[84-1 USTC ¶9155]First-Lockhart National Bank, Plaintiff v. United States of America , Defendant

U. S. District Court, West. Dist. Tex., Austin Div., A-83-CA-398, 1/3/84

[Code Sec. 7425]

Redemptions: Scope of redemption rights: Existence of tax lien.--Subsequent to a governmental sale of real property to satisfy a tax lien, and within 120 days of a second sale by a senior lienor of the same property, the United States was entitled to redeem the property from the senior lienor. The federal tax liens were not extinguished by the government's sale but remained in existence until the earlier of either an expiration of the taxpayer's right of redemption or until the time that the senior lienor gave the IRS proper notice and conducted a foreclosure sale. A letter and attachments that a substitute trustee sent to the IRS were sufficient for the latter purpose so that the second sale extinguished the IRS 's liens and began the running of the redemption period.

Robert W. Swanson, Alvis, Carssow & Van Kreisler, 800 Southwest Tower, Austin , Texas 78701 , for plaintiff. Cary L. Jennings, Department of Justice, Dallas , Texas 75242 , for defendant.

Memorandum

GARCIA, District Judge:

The issue before the Court is the applicability of the government's right to redeem property pursuant to Title 26 U. S. C. Section 7425. Both plaintiff and defendant claim title to the real property which is the subject of this suit. There are no disputed issues of fact, and this matter is proper for summary judgment resolution.

In 1977, F. M. Swayze and his wife Sylvia were the owners of certain real property in Lockhart, Caldwell County , Texas . On October 3, 1977 , the Swayzes borrowed $27,000.00 from the plaintiff, First-Lockhart National Bank securing the loan with a deed of trust in favor of the bank on the subject property. The Swayzes failed to pay certain employment taxes to the Internal Revenue Service. The taxes were assessed, and federal tax lien notices were filed with the county clerk of Caldwell County in April, 1981, October, 1981, August, 1982, and September, 1982. To collect the unpaid taxes, the IRS seized the subject property, and on October 22, 1982 , issued a notice that the property would be sold at public auction on November 30, 1982 . The property was sold on that day to Clarence Guerrero and Roy E. Maddox for $4,600.00, subject to the bank's prior lien. A certificate of sale was issued to the purchasers, pursuant to title 26 U. S. C. Section 6338. On December 7, 1982 , Charles R. Kimbrough, acting as substitute trustee for the bank under the deed of trust, notified the IRS of his intent to sell the property to satisfy the bank's lien. The bank purchased the property at the foreclosure sale on January 4, 1983 for a price of $27,659.50. Within 120 days of the foreclosure sale, the IRS decided to redeem the property. Its tender of a redemption check to the bank was refused. On May 3, 1983 , a certificate of redemption was filed with the Caldwell County Clerk.

[Plaintiff's Arguments]

Plaintiff argues two theories to defeat redemption; first, that the IRS had no lien which could be extinguished by the foreclosure sale, thus no right of redemption and, second, if IRS did have a lien at the time of the foreclosure sale, it was not extinguished because the IRS was not properly notified of the sale, thus the property bought by plaintiff is subject to the tax lien but not to redemption.

Section 7425(d)(2) permits the government to redeem real property within 120 days after it is sold to satisfy a lien prior to that of the United States . Plaintiff's lien preexisted the tax liens. Redemption is permitted after sales to which subsection (b) of Section 7425 applies. Subsection (b) refers to sales other than those pursuant to judicial proceedings. A sale by a substitute trustee under a deed of trust falls within that subsection, which governs the dischargeability of tax liens. It expressly refers to the sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien. Tax liens were properly filed long before the foreclosure sale. Title could not be passed to the purchasers at the tax sale until 180 days after the tax sale because of the taxpayer's right to redeem. See, Title 26 U. S. C. Sections 6338 and 6339. So long as title was still in the taxpayer, the federal tax liens on the property were still in existence. The tax liens were, therefore, in effect on January 4, 1983 when the foreclosure sale was held.

According to Section 7425(b), the foreclosure sale would be subject to the tax liens, as opposed to extinguishing them, if the IRS did not receive proper notice of the sale. The summary judgment evidence proves that the substitute trustee notified the IRS by letter of December 7, 1982 , with attachments, that the property would be sold January 4, 1983 . The notice was sufficient. See, Title 26 CFR Section 400.4-1(f). Fince the foreclosure sale did operate to extinguish the tax liens, the government could redeem the property. Plaintiff's motion for summary judgment will be denied and defendant's motion for summary judgment will be granted.

Order

In accordance with the Memorandum being entered contemporaneously herewith;

It is ORDERED that plaintiff's motion for summary judgment be DENIED and defendant's motion for summary judgment be GRANTED.

Judgment

In accordance with the Order being entered contemporaneously herewith;

It is ORDERED, ADJUDGED and DECREED that judgment be entered for defendant, and that upon retender

[99-1 USTC ¶50,353] Robert Vardanega, Plaintiff-Appellant v. Internal Revenue Service, Defendant-Appellee

(CA-9), U.S. Court of Appeals, 9th Circuit, 97-17301, 3/19/99 , 170 F3d 1184, Affirming an unreported District Court decision

[Code Sec. 7425 ]

Tax liens: Foreclosure: Redemption from third party: Entire property v. taxpayer's interest: Unlawful taking: Notice of statutory right: Full compensation paid: Certificate of redemption: Validity of.--A federal tax lien on a delinquent taxpayer's one-third interest in real property entitled the IRS to redeem the entire property from a third party who purchased the realty at a foreclosure sale and who had notice of the tax lien. Upon redemption, the IRS steps into the shoes of the foreclosure purchaser, not of the delinquent taxpayer. The foreclosure purchaser's argument that the redemption constituted an unlawful taking under the Fifth Amendment was rejected. He had notice of the tax lien and was fully compensated for the property. His challenge to the validity of the certificate of redemption on the ground that it referred to the taxpayer's interest, rather than to his interest as the purchaser, was likewise denied. The certificate merely evidenced a redemption that was completed when the government tendered the check to him.

Paul H. Greisen, Greisen Law Corporation, Fair Oaks, California, for the plaintiff-appellant. William S. Estabrook, Murray S. Horwitz, Charles F. Marshall, Tax Division, United States Department of Justice, Washington, D.C., for the defendant-appellee.

Before: WOOD, JR., ¹ THOMPSON and THOMAS, Circuit Judges.

OPINION

THOMAS, Circuit Judge:

Robert Vardanega appeals a decision of the U.S. District Court for the Eastern District of California. The district court in this case granted summary judgment in favor of the Internal Revenue Service (" IRS ") in Vardanega's action to quiet title in real property. Vardanega argued below that 26 U.S.C. §7425 permits the IRS to redeem only the exact property interest on which it has a tax lien. The district court disagreed and held that the statutory language of §7425 permits the IRS to redeem the entire real property on which it has a lien that is purchased at a foreclosure sale. We have jurisdiction pursuant to 28 U.S.C. §1291, and affirm the decision of the district court.

I

In 1991, Donna Benedetti, Cathleen Benedetti, and Dorothy Wildes acquired property at 821 Carsten Circle in Solano County, California (the "Carsten property") as coequal joint tenants. In February 1993, the three owners obtained a loan on the property secured by a properly recorded deed of trust. In June 1995, the IRS filed notice of a tax lien in Solano County against Donna Benedetti for unpaid taxes in the amount of $46,595.26.

Windsor Management Company, the trustee for the deed of trust, foreclosed on the Carsten property pursuant to California law and notified the IRS of the impending sale. In December 1996, Vardanega purchased the Carsten property for $105,881.47 at the trustee's foreclosure sale. He had actual knowledge of the IRS 's tax lien. On April 14, 1997 , the IRS redeemed the Carsten property by sending a check to Vardanega for $107,970.09, the amount that he paid for the Carsten property plus statutory interest.

Although Vardanega was aware of the IRS 's tax lien, he believed that the IRS could redeem only the property interest against which it had a tax lien, i.e., Donna Benedetti's one-third, undivided interest, and he attempted to return to the IRS two-thirds of the amount of the check it had sent him. The IRS rejected the payment and recorded a certificate of redemption.

On May 16, 1997 , Vardanega brought suit against the IRS to quiet title in the Carsten property and for partition, seeking a two-thirds, undivided interest. A few days later, the IRS sold the entire Carsten property to the GH-A Corporation for $172,300.00. Both Vardanega and the IRS filed motions for summary judgment, and on November 7, 1997 , the district court granted summary judgment for the IRS .

II

When interpreting a statute, we first look to the plain language of the statute to interpret its provisions. "In statutory interpretation, the starting point is always the language of the statute itself." Jeffries v. Wood, 114 F.3d 1484, 1494 (9th Cir.), cert. denied, 118 S. Ct. 586 (1997). If the language is clear, there is no need to look any further. See Connecticut Nat'l Bank v. Germain, 503 U.S. 249, 253-54 (1992).

