attempting to convey this solitary interest, however, the government must clearly articulate the precise nature of the interest in the notice of sale. See 15 U.S.C. §6335(b) (stating that "[s]uch notice shall specify the property to be sold, and the time, place, manner, and conditions of the sale thereof"). First, the government must make it clear that the only interest in the homestead property subject to sale is Mr. O'Hagan's survivorship interest. The third-party purchaser, in fact, would simply be gambling that Mrs. O'Hagan will predecease Mr. O'Hagan because if Mr. O'Hagan were to die first, the right acquired by the third-party purchaser would vanish in its entirety. ⁷

Second, we emphasize, as the government must in the notice of sale, that this solitary interest is subject to a further, and substantial limitation. Ironically, once Mr. O'Hagan's right of survivorship is conveyed by the government to a third-party purchaser, that interest cannot be recorded because recordation would sever the joint tenancy, thereby extinguishing the very right of survivorship that was acquired. See Minn. Stat. §500.19, subd. 5 (1996 Supp.). ⁸ Moreover, as discussed above, Mr. O'Hagan does not have the right to unilaterally sever the joint tenancy and thus neither the government nor a third-party purchaser would have that right.

Finally, we note that the third-party purchaser would acquire Mr. O'Hagan's obligations under the mortgage if Mrs. O'Hagan were to predecease Mr. O'Hagan. This fact must also be made clear to potential purchasers. Therefore, it is vital that the government recognize and accurately articulate the precise, and limited, nature of the interest it would be conveying in the present case. See Herndon, 501 F.2d at 1223 (requiring, as a matter of fairness under the circumstances, that the government advise all prospective purchasers that the real property is being sold subject to the homestead interest in the other spouse and that the government inform all prospective purchasers about the litigation in the case). Although we believe it is highly improbable that a fully-informed third-party purchaser would buy such a limited property right, we acknowledge that the government does have a valid lien on Mr. O'Hagan's survivorship interest, which, while held by the government, provides protection for the government without affecting Mrs. O'Hagan's interests. See William T. Plumb, Jr., Federal Liens and Priorities--Agenda for the Next Decade II, 77 Yale L.J. 605, 638 (1968) (suggesting "that the tax lien, if and when it cannot be satisfied from other sources, should be fastened to the property by appropriate judicial proceedings within the period of limitations, with actual enforcement by sale deferred until the survivorship contingency is resolved").

Lastly, we are not called upon to resolve the merits of the present case, except to the extent necessary to determine whether Mrs. O'Hagan has satisfied the statutory exception to the Anti-Injunction Act. ⁹ We conclude that Mrs. O'Hagan has adequately demonstrated that the district court has jurisdiction to issue a preliminary injunction to prevent the sale of Mr. O'Hagan's right to use and occupy the homestead property. ¹⁰ We do not express any opinion as to the likely outcome of a judicial lien foreclosure proceeding under section 7403 of the IRC. See Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 703-12; United States v. Bierbrauer [91-2 USTC ¶50,331 ], 936 F.2d 373, 375 (8th Cir. 1991).

III. CONCLUSION

The district court has subject matter jurisdiction to enjoin the forced sale of Mr. O'Hagan's right to use and occupy the homestead property, but cannot enjoin the government from attempting to sell Mr. O'Hagan's right of survivorship, subject to the limitations set forth in this opinion. Accordingly, the district court's order granting Mrs. O'Hagan's motion for a preliminary injunction is affirmed in part and reversed in part.

¹ In Enochs, the Supreme Court held that federal courts have jurisdiction to hear cases brought by an allegedly delinquent taxpayer in which the collection or assessment of taxes would be enjoined because: (1) the government cannot prevail on the merits even if the facts and law are examined in the light most favorable to the government; and (2) equity jurisdiction would otherwise exist. [62-2 USTC ¶9545 ], 370 U.S. at 7-8.

