Bona Fide Purchaser for Value Page 3

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2. On October 14, 1992 , Watt transferred his interest in real property at 8799 North State Route 68, West Liberty , Ohio in Champaign County , Ohio (the "Property") to his wife, Patricia Watt, by a quit claim deed recorded in Champaign County .

3. On October 19, 1992 , a decree of dissolution of Watt's marriage to Patricia Watt was entered.

4. On November 9, 1992 , the IRS filed its Notice of Tax Lien for the previously listed assessments in Logan County , Ohio , a county other than where the property is located.

5. On December 19, 1992 , the Property was sold by Patricia Watt to John Nolan, II ("Nolan").

6. On January 7, 1993 , the IRS properly filed its Notice of Tax Lien for these assessments in the amount of $12,258.18 in Champaign County , the county where the property is located.

7. On February 24, 1993 , Watt filed for relief under chapter 7 of the Bankruptcy Code.

8. On May 3, 1993, the chapter 7 trustee (the "Trustee") obtained, from the IRS, proceeds from an auction of the debtor's personal property which the IRS had levied upon immediately prior to Watt's filing for bankruptcy relief.

9. On July 16, 1993 , the Trustee filed an adversary proceeding against Patricia Watt alleging causes of action under 11 U.S.C. §547 and §548.

10. The IRS filed its proof of claim on August 19, 1993 . The IRS asserts a secured claim in the amount of $11,671.55, a priority claim in the amount of $5,964.30, and an unsecured claim in the amount of $1,007.84 for a total claim of $18,643.69.

11. On February 24, 1994 , the Trustee settled the adversary proceeding filed against Patricia Watt for the amount of $5,750.00. (Doc. 40-1).

12. The Trustee objected to the claim of the IRS on March 17, 1994 . The Trustee objected to "all of the claim in excess of $5,964.30," the priority claim. (Doc. 45-1). The IRS filed a response on April 15, 1994 . (Doc. 46-1). In addition, the Trustee filed a memorandum. (Doc. 48-1). The court held a hearing on June 8, 1994 to consider these pleadings. To allow the parties to clarify the facts and issues in this proceeding, the court ordered that the parties file supplemental documents. (Doc. 49-1).

13. Pursuant to this order, the Trustee filed an amended report of assets (Doc. 51-1). In this report, the Trustee stated that the following assets exist in the debtor's estate: 1) monies from the settlement of an adversary proceeding against Patricia Watt filed pursuant to 11 U.S.C. §547 and §548 in the amount of $5,750.00 (the "Settlement Monies"), 2) proceeds from an auction sale turned over to the Trustee by the IRS in the amount of $3,336.01 (the "Auction Proceeds"), and 3) interest in the amount of $89.56. The IRS filed a memorandum in support of its proof of claim (Doc. 53-1). The Trustee filed another objection to the IRS proof of claim (Doc. 55-1), and the IRS filed its reply (Doc. 56-1) to the Trustee's objection.

ISSUES

This proceeding presents the following issues: 1) whether the IRS has a lien on the Settlement Monies, 2) whether the IRS has a lien on the Auction Proceeds, and 3) if the IRS does have a lien on any of the assets held by the Trustee, whether the IRS liens are to be subordinated under 11 U.S.C. §724 .

DISCUSSION

A. The Settlement Monies

The IRS asserts that it is secured with respect to the Settlement Monies because it had a lien on Watt's property prior to his filing for bankruptcy relief. The IRS further argues that, had it not been for the bankruptcy, it could have recovered from the debtor's wife, Patricia Watt, as a transferee of the Property under 26 U.S.C. §6901 , which addresses the liability of transferees. The Trustee disputes that the IRS is secured. He asserts that the IRS had not properly filed its Notice of Lien until after Patricia Watt transferred the Property to a bona fide purchaser.

In determining whether the IRS has a lien on the Settlement Monies, the court must initially determine the nature of the lien asserted by the IRS. Pursuant to §6321 of the Internal Revenue Code, if a taxpayer fails to pay taxes there "shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person." 26 U.S.C. §6321 . "[T]he 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." 26 U.S.C. §6322 . Furthermore, in general, " '[p]roperty subject to a Federal tax lien which has been sold or otherwise transferred by the taxpayer may be seized while in the hands of the transferee or any subsequent transferee.' " TKB International, Inc. v. United States [93-1 USTC ¶50,346 ], 995 F.2d 1460, 1463-64 (9th Cir. 1993) (quoting 26 C.F.R., §301.6331-1(a)(1) ). See also United States v. Carson, 741 F.Supp. 92 (E.D. Pa. 1990). In fact,

When first created by Congress in 1866, a tax lien on a delinquent taxpayer's property "defeated even a bona-fide purchaser of realty without notice or knowledge or an unfiled tax lien." The rule holding "secret" tax liens were good as against a purchaser for value without notice continued to be enforced through the beginning of the twentieth century, a period of history in which tax liens were few.

However, shortly after the ratification of the Sixteenth Amendment in 1913, Congress began a "retreat from the pre-amendment harsh rule in order to protect specified interests from the operation of the lien." [sic] Congress amended the tax lien statutes so that a "tax lien 'shall not be valid as against any mortgagee, purchase, or judgment creditor until notice of such lien shall be filed by the collector (in the designated place for filing).' "

"Subsequently, the Federal tax lien statutes were amended by Section 3672 of the Internal Revenue Code [in 1939] to protect mortgagees, pledgees, purchasers and judgment creditors where proper notice of the lien was not given as provided by the statutes." The prime purpose of this section, now 26 U.S.C. 6323, was "to mitigate the rigors of Sec. [6321] by protecting from secret liens the persons described in Subd. (a) of that section." [sic] The rule remains, however, "[u]nless a federal statute requires a government tax lien to be recorded, the unrecorded lien may be enforced against subsequent transferees."

TKB Int'l, Inc. [93-1 USTC ¶50,346 ], 995 F.2d at 1463-64 (citations omitted). Section 6323(a) provides:

The lien imposed by section 6321 shall not be valid as against any purchaser, holder of security interest, mechanic's lienor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary or his delegate.