In this case, the statute plainly and unambiguously allows the IRS to redeem the entire real property that was sold at a foreclosure sale if any portion of the real property was subject to a federal tax lien prior to the foreclosure sale.

Section 7425(d) states:

In the case of a sale of real property . . . to satisfy a lien prior to that of the United States, the Secretary may redeem such property within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer.

26 U.S.C. §7425(d) (1994).

Vardanega argues that the term "such property" in the statute refers to the property interest on which the government has a tax lien. However, this would require a strained construction of the statute. The statute refers to "real property" which is sold, then provides for redemption of "such property." If Congress had intended to limit redemption to only a portion of the property, it could have stated so explicitly. By its terms, section 7425 allows the IRS upon redemption to step into the shoes of the foreclosure purchaser, not those of the delinquent taxpayer. See 26 U.S.C. §7425(d)(3)(C) (1994) (stating that when the certificate of redemption is recorded, the United States obtains all the "rights, title, and interest in and to such property acquired by the person from whom the United States redeems such property by virtue of the sale of such property"); see also Olympic Fed. Sav. & Loan Ass'n v. Regan [81-2 USTC ¶9507], 648 F.2d 1218, 1220 (9th Cir. 1981) ("[T]he Service takes the interest that the redemptionee acquired at the execution sale.").

The statutory amount that the IRS is required to pay to the purchaser upon redemption also supports our holding. In order to redeem real property, the United States must pay the amount paid by the purchaser, plus interest and other costs. See 28 U.S.C. §2410 (1994) ("In any case in which the United States redeems real property . . . the amount to be paid for such property shall be the sum of . . . the actual amount paid by the purchaser at such sale"). Section 2410's requirement that the IRS pay the entire purchase price compels our conclusion that the IRS redeems the whole property and not the equivalent of its tax lien.

The legislative history also supports this interpretation. The Senate Report issued upon the passage of 26 U.S.C. §7425(d) discusses the IRS 's right of redemption. See S. Rep. No. 1708, reprinted in 1966 U.S.C.C.A.N. 3722. The Report states that when the government invokes its right to redeem, "it must pay the amount paid by the purchaser at the sale plus interest and expenses necessary to maintain the property from the time of sale." Id. at 3750. It would be anomalous and quite expensive if the government was required to pay the entire amount paid by the purchaser but could not redeem the entire property purchased by the purchaser.

The Senate Report also discusses Congress's purpose in granting the IRS a right of redemption under §7425: "[T]he Government can purchase property sold at distress prices and resell the property at a profit. This profit, of course, is applied in satisfaction of the taxpayer's liability. . . .[T]he exercise of this power, where the redeemed property is sold at a profit, inures to the benefit of delinquent taxpayers." Id. at 3753. Congress intended the redemption statute to prevent foreclosure purchasers from buying real property for less than the fair market value and then selling the real property and keeping the profit. Instead, Congress intended that any excess profit, after all prior liens were satisfied, to inure to the benefit of the taxpayer. See id.; Delta Sav. & Loan Ass'n v. IRS , 847 F.2d 248, 251 (5th Cir. 1988). Thus, to prevent a potential windfall to a foreclosure purchaser, the IRS can repay the purchaser the purchase price and sell the property at closer to fair market value. All excess profit then accrues for the benefit of the taxpayer--to pay off the taxpayer's tax liability. The IRS 's redemption right protects the taxpayer, who would otherwise be liable to the IRS for unpaid taxes but, under Vardanega's construction, would have lost the excess profit from the sale of his or her real property. ²

Finally, a number of cases illuminate the general scheme of §7425 and buttress our holding in this case. See, e.g., Little v. United States [86-2 USTC ¶9558], 794 F.2d 484, 490 (9th Cir. 1986) (holding that the property interest redeemed by the government was equivalent to that held by the purchaser after the foreclosure sale); Meek v. United States, 26 Cl. Ct. 1357, 1358, 1361 n.5 (1992) (noting that, after the IRS redeemed real property on which it had a lien against one of the owners, the IRS owned the entire property because the foreclosure sale included the property interests of both owners), aff'd by, 6 F.3d 788 (Fed. Cir. 1993) (unpublished mem.).

Vardanega confuses two distinct IRS proceedings. If the IRS had levied on the Carsten property under 26 U.S.C. §6331, the IRS 's rights would be different. AS 6331 levy "does not determine whether the Government's rights to the seized property are superior to those of other claimants." United States v. National Bank of Commerce [85-2 USTC ¶9482], 472 U.S. 713, 721 (1985). Instead, under §6331 the " IRS steps into the taxpayer's shoes" and has "whatever rights the taxpayer himself possesses." Id. at 725 (citations and internal quotation marks omitted). In such a situation, the IRS would step in and obtain only Donna Benedetti's one-third, undivided interest. In the case of redemption under §7425, however, the IRS steps into Vardanega's shoes as long as it pays him the full purchase price.

III

We also reject Vardanega's argument that the redemption statute itself constitutes a taking in violation of the Fifth Amendment. See Bank of Hemet v. United States [81-1 USTC ¶9379], 643 F.2d 661, 666 (9th Cir. 1981); Meek, 26 Cl. Ct. at 1366. When Vardanega purchased the Carsten property, he purchased it with notice of an encumbrance--the statutory right of redemption by the United States, codified in 1966. Therefore, he did not purchase clear title to fee property, but property encumbered by a right of redemption. By exercising its statutory right of which Vardanega had notice, the IRS did not divest him of any vested property interest in violation of the Fifth Amendment.

Further, Vardanega was reimbursed for all of the money that he spent to purchase the Carsten property. What he "lost" was the right to get a windfall at the expense of the taxpayer and the other joint tenant owners of the Carsten property. Full compensation for property does not an unlawful taking make.

IV

Vardanega also challenges the wording of the certificate of redemption because it refers to the taxpayer's interest in the property. Although the wording could have been more precise, it suffices to express the intent of the United States to redeem the entire Carsten property, particularly coupled with a tender of the full purchase price.

Moreover, this argument misapprehends the function of a redemption certificate. A certificate of redemption "serves merely to evidence that redemption occurred and to transfer legal title of the redeemed interest." Southwest Prods. Co. v. United States [89-2 USTC ¶9482], 882 F.2d 113, 118 (4th Cir. 1989). Redemption is completed by tender of a check to the purchaser for the purchase price. See id. at 117. At that point, not at the time of the certificate filing, the IRS steps into the shoes of a purchaser and acquires the purchaser's interest.

In this case, redemption was complete when the IRS sent the full purchase price to Vardanega. Because the IRS sent Vardanega the amount that he paid for the Carsten property, the IRS redeemed the entire Carsten property.

Accordingly, we affirm.

AFFIRMED.

¹ The Honorable Harlington Wood, Jr., Senior United States Circuit Judge for the United States Court of Appeals for the Seventh Circuit, sitting by designation.

² The taxpayer's statutory right of redemption is instructive. Under 26 U.S.C. §6337, a delinquent taxpayer has a right of redemption when her property is sold at a tax sale by the IRS . See 26 U.S.C. §6337 (1994). This statute provides that not only the taxpayer, but her "heirs, executors, or administrators, or any person having any interest[in the property sold] shall be permitted to redeem the property sold . . . within 120 days." Id. It follows that the United States, pursuant to §7425, can redeem property in which it has a partial interest, in the same manner that property sold in a tax sale by the IRS can be redeemed by a person with only a partial interest in foreclosed property.

[83-1 USTC ¶9343]William Little, Plaintiff-Appellant v. United States of America, Defendant-Appellee

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 82-5387, 704 F2d 1100, 4/26/83 , Affirming in part and remanding in part an unreported District Court decision

[Code Secs. 6321 and 7425]

Tax liens: Redemption by U. S.: Property subject to lien: State redemption right: Amount of redemption.--The title to real property acquired by the U. S. pursuant to the exercise of its right to redeem property subject to federal tax lien was valid. The state redemption right to which the lien attached constituted an interest in the real property to which a federal tax lien may attach. However, there was insufficient evidence in the record to determine whether the redemption price should have included amounts paid by the person from whom the property was redeemed for repairs and to obtain the beneficial interest in a senior encumbrance not extinguished in the foreclosure sale.

Kenneth G. Gordon, Hochman, Salkin & DeRoy, 9100 Wilshire Blvd., Beverly Hills, Calif. 90212, for plaintiff-appellant. Thomas M. Preston, Department of Justice, Washington, D. C. 20530, for defendant-appellee.

Before ELY , SCHROEDER, and PREGERSON, Circuit Judges.