² As we have often noted, we review judgments, not the text of opinions, and thus may affirm on any ground supported by the record regardless of whether it was argued below or considered by the district court. See, e.g., African American Voting Rights Legal Defense Fund, Inc. v. Villa, 54 F.3d 1345, 1356 (8th Cir. 1995), cert. denied, Tyus v. Bosley, 116 S. Ct. 913 (1996); United States v. Sager, 743 F.2d 1261, 1263 n.4 (8th Cir. 1984), cert. denied, 469 U.S. 1217 (1985). In the present case, however, the district court expressly recognized both the statutory exception and the Enochs exception and the government argued in its opening brief that Mrs. O'Hagan did not satisfy either exception.

³ Under Minnesota law, a severance of a joint tenancy is legally effective only when:

(1) the instrument of severance is recorded in the office of the county recorder or the registrar of titles in the county where the real estate is situated; or (2) the instrument of severance is executed by all of the joint tenants; or (3) the severance is ordered by a court of competent jurisdiction; or (4) a severance is effected pursuant to bankruptcy of a joint tenant.

A decree of dissolution of marriage severs all joint tenancy interests in real estate between the parties to the marriage, except to the extent the decree declares that the parties continue to hold an interest in real estate as joint tenants.

Minn. Stat. §500.19, subd. 5 (1996 Supp.).

⁴ A joint-tenant spouse who unilaterally severs a joint tenancy in homestead property, however, would nevertheless be precluded from conveying any interest in that homestead property. Minn. Stat. §500.19, subd. 4 (1996 Supp.); Minn. Stat. §507.02. Moreover, severing the joint tenancy does not completely destroy the other spouse's survivorship interest because Minnesota provides statutory protection for a joint tenant's survivorship interest in homestead property. Minn. Stat. §525.145 (1996 Supp.).

⁵ According to the dissent, a spouse can unilaterally convey homestead property, thereby severing a joint tenancy, simply by recording an instrument of severance pursuant to Minn. Stat. §500.19, subd. 5. In a case strikingly similar to the one before us, Judge Kyle expressly rejected the dissent's construction of Minn. Stat. §507.02. Marshall v. Marshall, 921 F. Supp. 641, 645-46 (D. Minn. 1995) ("To hold that one spouse could deprive the other spouse of this interest by recording a deed after having unilaterally and wrongfully sold the homestead would defeat [the purpose of the homestead law, which is to create a property interest that could not be conveyed without the consent of both spouses]"), vacated on other grounds, 921 F. Supp. 647 (D. Minn. 1996). In light of the clear statutory language prohibiting a unilateral conveyance of homestead property without the written consent of both spouses, Minnesota case law holding that a conveyance of homestead property without the signature of both spouses is void, and the public policy justification for granting extra protection to homestead property, we leave it to Minnesota courts to adopt the dissent's counterintuitive construction of Minn. Stat. §507.02 if they so chose. See, e.g., Dvorak v. Maring, 285 N.W.2d 675, 677 ( Minn. 1979); Renneke v. Shandorf, 371 N.W.2d 12, 14 (Minn. Ct. App. 1985).

⁶ We emphasize that even the judicial lien foreclosure proceeding set out in 15 U.S.C. §7403 --which might enable the government to sell the entire homestead and compensate the innocent spouse with monetary damages--allows the supervising court equitable discretion as to whether it would authorize the transaction. See Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 706; United States v. Bierbrauer [91-2 USTC ¶50,331 ], 936 F.2d 373, 375 (8th Cir. 1991).

⁷ Furthermore, neither the government nor a third-party purchaser would acquire Mr. O'Hagan's statutorily protected right of survivorship in the homestead property--e.g., to a life estate--because this protection is limited to a surviving spouse. Minn. Stat. §525.145 (1996 Supp.).