26 U.S.C. 6323(a) (emphasis added). ¹ Section 6323(h)(6) defines purchaser:

The term "purchaser" means a person who, for adequate and full consideration in money or money's worth, acquires an interest (other than a lien or security interest) in property which is valid under local law against subsequent purchasers without actual notice.

Here, the IRS' liens attached to Watt's real and personal property at the time of assessment. This property remained subject to the liens even though it was transferred from Rob ert Watt to Patricia Watt. However, Patricia Watt sold the Property to Nolan on December 19, 1992, prior to the date by which the IRS had filed its Notice of Tax Lien as required by §6323(f) .

Both the IRS and the Trustee characterize Nolan as a bona fide purchaser. "A bona fide purchaser is one who has purchased property for value without notice of any defects in the title of the seller." United States v. Hunter (In re Walter ) [93-2 USTC ¶50,604 ], 158 B.R. 984, 985 n. 3 (N.D. Ohio 1993) (citing Black's Law Dictionary 177 (6th ed. 1990)). Consistent with the plain language of §6323(h)(6) , the court finds that Nolan was a bona fide purchaser. Accordingly, because the IRS did not properly file its Notice of Tax Lien prior to Nolan's purchase of the Property, its lien was no longer secured by the Property transferred to Nolan.

The IRS states that it is not seeking to assert its lien against the rights of Nolan as a bona fide purchaser but is seeking to assert its lien against property recovered from Patricia Watt, the transferee of the fraudulent transfer. The IRS asserts that once the Trustee avoided the transfer to Patricia Watt, it was no different than if Watt had held the Property until he filed his petition. (Doc. 56-1, p.4). ²

Although the IRS states that it is not asserting its lien against the purchaser Nolan or the Property itself, the fact that the Property, the subject of the Trustee's recovery, was transferred prior to the time the IRS properly filed its Notice of Tax lien is legally significant. The IRS is correct in that the successful exercise of a trustee's avoiding power causes the affected transfer to become void, allowing the trustee to recover the transferred property or its value under 11 U.S.C. §550. However, even if the transfer of the Property is avoided, and the Property or its value is added to the debtor's estate, the IRS is still not secured by the Property.

By enacting legislation removing the "secret" tax lien position that had been accorded to the IRS, Congress chose to protect purchasers of property subject to IRS assessment liens and chose to leave the IRS with only a cause of action against a transferee who was not a bona fide purchaser and with no cause of action against the previously secured real property which was transferred. Here, prior to the date on which the IRS properly filed its Notice of Tax Lien, the Property was sold to a bona fide purchaser. The assessment lien no longer had any real property to which it could attach; and, to that extent, the IRS assessment lien was no longer a lien secured by the Property. Accordingly, because the IRS assessment lien was not secured by the Property itself, the IRS assessment lien is not secured by the Settlement Monies, which were obtained from the transfer of the Property as a compromise of the trustee's various causes of action pursuant to §547 (preference) and §548 (fraudulent conveyance). Any other determination would defeat the statutory requirement that for an assessment lien to be secured against real property transferred to a bona fide purchaser the IRS must properly record its lien and would be tantamount to giving the IRS a lien on property it would not have had if Watt had not filed a bankruptcy petition. ³

Although the IRS, as it suggests, may have a cause of action against Patricia Watt under 26 U.S.C. §6901 for transferee liability and may even be secured against property of hers, this does not elevate the IRS position in the debtor Rob ert Watt's bankruptcy to that of a creditor secured by the funds obtained in a compromise of the trustee's claims against Patricia Watt.

The IRS argues that Staats v. Barry (In re Barry ), 31 B.R. 683 (Bankr. S.D.Ohio 1983) supports their position. To the extent that Barry may support the IRS position, it is not determinative in this proceeding. Although Barry involved the fraudulent transfer of real property prior to the IRS filing its Notice of Tax lien, it did not involve a "purchaser" under 26 U.S.C. §6323 . Likewise, other authorities cited by the IRS involve cases where the creditor held a lien that was properly perfected, prepetition, in the property which was the subject of the trustee's action. ⁴ In this proceeding, as a result of the transfer of the Property to a bona fide purchaser, the IRS no longer had a lien on the Property; nor, accordingly, on the proceeds obtained by the Trustee in compromise of his various causes of action.

Based upon the foregoing, the court concludes that the IRS is not secured with respect to the Settlement Monies.

B. The Auction Proceeds

The Trustee also asserts that the IRS is not secured in the Auction Proceeds. The government has several methods for collecting unpaid taxes. See United States v. Nat'l Bank of Commerce [85-2 USTC ¶9482 ], 472 U.S. 713, 719, 105 S.Ct. 2919, 2924, 86 L.Ed.2d 565 (1985); United States v. Bank of Celina [83-2 USTC ¶9688 ], 721 F.2d 163, 166 (6th Cir. 1983). "One method is to levy 'upon all property and rights to property . . . belonging to [the taxpayer] or on which there is a lien. . . .' 26 U.S.C. §6331(a) ." Celina [83-2 USTC ¶9688 ], 721 F.2d at 166. A levy is merely the admin istrative method for collecting property encumbered by a federal tax lien. A "levy does not determine whether the Government's rights to the seized property are superior to those of other claimants; it, however, does protect the Government against diversion or loss while such claims are being resolved." National Bank of Commerce [85-2 USTC ¶9482 ], 105 S.Ct. at 2924. The release of a levy does not release an underlying lien. See Wessel v. United States (In re Wessel ) [93-2 USTC ¶50,549 ], 161 B.R. 155, 161 (Bankr. D.S.C. 1993).

The parties have not stated the date of the levy; however, the IRS stated that "[i]mmediately prior to the filing of his bankruptcy petition, some of the debtor's personal property was sold at auction." (Doc. 56-1, p.5). As previously stated, the IRS lien attached to Watt's personal and real property under 26 U.S.C. §6321 . Further, the IRS properly filed a Notice of Tax lien prior to the date Watt filed for bankruptcy relief. Although the IRS released its levy of the auction proceeds, it did not release its lien. The IRS remains secured as to these auction proceeds.