Opinion

ELY , Circuit Judge:

At issue in this quiet title action is the validity of the title acquired by the United States in certain improved real property when the United States redeemed such property from the plaintiff pursuant to Section 7425 of the Internal Revenue Code of 1954 (26 U. S. C.). The District Court held that the Government properly exercised its right of redemption and thereby acquired all rights, title and interest in the property free and clear of any claims thereto of the plaintiff. We affirm the judgment of the District Court except as to the correctness of the amount tendered by the United States to the plaintiff in redemption of the subject property. As to such matter, the case is remanded to the District Court for further proceedings not inconsistent with this opinion.

I. Factual Background

William Little (plaintiff) commenced this action on March 23, 1981 , by filing a Complaint for Temporary Restraining Order, Preliminary Injunction and Order to Quiet Title in which he sought to prevent the United States from redeeming certain real property. Little also sought a declaration that the title to the subject property rested solely on him. The property, which consists of a 28-unit apartment building, known as 1110 W. Washington Boulevard, Los Angeles, California, was acquired by Alexander Rojas by grant deed dated April 18, 1973. Thereafter, Rojas encumbered the property by a first deed of trust recorded August 25, 1978, naming Commonwealth Land Title Company as trustee with a power of sale. Rojas further encumbered the property by a second trust deed dated November 7, 1978, naming Title Insurance Trust Company trustee with a power of sale.

On July 2, 1979, the property was conveyed via a tax deed to the State of California to satisfy delinquent property taxes for the fiscal year 1973-74. This tax deed was recorded in the Office of the County Recorder for Los Angeles County on July 17, 1979. By grant deed dated May 6, 1980, Rojas transferred a one-half undivided interest in the property to Bell Builders Supply, Inc., a California corporation. The deed was duly recorded on May 8, 1980. Thereafter, on September 17, 1980, the Internal Revenue Service recorded a notice of federal tax lien with the Los Angeles County Recorder in the name of Bell Builders Supply, Inc., for unpaid federal employment taxes owed by that corporation for the tax period ended March 31, 1980, in the amount of $12,587.37. The Internal Revenue Service subsequently filed a second notice of federal tax lien against Bell Builders Supply, Inc. on November 4, 1980 , for unpaid federal employment taxes due for the period ended June 30, 1980 , in the total amount of $12,220.96.

On December 16, 1980, the subject property was sold by the trustee under the second deed of trust to Jess Mendoza for $23,670. The trustee's deed transferring the property to Mendoza was recorded on January 21, 1981. By grant deed dated December 17, 1980 (recorded January 28, 1981) Mendoza transferred his interest in the subject property to William Little, the plaintiff herein.

On March 19, and 20, 1981, the Internal Revenue Service seized the subject property pursuant to its previously recorded tax liens. Thereafter, plaintiff commenced this action seeking to restrain the Government from exercising its right of redemption pursuant to Section 7425(d) of the Internal Revenue Code. On April 14, 1981, the District Court entered its findings of fact and conclusions of law. The District Court held that the privilege of redeeming the subject property from the State of California by payment of the delinquent property taxes for the years 1973 and 1974 constituted sufficient "property interests" to provide plaintiff's standing to bring this action pursuant to Section 6321 of the Internal Revenue Code. In addition, the District Court held that this privilege of redemption was the interest transferred to Bell Buildings Supply, Inc. to which the federal tax liens subsequently attached. The District Court also specifically held that the privilege of redemption, under California law, is transferable, has value, and, therefore, constitutes "property or rights to property" within the meaning of Section 6321 of the Internal Revenue Code. The District Court also found, however, that the plaintiff would suffer irreparable injury if the Government exercised its right to redeem the property under the Internal Revenue Code, and entered an order granting a preliminary injunction restraining the Government from exercising its right of redemption.

On April 15, 1981, the final day of the 120-day statutory period for redeeming the subject property after the December 16, 1980 sale under the second deed of trust (Section 7425(d)), this court stayed the injunctive order of the District Court pending appeal and the Government timely redeemed the subject property from the plaintiff. ¹ A certificate of redemption was properly recorded with the Office of the County Recorder in Los Angeles on April 17, 1981.

On May 14, 1981, the trustee under the first deed of trust filed a notice of a trustee's sale with respect to the first deed of trust to be held on May 28, 1981. At the sale, the plaintiff's assignee purchased the property for the sum of $42,611.50, thereby discharging the debt secured by the first deed of trust. ² The United States, which at that time had title to the subject property pursuant to its redemption of April 15, 1981, was not notified as to the foreclosure and sale.

Thereafter, plaintiff filed, by leave of court, his first amended and supplemental complaint. ³ In his amended complaint, plaintiff again alleged that the United States did not have a federal statutory right of redemption because Bell Builders Supply, Inc. did not acquire from Rojas a "property interest" to which the federal tax lien attached. Plaintiff also asserted, in the alternative, that if the alleged right of redemption had been properly exercised, the Government failed to tender the proper amount upon redemption pursuant to 28 U. S. C. §2410(d) and Treasury Regulations on Procedure and Administration (1954) Code) §301.7425-4(b) (26 C. F. R.). Finally, plaintiff contended that if the redemption was proper, the Government acquired title to the property subject to a senior encumbrance, i.e., the first deed of trust, and that the subsequent foreclosure and sale on May 28, 1981, at which plaintiff's assignee purchased the property, divested the Government of the title it had acquired through redemption. Additionally, plaintiff offered to pay in full the remaining tax lien against Bell Builders Supply, Inc. recorded on November 4, 1980, asserting that satisfaction of that lien would remove any Government ownership or lien interest in the subject property.

Cross motions for summary judgment were filed by both parties. The District Court granted the Government's motion and, consequently, dismissed plaintiff's complaint. In its findings of fact and conclusions of law, the District Court held that the Government had properly exercised its right of redemption with respect to the real property involved in this action, and therefore, had acquired title to the property from the date of redemption by operation of Section 7425(d) of the Internal Revenue Code of 1954. The District Court also specifically rejected the plaintiff's request to quiet title to the property which was based on the foreclosure of the first deed of trust and the May 28, 1981 trustee's sale at which plaintiff allegedly acquired title to the subject property through his assignee. The District Court held, in this regard, that the Government's title to the property was derived from the enforcement of a lien, and that the nonjudicial sale of the subject property to satisfy a senior lien under the first deed of trust, without specific notice to the United States as required by Section 7425(d)(1), was made subject to and without disturbing the Government's title. Consequently, the District Court declared that the title in the United States was free and clear of any and all rights, title and interest of the plaintiff with respect to the redeemed property. From this adverse judgment plaintiff appeals.

II. Issues Presented

This appeal raises three issues. First, whether, in granting summary judgment for the United States and dismissing the plaintiff's complaint, the District Court correctly held that the taxpayer (Bell Builders Supply, Inc.) had a property interest, within the meaning of Section 6321 of the Internal Revenue Code of 1954, in the subject real property and that, consequently, the Government's tax liens attached to that interest. Second, whether the District Court correctly determined that the United States properly exercised its right of redemption with respect to the subject real property and, thereby, acquired all rights, title and interest in the property free of any claims thereto of the plaintiff. Third, whether the United States, in exercising its right of redemption, tendered the proper amount to plaintiff.

III . Analysis

First, whether, in granting summary judgment for the United States and dismissing the plaintiff's complaint, the District Court correctly held that the taxpayer (Bell Builders Supply, Inc..) had a property interest, within the meaning of Section 6321 of the Internal Revenue Code of 1954, in the subject real property and that, consequently, the Government's tax liens attached to that interest. ⁴

Plaintiff contends that the taxpayer, Bell Builders Supply, Inc., could acquire from his predecessor in interest, Rojas, that which Rojas had to transfer, and that, since at the time of the transfer to Bell Builders Supply, Inc. the property in question had been tax-deeded to the State of California, the only interest acquired by Bell Builders Supply, Inc. was the statutory privilege of redemption. This privilege of redemption, so plaintiff contends, does not rise to the level of "property or a right to property" within the meaning of Section 6321 of the Internal Revenue Code, thereby, rendering void the Government's interest in the subject property.

Section 6321 of the Internal Revenue Code of 1954 provides that if any person liable to pay any tax neglects or refuses to do so, the amount of the tax "including interest, additions, penalties or costs that may accrue) "shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." The lien provided for in Section 6321 arises at the time the tax assessment is made and continues until the underlying liability is satisfied or becomes unenforceable by reason of lapse of time. Section 6322 of the Internal Revenue Code of 1954. The initial question in this case is whether the taxpayer (Bell Builders Supply, Inc.) had "property or rights to property" to which the Government's tax liens against the taxpayer could attach. In answering that question, resort to state law is required, for in applying a provision of the Internal Revenue Code, state law controls in determining the nature of the legal interest which the taxpayer has in the property sought to be reached by the federal statute. Aquilino v. United States [60-2 USTC ¶9538], 363 U. S. 509, 512-13 (1960); United States v. Bess [58-2 USTC ¶9595], 357 U. S. 51, 55 (1958); Morgan v. Commissioner [40-1 USTC ¶9210], 309 U. S. 78, 82 (1940). Of course, once it is determined that the taxpayer possesses property or rights to property recognizable under state law the federal tax consequences pertaining to such rights are solely a matter of federal law and, consequently, liens provided by federal statute may not be defeated by state exemption statutes. United States v. Bess at 57.