⁸ This anomaly would not occur under the common-law rule, which assumes that a conveyance severs a joint tenancy because the act of conveyance destroys at least one of the four unities (time, title, interest, or possession). In abrogating the common-law rule, Minnesota has apparently replaced the act of conveyance with the act of recordation as the triggering event that severs a joint tenancy.

⁹ Without deciding whether it is essential to this type of case, we conclude that the four factors normally considered in a preliminary injunction claim also have been satisfied regarding the sale of Mr. O'Hagan's right to use and occupy the homestead property. Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 114 (8th Cir. 1981) (en banc). In Dataphase, we held that a court considers four factors when evaluating a motion for a preliminary injunction: (1) whether there is a substantial threat that the plaintiff will suffer irreparable harm if the relief is not granted; (2) whether the irreparable harm would outweigh any potential harm in granting the preliminary injunction; (3) whether there is a substantial probability that the plaintiff will prevail on the merits; and (4) the public interest. Id.

¹⁰ Our conclusion is consistent with the Supreme Court's decision in Rodgers, in which the Court held that homestead property could be sold--pursuant to the judicial lien foreclosure procedure under section 7403 of the IRC--to satisfy tax obligations owed by only one spouse. The Court also acknowledged, however, that its decision did not affect the traditional rule that the homestead property rights of an unindebted spouse could not be sold pursuant to an administrative levy, such as the IRS is attempting here, to satisfy the other spouse's tax liability. Rodgers [83-1 USTC ¶9374 ], 461 U.S. at 702-03 n.31.

[Dissenting Opinion]

Morris Sheppard ARNOLD , Circuit Judge

I respectfully dissent.

The court decides this case on a ground never presented to it, namely, that the taxpayer's inability to alienate his interest in homestead property without Mrs. O'Hagan's consent gives her a right in property, superior to the government's interest, that will be irreparably damaged by a sale of the taxpayer's property. Mrs. O'Hagan did assert below and in this court that the taxpayer's interest was not alienable without her consent, but not in order to demonstrate that she had an interest in the taxpayer's property superior to the government's. Rather, she did that in an effort to show that her right to veto, as it were, any alienation by the taxpayer meant that the government could not convey title to the taxpayer's interest at a tax sale.

In other words, her argument was that the government can by levy acquire no more rights in property than the taxpayer had, and, since the taxpayer could not alienate his interest without his wife's consent, neither can the government. See, e.g., United States v. Rodgers [83-1 USTC ¶9374 ], 461 U.S. 677, 690-91 (1983). That argument itself has a certain syllogistic appeal and presents a nice question, but, as I understand it, it is a question that the court does not decide today. It is, moreover, entirely irrelevant to the case.

The district court accepted Mrs. O'Hagan's argument and granted her motion for an injunction based on Enochs v. Williams Packing and Navigation Company, Inc. [62-2 USTC ¶9545 ], 370 U.S. 1 (1962). That case established the principle that an injunction against a tax levy and sale can issue if (1) the government cannot prevail on the merits even if the facts and law are examined in the light most favorable to the government and (2) irreparable harm to the property owner would ensue if the sale were allowed to proceed. Id. at 6-7. But Enochs has no application to this case.

First of all, the benefit of Enochs may extend only to the taxpayer, not to affected third parties. In fact, Mrs. O'Hagan conceded this proposition at oral argument in the district court. Enochs requires, moreover, an inquiry into whether the government can prevail on the merits of the tax claim, not whether the taxpayer has any interest in the property that can be levied on and sold. Id. at 7. The district court therefore focused on the merits of the wrong issue. The relevant question under Enochs is whether the taxpayer might conceivably owe taxes, and it does not seem to have been controverted that the taxpayer in this case owes taxes. The district court therefore erred in relying on Enochs as a way to overcome the prohibition of the Anti-Injunction Act, 26 U.S.C. §7421(a) .