C. Distribution

Having determined that the IRS is not secured with regard to the Settlement Monies but is secured with regard to the Auction Proceeds, the court examines how the Trustee must distribute the estate assets. The IRS claim is in the total amount of $18,643.69, with a secured claim of $11,671.55; a priority claim of $5,964.30; and an unsecured general claim of $1,007.84. The Trustee has only objected to the IRS claim to the extent that the IRS argues that it is secured. The Trustee does not dispute that the IRS claims are priority claims.

Section 724 expressly pertains to priority and distribution problems involving property of the estate. United States v. Darnell (In re Darnell ) [88-1 USTC ¶9123 ], 834 F.2d 1263, 1268 (6th Cir. 1987). Section 724(b) provides that property encumbered by a tax lien shall be distributed in the following manner:

(1) first, to any holder of an allowed claim secured by a lien on such property,that is not avoidable under this title and that is senior to such tax lien;

(2) second, to any holder of a claim of a kind specified in section 507(a)(1) , 507(a)(2) , 507(a)(3), 507(a)(4), 507(a)(5), or 507(a)(6) of this title, to the extent of the amount of such allowed tax claim that is secured by such tax lien;

(3) third, to the holder of such tax lien, to any extent that such holder's allowed tax claim that is secured by such tax lien exceeds any amount distributed under paragraph (2) of this subsection;

(4) fourth, to any holder of an allowed claim secured by a lien on such property that is not avoidable under this title and that is junior to such tax lien;

(5) fifth, to the holder of such tax lien, to the extent that such holder's allowed claim secured by such tax lien is not paid under paragraph (3) of this subsection; and

(6) sixth, to the estate.

Pursuant to §724 , property is not distributed to the estate (§724(b)(6)) until all liens are satisfied. Darnell [88-1 USTC ¶9123 ], 834 F.2d at 1268. Under §724(b) , a tax lien becomes the source of payment for admin istrative expenses up to the amount of the tax liens. King v. Board of Supervisors of Fairfax County (In re A.G. Van Metre, Jr., Inc. ), 155 B.R. 118, 122 (Bankr. E.D.Va. 1993); Wurst v. City of New York (In re Packard Properties, Ltd. ), 112 B.R. 154, 156 (Bankr. N.D.Tex. 1990).

The IRS does not dispute that their lien is subject to subordination under §724(b) . Further, to the extent that the IRS sets forth a secured claim which remains unpaid, the tax and interest portion is allowed as a priority claim, and the penalty portion is allowed as a general unsecured claim. However, no distributions for admin istrative claims have been requested from these proceeds. Once such admin istrative claims have been filed and the issue of distribution is ripe for decision, the IRS may, at that time, dispute the amount by which their claims are to be subordinated.

CONCLUSION

For the reasons set forth, the Trustee's objection to the proof of claim filed by the Internal Revenue Service is GRANTED IN PART AND DENIED IN PART. It is granted to the extent that the court determines that the IRS does not hold a valid lien against the Trustee's recovery of his claims against Patricia Watt. It is denied to the extent that the IRS does hold a lien against the Auction Proceeds; however, the IRS lien shall be subordinated under §724(b) . Further, to the extent that the IRS has set forth a secured claim which will remain unpaid, the tax and interest portions are allowed as a priority claim, and the penalty portion is allowed as a general unsecured claim.

An order in accordance with this decision is simultaneously entered.

¹ Subsection (f) of 6323 sets forth the requirements for filing proper notice of a federal tax lien. TKB Int'l [93-1 USTC ¶50,346 ], 995 F.2d at 1464. Section 6323(f) provides:

(1) Place for filing.--The notice referred to in subsection (a) shall be filed--

(A) Under State laws.--

(i) Real property.--In the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated; and

(ii) Personal property.--In the case of personal property, whether tangible or intangible, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the lien is situated. . . .

. . . .

2) Situs of property subject to lien.--For purposes of paragraphs (1) and (4), property shall be deemed to be situated--

(A) Real property.--In the case of real property, at its physical location; or

(B) Personal property.--In the case of personal property, whether tangible or intangible, at the residence of the taxpayer at the time the notice of lien is filed.

Under Ohio law, "[n]otices of liens for internal revenue taxes . . . shall be filed for record . . . in the office of the county recorder of the county in which the property subject to the lien is situated." O.R.C. §317.09. See also In re Ray, 48 B.R. 534, 536 (Bankr. S.D.Ohio 1985). The IRS appears to concede that the proper place for filing its Notice of Lien against the Property was in Champaign County .

² The court notes that the Trustee did not "avoid" the transfer to Patricia Watt, but rather "compromised" various causes of action against Patricia Watt.

³ The court notes that, in the context of §552 , courts have held that even creditors with properly perfected security interests are not secured in recoveries made by a trustee in preference actions. See, e.g., Mellon Bank (East ), N.A. v. Glick (In re Integrated Testing Products Corp.), 69 B.R. 901 (D. N.J. 1987); In re Tek-Aids Indus., Inc., 145 B.R. 253 (Bankr. N.D.Ill. 1992); Hennessy v. Kennedy (In re Sun Island Foods ), 125 B.R. 615 (Bankr. D.Hawaii 1991). As the court stated in Tek-Aids:

A preference action can only be initiated in the context of a bankruptcy case after the filing of a bankruptcy case. Even if all of the elements spelled out by §547(b) are present, no one can recover the preferential transfer as preferential unless some voluntary or involuntary bankruptcy petition is filed.

Indeed, to rule otherwise would give every secured creditor with a properly perfected security interest in all of the debtor's personal property a lien on recoveries by the trustee in preference actions. This would not only defy logic, but would undermine the policy behind the avoidance powers as well.

Id. at 256 (citations omitted; emphasis in original).