Resolution of the question whether Bell Builders Supply, Inc. possessed "property or rights to property" under Section 6321 involves determining whether under California law ⁵ the interest in question is an economic asset in the sense that it has pecuniary worth and is transferable, so that a claim can be enforced against it. After a careful review of the record and California case law, we conclude that the right of redemption acquired by the taxpayer in the instant case has pecuniary worth and is transferable. See Potter v. County of Los Angeles, 251 Cal. App. 2d 280, 59 Cal. Rptr. 335 (1967); Potter v. Entler, 71 Cal. App. 2d 710, 163 P. 2d 490 (1945); Graham v. Reed, 83 Cal. App. 635, 257 P. 131 (1927). The record shows that the taxpayer gave valuable (although unspecified) consideration to acquire the right. The record further shows that when the second deed of trust on the property was foreclosed in December 1980, Jess Mendoza purchased the remaining interest in the property--i.e., the right to redeem the property from the State of California--for some $23,000. Indeed, the very fact that the plaintiff instituted this action to quiet title and to, thereby, secure for himself the right to redeem the property from the State of California, establishes that the right of redemption in issue is a valuable right. Thus, the plaintiff is in the untenable position of arguing, on the one hand, that he should prevail against the Government because Bell Builders Supply, Inc. did not acquire an interest in the subject real property to which the Government's tax liens could attach, and asserting, on the other hand, that title should be quieted in him by virtue of the interest he acquired in the property at the December 1980 foreclosure sale. The only possible interest acquired by the plaintiff at that sale was the right to redeem the property from the State of California. If this right did not rise to the level of a property interest, i.e., an interest protected under state law, then plaintiff would have no basis for maintaining the instant quiet title action. If, however, the right of redemption at stake here is a valuable right to property, and we hold it is, then there is not only standing for plaintiff's action but there is also a right to property to which the Government's tax liens attached.

The California cases cited by plaintiff do not support his position that a right of redemption does not constitute property or rights to property within the meaning of Section 6321 of the Internal Revenue Code. See Potter v. County of Los Angeles, 251 Cal. App. 2d 280, 59 Cal. Rptr. 335 (1967); Mercury Herald Co. v. Moore, 22 Cal. 2d 269, 138 P. 2d 673 (1943); Helvey v. Bank of America, 43 Cal. App. 2d 532, 111 P. 2d 390 (1941). These cases seem to hold that the right of redemption under California law is nothing more than a personal privilege granted by statute to a delinquent taxpayer to allow him to divest the State's title in tax deeded property upon payment of all delinquent taxes. From these cases appellant argues that the right of redemption is neither a vested nor a sumstantial right and, accordingly, cannot meet the definitional requirements of Section 6321 of the Internal Revenue Code. We agree with the District Court's conclusion that such reasoning is myopic. Simply because an interest is classified as a "privilege" under state law should not exempt such interest from attachment by a federal tax lien if such interest represents an economic asset in the sense that it has pecuniary worth and is transferable, so that a claim can be enforced against it. As previously discussed, the interest in the instant case meets this definition and should, therefore, be considered a property interest within the meaning of Section 6321 of the Internal Revenue Code.

Second, whether the District Court correctly determined that the United States properly exercised its right of redemption with respect to the subject real property and, thereby, acquired all rights, title and interest in the property free of any claims thereto the plaintiff.

Section 7425(b) expressly provides that a nonjudicial sale of property on which the United States has a lien, or a title derived from the enforcement of a lien, shall be made "subject to and without disturbing such lien or title" if the United States is not given notice of such sale in the manner prescribed in subsection (c)(1). ⁶ (Emphasis added.) The record here shows that on April 15, 1981 , the Internal Revenue Service timely redeemed the subject real property pursuant to Section 7425 of the Internal Revenue Code and further shows that the Government duly recorded its certificate of redemption on April 17, 1981 , with the Office of the County Recorder in Los Angeles, California. Thereafter on May 28, 1981 , there was a foreclosure of the first deed of trust and a nonjudicial sale of the property to the plaintiff's assignee. It is clear from the record that no notice of the May 28 sale as provided by Sections 7425(b) and (c), was given to the Internal Revenue Service. It therefore follows, under Section 7425(b), that the title acquired by the United States upon its redemption of the property was not disturbed by the subsequent foreclosure and sale of the property.

Third, whether the United States, in exercising right of redemption, tendered the proper amount to plaintiff.

With respect to the amount to be paid by the United States upon exercise of its right of redemption, Section 7425(d)(2) provides that the redemption price shall be the amount prescribed by subsection (d) of Section 2410 of Title 28 of the United States Code. ⁷ In addition, Treasury Regulations on Procedure and Administration (1954 Code) §301.7425-4(b)(iv) (26 C.F.R.) provide that with respect to a redemption made after December 31, 1976 , the redemption price shall include the amount of payment made by a purchaser or his successor in interest after the foreclosure sale to a holder of a senior lien.

The United States upon redemption of the property, following the December 16, 1980 foreclosure and sale, tendered to plaintiff the sum of $24,136.92. This amount represented the amount paid by the purchaser at the foreclosure sale ($23,670) plus interest thereon from the date of the sale to the date of redemption. Plaintiff contends that the redemption price paid by the United States was inadequate. He asserts in this regard that following the foreclosure sale he expended some $16,000 for repairs to the properly and further asserts that he paid $60,000 to obtain the beneficial interest in the first deed of trust, a senior encumbrance on the property which was not extinguished by the foreclosure sale. The United States, so plaintiff contends, was required to reimburse him for these two payments when it redeemed the property.

Plaintiff's allegations regarding amounts he expended for repairs and for satisfaction of a senior lien involve factual matters which cannot be resolved from the record as it now stands. The case was disposed of on the basis of the parties' cross motions for summary judgment. Consequently, the District Court held no evidentiary hearing with respect to plaintiff's allegations regarding the inadequacy of the amount tendered by the Government and made no specific findings regarding such allegations. In these circumstances, the question as to the correctness of the amount tendered by the Government cannot properly be resolved on appeal. The matter should be remanded to the District Court for further proceedings.

Conclusion

For the reasons stated above, the judgment of the District Court is affirmed, except as to the matter of the correctness of the amount tendered by the United States. As to such matter, the case is remanded to the District Court for further proceedings.

¹ This court stayed the District Court's order on the basis of the Government's appeal and emergency motion pursuant to 28 U. S. C. §1292(a)(1). The appeal was later dismissed as moot.

² Plaintiff allegedly acquired his beneficial interest in the note secured by the first deed of trust from a W. Michael Mayock, who had received that interest from the original beneficiaries on October 27, 1980 . However, the assignment of the promissory note attached to plaintiff's Response to the defendant's Statement of Genuine Issues of Fact, was executed on March 3, 1981 , and purports to transfer the beneficial interest from Mayock to Frank Darmiento III , the nominee of the plaintiff. Thereafter, on May 7, 1981 , Darmiento caused a substitution of the trustee under the first deed of trust, appointing Joel Mithers as trustee.

³ Although the District Court's temporary injunction against the Government of April 14, 1981 was stayed by this court (see note 1, supra), the merits of the case were not finally decided. For this reason the District Court permitted the plaintiff to file an amended and supplemental complaint.

⁴ Internal Revenue Code of 1954 (26 U. S. C.): SEC . 6321. LIEN FOR TAXES.

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

SEC . 6322. [as amended by Sec. 113(a), Federal Tax Lien Act of 1966, Pub. L. No. 89-719, 80 Stat. 1125] PERIOD OF LIEN.

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 (or a judgment against the taxpayer arising out of such liability) is satisfied or becomes unenforceable by reason of lapse of time.

⁵ California law provides that the tax collector shall annually sell to the State of California property on which taxes are unpaid, and, five years later, if the property has not been redeemed by payment of the delinquent taxes, executed a deed conveying the property to the State. California Rev. & Tax Code §§ 3351, 3352, 3436, 3511 (West 1970). Redemption of both "tax-sold" and "tax-deeded" property is provided by California Rev. & Tax Code §4101 (West 1970). Under that provision, tax-sold property and, if the right of redemption has not been terminated, tax-deeded property, may be redeemed from the State. When property is deeded to the State, Cal. Rev. & Tax Code §3520 (West 1970) provides that the tax deed conveys the absolute title to the property, free of all encumbrances, except certain liens and assessments not relevant herein. The so-called tax sale to the State, prior to the issuance of a deed to the State, does little more than establish a lien in favor of the State, subject to the absolute right of the taxpayer to clear his title by paying off the lien. After five years, however, when the property is deeded to the State, there is a transfer of beneficial ownership, subject to a privilege or opportunity to redeem the property if the State has not disposed of the property or taken other steps to terminate the privilege of redemption. Weber v. Wells, 154 F. 2d 1004 (9th Cir. 1946).