Because it found Enochs applicable and satisfied, the district court did not address the question of whether 26 U.S.C. §7426(b)(1) might provide a basis for an injunction. Indeed, this possibility was never mentioned until the government itself raised it in its brief filed in response to the plaintiff's brief in support of her motion for an injunction below. Even on appeal the plaintiff makes only one reference in her brief to this statutory provision, and then in an attempt to demonstrate what is plainly not so, namely, that the district court relied on it in deciding the case. And, more to the point, the plaintiff has never made an effort to identify what interest she had in the taxpayer's property that was superior to the government's, much less has she ever asserted that that very interest was the taxpayer's inability unilaterally to convey his interest in the residence. This last is a theory that the court constructed on its own.

The court therefore decides this case on a principle never presented to it and without giving the government the opportunity to convince it to the contrary. Perhaps that is partly because the government, in an effort to rebut Mrs. O'Hagan's argument that it could not sell the taxpayer's interest in the residence, has already advanced its best argument to the contrary, namely, that the district court misconstrued the relevant Minnesota statutes. But there may well be other arguments that the government could have advanced against the court's holding, and at the least it should have been given a chance to make them. In any case, I suggest with respect that the court has indeed misread the applicable Minnesota law.

In my view, Minnesota statutes do give a spouse who jointly owns homestead property the right unilaterally to sever the joint tenancy by conveyance. That power is conferred by the portion of Minn. Stat. Ann. §507.02 that allows joint owners of homesteads to make "a severance of a joint tenancy pursuant to section 500.19," that is, by simply recording an instrument of severance (presumably either a deed to a third party or to the grantor) in an appropriate governmental office. See Minn. Stat. Ann. §500.19.5(1). Such an instrument is "valid without the signatures of both spouses." See Minn. Stat. Ann. §507.02.

Section 507.02 was amended in 1979 specifically to allow such severances, perhaps partly in response to Hendrickson v. Minneapolis Federal Savings and Loan Association, 161 N.W.2d 688, 691 (Minn. 1968), which had held, construing the former version of the statute, that a joint tenancy in homestead property could not be severed by a conveyance to a third party by one of the cotenants. The provisions of Minn. Stat. Ann. §500.19.4(a) are not to the contrary, because they must be taken to refer only to those portions of §507.02 that require the consent of a spouse to a conveyance. The first paragraph of §507.02 allows unilateral severance; it is the second paragraph that requires spousal consent to certain kinds of conveyances. Any other construction of the relevant statutes would render the first paragraph of §507.02 difficult to comprehend.

Plaintiff evidently believes (and perhaps the court does too) that §507.02 merely confers on a joint owner of a homestead property the power to convert the joint tenancy into a tenancy in common. That is certainly one way of severing a joint tenancy, or one ultimate result to which a severance may lead. But the statute speaks generally of a right to sever, and the Minnesota cases quite clearly recognize, as do cases from other common-law jurisdictions, that one way to sever a joint tenancy is for one cotenant to convey his or her interest to a third party. See, e.g., Application of Gau, 41 N.W.2d 444, 447 ( Minn. 1950). If the legislature had intended the scope of the statute to be as narrow as the plaintiff urges, it could easily have said so. It did not.

The court holds that even if the taxpayer had a unilateral right to alienate his interest in the jointly held homestead, that general right is restrained by the principles announced in Hendrickson. But that case held, at most, in relevant part, that the survivorship feature of a joint tenancy could not be destroyed by the unilateral act of one joint tenant if another tenant had somehow acted in reliance on the continuing existence of that survivorship feature. Hendrickson, 161 N.W.2d at 692. There is a good argument that this is only dictum: The Minnesota Supreme Court said simply that "it would seem reasonable to insist" that this was so, id. But assuming arguendo that the court correctly describes the holding in Hendrickson, it is an extraordinary holding indeed. In fact, it is evidently unique.