⁴ The court is aware of Claussen Concrete Co., Inc. v. Walker (In re Lively ), 74 B.R. 238 (S.D. Ga. 1987), aff'd without opinion, 851 F.2d 363 (11th Cir. 1988), in which the court found that a valid judgment lien against the debtors' property was enforceable against the property recovered by the trustee in settlement of the trustee's claims against the debtor's wife for a fraudulent conveyance. Lively is, however, distinguishable from the present case. Unlike this proceeding, Lively involved a creditor with a valid, prepetition judgment lien secured by real property, which was the subject of the trustee's action. See also In re Figearo, 79 B.R. 914 (Bankr. D.Nev. 1987) (creditor who held properly perfected security interest in debtor's jewelry inventory prior to debtor's bankruptcy filing held a security interest pursuant to §552 in the funds held by the trustee as a result of a compromise of a fraudulent conveyance action).

 

 

[94-1 USTC ¶50,206] Brice Nelson, Personal Representative of the Estate of John M. Nelson, Deceased, and Darrel Brant, Plaintiffs v. United States of America, Defendant Maxwell Tomlinson, Plaintiff v. United States of America, Defendant

U.S. District Court, East. Dist. Mich. , So. Div., Civ. 92-70660, Civ. 92-77376, 3/30/94

[Code Sec. 6503 ]

Collections: Levies: Limitation period: Bankruptcy.--The IRS's levies on bond interest coupons owned by a debtor in a chapter 7 bankruptcy proceeding were not barred by the applicable statute of limitations. Thus, the taxpayers' motion for summary judgment was denied. The suspension of the limitations period on collection that normally ends six months after the bankruptcy court orders a discharge of a taxpayer's debt was extended. The limitations period was extended for an additional period equal to the time between the date that the taxpayer's discharge in bankruptcy was ordered and the date that the discharge order was set aside for the debtor's fraudulent failure to disclose his interest in the bonds during the original bankruptcy proceeding. Since the IRS was prohibited from collecting the tax during the extended period, levies within such period were not time barred.

[Code Secs. 6331 , 6332 and 6343 ]

Levy and distraint: Ownership of property: Release of levy: Effect of release.--The IRS's levies on bond interest coupons owned by a delinquent taxpayer in bankruptcy were properly issued to banks acting as transfer agents for the bond issuers. Only by issuing the levies directly to the transfer agents was the IRS assured of reaching such assets of the taxpayer, who had already been convicted of concealing the bonds' existence from the bankruptcy court. The claims of persons to whom the debtor transferred the interest coupons that the levies were improper were without merit because the levies on the bonds and coupons were issued before the transferees received the coupons, and the coupons were subject to the IRS's pre-existing interest in the bonds based on its existing tax lien. Although the IRS released its lien the day after the debtor's discharge in bankruptcy was set aside because of his fraudulent concealment, a levy after that time was still proper since the debtor's tax liability had not been satisfied and the levy was not time barred. Furthermore, the levies were effective against coupons maturing and presentable for payment only after the levies were issued because the obligation represented by the coupons was clearly fixed and determinable.

[Code Sec. 6323 ]

Validity of lien: Bona fide purchaser.--The IRS did not wrongfully levy against bond interest coupons obtained by transferees from a debtor in a chapter 7 bankruptcy proceeding who was convicted of failing to disclose the existence of the bonds and coupons to the bankruptcy court. Since the transferees did not timely present the issue of whether they were bona fide purchasers of the coupons for value in the complaint, they waived that defense. The issue could not be raised for the first time in a response to the government's motion for summary judgment.

MEMORANDUM OPINION AND ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

GADOLA, District Judge:

Plaintiff Maxwell Tomlinson is seeking to quiet title to some bearer bonds in his possession which are subject to tax levies issued by defendant United States . Plaintiffs Brice Nelson and Darrel Brant have brought an action under 26 U.S.C. §7426 , alleging that the United States wrongfully levied $73,125 in bond interest coupons. Based on a joint motion submitted by all parties, the court consolidated these two actions. Before the court are the parties' cross motions for summary judgment. For the reasons discussed below, the court will grant defendant's motion.

I. Background

In 1981, plaintiff Maxwell Tomlinson was assessed for tax liability for his failure to file tax returns for the years 1969 through 1979. On June 18, 1982 , the Internal Revenue Service ("IRS") issued a Notice of Federal Tax Lien against Tomlinson in the amount of $627,346.74. On May 24, 1985 , Tomlinson filed a chapter 7 bankruptcy petition. As a result, an automatic stay of the collection of all debts was set in place. On December 11, 1985 , the bankruptcy court issued an order granting a discharge of Tomlinson's debt.

After the discharge, the IRS discovered that Tomlinson had municipal bonds valued at approximately $1,000,000 in his possession. Tomlinson did not disclose his interest in these bonds during the bankruptcy proceedings.

Tomlinson was later indicted and convicted for concealing his interest in these bonds from the IRS and the bankruptcy court by filing a fraudulent bankruptcy petition. As a result of his conviction, Tomlinson later spent eighteen months in prison.

When Tomlinson's fraud was discovered, the bankruptcy court set aside its order granting the discharge on February 12, 1987 . The bankruptcy estate was closed on March 9, 1987 . Tomlinson's petition was later dismissed on January 5, 1993 .

On April 6, 1989 , before entering prison, Tomlinson borrowed $200,000 from John Nelson in order to pay the IRS some of the money that he owed. Allegedly, Nelson was given a luxury bus worth $225,000 as security on the loan.

On August 3, 1989 , the IRS issued four Notices of Levy to four different banks regarding the municipal bonds and interest coupons held by Tomlinson. The four banks were acting as transfer agents for the municipalities that had issued the bonds. The levies reflect that as of December 30, 1989 , Tomlinson owed the IRS $1,252,959.83.

In October of 1990, John Nelson died in a plane crash. Plaintiff Brice Nelson is John Nelson's brother and the personal representative of John Nelson's estate. After getting out of prison, Tomlinson gave Brice Nelson $167,000 in interest coupons in partial payment of the $200,000 loan made by John Nelson. The remaining $33,000 of the loan was allegedly forgiven.

Brice Nelson then gave approximately $131,000 in interest coupons to plaintiff Darrel Brant. The money was apparently given as a loan for Brant's business. On March 15, 1991 , Brant then presented the $131,000 in coupons to the Van Wert National Bank. Of this amount, $73,125 of the coupons were from levied sources. These coupons were forwarded for payment to the City National Bank, one of the transfer agent banks that had been served a notice of tax levy by the IRS. City National honored the tax levy and forwarded the $73,125 in proceeds to the IRS.