Upon redemption of tax-deeded property, the State's title is rendered null and void and the interest acquired by virtue of the sale to the State ceases. Thus, even though a successor in interest may redeem the property, redemption does not operate to give the redemptioner the State's title. The State's title is extinguished by the redemption, and the redemptioner has only the title existing prior to the State's title subject to any encumbrances or liens at that time. Potter v. Entler, 71 Cal. App. 2d 710, 163 P. 2d 490 (1945). Potter v. County of Los Angeles, 251 Cal. App. 2d 280, 59 Cal. Rptr. 335 (1967). A redemptioner, however, or any other person claiming through him, may bring suit against the State to quiet title to all or any portion of the property and prosecute it to final judgment. Cal. Rev. & Tax Code & 4113 (West 1970).

It should also be noted that in California redemptions from tax deeds are favored in the law because the title acquired by the State via a tax deed is not of the same nature as that vested in a private purchaser. The object of the purchase by the State is not the acquisition of the property, but rather the collection of taxes. Hossom v. City of Long Beach, 83 Cal. App. 2d 745, 189 P. 2d 787 (1948); Anglo California Nat'l Bank of San Francisco v. Leland, 9 Cal. 2d 347, 70 P. 2d 937 (1937). Moreover, it is the settled policy of state law to give a delinquent taxpayer every reasonable opportunity compatible with the rights of the State to redeem his property and to return it to the tax rolls for further governmental support. People v. Gustafson, 53 Cal. App. 2d 230, 127 P. 2d 627 (1942).

In the instant case the State of California never disposed of the subject property. Thus, any right of redemption acquired by Bell Builders Supply, Inc. was still exercisable at the time the property was transferred to the plaintiff. Indeed, if the right of redemption had terminated this suit by the plaintiff would be moot.

⁶ Internal Revenue Code of 1954 (26 U. S. C.) Section 7425 provides in pertinent part:

SEC . 7425. DISCHARGE OF LIENS.

(a) Judicial Proceedings.--If the United States is not joined as a party, a judgment in any civil action or suit described in subsection (a) of section 2410 of title 28 of the United States Code, or judicial sale pursuant to such a judgment, with respect to property on which the United States has or claims a lien under the provisions of this title--

(1) shall be made subject to and without disturbing the lien of the United States, if notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced, or

(2) shall have the same effect with respect to the discharge or divestment of such lien of the United States as may be provided with respect to such matters by the local law of the place where such property is situated, if no notice of such lien has been filed in the place provided by law for such filing at the time such action or suit is commenced or if the law makes no provision for such filing.

If a judicial sale of property pursuant to a judgment in any civil action or suit to which the United States is not a party discharges a lien of the United States arising under the provisions of this title, the United States may claim, with the same priority as its lien had against the property sold, the proceeds (exclusive of costs) of such sale at any time before the distribution of such proceeds is ordered.

(b) Other Sales.--Notwithstanding subsection (a) a sale of property on which the United States has or claims a lien, or a title derived from enforcement of a lien, under the provisions of this title, made pursuant to an instrument creating a lien on such property, pursuant to a confession of judgment on the obligation secured by such an instrument, or pursuant to a nonjudicial sale under a statutory lien on such property--

(1) shall, except as otherwise provided, be made subject to and without disturbing such lien or title, if notice of such lien was filed or such title recorded in the place provided by law for such filing or recording more than 30 days before such sale and the United States is not given notice of such sale in the manner prescribed in subsection (c)(1); or

(2) shall have same effect with respect to discharge or divestment of such lien or such title of the United States, as may be provided with respect to such matters by the local law of the place where such property is situated, if--

(A) notice of such lien or such title was not filed or recorded in the place provided by law for such filing more than 30 days before such sale,

(B) the law makes no provisions for such filing, or

(C) notice of such sale is given in the manner prescribed in subsection (c)(1).

(c) Special Rules.--

(1) Notice of sale.--Notice of sale to which subsection (b) applies shall be given (in accordance with regulations prescribed by the Secretary or his delegate) in writing, by registered or certified mail or by personal service, not less than 25 days prior to such sale, to the Secretary or his delegate.

. . . .

(d) Redemption by United States.--

(1) Right to redeem.--In the case of a sale of real property to which subsection (b) applies to satisfy a lien prior to that of the United States, the Secretary or his delegate may redeem such property within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer.

(2) Amount to be paid.--In any case in which the United States redeems real property pursuant to paragraph (1), the amount to be paid for such property shall be the amount prescribed by subsection (d) of section 2410 of title 28 of the United States Code.

⁷ Section 2410 of 28 U. S. C. provides in pertinent part:

. . .

(d) In any case in which the United States redeems real property under this section or section 7425 of the Internal Revenue Code of 1954, the amount to be paid for such property shall be the sum of--

(1) the actual amount paid by the purchaser at such sale (which, in the case of a purchaser who is the holder of the lien being foreclosed, shall include the amount of the obligation secured by such lien to the extent satisfied by reason of such sale),

(2) interest on the amount paid (as determined under paragraph (1)) at 6 percent per annum from the date of such sale, and

(3) the amount (if any) equal to the excess of (A) the expenses necessarily incurred in connection with such property, over (B) the income from such property plus (to the extent such property is used by the purchaser) a reasonable rental value of such property.

[81-2 USTC ¶9692]In the Matter of Linganore Corporation Bankrupt

U. S. District Court, Dist. Md., Civil No. M-81-700, 7/27/81 , Reversing Bankruptcy Court, 80-2 USTC ¶9628

[Code Secs. 6871 and 7425]

Discharge of liens: Redemption by U. S.: Sale of property: Jurisdiction of Bankruptcy Court over sale proceeds.--An order of the Bankruptcy Court that the IRS could only apply the proceeds it derived from a sale of a bankrupt's land that it had redeemed to pre-petition interest and the principal of the tax debt was reversed. Such proceeds were outside the jurisdiction of the Bankruptcy Court because that court had released the property from its jurisdiction prior to the sale. Therefore, the IRS had properly applied the proceeds to the debtor's full tax liability, including post-petition interest and penalties, even though those claims would not have been allowed in the bankruptcy proceeding itself.

Gary A. Goldstein, Laurence B. Russell, Joshua E. Raff, Schimmel & Tatellbaum, 36 South Charles Street, Baltimore, Md. 21201, for appellee. Russell T. Baker, United States Attorney, Glenda G. Gorden, Assistant United States Attorney, Baltimore, Md. 21201, Francis G. Hertz, John J. McCarthy, Department of Justice, Washington, D. C. 20530, for appellant.

Memorandum and Order

MILLER, Jr., District Judge:

This action was filed by the Internal Revenue Service (" IRS ") to appeal the Bankruptcy Court's Order of June 11, 1980, sustaining the Trustee's objection to the IRS 's proof of claim, and from that Court's Order of February 13, 1981, denying the Government's Motion for a New Trial.

I. Factual Background

The dispute in this appeal centers around the sale of a tract of land in Frederick County, Maryland, known as the Weller Farm, which was formerly owned by the bankrupt, the Linganore Corporation.

On July 22, 1970, the Weller Corporation mortgaged the Weller Farm to Farmers & Mechanics National Bank. On September 2, 1970, Weller Corporation sold the farm to Linganore Corporation, which assumed the mortgage to Farmers & Mechanics National Bank and conveyed to Weller Corporation a second purchase money mortgage. This second mortgage was subsequently assigned to Harold and Irma Weller.

On December 26, 1974, the Linganore Corporation filed for an arrangement under Chapter XI with the Bankruptcy Court for the District of Maryland. At that time, the IRS had already filed notice of federal tax liens on account of federal taxes owed by Linganore Corporation. Timely proofs of claim were filed by the IRS as well as by Farmers & Mechanics National Bank and Harold and Irma Weller.

As of May, 1977, Linganore owed in excess of $9,000 in county real property taxes for the years 1973 through 1977. At that time, Linganore also owed Farmers & Mechanics National Bank a principal balance of $46,750 on the assumed mortgage, together with interest in excess of $13,000. Therefore, on May 11, 1977 , Farmers & Mechanics National Bank filed a petition with the Bankruptcy Court seeking a removal of the automatic stay and a release of certain properties, including the Weller Farm, from the jurisdiction of the Bankruptcy Court for purposes of foreclosure. The petition was granted by Order dated July 7, 1977 , which stated, in pertinent part:

[T]he "Weller Property" [is] released from the automatic stay imposed by Rule 11-44; and this Court releases jurisdiction on [that property] except to the extent sales proceeds from the foreclosure proceedings should exceed the amount of indebtedness owed to [Farmers & Mechanics National Bank] . . . under . . . its respective mortgag[e] and the amount due subsequent lienholders and the proper expenses of the foreclosure proceedings.