The ordinary rule is that joint tenants take the risk that their cotenant will alienate his or her interest and destroy their right of survivorship. This circumstance alone provides some basis for believing that the Minnesota Supreme Court might overrule this aspect of Hendrickson if given the opportunity. Furthermore, the holding in Hendrickson was based in part on the fact that the version of §507.02 in effect when the case was decided did not allow for unilateral severance of a joint tenancy in a homestead property by deed to a third person. Since it now does, and since it contains no exceptions to the joint tenant's power to sever, the Minnesota Supreme Court might well hold that the legislature had rejected the holding in Hendrickson.

Finally, an application of Hendrickson, as the court interprets it, will not lead to the result that Mrs. O'Hagan urges. We simply do not know whether Mrs. O'Hagan would have signed the mortgage note if she had anticipated the destruction of the survivorship feature of her cotenancy with her husband. There is no evidence in the record one way or the other on this point, so there is no basis for the court's finding that Mrs. O'Hagan acted in reliance on the continued existence of her right of survivorship. She has the burden of proof on this issue, and it cannot be satisfied by conjecture. In fact, there is every reason to believe that she would have signed the note anyway, because, since the residence was homestead, if she survives her husband, she would be entitled to at least a life estate, and perhaps to a fee simple, even without the presence of a survivorship feature in the ownership arrangement. See Minn. Stat. Ann. §524.2-402(a). Even if she eventually received only a life estate, that could be the near equivalent of a fee simple, depending on when Mrs. O'Hagan became entitled to exclusive possession.

Mrs. O'Hagan therefore has no right in the taxpayer's property that is superior to the government's. What is more, she cannot carry her burden of showing that she will be irreparably injured by a tax sale. The court asserts that Mrs. O'Hagan has a right to exclude anyone but Mr. O'Hagan from the residence, and that the loss of this right occasioned by a sale to a third party is irreparable. But that proves too much, because such a loss is attendant upon a sale of any commonly-held property interest. The possibility that a cotenant might sell is a risk that inheres in coownership generally and freights the property rights of all cotenants (except tenants by the entireties).

The court also maintains that the sale of the taxpayer's interest would undoubtedly diminish the value of Mrs. O'Hagan's interest. This is a dubious proposition at best. In fact, her interest might well become more valuable, since it is not likely that any buyer of her husband's interest would move in with her. Mrs. O'Hagan would thus have the exclusive use of the premises, and she could invite her husband to live with her. Even if a sale did diminish the value of her property, that would simply give her a right to an action for money damages under 26 U.S.C. §7426(b)(2)(C) .

The court responds that monetary relief can never provide adequate compensation for the loss of an interest in real property. But the court cites only Minnesota state-law authority for this proposition, and the relevant question is the meaning of a federal statute. No federal case is marshaled in support of this extraordinary proposition, because none can be. In fact, the principle that the court adopts would evidently be applicable in every case under 26 U.S.C. §7426 that involves a levy on realty. This takes a greater bite out of the levy statute than Congress could possibly have intended. Reliance on a state-law equitable aphorism that supplies the basis for extraordinary relief in cases involving land contracts is simply not at home in a federal tax case.

The most fundamental objection, however, to the court's holding is that the court fails to connect Mrs. O'Hagan's alleged injuries to the allegedly superior property interest that she has, namely, her right to restrain the taxpayer's alienation of his interest. The injuries that the court identifies are injuries to her right to possess and enjoy her own interest, not to her right to withhold consent to her husband's conveyance. Such injuries do not qualify her for relief under the statute.

For the foregoing reasons, I believe that the district court erred in granting the injunction prayed for in this suit. I would therefore reverse the court's judgment and direct it to dismiss the motion for injunction for lack of jurisdiction in the district court to grant it.