On January 21, 1992 , Tomlinson asked the IRS to release the tax lien and the levies based on his contention that they were ineffective. Without comment, the IRS issued a release on the $627,346.74 tax lien on February 12, 1992 . However, the IRS has not issued a release of the August 3, 1989 levies.

On February 7, 1992, plaintiffs Brant and Brice Nelson filed an action under 26 U.S.C. §7426 alleging that the United States wrongfully levied the $73,125, representing the coupons presented by Brant to the Van Wert bank. On August 31, 1992 , Tomlinson filed suit seeking to quiet title to the remaining bearer bonds and interest coupons in his possession subject to the tax levies. In response to a joint motion by all of the parties, the two separate actions were consolidated by order of this court on August 13, 1993 .

Plaintiffs have filed a joint motion for summary judgment based on their claim that the statute of limitations on collection had expired before the IRS issued its levies, and based on the fact that the government needed physical possession of the bonds in order for the levies to be effective. Subsequently, the government has filed a cross motion for summary judgment claiming that its levies were properly issued and that the statute of limitations had not run.

II. Standard of Review

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment may be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." "A fact is 'material' and precludes grant of summary judgment if proof of that fact would have [the] effect of establishing or refuting one of the essential elements of the cause of action or defense asserted by the parties, and would necessarily affect [the] application of appropriate principle[s] of law to the rights and obligations of the parties." Kendall v. Hoover Co., 751 F.2d 171, 174 (6th Cir. 1984) (citation omitted) (quoting Black's Law Dictionary 881 (6th ed. 1979)). The court must view the evidence in a light most favorable to the nonmovant as well as draw all reasonable inferences in the nonmovant's favor. See United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Bender v. Southland Corp., 749 F.2d 1205, 1210-11 (6th Cir. 1984).

The movant bears the burden of demonstrating the absence of all genuine issues of material fact. See Gregg v. Allen-Bradley Co., 801 F.2d 859, 861 (6th Cir. 1986). The initial burden on the movant is not as formidable as some decisions have indicated. The moving party need not produce evidence showing the absence of a genuine issue of material fact. Rather, "the burden on the moving party may be discharged by 'showing'--that is, pointing out to the district court--that there is an absence of evidence to support the nonmoving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party discharges that burden, the burden shifts to the nonmoving party to set forth specific facts showing a genuine triable issue. Fed. R. Civ. P. 56(e); Gregg, 801 F.2d at 861.

To create a genuine issue of material fact, however, the nonmovant must do more than present some evidence on a disputed issue. As the United States Supreme Court stated in Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986),

There is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the [nonmovant's] evidence is merely colorable, or is not significantly probative, summary judgment may be granted.

(Citations omitted). See Catrett, 477 U.S. at 322-23; Matsushita Elec. Indus. Co. v Zenith Radio Corp., 475 U.S. 574, 586-87 (1986). The standard for summary judgment mirrors the standard for a directed verdict under Fed. R. Civ. P. 50(a). Anderson, 477 U.S. at 250. Consequently, a nonmovant must do more than raise some doubt as to the existence of a fact; the nonmovant must produce evidence that would be sufficient to require submission to the jury of the dispute over the fact. Lucas v. Leaseway Multi Transp. Serv., Inc., 738 F. Supp. 214, 217 (E.D. Mich. 1990), aff'd, 929 F.2d 701 (6th Cir. 1991). The evidence itself need not be the sort admissible at trial. Ashbrook v. Block, 917 F.2d 918, 921 (6th Cir. 1990). However, the evidence must be more than the nonmovant's own pleadings and affidavits. Id.

III. Analysis

Plaintiffs are seeking summary judgment based on their assertions that defendant improperly issued levies beyond the statute of limitations period and that proper procedures were not followed to perfect the levies. The court will address each issue in turn.

A. Statute of Limitations

The applicable statute of limitations is found at 26 U.S.C. section 6502(a)(1) . At the time that the tax was assessed, section 6502(a)(1) held that tax money could be collected by levy issued "within six years after the assessment of the tax." Id. The tax liabilities at issue in this case were assessed between July 13, 1981 and December 7, 1981 .

Normally, the statute of limitations on collections would have run in 1987. In this case, however, the limitations period was suspended when Tomlinson filed his petition for bankruptcy on May 24, 1985 . In cases involving bankruptcy, the running of limitations for the collection of tax liability is "suspended for the period during which the Secretary is prohibited . . . from collecting" the tax and for six months thereafter. 26 U.S.C. §6503(h) .

According to plaintiffs, the limitations period was suspended from May 24, 1985 , when Tomlinson filed for bankruptcy, through December 11, 1985 , when the bankruptcy court ordered the discharge of Tomlinson's debt and the automatic stay on collection proceedings was lifted. Including the additional six month period dictated by section 6503(h) , plaintiffs claim that the statute of limitations was only suspended for one year and seventeen days. Thus, they argue that the limitations period had run in 1988 on all of the assessments, well before the levies were issued by the IRS on August 3, 1989 . As a result, plaintiffs contend that the levies are improper.

What plaintiffs fail to realize, however, is that the IRS was prohibited from collecting on the taxes that Tomlinson owed well after the order of discharge on December 11, 1985 . As a result of the discharge order, Tomlinson's tax liability was extinguished. The IRS could no longer collect the taxes from Tomlinson. 11 U.S.C. §524. On February 11, 1987 , however, the discharge order was set aside and within one month Tomlinson's bankruptcy estate was closed. Thus, the IRS was actually prohibited from collecting the tax from May 24, 1985 through February 11, 1987 . The period of limitations was thereby extended an additional fourteen months to make up for the fourteen months during which the bankruptcy court's discharge order was in place. Under this analysis, the limitations period on the tax assessments began to expire in late September of 1989. The IRS issued the four levies on August 3, 1989 , well within the limitations period dictated by section 6503(h) . As a result, these levies are not barred by the statute of limitations.