On December 1, 1977 , ¹ the Weller Farm was sold under the power of sale contained in the first mortgage. The farm was purchased by Harold and Irma Weller for $108,788. Out of this sum, $63,467.74 was paid to satisfy the obligation to Farmers & Mechanics National Bank, and $27,983.26 satisfied a portion of the indebtedness due to the purchasers on their second mortgage covering the property. A deficiency balance of $40,820.36 resulted from the sale.

The Wellers executed a Deed of Trust to secure the money borrowed to purchase the farm as well as the balance of the unpaid purchase money mortgage. On March 21, 1978 , the Wellers filed a Statement of Account on the sale with the Circuit Court for Frederick County, Maryland, which then entered an Order Nisi on the audit.

On March 31, the IRS filed a notice of intention to redeem the Weller Farm, pursuant to statutory authority set forth in 26 U. S. C. §7425(d). ² The District Director tendered the statutory fee required to perfect the redemption. ³

On June 5, 1978 , the Circuit Court for Frederick County entered a final order ratifying the sale of December 1, 1977 .

On June 30, 1978 , pursuant to statutory authority set forth in 26 U. S. C. §2506, the District Director sold the Weller Farm at public sale to Quince Orchard Associates for $231,000, thus realizing for the United States a net profit on this sale of $109,103.72. The District Director applied a substantial portion of this amount to reduce post-petition interest and penalties, which claims woluld not have been allowed in the bankruptcy proceeding itself. More than $38,000, however, was applied to reduce the principal tax debt of the bankrupt.

On January 20, 1980 , the Trustee filed an objection to the IRS 's proof of claim, alleging that the IRS had erroneously applied the profits of the sale in violation of the Bankruptcy Act and to the detriment of the bankrupt's estate and its creditors. The Trustee prayed for an accounting requiring the IRS to apply the net sale proceeds only to pre-petition interest and the principal of the tax debt.

By Order dated June 11, 1980 , the Bankruptcy Court upheld the Trustee's objections. The court stated that:

[T]he Internal Revenue Service would not have been entitled to post-petition interest and penalties had it not redeemed, and by taking action to redeem, the Service cannot put itself in a better position than it would have been under Section 57 to the detriment of all creditors.

The court then ordered that the IRS apply the sale proceeds only to the principal of the tax debt and the pre-petition interest.

The IRS filed a timely Motion for a New Trial under Rule 923 of the Rules of Bankruptcy Procedure. This motion was denied by Order dated February 13, 1981 . A timely Notice of Appeal was filed on February 20, 1981 .

II. Legal Analysis

The essence of the IRS 's position is that pursuant to the Bankruptcy Court's Order of July 7, 1977 , that court relinquished jurisdiction over the Weller Farm on December 1, 1977 , at the time of the foreclosure sale to Harold and Irma Weller. The court retained jurisdiction only to the extent that sales proceeds exceeded indebtedness. Since, in fact, the proceeds did not exceed indebtedness, the IRS claims that the property was then outside the jurisdiction of the Bankruptcy Court. All later actions taken by the IRS were, under the Government's theory, taken pursuant to other statutory powers and are not within the purview of the bankruptcy proceedings.

The Trustee, on the other hand, argues that the substance of the transaction should not give way to form to the detriment of the creditors. Since the IRS would not have been entitled to post-petition interest and penalties had it not redeemed, the Trustee argues that it should not be allowed to obtain this result through redemption. This position was adopted in Judge Lebowitz' Order dated June 11, 1980 . Although this court is sympathetic to the concerns of the Trustee and the Bankruptcy Court, it finds that the form of the transaction in this case dictates that it is beyond the reach of the Bankruptcy Court's jurisdiction.

As previously noted, the Bankruptcy Court's Order of July 7, 1977 , directing the foreclosure sale retained jurisdiction over the Weller Farm only to the extent that proceeds exceeded indebtedness. At the time of the sale, there were no excess proceeds, so the Bankruptcy Court's jurisdiction over the property ceased at that time. The IRS then proceeded in accordance with the following statute:

Right to redeem.--In the case of a sale of real properly to which subsection (b) applies to satisfy a lien prior to that of the United States, the Secretary or his delegate may redeem such property within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer.

26 U. S. C. §7425(d)(1).

Once the District Director redeemed the property, he had broad discretion as to how to proceed. His options are set forth by statute as follows:

(a) Person charged with.--The Secretary or his delegate shall have charge of all real estate which is or shall become the property of the United States by judgment of fortfeiture under the internal revenue laws, or which has been or shall be assigned, set off, or conveyed by purchase or otherwise to the United States in payment of debts or penalties arising under the laws relating to internal revenue, or which has been or shall be vested in the United States by mortgage or other security for the payment of such debts, or which has been redeemed by the United States, and of all trusts created for the use of the United States in payment of such debts due them.

(b) Sale.--The Secretary or his delegate, may, at public sale, and upon not less than 20 days' notice, sell and dispose of any real estate owned or held by the United States as aforesaid.

(c) Lease.--Until such sale, the Secretary or his delegate may lease such real estate owned as aforesaid on such terms and for such period as the Secretary or his delegate shall deem proper.

(d) Release to debtor.--In cases where real estate has or may become the property of the United States by conveyance or otherwise, in payment of or as security for a debt arising under the laws relating to internal revenue, and such debt shall have been paid, together with the interest thereon, at the rate of 1 percent per month, to the United States, within 2 years from the date of the acquisition of such real estate, it shall be lawful for the Secretary or his delegage to release by deed or otherwise convey such real estate to the debtor from whom it was taken, or to his heirs or other legal representatives.

Thus, the IRS was not obligated to sell the property. It could have kept the property, leased it or managed it, and sold it at a later date. The IRS decision to re-sell the property cannot be construed to bring the net proceeds from the sale back within the jurisdiction of the Bankruptcy Court. Ruhter v. Internal Revenue Service, 339 F. 2d 575 (10th Cir. 1964).

Recently, in Olympic Federal Savings & Loan Association v. Regan, -- F. 2d --, -- (9th Cir. 1980), the Ninth Circuit considered the argument that Congress did not intend that the IRS exercise its statutory right of redemption "to deprive third parties of legitimate property interests when tax collection interests are not implicated." The Service responded that a secondary purpose of §7425(d) is to protect from a loss of taxpayer equity as a result of underbidding at an execution sale. Citing Equity Mortgage Corp. v. Loftus [70-2 USTC ¶9722], 323 F. Supp. 144, 151-54 (E. D. Va. 1970), rev'd on other grounds, [74-2 USTC ¶9757] 504 F. 2d 1071 (4th Cir. 1974), the Ninth Circuit held:

Regardless of whether the Service has a duty to act to protect taxpayer interests, we find it unwise to intervene in a Regional Director's decision about how to satisfy an outstanding tax lien, at least in circumstances such as these in this case. To require the Government to pick out and foreclose on only those liens which will create the least hardship on third parties, would impose a considerable burden on the revenue collection process.

(citations ommitted). Olympic Federal Savings & Loan Association v. Regan, -- F. 2d at --.

In the present case, the IRS properly exercised its statutory right of redemption and thereby succeeded to the Weller's fee simple interests in the property. At that point in time, the property had been released from the jurisdiction of the Bankruptcy Court. Thus, when the IRS later opted to re-sell the property, the net proceeds of that sale were also outside the jurisdiction of the Bankruptcy Court. The IRS could therefore properly apply those net proceeds to Linganore's full tax liability, without observing the limitations which would otherwise have been imposed by the Bankruptcy Court under §57(j). Accordingly, the June 11, 1980 decision of the Bankruptcy Court sustaining the Trustee's objection to the IRS 's proof of claim is hereby REVERSED. Given this decision, the court need not address the issue regarding the February 13, 1981 denial of the Government's Motion for New Trial.

¹ The Linganore Corporation was declared a bankrupt on August 31, 1977.

² Title 26, U. S. C. §7425(d) grants the IRS a right of redemption for a period of 120 days after sale where real property is sold to satisfy a lien prior to that of the United States, thus extinguishing a tax lien.

³ The statutory amount tendered was $110,295.03.