 

 

 

[96-1 USTC ¶50,122] Carole Marshall, Plaintiff v. Joseph R. Marshall, Eugene V. Sitzmann, District Director of Internal Revenue Service for the St. Paul District, Northland Mortgage Company, Federal National Mortgage Corporation, John Doe and Mary Roe, Defendants

U.S. District Court, Dist. Minn., Third Div., Civ. 3-95-554, 12/18/95 , 921 FSupp 641, 921 FSupp 641

[Code Secs. 6321 and 6331 ]

Lien for taxes: Nondeliquent spouse: Homestead property: Levy and distraint: Sale of property.--The IRS's sale of an undivided one-half interest in jointly held homestead property to satisfy a tax lien was not valid. The IRS sold the property without the taxpayer's consent in order to satisfy her estranged husband's delinquent tax liabilities. The IRS did not acquire the right to unilaterally convey a portion of the homestead because, under state ( Minnesota ) law, the husband did not have such a right. Even though it appeared that the husband had the ability to sever the homestead without the taxpayer's consent, the IRS did not exercise this right once it was acquired. Moreover, state law may have prohibited the husband from unilaterally severing the property and conveying his remaining one-half interest.

Roy D. Hawkinson, Minneapolis , Minn. , for plaintiff. Rachel D. Cramer, Department of Justice, Washington, D.C. 20530, for District Director of I.R.S., William R. Busch, 803 Degree of Honor Bldg., St. Paul, Minn., for Eugene V. Sitzmann.

MEMORANDUM OPINION AND ORDER

Introduction

KYLE, District Judge:

Before the Court is Plaintiff Carole Marshall's ("Mrs. Marshall") Objections to the November 1, 1995 Report and Recommendation of United States Magistrate Judge Ann D. Montgomery ("R & R"). This matter was referred to Magistrate Judge Montgomery pursuant to 28 U.S.C. §636(b)(1)(A) and (B) and Local Rule 72.1(c). In the R & R, Magistrate Judge Montgomery recommends (1) Defendant District Director's ¹ Motion to Dismiss the claims against it be granted, (2) Plaintiff's Motion to Amend the Complaint be denied, and (3) this action be remanded to Hennepin County District Court. For the reasons set forth below, the Court declines to adopt the R & R.

Background ²

Mrs. Marshall commenced this action seeking to quiet title in residential real estate (" Homestead ") located in Minneapolis , Minnesota . ³ Mrs. Marshall and Defendant Joseph R. Marshall ("Mr. Marshall"), her estranged husband, owned the Homestead as joint tenants from 1974 through 1994. On February 18, 1994 , the IRS placed a federal tax lien, pursuant to 26 U.S.C. §6321 , on Mr. Marshall's interest in the Homestead to collect his delinquent federal income taxes. Mrs. Marshall's interest in the Homestead is not encumbered by this lien, and she does not currently contest the lien's validity. After acquiring the lien, the IRS levied on Mr. Marshall's interest in the Homestead pursuant to the administrative procedures set out in 26 U.S.C. §6331 , and conducted a public auction at which Defendant Sitzmann ("Sitzmann") "purchased" Mr. Marshall's interest in the Homestead. Neither Mr. Marshall nor Mrs. Marshall, on his behalf, attempted to redeem the property pursuant to 26 U.S.C. §6337(b) . Following the expiration of the redemption period, the IRS gave Sitzmann a quit claim deed purporting to convey Mr. Marshall's undivided one-half interest in the Homestead . (See Sitzmann Aff., attach.)

Plaintiff subsequently commenced this quiet title action in Hennepin County District Court. The IRS timely removed that action to this Court and moved to dismiss pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure on the grounds that the IRS no longer had an interest in the Homestead and therefore was not a proper party. The Plaintiff resisted this Motion, claiming that the sale of the property was void and that the IRS maintained a valid lien on the property. Plaintiff also moved to amend the Complaint to add a claim for an unconstitutional taking under the Due Process Clause of the Fifth Amendment.

In the R & R, the Magistrate Judge determined that the sale of Mr. Marshall's interest in the property was valid and that the IRS was accordingly not subject to the Court's jurisdiction in this matter. The Magistrate Judge further determined that Plaintiff's proposed amendment would be futile.