Even if the limitations period were not suspended during the time that the discharge order was in effect, the principle of equitable estoppel would apply in this case. Tomlinson fraudulently concealed assets in a scheme to use the bankruptcy laws to discharge the taxes that he owed. The court cannot conceive of a more classic case where equitable estoppel would block the assertion of the statute of limitations. Plaintiffs are estopped from claiming that the tax levies are barred by the statute of limitations.

B. Levy Procedures

Plaintiffs' second argument is that improper procedures were used by the IRS in issuing the levies. The IRS served the levies on four banks acting as transfer agents for the municipalities that issued the bonds held by Tomlinson. Plaintiffs claim that the levies were ineffective because the IRS did not have physical possession of the bonds or the interest coupons.

The issuance of tax levies is governed by 26 U.S.C. §6331 . Under section 6331(a) ,

[i]f any person liable to pay tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax . . . by levy upon all property . . . belonging to such person or on which there is a lien provided in this chapter for the payment of such tax.

Id. The levy "extend[s] only to property possessed and obligations existing at the time" the levy is issued. Id. §6331(b) . The IRS may "seize and sell such property or rights to property (whether real or personal, tangible or intangible)." Id.

Plaintiffs rely on Rev. Rul. 75-355 , 1975-2 C.B. 478 in support of their claim that the IRS used improper procedures when it issued the levies to the transfer agents. Revenue Ruling 75-355 states that a levy by the government on "funds represented by a negotiable certificate of deposit must be made by presentation of the negotiable certificate and the surrender of such certificate to the maker." Id. ; see also United States v. Bowery Savings Bank [61-2 USTC ¶9728 ], 297 F.2d 380 (2d Cir. 1961). Plaintiffs analogize the bonds and interest coupons at issue to negotiable certificates of deposit.

In the special circumstances presented by this case, however, the court finds that the levies issued by the IRS to the transfer agents were proper. At the time that the levies were issued, a tax lien was still in effect and the obligations to Tomlinson represented by the bonds and coupons were in existence. A levy on Tomlinson alone would not have been effective in seizing the bonds and coupons. The coupons could still have been presented to the banks acting as transfer agents for payment because the banks would have no notice of the tax liability and would have no duty to forward the proceeds to the IRS. Only by issuing the levies directly to the banks was the IRS assured of reaching the assets retained by Tomlinson. Tomlinson had already been convicted of bankruptcy fraud because he had concealed over $1,000,000 in municipal bonds from the bankruptcy court. Given these circumstances, issuing the levies to the transfer agents was both proper and effective. In addition, any bona fide purchasers of bonds or coupons from Tomlinson would be protected from the levies by 26 U.S.C. §6323 without the necessity of prior seizure and possession by the government.

The claims of plaintiffs Brant and Nelson are also without merit. The levies on the bonds and coupons were issued before either Brant or Nelson received the coupons from Tomlinson. Additionally, at the time that Brant and Nelson received the coupons, those coupons were subject to the government's pre-existing interest in the bonds based on the tax lien then in force under 26 U.S.C. §§6321 -6322.

Plaintiffs further argue that because the IRS issued a release of the tax lien on February 12, 1992 , the levies are now improper. Under 26 U.S.C. §6343(a)(1)(A) , the IRS shall release a levy if "the liability for which such levy was made is satisfied or becomes unenforceable by reason of lapse of time." In this case, however, neither situation presents itself. Tomlinson's tax liability has not been satisfied, and as the court has already determined, collection of that liability has not become unenforceable because of a lapse of time. As a result, the levies continue to be proper.

The plaintiffs also claim that the levies, if they are proper, are ineffective as to those coupons maturing after August 3, 1989 , because those coupons could only be presented to the transfer agents for payment at a date after the levies were issued. Under Treasury Regulation §301.6331-1 , however, levies attach to obligations that "exist when the liability of the obligor is fixed and determinable although the right to receive payment thereof may be deferred until a later date." In this case, the obligation represented by the coupons was clearly fixed and determinable. As a result, the levies were effective against the coupons regardless of the date set for them to mature.

Finally, in their joint response to the government's motion for summary judgment, plaintiffs raise for the very first time the issue of Nelson and Brant's status as bona fide purchasers under 26 U.S.C. §6323(b)(1)(B) . Plaintiffs did not seek protection under this section in either their original or their amended complaint. The sole bases for plaintiffs Brant and Nelson's complaint were the expiration of the statute of limitations and the improper procedures used in issuing the levies. Their alleged status as bona fide purchasers under section 6323(b)(1)(B) did not appear in either complaint or in plaintiffs' joint motion for summary judgment. As a result, plaintiffs Brant and Nelson are too late in presenting this issue, and the court finds that they have waived this defense.

IV. Conclusion

The court finds that the IRS issued the levies within the statute of limitations. The levies were properly issued and are valid. The bonds and interest coupons still held by plaintiff Tomlinson remain subject to the levies. The court also finds that plaintiffs Brant and Nelson cannot show pursuant to 26 U.S.C. §7426 that the interest coupons in their possession were wrongfully levied upon by the IRS.

ORDER

NOW, THEREFORE, IT IS HEREBY ORDERED that plaintiffs' joint motion for summary judgment is DENIED.

IT IS FURTHER ORDERED THAT defendant's motion for summary judgment is GRANTED. Both complaints are DISMISSED on the merits. SO ORDERED.

 

 

[93-1 USTC ¶50,063] United States of America, Plaintiff v. Leslie Grable, individually and as Independent Personal Representative of the Estate of Irene Grable, L. David Grable, Valerie Grable, George E. Johnson, Joyce M. Johnson, Grable and Sons Metal Products, Inc., a Michigan corporation, and State of Michigan, Department of Treasury, Defendants

U.S. District Court, West. Dist. Mich., 1:90:CV:971, 11/18/92

[Code Secs. 6323 , 7403 , 7422 , and 31 USC Sec. 3713 ]

Lien for taxes: Res judicata: Executors and admin istrators: Personal liability.--Judgment against the personal representative of a decedent's estate was entered for the unpaid balance of the decedent's income tax assessment. The doctrine of res judicata prohibited the representative from contesting the IRS's assertion that it had properly sent notice of, and a demand to pay, the outstanding assessment. Foreclosure of federal tax liens upon property in the decedent's estate was ordered and the proceeds were applied against the decedent's tax liabilities. A valid tax lien also attached to property that had been transferred by the representative to his own estate for no consideration or money. In addition, the representative was held personally liable for distributions of assets from the estate in payment of creditors, other than the United States , and for disbursements made in exchange for no consideration.