[81-2 USTC ¶9507]Olympic Federal Savings & Loan Association, a corporation; Heritage Auxiliary Company, Inc., a California Corporation, Plaintiffs-Appellants v. Donald T. Regan, Secretary of the Treasury of the United States; William Williams, Acting Commissioner of the Internal Revenue Service; Thomas Cordoza, Regional Commissioner of the Internal Revenue Service, and the Internal Revenue Service, and the United States of America, Defendants-Appellees

(CA-9), U. S. Court of Appeals, 9th Circuit, No. 79-4065, 648 F2d 1218, 6/22/81 , Aff'g DC, 79-1 USTC ¶9180

[Code Sec. 7425]

Lien for taxes: Redemption of real property by U. S.: Foreclosure sale: Payment tendered within 120 days of sale: Successor in interest.--Payment tendered by the U. S. within 120 days of the trust deed sale in foreclosure of real property was a valid exercise of the government's right of redemption under a prior tax lien. The government was not required to accept payment offered by the purchaser at the foreclosure sale of an amount equal to the tax lien. The savings and loan association was not a successor in interest of the foreclosure purchaser who executed a deed of trust as security for a mortgage on the property, so the government correctly tendered the purchase price to the foreclosure purchaser.

Richard M. Schulze, 1990 N. California Ave., Walnut Creek, Calif., for plaintiffs-appellants. Gilbert E. Andrews, Thomas M. Preston, Department of Justice, Washington, D. C. 20530, for defendants-appellees.

Before BROWNING, Chief Judge, TRASK, Circuit Judge, and JAMESON, ^* District Judge.

TRASK, Circuit Judge:

Appellants Olympic Federal Savings and Loan Association and Heritage Auxiliary Company (collectively Olympic) appeal from a summary judgment rendered in favor of the Internal Revenue Service (the Service) on Olympic's action to quiet its title to and prevent the Service from redeeming certain real property. The previous owners of the property had given a deed of trust on it to Olympic as security for a loan. Thus, the redemption apparently extinguished Olympic's security interest. Olympic argues that its interest survived the redemption because the Service acquired only the interest that the previous owners had in the property at the time the redemption was effected. Alternatively, Olympic argues that the redemption is invalid, either because the redemption amount should have been tendered to Olympic as successor-in-interest to the previous owners, or because the Service's right to redeem was extinguished by tender to it of the amount of its tax lien. We affirm.

[Background]

I. The property in question was originally owned by Mr. and Mrs. Arnold Remmens subject to a deed of trust in favor of United California Bank (UCB). On January 8, 1975, the Service recorded notice of a tax lien against Mr. Remmen's interest in the property. On May 21, 1976, UCB recorded a notice of default against the property.

Title to the property was altered by a number of events which occurred in quick succession in late December, 1976. Mrs. Remmen gave a quit-claim deed for her interest in the property to Thaler. UCB transferred its note and deed of trust to Thaler, who then recorded them in the name of Fries on December 16. On December 20, Fries recorded an assignment of the note and deed to his wife under her maiden name, Nelson, and Thaler was substituted as trustee on the deed.

A foreclosure sale was held January 21, 1977, at which time the property was sold to Fries for $34,500. Title was recorded in Nelson's name. On March 6, Nelson entered into a deposit receipt and sales contract pursuant to which the property was to be conveyed to the Teeples for $59,950. On April 15, Thaler inquired of the Service whether it would be willing to release the right of redemption that it held by virture of I. R. C. [26 U. S. C.] §7425. He was told that he would have to make formal application for such a release. On April 18, before receiving a release from the Service, Nelson deeded the property to the Teeples, who immediately gave a deed of trust to Olympic as security for a loan of $47,950.

On April 28, the Service gave notice of its intention to redeem the property pursuant to section 7525(d). On May 9, two checks in the amount of the Service's tax lien were tendered to the Service on behalf of Thaler, Fries, and the Teeples. The Service did not negotiate or otherwise accept these checks as payment of Mr. Remmens' taxes. On May 11, the Service redeemed the property by tendering $35,843 to the Teeples, who accepted the money. It is not disputed that this amount was statutorily correct. On May 12, the Service recorded a certificate of redemption against the property.

Having lost the security for its loan to the Teeples, Olympic filed suit in the district court, attacking the legality of the Service's remeption. On the motion for summary judgment, however, the district court held that the Service had properly exercised its right of redemption, and that the redemption had operated to pass to the Service unencumbered title to the redeemed property. Olympic appeals from this judgment.

[Standard of Review]

II. A movant for summary judgment must demonstrate the absence of any genuine issue of material fact and articulate a viable theory of law under which he is entitled to judgment. Abramson v. University of Hawaii, 594 F. 2d 202, 208 (9th Cir. 1979); Pepper & Turner, Inc. v. Shamrock, 563 F. 2d 391, 393 (9th Cir. 1977); Fed. R. Civ. P. 56(c). Because the material facts are not in dispute in this case, we may reverse only if we find that the district court erred in stating or applying the law.

[Nature of Interest]

A. Olympic first contends that the Service acquired only the interest that the Teeples had in the property at the time the redemption was effected. Under this theory, the Service would have redeemed the property subject to the deed of trust securing Olympic's loan to the Teeples.

The portion of section 7425 that describes the title taken by the Service as redemptioner is subsection (d)(3)(C): "[Redemption] shall . . . transfer to the United States all the rights, title, and interest in and to such property acquired by the person from whom the United States redeems . . .." ¹ The regulations contain similar language. See 26 C. F. R. 301.7425 -4(c)(3). Olympic contends that the plain meaning of this provision and the similarity of its description of title to that of a quitclaim deed indicate that the Service redeems subject to existing encumbrances. This, however, only begs the question at issue. The question is not merely whether the Service takes subject to existing encumbrances when it redeems pursuant to section 7425(d), but whether it takes subject to the encumbrances existing at the time of redemption of the property, or those existing at the time of the property's acquisition by the redemptionee.

The legislative history of section 7425(d) states in part: "Where the government exercises its right of redemption, it must pay the amount paid by the purchaser at the sale plus interest and expenses necessary to maintain the property from the time of sale." S. Rep. No. 1708, 89the Cong., 2d Sess. 27, reprinted in [1966] U. S. Code Cong. & Ad. News 3722, 3750. The requirement that the Service pay to the redemptionee interest and maintenance expenses incurred during the pre-redemption period implies that the Service obtains title to the redeemed property retroactive to the date of the execution sale. See Plumb, Federal Liens and Priorities--Agenda for the Next Decade (Pt. III ), 77 Yale L. J. 1104, 1180 (1967) (redemption under §7425(d) puts United States in shoes of purchaser at execution sale); 33 C. J. S. Executions §263, at p. 552 (1941) (in most jurisdictions a nondebtor redemptioner "merely steps into the shoes of the execution purchaser, and succeeds to what ever right, title or interest the purchaser acquired at the sale as fully . . . as if the redemptioner had purchased the certificate of sale"). Thus, when redeeming under section 7425(d), the Service takes the interest that the redemptionee acquired at the execution sale. If the redemptionee did not purchase at the sale, the Service takes the interest that the redemptionee obtained from such purchaser or his successor-in-interest.

The Teeples took the fee to the property, encumbered only by the Service's tax lien, from Nelson, whose husband (and apparent co-venturer ² was the purchaser at the execution sale. Olympic's encumbrance did not come into existence until after the Teeples acquired the property from Nelson. ³ When the Service redeemed from the Teeples it took the entire fee, because the property was "encumbered" only by the Service's own lien.

Olympic responds that the foregoing analysis depends upon an excessively narrow and literal interpretation of section 7425(d). Another section of the Act, however, has been as narrowly and literally interpreted. See Equity Mortgage Corp. v. Loftus [74-2 USTC ¶9757], 504 F. 2d 1071, 1076 (4th Cir. 1974) (28 U. S. C. §2410). Additionally, we note that Olympic's construction of the statute would permit the purchaser at an execution sale to complicate, and possibly totally frustrate, the Service's exercise of its right of redemption merely by encumbering any property subject to such right.

[Invalid Redemption]

B. Olympic next asserts that the Service's redemption was invalid under the terms of section 7425. Legal title was conveyed to Olympic by the Teeples under the deed of trust that secured Olympic's loan to them. Thus, Olympic argues that it was a successor-in-interest to the Teeples at the time the Service redeemed that property, and, as such, Olympic rather than the Teeples should have been tendered the statutory redemption amount by the Service.

The key issue here is the proper definition of "successor-in-interest." The premise of Olympic's argument is that one succeeds to the property interest of another by acquiring legal title to it. The Service argues that a successor-in-interest is one who acquires at least beneficial and equitable title to property, and that a grantor of bare legal title under a deed of trust has always been viewed as retaining equitable and beneficial title.