Analysis

I. Standard of Review

A district court must make an independent determination of those portions of a report and recommendation to which objection is made and may accept, reject. or modify, in whole or in part, the findings or recommendations made by the magistrate judge. 28 U.S.C. §636(b)(1)(C) .

II. Discussion

Plaintiff objects to the R & R on two grounds: (1) the R & R failed to apply the correct legal standard in determining whether the tax sale of the subject property was valid, and (2) the R & R erroneously denied the Plaintiff's Motion to Amend her Complaint. Both the IRS and Sitzmann filed responses to the Plaintiff's Objections as well as memoranda in support of the IRS's Motion to Dismiss. Mr. Marshall, the Northland Mortgage Company and the Knutson Mortgage Corporation have not submitted responses to the R & R or material in support of the IRS's Motion to Dismiss.

A. Validity of Levy and Sale

The issue in the IRS's Motion is whether the IRS had authority to sell Mr. Marshall 's undivided one-half interest in the Homestead to satisfy its tax lien. If the sale was valid, the IRS no longer has an interest in the Homestead and, for the reasons set forth in the R & R (R & R at 3-5), the IRS must be dismissed as a party pursuant to 28 U.S.C. §2410(a). If the sale was not valid, the IRS is a proper party in this action and its Motion must be denied. The Court finds the sale was not valid.

1. Legal Standard

All parties agree on the general principle to be applied in this case: the government "steps into the shoes" of the delinquent taxpayer when it acquires a tax lien. See United States v. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 724, 105 S. Ct. 2919, 2926 (1985) (citations omitted). Accordingly, in a levy proceeding, the "IRS acquires whatever rights the taxpayer himself possesses" in the homestead property. Id.; Thompson v. United States, 66 F.3d 160, 162 (8th Cir. 1995) ("[t]he IRS acquires by its lien and levy no greater right to property than the taxpayer himself has at the time the tax lien arises") (citing cases); Gardner v. United States [94-2 USTC ¶50,482 ], 34 F.3d 985, 988 (10th Cir. 1994) ("the tax collector not only steps into the taxpayer's shoes but must go barefoot if the shoes wear out") (quotation omitted). The parties also agree that, in applying the Internal Revenue Code, state law defines the nature of the taxpayer's interest in the homestead property. National Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. at 2926, 105 S. Ct. at 2926; see also Gardner [94-2 USTC ¶50,482 ], 34 F.3d at 987 ("it has long been the rule that in the application of a federal revenue act, state law controls in determining the nature of the legal interest which the taxpayer had in the property ... sought to be reached by the statute" and "[i]t is only after a taxpayer's legal interest in the property is so determined that federal law dictates the tax consequences") (quoting Aquilino v. United States [60-2 USTC ¶9538 ], 363 U.S. 509, 512-13, 80 S. Ct. 1277, 1378-80 (1960) (internal quotations omitted)).

2. Application

In order to determine the interest the IRS acquired by its lien, the Court must first consider the nature and extent of the property right Mr. Marshall had in the Homestead at the time of the lien. Mr. Marshall had an undivided one-half interest in the Homestead and held that interest with Mrs. Marshall in joint tenancy with right of survivorship. This interest was subject to at least one restriction. In Minnesota , the nature of homestead property held by husband and wife is such that it may not be conveyed without consent of the other unless the joint tenancy is officially severed. See Minn. Stat. §507.02 ("If the owner is married, no conveyance of the homestead, except ... a severance of a joint tenancy pursuant to section 500.19, subdivision 5 ... shall be valid without the signatures of both spouses"). Thus a spouse's interest in marital homestead property under Minnesota law does not include the right to unilaterally convey the property while it is held in joint tenancy. This is the property right the IRS acquired when it stepped into Mr. Marshall's shoes. Since the IRS did not acquire property rights superior to Mr. Marshall's, the IRS did not acquire the right to unilaterally convey a portion of the Homestead to Sitzmann while the Homestead was held in joint tenancy.