OPINION

ENSLEN, District Judge:

This case is before the Court on plaintiff's motion for summary judgment. On April 29, 1992 , plaintiff United States filed a motion for summary judgment. By that motion, plaintiff seeks several rulings: (1) that the Court reduce to a judgment the unpaid balance of the income tax assessment for the 1979 and 1980 tax years against now deceased Irene Grable; (2) that the doctrine of res judicata prohibits taxpayers from contesting plaintiff's assertion that they received notice of and a demand to pay that outstanding income tax assessment; (3) that plaintiff may foreclose on its federal tax lien upon certain property that was owned by Grable at the time of her death; and (4) that judgment against Leslie Grable, in his individual capacity, pursuant to 31 U.S.C. §3713, shall be entered because of his failure, as personal representative of the Estate of Irene Grable, to pay the outstanding income tax liabilities of Irene Grable before making distributions, or payments, of assets from the Estate.

Background

The factual background of this dispute is fairly straightforward. Simply put, this case is about the failure to pay taxes. The Court notes that it has a couple of cases before it involving the Grable family. For the most part, all of the defenses asserted by the Grables in all of these cases are frivolous. Moreover, the facts in these cases are nearly identical. The relevant facts here are as follows: On October 25, 1984 , the United States Tax Court entered a decision which found, "[T]hat there are deficiencies in income taxes due from petitioners [Earl K. Grable and Irene Grable] for the taxable years 1979 and 1980, in the amounts of $25,999.00 and $1,621, respectively." Plaintiff's Brief at Exhibit A. On November 28, 1984 , the Internal Revenue Service made an assessment against Irene Grable for the income tax deficiencies found due the United States pursuant to the Tax Court decision. Id. at Exhibits B&C. Notices of the assessments and demand for payment thereon, dated November 28, 1984 , were mailed to Earl K. and Irene Grable on November 28, 1984 . Id. No payments have been made with respect to the income tax deficiencies that were assessed against Earl and Irene Grable pursuant to the Tax Court Decision. Id. There remains due and owing to the United States from Earl and Irene Grable, jointly and severally, for the tax years 1979 and 1980, the total amount of $48,536.97, plus statutory additions from November 28, 1984 .

As of August 18, 1986 , both Earl and Irene Grable were deceased. Plaintiff's Brief, Dep. Exhibit 9; see also Dep. of Leslie Grable. Thus, on January 20, 1987 , Leslie Grable was appointed the Independent Personal Representative of the Estate of Irene Grable (hereinafter "Estate"). Dep. of Leslie Grable. Leslie Grable was aware of the Tax Court Decision against Irene Grable and also knew of her income tax liabilities prior to her death. Id.

In his capacity as personal representative of the Estate of Irene Grable, Leslie Grable either directly disbursed or transferred assets from the Estate, or authorized their disbursal or transfer, but never paid, or authorized a payment to, the United States . Id.

The Estate initially listed the total fair market value of its property as $151,600.00. Plaintiff's Brief, Dep. Exhibit 35. Presently, the value of the properties in the Estate is well below the total tax liabilities of the Estate. Id.

Standard

In reviewing a motion for summary judgment, this Court should only consider the narrow questions of whether there are "no genuine issues as to any material fact and [whether] the moving party is entitled to judgment as a matter of law." Fed. R. Civ. Proc. 56(c). On a Rule 56 motion, the Court cannot try issues of fact, but is empowered to determine only whether there are issues in dispute to be decided in a trial on the merits. Gutierrez v. Lynch, 826 F.2d 1534, 1536 (6th Cir. 1987); In re Atlas Concrete Pipe, Inc., 668 F.2d 905, 908 (6th Cir. 1982). The crux of the motion is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986); see Booker v. Brown & Williamson Tobacco Co., Inc., 879 F.2d 1304, 1310 (6th Cir. 1989).

A motion for summary judgment requires this Court to view " 'inferences to be drawn from the underlying facts . . . in the light most favorable to the party opposing the motion.' " Matsushita Electric Ind. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting United States v. Diebold, Inc., 369 U.S. 654, 655 (1962)), quoted in Historic Preservation Guild of Bay View v. Burnley , 896 F.2d 985, 993 (6th Cir. 1989). The opponent, however, has the burden to show that a "rational trier of fact [could] find for the non-moving party [or] that there is a 'genuine issue for trial.' " Historic Preservation, 896 F.2d at 993 (quoting Matsushita, 475 U.S. 587).

As the Sixth Circuit has recognized and heartily supported, recent Supreme Court decisions have encouraged the granting of summary judgments. Historic Preservation, 896 F.2d at 993 (citing Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)). The Courts have noted that the summary judgment motion may be an "appropriate avenue for the 'just, speedy and inexpensive determination' of a matter." Cloverdale Equipment Co. v. Simon Aerials, Inc., 869 F.2d 934, 937 (6th Cir. 1989) (quoting Celotex, 477 U.S. at 327). Consistent with the concern for judicial economy, "the mere existence of a scintilla of evidence in support of the [non-moving party's] positions will be insufficient." Anderson, 477 U.S. at 252. "Mere allegations do not suffice." Cloverdale, 869 F.2d at 937. "[T]he party with the burden of proof at trial is obligated to provide concrete evidence supporting its claims and establishing the existence of a genuine issue of fact." Id.