California law regarding secured real estate loans has long operated on the "title theory," under which the lender receives legal title to the security rather than a mere lien against it. Nevertheless, California courts have attached little significance to this distinction; security interests represented by deeds of trust and those evidenced by mortgage liens are treated as if they were legally identical. E.g., Cornelison v. Kornbluth, 15 Cal. 3d 590, 125 Cal. Rptr. 557, 563 n. 4, 542 P. 2d 981, 987 & n.4 (1975); Bank of Italy v. Bentley, 217 Cal. 644, 20 P. 2d 940, 944-45 (Cal. 1933); Department of Transportation v. Redwood Baseline, Ltd., 84 Cal. App. 3d 662, 149 Cal. Rptr. 11, 16 n.6 (1978); Woody v. Lytton Savings & Loan Association, 229 Cal. App. 2d 641, 40 Cal. Rptr. 560, 562 n.1 (1964). Consequently, the grantor-trustor under a deed of trust "is generally treated by [California] law as the holder of the title," even though legal title has actually been conveyed to the lender. Bank of Italy v. Bentley, supra, 20 P. 2d at 944; accord Bank of America v. Embry, 188 Cal. App. 2d 425, 10 Cal. Rptr. 602, 603-04 (1961) (trustor retains complete title and ownership to subject property with trustee receiving only bare legal title sufficient to ensure preservation of loan security in case of default); Comment, Comparison of California Mortgages, Trust Deeds and Land Sale Contracts, 7 U.C.L.A. L. Rev. 83, 91 (1960) (positions of trustor and mortgagor are essentially the same and each should be treated as the legal owner of encumbered property).

The California cases do not identify precisely what it is that makes one a successor-in-interest to the purchaser at an execution sale. They have, however, defined the successor to a judgment debtor as "one who has acquired (or succeeded to) the interest of the judgment debtor in the property, subject, of course, to the effect of the judgment and sale . . .." Call v. Thunderbird Mortgage Co., 58 Cal. 2d 542, 546-47, 25 Cal. Rptr. 265, 375 P. 2d 169, 173-74 (1962) (quoting Ogden's California Real Property Law §17.57, at 662, 663). See also Bateman v. Kellogg, 59 Cal. App. 464, 211 P. 46, 50 (1922). By analogy, then, the successor to the interest of the purchaser at an execution sale is one who acquires the interest that the purchaser himself acquired at the sale.

Under this definition, Olympic is not a successor-in-interest to the Teeples, because it did not acquire all, or even a substantial part, of the interest that the Teeples acquired from Nelson. Although Olympic held legal title to the redeemed property, it possessed hardly any of the rights normally associated with ownership of property. For example, it had no right of possession or enjoyment, it could not devise the property or give it away, nor could it sell the property. See generally Comment, supra, 7 U.C.L.A. L. Rev. at 94-45. Olympic's sole interest in the property was a right to sell it in the event the Teeples defaulted on the conditions of their note. The Teeples retained all other rights, and under California law were considered the owners of the property in all other respects. Accordingly, we hold that the Service was not required to redeem from Olympic rather than the Teeples when it determined to exercise its rights under section 7425.

[Tender of Tax Due]

C. Finally, relying on Royall v. Virginia, 116 U. S. 572, 6 S. Ct. 510, 29 L. Ed. 735 (1885) Olympic contends that the tender to the Service of the amount of its tax lien operated to void the effect of any subsequent tax collection steps taken by the Service, including exercise of its right to redeem. The Service responds that it had no duty to release its right to redeem upon any such tender, and that, in fact, it had an affirmative duty to exercise its redemption right.

In Royall, an attorney had attempted to pay a state license fee with coupons from a state-issued bond. The state refused to accept the coupons as payment because a state statute, passed after the bonds had been issued, required payment of all state fees in United States money. The Court noted that the bonds were issued on the understanding that they could be used as legal tender for the payment of state debts. 116 U. S. at 578, 6 S. Ct. at 512. Thus, the Court held that the State statute was an unconstitutional impairment of the prior contract between the state and the bondholders. Id. at 578-79, 6 S. Ct. at 512-13. It went on to hold that the attorney could not be found guilty of practicing law without a license, because his offer to pay the license fee in legal tender and his undisputed compliance with the other requirements created a duty in the state to issue him a license, which duty the state had violated. Id. at 579-80, 582-83, 6 S. Ct. at 513, 515.

It is doubtful that an analogous duty on the part of the Service exists in this case. Section 7425 does not provide that the Service's redemption rights shall be extinguished by tender to it of the amount of its tax lien, or, for that matter, by the occurrence of any other event. Olympic argues that in such cases a duty not to redeem exists because the Service has no duty to act on behalf of a taxpayer. Even if it is true, however, that the Service has no duty to act to protect taxpayer interests, it does not follow that the Service is prohibited from acting to protect such interests if it wishes to do so.

Without citation to either the Act itself or its legislative history, Olympic further contends that Congress did not intend that the Service exercise its statutory rights to deprive third parties of legitimate property interests when tax collection interests are not implicated. Olympic argues that tender to the Service of the amount of its tax lien obviated the need for the Service to redeem the property to collect taxes due, thus leaving the Service without a statutorily legitimate basis for exercising the right to redeem. The Service responds that a secondary purpose of section 7425(d) was to protect taxpayers, as well as the Service, from loss of taxpayer equity as a result of underbidding at an execution sale. Authority for the Service's position is also meager. See Equity Mortgage Corp. v. Loftus [70-2 USTC ¶9722], 323 F. Supp. 144, 151-54 (E. D. Va. 1970) (citing Plumb, supra, 77 Yale L. J. at 1178-79), reversed on other grounds, [74-2 USTC ¶9757] 504 F. 2d 1071 (4th Cir. 1974).

Regardless of whether the Service has a duty to act to protect taxpayer interests, we find it unwise to intervene in a regional director's decision about how to satisfy an outstanding tax lien, at least in circumstances such as those in this case: "[T]o require the Government to pick out and foreclose on only those liens which will create the least hardship on third parties, would impose a considerable burden on the revenue collection process." Kovacs v. United States [66-1 USTC ¶9178], 355 F. 2d 349, 351 (9th Cir.), cert. denied, 384 U. S. 941, 86 S. Ct. 1460, 16 L. Ed. 2d 539 (1966), quoted with opproval in Plumb, supra, 77 Yale L. J. at 1182. See also id. n.425. The release of a right of redemption under section 7425 is committed to the sound discretion of the regional director. See 26 C. F. R. §301.7425-4(c)(4). That discretion was not abused here. Accordingly, we hold that the Service did not violate any duty owed to Olympic when it redeemed pursuant to section 7425.

[Inequity?]

III . Olympic makes an impassioned plea for reversal based on the seeming injustice of allowing the Service to exercise its right of redemption in this case. It argues that upholding the Service's position in this case will unfairly destroy Olympic's interest in property upon which it relied for security in making a loan.

We are not persuaded that any injustice has resulted from the Service's exercise of its right of redemption. Olympic may properly be charged with notice of the risk that the property on which it relied for security would be redeemed out from under it, leaving it without effective recourse in case of default. The Service's tax lien against the property was duly recorded long before the Teeples and Olympic appeared on the scene. The Teeples acquired the property from the purchaser at an execution sale pursuant to foreclosure under a senior lien. Section 7425(d) clearly states that in such circumstances, the Service has a right to redeem from the purchaser at the execution sale or his successor-in-interest. These are all matters of public record discoverable upon reasonable investigation. See generally Bank of Hemet v. United States [81-1 USTC ¶9379], 643 F. 2d 661 at 665-66 (9th Cir. 1981).

Olympic might have avoided this risk in a number of ways, including requiring further security from the Teeples, insuring the title against the possibility of redemption by the Service, waiting to disburse the loan funds until the Service had unequivocally released its right to redeem, or not making the loan at all. Olympic made the loan in spite of this risk, and that it might incur financial loss as a result is due to faulty business judgment rather than any inequity in the law.

The judgment of the district court is AFFIRMED.

^* Honorable William J. Jameson, Senior United States District Judge for the District of Montana.

¹ The statute reads more fully as follows:

(d) Redemption by United States.--

(1) Right to redeem.--In the case of a sale of real property to which subsection (b) applies to satisfy a lien prior to that of the United States, the Secretary or his delegate may redeem such property within the period of 120 days from the date of such sale or the period allowable for redemption under local law, whichever is longer.

* * *

(3) Certificate of redemption.--

* * *

(C) Effect.--A certificate of redemption executed by the Secretary or his delegate shall constitute prima facie evidence of the regularity of such redemption and shall, when recorded, transfer to the United States all the rights, title, and interest in and to such property acquired by the person from whom the United States redeems such property by virtue of the sale of such property.

² Olympic does not dispute the Service's statement that Thaler, Fries, and Nelson were co-venturers. The facts support an inference that the three acted in concert.

³ Olympic attempts to finesse this point by asserting that the Teeples' acquisition of title to the property and the attachment of Olympic's encumbrance thereto were "contemporaneous." This is conceptually inaccurate. The Teepels must have first acquired title to the property themselves before being properly empowered to convey such title to Olympic.