While recognizing that it only acquired Mr. Marshall's rights in the Homestead , the IRS claims the sale is valid because courts, in accordance with IRS regulations, have determined that state "homestead exemptions" do not impair the IRS's ability to levy on marital property. The IRS relies heavily on Herndon v. United States [74-1 USTC ¶16,127 ], 501 F.2d 1219 (8th Cir. 1974) to support this position, and claims Herndon "present[s] no significant distinctions from the instant case." ( United States ' Reply Br. at 7.) A close review of the facts of Herndon shows the IRS's reliance is misplaced. The issue in Herndon was whether the IRS could levy on the plaintiff's homestead to collect her spouse's delinquent taxes. The plaintiff's homestead was located in Arkansas , and Arkansas law provided the following exemption: "Homestead exemptions from legal process--Exemptions. The homestead of any resident of this State who is married ... shall not be subject to the lien of any judgment, ... or to sale under execution. ..." Herndon [74-1 USTC ¶16,127 ], 501 F.2d at 1220 n.2 (quoting Ark. Const. art. 9, §3 ). The Eighth Circuit concluded that state laws which purport to exempt property from foreclosure have no effect as against federal tax liens. Id. at 1222.

Minnesota Statute section 507.02 is fundamentally different from the provisions considered in Herdon and those in the supporting cases cited by the IRS. Unlike these provisions, Minnesota Statute section 507.02 does not create an "exemption" from a creditor's ability to levy upon the homestead. Rather, section 507.02 alters the very nature of one spouse's property right in the homestead. As such, this case is not within the purview of Herdon and related "homestead exemption" cases. Put another way, this is not a "homestead exemption" case. Indeed, Minnesota 's "homestead exemption" is contained in Minn. Stat. Ch. 510. Minnesota 's homestead exemption is similar to the exemptions in Herndon and in the cases cited by the IRS, and the rationale of those cases would apply to render Minnesota 's homestead exemption inoperative as against the IRS. Plaintiff correctly has not asserted a defense under this Chapter.

The Court has found only two cases which have specifically addressed whether the IRS may use an administrative levy proceeding ⁴ to sell a delinquent spouse's share in the homestead when state law defines that interest as prohibiting unilateral transfer. Both these cases support Plaintiff's position in this case. The first is indistinguishable from the material facts presented in the IRS's Motion. See O'Hagan v. United States [95-1 USTC ¶50,082 ], Civ. No. 4-94-952, 1995 WL 113417 (D. Minn. 1994), appeal docketed, No. 95-1185MNMI (8th Cir. argued Nov. 13, 1995). ⁵ The second is nearly identical to the facts presented here and is on all fours with this Court's rationale. In Elfelt v. Cooper [92-2 USTC ¶50,338 ], 168 Wis.2d 1009, 485 N.W.2d 56 (1992), cert. denied, 113 S. Ct. 1251 (1993), ⁶ the IRS had filed a tax lien on the husband's portion of jointly held homestead property. The IRS subsequently sold that portion following a §6331 administrative levy proceeding. Wisconsin , like Minnesota , defined the property right a spouse had in the homestead to be inalienable without the other spouse's consent. Id. at 61 (citing Wis. Stat. §706.02(1)(f)). The IRS did not obtain the nondelinquent spouse's consent. Elfelt determined that "the statutory requirement of spousal consent illustrates that the nature of the property interest owned by a spouse in a jointly held homestead is a limited interest that can only be alienated with the consent of both spouses or by court action." Id. at 62. Based on this, Elfelt observed that "the IRS cannot gain an interest superior to that which [the delinquent spouse] himself had" and concluded the IRS did not have authority to sell the husband's interest in the jointly held homestead property. Elfelt acc