Discussion

Defendants' Response to Plaintiff's Motions

Defendants' responses are lacking in that (1) they have provided very little case law in support of their arguments and (2) they have provided irrelevant, immaterial or no evidence by way of affidavits, deposition testimony, answers to interrogatories, admissions, or anything else which this Court is directed to consider in its determination of whether genuine issues of material fact exist under Fed. Rule Civ. Proc. 56. For the most part, all I have to rely on in defendants' favor are their bare allegations and unsupported assertions of law. For instance, defendants submitted one affidavit, signed by Leslie Grable, which essentially states that the Estate of Irene Grable does not have any tax liability. In other words, Leslie Grable is of the opinion that the Estate does not owe any taxes. This affidavit is completely ineffective because it assumes the conclusion. To draw an analogy, suppose Mr. Doe is involved in a lawsuit with the State of Ames in which the issue is whether the world is flat or round. In a motion for summary judgment, the State of Ames presents scientific data proving that the world is round. In response, Mr. Doe submits a signed and sworn affidavit that he believes the world is flat. Mr. Doe provides the Court with nothing other than his opinion that the world is flat. In such a case would summary judgment in favor of the State be proper? The answer is easy--absolutely; there are no issues of material fact. A bald assertion made by a party either in the brief or in an affidavit does not rise to the level of creating a material issue of fact. "Mere allegations do not suffice." Cloverdale, 869 F.2d at 937.

One final example the Court would like to note is on page 3 of defendants' brief where defendants state: "The Courts have held that even if this is a proper Tax Court decision all this does is determine a deficiency or a number, and does not create any sort of liability." Defendants' Brief at 3. Unfortunately, defendants fail to inform this Court which "Courts" have so held. They provide absolutely no legal support for this statement.

Entitlement to Reduce to Judgment the 1979 & 1980 Assessments

Plaintiff seeks to reduce to judgment its 1979 and 1980 assessments made pursuant to the tax court's determination as to the amount owed. See Grable v. Commissioner of IRS, reprinted in Motion of United States for Partial Summary Judgment, May 16, 1990 , Ex. A. The tax court issued a decision in that case finding a deficiency of $25,999.00 and $1,621.00 in income taxes due from taxpayers. Plaintiff argues that this decision is res judicata as to the claims raised by defendants.

Defendants fail to address the issue raised by plaintiff that the Tax Court Decision is res judicata. Instead, defendants make a fairly unclear argument which essentially states that there has never been a finding of liability or deficiency by any court or other government body against Irene Grable. In the alternative, defendants appear to argue that, if there was a finding of liability against Irene Grable, then the United States failed to properly send notices and demand. ¹ For the most part, these arguments have already been addressed by this Court in United States v. David Grable, 1:89-CV-1145 (W.D. Mich. 1991), as well as in this case, see Defendants' Motion to Dismiss (filed December 27, 1990).

Defendants' only argument concerning the Tax Court Decision is that the decision is not admissible evidence because it does not contain a file stamp. However, the decision and the docket sheet were attached to a certification of authenticity made by the clerk of the Tax Court, under seal. Therefore, I find that the Tax Court Decision and docket sheet are both admissible pursuant to Federal Rules of Evidence 902(1) and 803(8).

Without any other argument from defendants, I find that the Tax Court Decision is res judicata to defendants' claims. The tax years are the same in both the Tax Court Decision and in the current proceeding. Thus, the judgment entered by the Tax Court is res judicata as to the tax claims in the current proceeding "whether or not the basis of the agreements on which they rest reached the merits." United States v. International Building Co. [53-1 USTC ¶9366 ], 345 U.S. 502 (1953). The defendants can not attack the underlying basis for the liability established by the Tax Court Decision: Irene and Earl Grable's tax returns were deficient for the tax years 1979 and 1980 in the amounts of $25,999.00 and $1,621.00 respectively.

With respect to the alternative argument posed by defendants (if there was a tax court decision, then there was not notice), Section 6215(a) of the Internal Revenue Code provides that "[i]f the taxpayer files a petition with the Tax Court, the entire amount redetermined as the deficiency by the decision of the Tax Court . . . shall be assessed and shall be paid upon notice and demand from the Secretary." 26 U.S.C §6215(a) . Defendants here filed a prior lawsuit alleging that the government failed to give proper notice and demand. Judge Gibson ruled on July 19, 1988 that the IRS had satisfied the statutory requirements. Any arguments as to those elements of the statute are barred by the doctrine of res judicata. Brown v. Felsen, 442 U.S. 127, 131 (1979); Commissioner v. Sunnen [48-1 USTC ¶9230 ], 333 U.S. 591, 597 (1948).

The United States has amply demonstrated that the Estate of Irene Grable has unpaid income tax liabilities for the years 1979 and 1980 by showing, among other things, the filing of Forms 4340. Defendants have failed to provide any contrary evidence. Because the assessment in this case was simply a matter of entering the tax court's judgment, evidence of the Form 4340 satisfies plaintiff's burden of showing that such an entry was made. In addition, courts have consistently relied on the Certificate of Assessments and Payments forms as establishing at least prima facie evidence that an assessment was made. United States v. Chila [89-1 USTC ¶9299 ], 871 F.2d 1015, 1017-18 (1989); United States v. Voorhies [81-2 USTC ¶9710 ], 658 F.2d 710, 714-15 (9th 1981); Psaty v. United States [71-1 USTC ¶9346 ], 442 F.2d 1154, 1159 (1971); Cohen v. United States [62-1 USTC ¶9202 ], 297 F.2d 760 (9th Cir.), cert. denied, 369 U.S. 865 (1962).

The Certificate of Assessments and Payments form shows that on November 28, 1984 , the IRS made an assessment against taxpayers for $25,999.00 and $1,621.00 in past taxes due, pursuant to the tax court's judgment. With the addition of penalties and interest accrued since the tax court's judgment in October 1984, plaintiff now seeks more. I find that defendants have not satisfied their burden to prove the existence of a genuine issue of fact. Accordingly, I grant summary judgment in favor of plaintiffs on this issue, Count I of plaintiff's amended complaint.

Validity of the Federal Tax Liens

Section 6303 provides that within 60 days of the assessment, the IRS must provide taxpayer with notice of the assessment and demand for payment. 26 U.S.C. §6303 . Section 6321 , 26 U.S.C. §6321 ,